Military Construction: Kaiserslautern Military Community Center
Project Continues to Experience Problems (25-JUN-08,
GAO-08-923T).
The Kaiserslautern Military Community Center (KMCC) is one of
many projects initiated at Ramstein Air Base to upgrade
capabilities of the base as a result of the consolidation of
military bases in Europe. The KMCC is intended to provide
lodging, dining, shopping, and entertainment for thousands of
U.S. military and civilian personnel and their families in the
area. Construction on the project, which began in late 2003, was
originally scheduled to be completed in early 2006. On June 28,
2007, GAO testified that construction deficiencies and
mismanagement had drawn into question when the project would be
completed and at what cost. This testimony discusses updated
findings related to the KMCC project. The testimony describes (1)
the current status of the KMCC construction project, (2) whether
oversight and internal control improvements have been made by the
Air Force since GAO's last testimony, and (3) if other projects
recently completed in the KMCC area have experienced problems
similar to those affecting the KMCC. To address the objectives,
GAO interviewed officials from the U.S. Air Force, Army and Air
Force Exchange Service (AAFES), Air Force Services Agency, U.S.
Army Corps of Engineers, Department of State, and German
government. GAO also conducted site visits and reviewed project
plans, cost estimates, completion analyses, and other relevant
KMCC documents.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-923T
ACCNO: A82530
TITLE: Military Construction: Kaiserslautern Military Community
Center Project Continues to Experience Problems
DATE: 06/25/2008
SUBJECT: Air Force bases
Air Force facilities
Air Force personnel
Air Force procurement
Construction contracts
Construction costs
Contract modifications
Cost analysis
Erroneous payments
Expense claims
Facility construction
Facility management
Federal property management
Financial management
Foreign governments
Funds management
Internal controls
Military cost control
Military facilities
Military facility construction
Military forces
Policy evaluation
Schedule slippages
Cost estimates
Policies and procedures
Kaiserslautern Military Community Center
(KMCC)
Ramstein Air Base
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GAO-08-923T
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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:
Wednesday, June 25, 2008:
Military Construction:
Kaiserslautern Military Community Center Project Continues to
Experience Problems:
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-08-923T:
GAO Highlights:
Highlights of GAO-08-923T, a testimony before the Committee on
Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
The Kaiserslautern Military Community Center (KMCC) is one of many
projects initiated at Ramstein Air Base to upgrade capabilities of the
base as a result of the consolidation of military bases in Europe. The
KMCC is intended to provide lodging, dining, shopping, and
entertainment for thousands of U.S. military and civilian personnel and
their families in the area. Construction on the project, which began in
late 2003, was originally scheduled to be completed in early 2006. On
June 28, 2007, GAO testified that construction deficiencies and
mismanagement had drawn into question when the project would be
completed and at what cost.
This testimony discusses updated findings related to the KMCC project.
The testimony describes (1) the current status of the KMCC construction
project, (2) whether oversight and internal control improvements have
been made by the Air Force since GAO�s last testimony, and (3) if other
projects recently completed in the KMCC area have experienced problems
similar to those affecting the KMCC.
To address the objectives, GAO interviewed officials from the U.S. Air
Force, Army and Air Force Exchange Service (AAFES), Air Force Services
Agency, U.S. Army Corps of Engineers, Department of State, and German
government. GAO also conducted site visits and reviewed project plans,
cost estimates, completion analyses, and other relevant KMCC documents.
What GAO Found:
Approximately 1 year after GAO�s June 2007 testimony and over 2 years
after the KMCC�s originally scheduled construction completion date, the
project continues to experience significant cost and schedule
uncertainty along with construction quality problems and ongoing
criminal investigations. Limited progress has been made on KMCC
construction, and there are still no accurate estimates of how much the
total project will cost or when it will be completed. Major
construction deficiencies GAO reported in 2007 are just now beginning
to be corrected. The photos below show that other than floor tiles
being installed, the food court area remains essentially the same as in
2007 and still requires finishing work and the installation of
restaurants.
Figure: Photographs of the food court area, May 2007 and May 2008:
[See PDF for image]
Source: GAO.
[End of figure]
In addition, the Air Force does not track the total cost of the KMCC.
Specifically, tens of millions of dollars related to design, foreign
currency fluctuation, rework, personnel, and furniture and equipment
costs are not included in the Air Force�s cost estimates. Contingencies
to fund items such as repairs to cracking concrete are also not
included in the Air Force�s estimates. After including all estimated
costs, the total cost of the project will likely exceed $200 million.
Project delays have also resulted in additional costs to the U.S.
government and lost profit for project funding partners. For example,
AAFES estimates that it is losing $500,000 of profit for each month
that the exchange facility is not open.
Although these problems exist, the Air Force has made significant
improvements in its oversight and control over the project. For
example, the Air Force established standardized policies and procedures
for reviewing change orders and invoices. Improvements in controls over
payments and change orders have minimized future risks of paying for
unapproved work or fraudulent billings for work not performed.
Cost, schedule, and construction deficiencies affected other projects
built by German government construction agents in the KMCC area. For
example, underground electrical ducts at Ramstein Air Base flood with
water causing runway lights to malfunction. A freight terminal on the
air base was also built with structural deficiencies that resulted in
its temporary evacuation.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-923T]. For more
information, contact Gregory Kutz at (202) 512-6722 or [email protected] or
Terrell Dorn at (202) 512-6923 or [email protected].
[End of section]
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to discuss our findings on the current
status of the Kaiserslautern Military Community Center (KMCC)
construction project. This testimony is a 1-year update to our
testimony before this committee in June 2007,[Footnote 1] which
detailed the problems facing the project. In June 2007, we testified
that the KMCC was experiencing cost, schedule, and construction quality
problems that raised questions about when the project would be
completed and at what cost. At the time of our testimony, there were
few workers on-site, the building's roof was leaking, and German police
and Air Force Office of Special Investigations (AFOSI) agents were
seizing documents as part of ongoing criminal investigations. In
addition, the projected total cost of the project had increased
substantially because of delays, rework, and the appreciation of the
euro versus the U.S. dollar. Our 2007 testimony also detailed
construction management failures by the Landesbetrieb Liegenschafts-
und Baubetreuung's office in Kaiserslautern (LBB-Kaiserslautern), the
German construction agent charged with managing the project for the
U.S. forces. In addition, our testimony detailed control weaknesses
within the Air Force that contributed to the problems for the project.
This testimony provides an update on the status of the KMCC project and
its problems, and makes an assessment of whether other construction
projects in the area have experienced similar problems.
As we previously reported, the KMCC, an 844,000 square foot facility,
is one of many projects that were initiated at Ramstein Air Base to
upgrade capabilities of the base as a result of the consolidation of
military bases in Europe. It 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.
Project highlights include a 350-room visiting quarters, sports bar,
name-brand restaurant, food court, and numerous retail businesses.
Funding for the KMCC was provided from a variety of sources including
nonappropriated funds from the Army and Air Force Exchange Service
(AAFES) and the Air Force Services Agency (AFSVA), [Footnote 2]
military construction appropriations, and the Rhein Main Transition
Program (RMTP) funds.[Footnote 3] Construction on the KMCC began in
November 2003 and was planned to be completed in early 2006.
In addition, we previously reported that 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 Status of Forces
Agreement and various implementing agreements. The KMCC, like other
military construction projects in Germany, is governed by one such
agreement, the Auftragsbaugrundsaetze 1975 (ABG-75) Administrative
Agreement. ABG-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 LBB-Kaiserslautern, a
German government construction agency.
As requested, this testimony updates our findings on the status of the
project and problems affecting the KMCC. Specifically, the testimony
will describe (1) the current status of the KMCC construction project,
including projected costs, projected construction completion dates, and
status of ongoing investigations; (2) whether oversight and internal
control improvements have been made by the Air Force since our last
testimony; and (3) whether other projects recently completed in the
KMCC area have experienced problems similar to those affecting the
KMCC.
To address our objectives, we conducted interviews with Air Force
personnel responsible for the KMCC project. In addition, we interviewed
officials from LBB-Kaiserslautern, AAFES, AFSVA, and the U.S. Army
Corps of Engineers. We also interviewed officials from the Department
of State and officials from the Federal Republic of Germany's
construction division. We obtained and reviewed project plans, cost
completion analyses, and other relevant documents related to the design
and construction of the KMCC. We also compiled Air Force and LBB-
Kaiserslautern cost estimates for the various cost elements associated
with the KMCC. We physically inspected the KMCC and other recently
completed facilities on Ramstein Air Base. See appendix I for more
details on our scope and methodology.
Because of ongoing investigations, we were not able to fully explore
and discuss the details of fraud investigations with AFOSI and the
German police, which limited the scope of our audit work.
We conducted this performance audit from November 2007 through June
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Summary:
Approximately 1 year after our initial testimony and over 2 years after
the KMCC's originally scheduled construction completion date, the
project continues to experience significant cost and schedule
uncertainty along with construction quality problems and ongoing
criminal investigations. Since our testimony in June 2007, limited
progress has been made on KMCC construction, and there are still no
accurate estimates of how much the total project will cost or when it
will be completed. Delays in reaching completion agreements with major
contractors have contributed to the lack of progress over the last
year. In addition, major construction deficiencies, such as the leaking
roof and improperly installed kitchen exhaust ducts, which we discussed
during our initial testimony, are just now beginning to be corrected.
For example, in February 2008, a $2.7 million[Footnote 4] contract was
awarded for the first of four phases of repair work on the leaking
roof, and in May 2008, a $1.2 million contract was awarded for the
second phase of roof repairs. However, long cracks in concrete floors
have been identified since our June 2007 testimony, which raise new
concerns about construction quality and could result in additional time
and cost to repair. While the number of workers on-site has increased
in recent months, it is unclear whether the number and type of workers
are sufficient to complete construction by LBB-Kaiserslautern's current
projected date of January 2009. This projected date only represents
construction completion; however, the facility will not be open to the
public for about 4 months following construction completion. Finally,
criminal and civil investigations continue to surround the project and
indictments are expected, according to AFOSI agents.
There are no accurate estimates of how much the total KMCC project will
cost because the Air Force does not track all project costs. While the
Air Force actively tracks what it considers to be core construction-
related costs, tens of millions of dollars of other project costs are
not included in Air Force cost estimates. Specifically, costs that are
not included in the estimates are design costs, foreign currency
fluctuation costs, costs for roof repair and other rework, personnel
costs, and costs for furniture and equipment. Foreign currency
fluctuation costs are of particular concern because of the significant
appreciation of the euro versus the U.S. dollar since inception of the
project. In total, the euro has appreciated 35 percent against the U.S.
dollar since construction began on the KMCC in November 2003. In
addition, contingencies to fund items such as potential hindrance
claims[Footnote 5] and repairs to floor cracks are not included in the
estimated construction costs for completion. When taking into account
all estimated costs, the total cost of the project will likely exceed
$200 million. This figure was derived by consolidating numerous Air
Force cost estimates captured in different accounts, such as military
construction funds, non-appropriated funds, and operations and
maintenance funds. Project delays have also resulted in additional
costs to the U.S. government and lost profit for AAFES and AFSVA. For
example, AAFES, responsible for management of the new exchange,
estimates that it is losing $500,000 of profit for each month that the
exchange facility is not open. In addition, the Air Force also
estimates that the U.S. government is paying an additional $90,000 each
month when personnel traveling at the government's expense must stay
off base because the hotel portion of the KMCC remains unfinished.
Although problems exist with the project, the Air Force has made
significant improvements in its oversight and internal controls. In
June 2007, we reported that Air Force officials did not have adequate
or appropriately qualified personnel assigned to the project and did
not have effective oversight policies and controls in place. In the
last year, the Air Force created the Resident Director's Office (RDO),
which centralized management of the KMCC project and established
standardized policies and procedures for reviewing invoices and change
orders. According to the Air Force, the RDO has 29 personnel, which is
a significant increase over the 8 oversight personnel initially
assigned to the KMCC project. To minimize future risks of paying for
unapproved work or fraudulent billings, the Air Force has also
standardized its invoice and change order review processes. Finally, at
various times in 2007 and 2008, senior Air Force officials engaged
officials from the Department of State and the Federal Republic of
Germany in an effort to identify options for generating progress on the
project.
Other projects recently completed in the KMCC area have also
experienced problems similar to those affecting the KMCC. According to
the Air Force, several recent projects built by LBB-Kaiserslautern
associated with the RMTP on Ramstein Air Base have experienced
significant cost and schedule growth as well as construction
deficiencies. For example, the lights on the new south runway built on
Ramstein Air Base are affected by a construction defect that allows
groundwater to collect in the underground ducts and manholes that
contain electrical components used to control the lights. The Air Force
has repeatedly lost the capability to operate certain lights as a
result of power outages caused by water intrusion to the lighting
system and, when power outages occur, has been forced to divert
aircraft to other air bases during periods of low visibility. The south
runway also suffers from poor water drainage, in general, which at
times causes large ponds to form between the south runway and adjacent
taxiways. These ponds attract large waterfowl, which pose a safety risk
to aircraft using the runway. Another reported example of construction
deficiencies is illustrated by the newly constructed freight terminal,
which must rely on additional support columns as a precaution to
prevent the building's roofs from collapsing. Because of structural
integrity issues, 41 additional columns were installed in the freight
terminal to provide additional support to the roof.
Progress on the KMCC Has Been Slow, Quality Problems Persist, and
Project Costs Are Unknown:
Approximately 1 year after our initial testimony and over 2 years after
the KMCC's originally scheduled construction completion date, the
project continues to experience significant cost and schedule
uncertainty along with construction quality problems and ongoing
criminal investigations. Since our testimony in June of 2007, limited
progress has been made on KMCC construction, and estimates of how much
the total project will cost or when it will be completed are uncertain.
Total project costs are uncertain because the Air Force does not track
all costs associated with the project. Specifically, tens of millions
of dollars related to design, foreign currency fluctuation, rework,
personnel, and furniture and equipment costs are not included in the
Air Force's cost to date or estimate for construction completion of the
project. Contingencies to fund items such as potential hindrance claims
are also not included in the estimated costs for construction
completion.[Footnote 6] When including all estimated costs, the total
cost of the project will likely exceed $200 million.
Limited Progress Has Been Made:
Over the past year, limited progress has been made on constructing the
KMCC, and the project's construction completion date is uncertain.
Figures 1 and 2 show comparisons of the project when we visited in 2007
and during our last visit in May 2008. The comparison of the KMCC food
court area shows that other than some wall finishes and floor tiles
being installed, the area remains essentially the same and still
requires finishing work and the installation of the food court
restaurants. Overall, relatively few contractor employees were on-site
from the time of our initial site visit in May 2007 through early 2008,
as LBB-Kaiserslautern experienced repeated delays in reaching
agreements with major contractors to return to work. While LBB-
Kaiserslautern reached completion agreements with its major contractors
in March 2008, and the number of workers on-site has increased since
that time, it is not clear if the number and type of workers are
sufficient to sustain production and meet LBB-Kaiserslautern's new
estimated construction completion date of January 2009. This projected
date represents construction completion; however, the facility will not
be open to the public for about 4 months following construction
completion. Moreover, because LBB-Kaiserslautern has not met earlier
construction schedules and the estimated construction completion date
has continued to slip, we are concerned about LBB-Kaiserslautern's
ability to manage actions needed to achieve the January 2009 estimated
construction completion date.
Figure 1: Comparison of the KMCC Food Court Area:
Photographs of the food court area, May 2007 and May 2008:
[See PDF for image]
Source: GAO.
[End of figure]
The comparison of the KMCC name-brand restaurant shows that the
restaurant still requires painting, wiring, and other finishing work
similar to that needed in 2007.
Figure 2: Comparison of the KMCC Name-Brand Restaurant:
Photographs of the KMCC Name-Brand Restaurant, May 2007 and May 2008:
[See PDF for image]
Source: GAO.
[End of figure]
In addition, major construction deficiency problems, such as the
leaking roof and improperly installed kitchen exhaust ducts, which we
discussed in our 2007 testimony, are just now being repaired. For
example, contracts were recently awarded for the first two of four
phases of repair work on the leaking roof, and most of the deficient
ductwork has been removed. However, additional problems, such as
several long cracks in the concrete floor of the AAFES store, have been
identified by the Air Force since our last testimony. LBB-
Kaiserslautern has retained an expert consultant to investigate the
floor cracks, and the consultant's report recommends that joints be cut
into the floor to control further cracking. The actual scope of the
floor repair work and associated cost and schedule impacts are not
known at this time. Figure 3 shows an example of these cracks. The pen
in the photograph is provided for scale.
Figure 3: Example of Floor Cracks in the KMCC:
Photograph of floor cracks.
[See PDF for image]
Source: GAO.
[End of figure]
Final Costs of the KMCC Project Are Still Unknown:
Because the Air Force does not track the total cost of the KMCC
project, there are no accurate estimates of how much the total KMCC
project will cost. Cost estimates provided by the Air Force primarily
include core construction-related costs and do not account for millions
of dollars in other costs related to the KMCC project. When all project-
related costs are taken into account, the total cost for the project
will likely exceed $200 million.[Footnote 7] This figure was derived by
consolidating numerous Air Force cost estimates captured in different
accounts, such as military construction funds (MILCON), non-
appropriated funds, and operations and maintenance funds. According to
Air Force officials, approximately $121 million has been spent on core
construction-related costs for the KMCC as of March 31, 2008. In
addition, Air Force officials estimate that an additional $41 million
in construction-related costs are required to complete the project.
However, this estimate only relates to those costs that the Air Force
tracks for reporting purposes. Not included in the Air Force's estimate
are design costs, costs of rework to repair known construction
deficiencies, foreign currency fluctuation costs, costs for furniture
and equipment, some costs for secondary services[Footnote 8], and costs
for the numerous Air Force personnel reassigned from other projects in
order to help manage the KMCC construction project. For example, the
Air Force cost estimate does not fully reflect the effect of the
weakening dollar compared to the euro because payments from MILCON
funded project components to cover losses due to foreign currency
fluctuation are drawn from a separate account that the Air Force does
not track as part of this project. Table 1 shows the Air Force cost
estimate for core construction-related expenses along with additional
costs associated with the project. As the table shows, an accurate
estimate on the total cost of the project is not possible because of a
number of unknown expenses, such as the Air Force's liability for
contractor hindrance claims.
Table 1: KMCC Estimated Project Costs:
Cost Component (dollars in millions): Air Force estimated construction
costs; Construction costs paid[A,B];
Air Force/LBB-Kaiserslautern cost estimate: $121.7.
Cost Component (dollars in millions): Air Force estimated construction
costs; Construction costs to complete the project [A,B];
Air Force/LBB-Kaiserslautern: cost estimate: $41.2.
Cost Component (dollars in millions): Project costs not included in Air
Force construction cost estimates; Additional roof repair costs;
Air Force/LBB-Kaiserslautern cost estimate: $10.8.
Cost Component (dollars in millions): Project costs not included in Air
Force construction cost estimates; Additional kitchen duct repair
costs;
Air Force/LBB-Kaiserslautern cost estimate: $1.2.
Cost Component (dollars in millions): Project costs not included in Air
Force construction cost estimates; Secondary services;
Air Force/LBB-Kaiserslautern cost estimate: $5.7.
Cost Component (dollars in millions): Project costs not included in Air
Force construction cost estimates; MILCON foreign currency fluctuation
costs;
Air Force/LBB-Kaiserslautern cost estimate: $8.6.
Cost Component (dollars in millions): Project costs not included in Air
Force construction cost estimates; Design costs[B];
Air Force/LBB-Kaiserslautern cost estimate: $8.4.
Cost Component (dollars in millions): Project costs not included in Air
Force construction cost estimates; Furniture and equipment[B];
Air Force/LBB-Kaiserslautern cost estimate: $16.3.
Cost Component (dollars in millions): Total quantifiable costs;
Air Force/LBB-Kaiserslautern cost estimate: $213.9.
Cost Component (dollars in millions): Unquantifiable costs; Contractor
hindrance claims;
Air Force/LBB-Kaiserslautern: cost estimate: Unknown.
Cost Component (dollars in millions): Unquantifiable costs; Repairs to
cracking concrete;
Air Force/LBB-Kaiserslautern cost estimate: Unknown.
Cost Component (dollars in millions): Unquantifiable costs; Air Force
staffing to manage the KMCC;
Air Force/LBB-Kaiserslautern: cost estimate: Unknown.
Cost Component (dollars in millions):
Total project cost:
Air Force/LBB-Kaiserslautern: cost estimate: Unknown.
Source: Air Force (for all quantifiable project costs).
[A] Construction costs include costs for construction contracts;
certain secondary services; contingency costs; and supervision,
inspection, and overhead provided by LBB-Kaiserslautern.
[B] Cost component was included in original project documents submitted
to Congress disclosing appropriated and nonappropriated funds
estimates.
[End of table]
Additional clarification on selected project costs not included in the
Air Force's construction cost estimate is provided below.
* Construction deficiency repairs. Deficient construction has been
identified on major building components, including the roof and kitchen
exhaust ducts. LBB-Kaiserslautern is taking steps to contract for
repairs to correct these deficiencies.
- Roof damage. Significant sections of the roof require repair or
replacement. The current plan is to complete repairs to the roof in
four phases. The first phase of repairs is expected to cost $2.7
million and is included in the Air Force's construction cost estimate,
which according to the Air Force is being paid for primarily with funds
withheld from the original roof contractor. Costs for repair phases two
through four are estimated by the Air Force to cost about $10.8 million
and are not included in its construction cost estimate. U.S. government
funds remaining from the original roof contract are being used to fund
the majority of phase one repairs; therefore, the phase one repair cost
is reflected in the Air Force's construction cost estimate. Funds for
repair phases two through four are initially being funded by the German
government, and the Air Force excludes these costs in its construction
costs to complete the project.
- Kitchen exhaust ducts. The kitchen exhaust ducts installed in the
KMCC do not comply with U.S. National Fire Protection Association
standards specified by the Air Force. LBB-Kaiserslautern has completed
the design for repairs to the exhaust ducts and is negotiating with its
contractor a final price for their installation. The estimated
installation cost is approximately $1.8 million. In early 2007, the Air
Force agreed to pay for $600,000 of the rework and has included that
amount in its construction cost estimate, but has not included the rest
of the repair cost as part its construction cost estimate.
* Secondary services. As the project has progressed, the Air Force has
retained several contractor personnel to provide construction
inspection, engineering, consulting, and other secondary services. For
example, since January 2005 the Air Force has contracted for
construction inspectors who are responsible for, among other things,
ensuring that installed work meets the terms of the contract and
checking that invoices correctly reflect the work performed. The cost
for most of these secondary services is not included in the Air Force's
construction cost estimate. Air Force officials indicated that some of
the Air Force's technical consultants were also supporting other
projects, but that the majority of their work involved support on the
KMCC. Since the majority of work performed under these secondary
services contracts relates to the KMCC project, we have included the
cost of these contracts in the Air Force's estimate.
Foreign currency fluctuation. Since the start of the project in 2003,
the euro has appreciated 35 percent relative to the U.S. dollar.
Because KMCC contractors are paid in euros but KMCC project funds are
budgeted in dollars, the Air Force is susceptible to paying more when
the dollar loses value. In addition, this risk has been magnified by
the 2-year delay in completion of the project. Since the June 2007
testimony alone, the euro has appreciated by 15 percent, from $1.35 to
$1.55. As a result of the devaluation of the dollar, nonappropriated
fund payers (AAFES and AFSVA) have paid about $31.9 million in foreign
currency fluctuation expenses, and appropriated MILCON funds have paid
$8.6 million since the project's inception. The Air Force includes
nonappropriated fund foreign currency fluctuation costs in its
construction cost estimates. However, because MILCON foreign currency
fluctuation costs are paid from a separate account, the effect of
foreign currency fluctuation is not reflected in the Air Force's
construction cost estimate.[Footnote 9] Therefore we have included in
the estimate based on the Air Force's reported numbers the actual
foreign currency fluctuation costs paid to date associated with MILCON
funds. In addition, the Air Force also did not include an allowance for
future foreign currency fluctuation costs associated with MILCON
funding. Based on the trend of the strengthening euro, these foreign
currency fluctuation costs will only increase as MILCON expenses
increase. Figure 4 shows the trend in the strengthening of the euro
against the U.S. dollar over the past several years.
Figure 4: Currency Exchange Rates for Euros since 2003:
[See PDF for image]
This figure is a line graph depicting the following data:
Year: 2003, Q1;
U.S. dollars to one euro: 1.0.
Year: 2003, Q2;
U.S. dollars to one euro: 1.2.
Year: 2003, Q3;
U.S. dollars to one euro: 1.2.
Year: 2004, Q4;
U.S. dollars to one euro: 1.2.
Year: 2004, Q1;
U.S. dollars to one euro: 1.25.
Year: 2004, Q2;
U.S. dollars to one euro: 1.2.
Year: 2004, Q3;
U.S. dollars to one euro: 1.2.
Year: 2004, Q4;
U.S. dollars to one euro: 1.3.
Year: 2005, Q1;
U.S. dollars to one euro: 1.35.
Year: 2005, Q2;
U.S. dollars to one euro: 1.3.
Year: 2005, Q3;
U.S. dollars to one euro: 1.25.
Year: 2005, Q4;
U.S. dollars to one euro: 1.2.
Year: 2006; Q1;
U.S. dollars to one euro: 1.2.
Year: 2006; Q2;
U.S. dollars to one euro: 1.3.
Year: 2006; Q3;
U.S. dollars to one euro: 1.3.
Year: 2006; Q4;
U.S. dollars to one euro: 1.3
Year: 2007, Q1;
U.S. dollars to one euro: 1.3.
Year: 2007, Q2;
U.S. dollars to one euro: 1.35.
Year: 2007, Q31;
U.S. dollars to one euro: 1.36.
Year: 2007, Q4;
U.S. dollars to one euro: 1.5.
Year: 2008, Q1;
U.S. dollars to one euro: 1.5.
Year: 2008, Q2;
U.S. dollars to one euro: 1.55.
Source: Federal Reserve.
[End of figure]
In addition to the estimated expenses listed above, there are still a
number of significant costs associated with project completion that
have not been estimated. These items include potential hindrance
claims, repair of cracking concrete, and Air Force personnel costs for
staff needed to manage the KMCC's construction. Depending on the
resolution of these unknown costs, the total cost of the KMCC project
could increase substantially before completion.
* Hindrance claims. As a result of delays to the project, the Air Force
expects that contractors will submit claims for additional costs
incurred from being hindered in their performance. As of June 1, 2008,
LBB-Kaiserslautern had forwarded change order requests for contractor
hindrances totaling $8.2 million (5.4 million euros) to the Air Force.
However, the Air Force has denied the requests because it contends that
they are not substantiated. In anticipation of contractors making
formal hindrance claims--that must meet a prescribed legal standard and
would be adjudicated through the German courts--the Air Force has
retained a consultant[Footnote 10] to evaluate the history of the
project and prepare the Air Force's claims defense strategy.[Footnote
11] At this time, the Air Force's potential exposure to claims is
unknown.
* Concrete cracking. Long cracks have been identified by the Air Force
at various locations on concrete floors of the KMCC subsequent to our
2007 site visit. A German court appointed an expert consultant to
determine the severity of the cracks and identify their causes. The
consultant's report, issued in March 2008, indicates that joints will
need to be cut into the floor to keep additional cracks from occurring.
LBB-Kaiserslautern subsequently initiated design work to detail the
scope of the repairs. The Air Force expects that LBB-Kaiserslautern
will award a contract for the repairs in July 2008. At this time, the
cost of repairs is unknown. (See fig. 3 for an example of these
cracks).
* Air Force personnel costs for staff managing the KMCC. According to
the Air Force, a team of 29 military, civilian, and contractor
personnel manage the KMCC construction project. They are responsible
for financial management, claims management, design and construction
management, and stakeholder operations. This team comprises 6 military
officers and enlisted personnel, 10 civil service employees, and 13
contracted employees. The cost of the salaries and benefits for
military and civil service employees who have been reassigned from
other projects to assist in managing the KMCC project since its
inception in 2003 is a real cost of the project but is not included in
the Air Force's overall cost estimate. This cost is difficult to
quantify because the military and civilian personnel occasionally work
on other projects, and it is not clear how their time is apportioned
among projects.
Federal Republic of Germany funds. The extent to which project cost
increases will be borne by the Air Force and its funding partners is
unknown because of uncertainties regarding the $37.9 million (25
million euros) committed by the German government for the project. The
German government allocated $15.2 million (10 million euros) to pay
contractors' invoices against change orders that had not yet been
approved by the Air Force. According to the Air Force, only $8.6
million (5.7 million euros) were actually expended by LBB-
Kaiserslautern prior to the funds expiring at the end of calendar year
2007. According to the German officials, this initial $8.6 million
amounts to a loan, and the Air Force stated that it will reimburse this
amount when it approves the change orders and makes payment against the
associated invoices. The additional $22.7 million (15 million euros)
are planned to be used by LBB-Kaiserslautern to fund contracts for
rework items, such as roof repairs and kitchen exhaust duct
replacement, and may also be used to settle contractor hindrance
claims. In discussions with us, German officials characterized the
$22.7 million (15 million euros) as a loan as well and said that they
expected full repayment of funds. However, Air Force officials
contended that they will only pay for valid work under the original
KMCC contract and will not pay for rework. In light of these opposing
views, for transparency purposes, all expenses paid from the German
funds are incorporated into the total project cost regardless of which
party is ultimately responsible for financing them.
Delayed Completion Has Caused Opportunity Costs to Grow:
As a result of the delayed KMCC project completion, AFSVA and AAFES,
two major funding sources for the project, have experienced negative
financial effects. Both AFSVA and AAFES invested in the project with
the expectation of returns being generated in early 2006, the project's
original construction completion date. However, the delayed completion
has resulted in lost profits and in turn reduced the amount of funds
AAFES and AFSVA can provide to military communities for morale,
welfare, and recreation. For example, AAFES estimates that every month
the KMCC's opening is delayed, AAFES loses approximately $500,000 in
net profits from stores such as the base exchange and food court
restaurants. In total, AAFES estimates it will have lost more than $14
million in net profits by the time construction is estimated to be
completed in January 2009. Also, the unavailability of the 350 hotel
rooms to be completed in the KMCC Visitors Quarters results in the U.S.
government paying more for lodging on the local economy. According to
an Air Force estimate, on average each month that the opening of the
hotel is delayed results in the U.S. government paying an additional
$90,000 for off-base lodging of displaced personnel[Footnote 12]
traveling at the government's expense. Estimated increases in off-base
housing costs will total $2.9 million dollars if construction is
completed in January 2009.
Criminal and Civil Investigations Continue to Surround the KMCC and
Other Projects:
In our June 2007 testimony, we reported that several Air Force and LBB-
Kaiserslautern personnel involved in management of the KMCC and other
RMTP projects were under investigation by AFOSI and German police for a
variety of issues, both criminal and civil. AFOSI officials stated that
the cases have matured significantly since that time; however, formal
indictments have not yet been made. Because the investigations are
still active, AFOSI is limited as to the information it can disclose.
However officials did state that investigations involve U.S. military
and civilian employees, employees of LBB-Kaiserslautern, and KMCC trade
contractors. These individuals are being investigated for offenses such
as dereliction of duty and bribery.
The Air Force Has Improved Controls over the KMCC Project:
The Air Force has made significant improvements in its oversight and
internal controls over the KMCC project. As stated in the June 2007
testimony, the Air Force had failed to institute effective management
oversight and internal controls in order to mitigate the high risk of
the project. Specifically, the Air Force lacked standardized policies,
did not have sufficient staffing to oversee the project, was not
thoroughly reviewing invoices, and was approving change orders and
payments on the project without proper documentation. In the last year,
the Air Force created the RDO, which centralized management oversight
of the KMCC project and brought together appropriate personnel
specializing in financial management, claims management, design and
construction management, and stakeholder operations. The Air Force has
also standardized its invoice and change order review processes to
minimize future risks of paying for unapproved work. The Air Force
trained and appointed certifying officers and accountable officials for
the KMCC project to ensure that personnel authorizing payments are
aware of their fiduciary responsibilities. Finally, during 2007, senior
officials within the Air Force engaged officials from the Department of
State and the Federal Republic of Germany in an effort to encourage
progress on the project.
Establishment of the RDO and Improvements in Invoice and Change Order
Reviews:
In August 2007, the Air Force established the RDO to centralize control
over all aspects of the KMCC project. According to the Air Force, the
RDO has 29 personnel, which is a significant increase from the 8
oversight personnel initially assigned to the KMCC project. These 29
personnel are 6 military officers and enlisted personnel, 10 civil
service employees,[Footnote 13] and 13 contracted employees. The RDO is
divided into four branches: financial controls, ABG-75 administration,
engineering, and operations/quality assurance. The Air Force also
standardized policies and procedures for the four RDO branches, which
are documented in an official operating instruction manual for the KMCC
project. The documented policies were a measurable improvement from the
one-page flowchart used during our last visit in 2007. As part of the
establishment of the RDO, the Air Force also appointed and trained 9
certifying officers and accountable officials. Certifying officers are
responsible for certifying vouchers for payment. Accountable officials
provide source information to a certifying officer to support a
decision to certify a voucher for payment or to disburse funds.
Appointment and training of these types of officials are key to
ensuring that appropriate controls are in place over payments made by
the Air Force. The RDO also includes 6 quality assurance engineers and
technicians responsible for performing technical reviews of designs and
conducting daily surveillance of the work site.
Since creating the RDO, the Air Force has also improved its review
process for invoices. During our initial visit last year, we reported
how Air Force management instructed its staff to certify for payment
invoices with items included in unapproved change orders and items that
exceeded quantity limitations specified in contracts. The Air Force has
since revised its policy and now rejects invoices for quantities in
excess of contracted amounts and also rejects invoices with items
included in unapproved change orders. For example, if the Air Force
receives an invoice that contains charges for items contained in
unapproved project change orders, the Air Force will reject the invoice
and refuse payment until LBB-Kaiserslautern submits an invoice that
only lists items that have been approved by the Air Force. In addition,
the Air Force has gone back on prior invoices and recouped amounts
previously paid in excess of contracted quantities.
Involvement of Senior Air Force Officials:
Beyond improvements over internal controls and the establishment of the
RDO, senior Air Force, Department of State, and German government
officials have also increased oversight of the project. Beginning in
August 2007, the U.S. Air Forces in Europe Vice Commander, the U.S.
Ambassador to Germany, and the heads of the German Ministry of
Construction and the German Ministry of Finance started meeting
regularly to discuss problems facing the KMCC. These repeated meetings
between U.S. and German officials prompted the German government to
provide $37.9 million (25 million euros) to the project for backlogged
change orders and repair work. According to the Air Force, German
support is essential for a successful completion of the KMCC project.
The Air Force's expectation is that by maintaining strong relationships
among senior officials, it will ensure that those running the KMCC
project are able to better organize, prioritize, and execute the
project. Unfortunately, this joint effort has not yet expedited KMCC
construction to an acceptable pace according to Air Force officials.
Other Recent U.S. Projects on Ramstein Air Base Have Experienced
Similar Problems:
Other projects recently completed in the KMCC area managed by LBB-
Kaiserslautern have experienced problems similar to those affecting the
KMCC. Air Force officials report that several recent projects on
Ramstein Air Base experienced cost and schedule growth, including
projects that were delivered by LBB-Kaiserslautern months after the
planned delivery dates. In addition, several projects were delivered
with construction flaws that have caused flights to be diverted and
have affected the processing of freight shipments. According to the Air
Force, it has experienced fewer problems with less sophisticated
projects, such as the construction of more than 1,000 new military
family housing units in the KMCC area and the construction of an indoor
pool on Ramstein Air Base, that were managed by LBB-Kaiserslautern.
However, construction of these projects is not comparable to the scope
and complexity of constructing the KMCC building, runways, and other
operational facilities.
Cost and Schedule Growth of Other Projects:
Numerous recent projects associated with the RMTP built on Ramstein Air
Base by LBB-Kaiserslautern have experienced significant cost growth,
according to the Air Force. Several of these projects have also not
received final bills from LBB-Kaiserslautern despite being turned over
to the United States more than a year ago. Therefore, the final costs
of the projects are still unknown. In addition, many of the same group
of projects managed by LBB-Kaiserslautern also experienced significant
schedule growth according to the Air Force, including projects that
were delivered months after their scheduled completion dates.
Construction Deficiencies of Other Recently Completed Projects:
Construction deficiencies experienced on several of the RMTP projects
built by LBB-Kaiserslautern add to the concerns associated with cost
and schedule growth. Specifically, there have been several projects
where faulty construction has resulted in safety concerns, building
evacuations, and potentially reduced useful lives of facilities. Below
are examples of such problems.
* South runway. This runway was recently built on Ramstein Air Base in
order to upgrade the base's capabilities in support of overseas
missions, including those in Iraq and Afghanistan. However, the runway
lights are adversely affected by a construction defect that allows
groundwater to collect in the underground ducts and manholes that
contain electrical components used to control the lights. The intrusion
of water has damaged electrical components resulting in power outages
to the lights. These lights are crucial for operations because they
allow aircraft to land during times of extremely limited visibility.
According to the Air Force, because of the lighting failures, aircraft
could not land during periods of limited visibility from November
through December 2007 and flights were diverted to other bases in
Europe. Portable lights have been used to temporarily resolve the
problem. Additionally, water is pumped from the manholes as an ongoing
maintenance activity that according to Air Force officials, has cost
about $65,000 to date. Finally, during rainy periods, several large
ponds developed between the south runway and adjacent runways and
taxiways because of poor water drainage. These ponds, which were
several acres in total area during our visit in March 2008, have
attracted large waterfowl, which pose a safety hazard to aircraft using
the runway. Figure 5 shows one of these large ponds. Studies and court
actions are currently under way to resolve these issues.
Figure 5: Example of Large Pond Next to Ramstein's South Runway:
{See PDF for image]
Photograph of large pond next to Ramstein's South Runway.
Source: GAO.
[End of figure]
* Freight terminal. This large 100,000 square foot material handling
facility was constructed to assist in processing freight shipments to
and from overseas locations. However, deficiencies with the structural
steel that frames the freight terminal required evacuation of the
building until additional support columns could be installed. According
to the Air Force, because of material fabrication issues, insufficient
welds, and undersized connections, the steel structure that supports
the freight terminal building was determined to be at risk of
collapsing. As an interim safety measure, 41 additional support columns
were installed to bolster the structural integrity of the facility.
According to the Air Force, these additional supports effectively
reduce the open area in the center of the facility and affect freight
processing operations. For example, forklifts are restricted in
maneuvering and cannot access certain areas. Figure 6 shows an example
of the additional support columns installed within the freight terminal
building. A permanent resolution will be determined by legal
proceedings that are currently ongoing in the German courts. In
addition, officials were concerned that a building attached to the
freight terminal was also structurally deficient as a result of
potentially insufficient welds on the structural steel. Because of
these concerns, the building was evacuated from July through September
2007 while additional support columns were installed. An inspection
completed in March 2008 confirmed that the structural steel was, in
fact, installed correctly and that the building is not at risk of
collapsing. The attached building is currently being used as intended.
Figure 6: Example of Additional Support Column Installed in the Freight
Terminal:
[See PDF for image]
Photograph of additional support column installed in the Freight
Terminal.
Source: GAO.
[End of figure]
* Hot cargo pad. A large concrete area intended to be used for loading
live munitions onto aircraft destined for overseas locations such as
Iraq and Afghanistan was recently built near the Ramstein Air Base
runway. However, when building the concrete pad, contractors did not
install dowels between adjacent concrete slabs as is typically done in
this type of construction. Because the dowels were not installed, Air
Force officials stated that differential settling of the concrete slabs
could result in damage to the cargo pad and reduce its useful life. The
Air Force is currently negotiating with LBB-Kaiserslautern to determine
what, if any, actions will be taken to address this issue. While this
does not represent a safety risk, the reduced life span of the cargo
pad could result in the Air Force spending money for repair or
replacement earlier than would normally be expected.
Concluding Comments:
Although the Air Force has made measurable improvements in its
oversight and control of the KMCC since our last testimony, the project
remains at risk because of schedule and cost uncertainties. With few
visible changes, no reliable construction completion date, rising
repair costs, and continuing construction quality problems, the KMCC
will continue to be a high-risk project. Even after the KMCC is
completed and open, it will likely take years before all issues related
to this project, including litigation and potential construction
quality problems, are resolved.
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) 512-6722 or [email protected] or Terrell Dorn at (202) 512-
6293 or [email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
testimony.
[End of section]
Appendix I: Scope and Methodology:
To determine the current status of the Kaiserslautern Military
Community Center (KMCC) construction project, including projected
costs, cost completion analyses, projected construction completion
dates, and status of ongoing investigations, we interviewed officials
from the Air Force at Ramstein Air Base in Germany, the Army and Air
Force Exchange Service (AAFES), the Air Force Services Agency (AFSVA),
the U.S. Army Corps of Engineers (USACE), the Air Force Audit Agency,
the Air Force Office of Special Investigations (AFOSI), and the
Department of State. In addition, we interviewed officials from
Landesbetrieb Liegenschafts-und Baubetreuung office in Kaiserslautern
(LBB-Kaiserslautern), the German government construction agency; the
Federal Republic of Germany's construction division; and the German
police. We physically inspected the KMCC facility with an Air Force
project manager and observed construction deficiencies. We also
reviewed financial records and statements in the form of contracts,
change orders, and invoices to the extent that they were available. We
also compiled Air Force and LBB-Kaiserslautern cost estimates for the
various cost elements associated with the KMCC project.
To determine whether oversight and internal control improvements have
been made by the Air Force since our last testimony, we interviewed Air
Force officials from the KMCC Resident Director's Office. We also
interviewed officials from LBB-Kaiserslautern, AAFES, AFSVA, AFOSI and
the Air Force Audit Agency. We obtained and reviewed project management
plans, standardized policies and procedures, cost estimates, training
materials for certifying officers and accountable officials, and other
relevant documents related to project management.
To determine if other projects recently completed in the KMCC area have
experienced problems similar to those affecting the KMCC, we
interviewed Air Force officials regarding their construction projects
in Germany. We also conducted interviews with other organizations,
including USACE, AFOSI, LBB-Kaiserslautern, and the Air Force Center
for Engineering and the Environment to understand the cost, schedule,
and construction flaws experienced by other military construction
projects in the KMCC area and how they may affect the viability of
future construction projects. We also reviewed available technical
expert reports documenting construction deficiencies associated with
these projects.
Because of ongoing investigations, we were not able to fully explore
and discuss the details of fraud investigations with AFOSI and the
German police, which limited the scope of our audit.
We conducted this performance audit from November 2007 through June
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of testimony]
Footnotes:
[1] GAO, Military Construction: Observations on Mismanagement of the
Kaiserslautern Military Community Center, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-07-1039T] (Washington, D.C.: June
28, 2007).
[2] AAFES is a joint military activity providing merchandise and
services to active duty, guard and reserve members, military retirees,
and their families. AAFES uses earnings to improve troops' quality of
life and to support morale, welfare, and recreation programs. AFSVA
provides combat support and community service programs that enhance the
quality of life for Air Force members and their families. AFSVA
programs include lodging, youth programs, and sports and fitness
programs.
[3] The closure of the Rhein Main Air Base is part of the RMTP 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 the KMCC.
[4] For all contract and cost amounts accounted for in euros, we
converted costs into U.S. dollars at the specific conversion rate
estimated by Air Force officials for that specific cost element. In
cases where the Air Force did not have a specific conversion rate set
for a cost element, we converted the cost at a rate of .66 euros per
dollar, which was the most recent conversion rate used by the Air Force
for planning purposes.
[5] Hindrance claims refer to claims against the United States for
additional costs contractors incurred because of interruptions of
contractor work.
[6] The German government has loaned the project 25 million euros since
our 2007 testimony to finance rework and repairs, prepay invoices, and
settle contractor hindrance claims. German officials stated to us that
complete reimbursement for this loan from the United States is
expected. However, the Air Force contends that it will not pay for any
expenses related to rework or repairs to deficient construction. For
transparency purposes, we consider that all expenses funded by proceeds
from the loan are part of the total project cost regardless of which
party is ultimately responsible for financing each specific cost.
[7] Estimates for each independent cost element were developed by the
Air Force and German government officials; however, our review of these
estimates in aggregate resulted in confidence that the overall project
cost will likely exceed $200 million.
[8] Secondary services, also called soft costs, include work performed
by construction inspectors who are responsible for ensuring that
installed work meets the terms of the contract and checking that
invoices correctly reflect the work performed. Secondary services also
include consulting and logistical support services.
[9] Costs associated with foreign currency fluctuation for appropriated
MILCON funds are paid from a central MILCON foreign currency
fluctuation account and are not charged directly to projects.
[10] The cost of this claims consultant is included in the secondary
services cost estimate.
[11] The consultant is also investigating if there are areas where the
Air Force may be able to recover costs for problems caused by designer
or contractor errors.
[12] Displaced personnel include military and civilian personnel in
temporary duty status from the Air Force and other agencies, as well as
contractors who are eligible for military lodging.
[13] As previously discussed, salary and benefit costs for the military
and civil service employees are not included in the overall project
costs.
[End of section]
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