Board Report: 2014-AE-B-007 March 31, 2014
The Board has not yet established a contractually binding stated cost limitation with the A/E firm, which would serve as a ceiling on the construction estimate that results from the A/E firm’s design. In addition, the contract does not require KCCT to submit cost-saving items with its interim design submissions, which is an industry best practice. Although the Board is not required to follow the federal requirements of the Public Building Act and the FAR, or the guidance in GSA P-120 related to establishing stated cost limitations at the outset of a construction project, doing so is considered an industry best practice and is an important method for managing project costs. The Board has developed a budget for the Martin Building project, and the project team informed us that this budget is the effective ceiling for the project costs. Further, the project team informed us that it has identified project cost savings and selected options to achieve them, and we noted that the contract has provisions relating to the A/E firm’s obligations in cost management. However, until a stated cost limitation is established, the Board cannot be assured that KCCT will design the project within the Board’s budget, and without a stipulation that KCCT submit cost-saving items, the Board may miss opportunities to keep the project within budget.
The Martin Building project budgeted amount has not been contractually established as the stated cost limitation or communicated to KCCT as such. GSA P-120 notes that the Public Building Act of 1959, as amended, requires that the scope and budget for any major capital construction project be authorized before design services can begin. Further, GSA P-120 states that unless otherwise specified in design contract documents, the A/E firm must design the project so that construction costs will not exceed the funding limitation. The FAR states that the government may require the A/E firm to design the project so that construction costs will not exceed a contractually specified dollar limit. The stated cost limitation serves as a cost control because once established, the cost estimate associated with an A/E firm’s design is not permitted to exceed this limitation.
The project team informed us that the stated cost limitation has not been contractually established due to changes in the scope of the project that were not resolved until 2011 and because final programming with building requirements for this project had not been completed until December 2013. As a result, the current contract between the Board and KCCT for design services does not require the Board to establish a stated cost limitation, as the FAR indicates may be done, until after the Board approves the 30 percent design submission.18 If, after the stated cost limitation has been established, the construction cost estimate related to a periodic design submission exceeds the Board’s stated cost limitation, the current contract with the A/E firm provides the Board with several options, including
As of November 20, 2013, KCCT was scheduled to submit the 30 percent design submission in the first quarter of 2014, which is the trigger to establish the stated cost limitation. At that point, the firm will have worked approximately seven years without a contractually binding stated cost limitation. The project team informed us that the budgeted amount in the Board’s 2013 budget as approved by the Board of Governors is the effective ceiling for the project costs. However, until the Board establishes the stated cost limitation required by the A/E contract, there is no contractual ceiling for the estimated cost of the A/E firm’s design or provision for the Board to exercise the options discussed above.
We noted that KCCT is not contractually required to submit a list of cost-saving items with its interim design submissions. KCCT would only be required to submit such a list or revise the design documents if the Board requested it as a means to address any cost estimates that exceed the as-yet-to-be-determined stated cost limitation. Industry best practices, as embodied in GSA P-120, require the A/E firm to submit a list of cost-saving items throughout the design process to reduce the project’s cost to at least 10 percent below budget. This practice serves as a cost control, helping to ensure that the design is developing within the stated cost limitation. A member of the project team stated that design changes associated with cost-saving items should occur earlier in the process, because design changes that occur later in the process could result in change orders19 that would increase design cost.
The Board’s contract with KCCT does contain several provisions related to cost control and value engineering. For example, KCCT is required to make reasonable efforts to maintain cost controls throughout the development of design documents so that the work depicted in the final approved construction documents for the Martin Building project can be constructed and installed within the Board’s final approved stated cost limitation. In addition, if at any time any estimate of the construction cost by the construction administrator exceeds the Board’s stated cost limitation, the A/E firm is required to make appropriate recommendations to the Board as to potential adjustments in the Board’s program, including the project’s size, quality, or stated cost limitation.
The project team also informed us that it has made efforts to reduce project cost. For example, the team has decided not to pursue Leadership in Energy and Environmental Design, or LEED, certification and will use drywall instead of a demountable wall system. However, by not requiring the A/E firm to submit a list of cost-saving items throughout the design process, the Board may miss opportunities to select alternatives that could help it to manage costs effectively and to keep the project within budget.
Cost management is essential because the Martin Building project requires significant investment and has been identified as "a key enabler" of the Board’s strategic framework. Further, the Board’s Annual Performance Report 2012 states that budgetary discipline is necessary to manage the unavoidable expense growth required by the strategic framework; enhanced cost-management strategies can help offset the expense growth of the strategic initiatives. While the Board has identified cost savings and has cost controls incorporated into its contract with the A/E firm, we identified two opportunities for the Board to enhance its methods for managing costs associated with the Martin Building project. Establishing a stated cost limitation as soon as practicable and requiring KCCT to submit a list of cost-saving items will enhance the Board’s ability to effectively manage this large investment.
We recommend that the Director of the Management Division
In its response, management stated the following:
The Management Division concurs with the recommendations. However, in reference to recommendation 4, independent of an OIG audit, the Management Division would have elected to issue a stated cost limitation at the start of the 30% construction document (CD) activity, rather than defer issuance to the specified contract date of after completion of the 30% CD submission. These actions are particularly prudent considering that the baseline cost estimates are within a close tolerance of the budget and the programming documents will soon be completed. The report notes that this action should be taken "as quickly as practical." Management agrees with this, and intends to issue such guidance accordingly.
In reference to recommendation 5, the Management Division will brief the CBA, the Executive Oversight Group, and senior management at the time of the 30%, 60%, and 95% design phase cost estimates. These briefings were in the project plan, independent of OIG audit recommendations.
In reference to recommendation 6, KCCT is contractually obligated to provide a continuum of value engineering, cost estimating, analysis, and re-design, as necessary, to achieve compliance with the stated cost limitation. These responsibilities are inherent in the contract with KCCT, and have always been anticipated, though a specific deliverable – as in "submit a list of cost-savings items with the remainder of … design submissions" – may not have been cited.
The project team’s guidance to KCCT had already included initial value engineering areas for consideration and initial thoughts on additive and deductive alternatives for KCCT to consider incorporating in the work, as a best practice. Cost management meetings to discuss value engineering opportunities and incorporation of additive and deductive alternate strategies are anticipated at the start of the 30% CD activity and at the start of each subsequent phase, following the review future cost estimates. Those meetings can result in lists of cost savings strategies considered and resultant disposition.
Management’s full response is included as appendix D.
Regarding recommendation 6, because KCCT is not contractually required to submit a list of cost-saving items with its interim design submissions, our concern was that the Board may miss opportunities to select alternatives that could help it to manage costs effectively on an ongoing basis and keep the project within budget. Subsequent communication with a Management Division official confirmed that KCCT will be required to submit cost-saving items with the remainder of its design submissions.
In our opinion, the actions described by the Management Division appear to be responsive to our recommendations. We plan to conduct follow up activities to ensure that the recommendation is fully addressed.
