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Board Report: 2014-AE-B-007 March 31, 2014

Opportunities Exist for the Board to Improve Recordkeeping, Cost Estimation, and Cost Management Processes for the Martin Building Construction and Renovation Project

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The Martin Building construction and renovation project (Martin Building project) requires significant investment, and it has been identified by the Board of Governors of the Federal Reserve System (Board) as a theme in the Board’s strategic framework, which is presented in its Annual Performance Report 2012.1 In addition, the Martin Building project has been identified as “a key enabler” of the other five themes identified in the strategic framework. As such, our objectives for this audit were to assess how the cost estimates for the Martin Building project were determined and how these costs will be managed within the Board’s strategic framework. Details on our scope and methodology are presented in appendix A.


Martin Building Project

The Martin Building project is currently one of the Board’s largest strategic initiatives and comprises three interrelated construction and renovation efforts: (1) construction of a visitors’ center, (2) construction of a conference center, and (3) renovation of the Martin Building. The Board’s objectives for the project are to create a safe and secure work environment that updates the physical infrastructure and reduces utilities consumption and expenses. The project was conceived shortly after the events of September 11, 2001, as a way to address the need for heightened security at the Board.

As we detailed in an earlier report,2 since the original concept was developed, the Martin Building project has gone through a lengthy design phase, primarily due to significant scope changes.3 The initial architecture and engineering (A/E) contracting effort in 2005 was for the construction of a visitors’ center. The solicitation for this effort was amended in 2006 to also include the construction of a conference center. The 2006 amendment was followed in 2007 by the determination of Management Division officials that the construction of the visitors’ center and the conference center should take place concurrently with needed renovations to the Martin Building. In 2008, the then chair of the Committee on Board Affairs (CBA)4 approved a memorandum to include the Martin Building renovations in the existing A/E contract. After negotiations with the current A/E firm, the Board’s Procurement section modified the contract in 2011 to include the design of these renovations.

After the 2011 A/E contract modification, the Board needed to decide whether the Martin Building renovation should be phased (floor-by-floor) or nonphased construction; nonphased construction would require the Board to vacate the entire building. Ultimately, the decision was made to renovate the Martin Building using a nonphased approach.

Current staff involved with this project informed us that the scope changes, renovation approach, and other decisions described above were significantly complicated by the change in the Board’s organizational structure and leadership,5 the impact of the financial crisis on the Board, and significant staff growth during this period. In addition, these scope changes and approval decisions resulted in the preparation of several conceptual construction estimates for different aspects of this project. These conceptual estimates were eventually consolidated into a single conceptual construction cost estimate of $179.9 million, which is one component of an overall estimated project cost of $280.4 million (table 1).

Table 1: Breakdown of Martin Building Project Conceptual Cost Estimatea
Item Cost estimate
(in $ millions)
Design 15.4
Construction and postdesign 179.9
Furniture, equipment, and all other 8.5
Leased spaceb 76.7
Total 280.4c

Source: Martin Building project team, Martin Building Modernization Project Overview, presentation to the CBA, September 2012.

aIncludes the Martin Building renovation and construction of a visitors’ center and a conference center.
bLeased space is needed to accommodate displaced staff during the Martin Building renovation.
cCosts are rounded and may not add to the total shown.

The Martin Building project team presented the overall conceptual construction cost estimate in table 1 to the CBA in September 2012. The project was approved as a strategic plan project, and the capital portions of the project are currently included as a multiyear capital project in the Board’s 2013 Budget as Approved by the Board of Governors.

Martin Building Project Team

The Martin Building project is currently facilitated by an executive team and a core team. The Martin Building executive team, which acts as the management authority of the Martin Building project, consists of the Chief Operating Officer, the Director and Deputy Director of the Management Division, and the Senior Associate Director for Facility Services. The core team, which acts in a supporting role to the Martin Building project, consists of facilities, procurement, space planning, and budget and administration staff located in the Management Division and in the Division of Financial Management. These two teams have experienced significant turnover in personnel during the extended period that this project has been ongoing. Throughout this report, these teams will collectively be referred to as the Martin Building project team or the project team.

Construction Cost Estimates

Purpose of Construction Cost Estimates

A construction cost estimate plays an important role in the milestone or investment decisions that are typically made during a project. A construction cost estimate consists of all costs that a prudent and experienced contractor would incur during the construction of a project and should be based on a listing of known facts, construction tasks, and supplemental judgments. Without a reliable cost estimate, an agency is at risk for cost overruns, missed deadlines, and performance shortfalls. Once finalized, the cost estimate is typically used by the contracting officer to determine whether a construction contractor’s proposed price is fair and reasonable and reflects an understanding of the project requirements.

In addition, the estimate is used to manage costs through tracking of the budget and comparison of cost growth and cost modification from design through procurement and construction to project completion. Effective management of a cost estimate involves

  1. continually updating the estimate with actual data as the data become available
  2. revising the estimate to reflect changes
  3. analyzing the differences between estimates and actual costs
Conceptual Cost Estimates

Conceptual construction cost estimates are arrived at during the initial planning process of a construction project, and according to the project team, the actual final costs of the project can vary as much as ± 25 percent from this conceptual estimate. Factors contributing to this variance include changes in the cost of material and labor; further, at this stage, management’s knowledge of the requirements is limited and the potential for change (and cost growth) is greatest. The amount of this variance was confirmed by personnel from another government agency familiar with cost estimation process in the federal government, as well as industry standards.

The U.S. Government Accountability Office’s (GAO) GAO Cost Estimating and Assessment Guide states that a rough order of magnitude estimate is developed when a quick estimate is needed and few details are available. This estimate is based on historical ratio information and is typically developed to support what-if analyses. Because this estimate is developed from limited data and in a short time, GAO notes that it should never be considered a budget-quality cost estimate.

Estimates should be updated periodically as the program matures and as schedules and requirements change. As management becomes aware of actual costs, the cost estimate tends to become more certain. Industry standards note that by the design development stages of the project, the price variance associated with the initial estimate should decrease in relation to the final actual costs. Therefore, it is important to continually update estimates with actual costs so that management has the best information available for making informed decisions.

Martin Building Project Cost-Estimate History

In 2004, the Board contracted with URS Corporation (URS)6 to complete a renovation study and submit conceptual construction cost estimates as a necessary first step toward an overall renovation program. URS’s conceptual construction cost estimates detailed two possible approaches, with options, for the renovation of the Martin Building. The renovation approaches were phased construction and nonphased construction. The URS provided estimates for the different approaches as well as options for the renovation of the Martin Building, which varied significantly in scope. These estimates ranged from $47.5 million to $102.7 million.

In response to its 2005 solicitation, offer, and award for an A/E contract, the Board contracted with Karn Charuhas Chapman & Twohey (KCCT) in 2006 to be the A/E firm for the construction of the visitors’ center and conference center (VC/CC). In 2007, KCCT submitted conceptual construction cost estimates for the VC/CC to the Board. These estimates included a base option estimated at $43.6 million and three other options that ranged from $35.9 million to $38.4 million.

In 2010, KCCT submitted an updated conceptual construction cost estimate for the VC/CC of $47.0 million.7 This estimate was for the base option provided in 2007.

In 2011, the Board executed a contract modification with KCCT to combine the renovation of the Martin Building and the construction of the VC/CC into a single project. The Martin Building project team then used escalated8 information from the 2004 URS study, KCCT’s 2007 and 2010 conceptual estimates, as well as information from prior construction projects the Board had undertaken, to develop a $179.9 million conceptual construction cost estimate for the construction of the VC/CC and the renovation of the Martin Building. The project team presented this conceptual construction cost estimate to the CBA, and we focused our assessment on this estimate.

In 2012, Martin Building cost estimates provided by the Management Division were compared to bank renovation costs on an overall cost-per-square-foot basis by the Board’s Division of Reserve Bank Operations and Payment Systems (RBOPS). Also in 2012, the Board published an estimate of $188.3 million in its Annual Performance Report 2012. This estimate included the $179.9 million construction estimate discussed above, as well as furniture, equipment, and all other items (table 1).

The Board’s current contract with KCCT requires KCCT to submit successive estimates as information becomes available throughout the design process. Specifically, the contract calls for the submission of an estimate when the program review and verification report9 is submitted, as well as updates to this submission at the completion of various design percentages. In December 2013, we were informed that the program review and verification report had been submitted. Further, both KCCT and the project’s construction administrator10 submitted updated estimates in December 2013 after our fieldwork had been completed. These estimates were within the expected range of the conceptual cost estimates.

Laws, Regulations, and Guidance

Although the Board is not required to follow the laws, regulations, and guidance listed below, they are considered to embody industry best practices for construction estimation processes.

Federal Government Requirements
  • The Public Buildings Act of 1959—Includes requirements for the construction, alteration, and acquisition of public buildings of the federal government and is codified under Title 40 of the U.S. Code.
  • Federal Acquisition Regulation (FAR) Part 36, Construction and Architect Engineer Contracts—Prescribes policies and procedures specific to contracting for construction and A/E services, including establishing contractually specified dollar limits. The Board has voluntarily committed to follow the spirit of the FAR.
Agency-Specific Guidance
  • GAO Cost Estimating and Assessment Guide—Based on best practices, establishes a consistent methodology that can be used across the federal government for developing, managing, and evaluating capital program cost estimates.
  • U.S. General Services Administration’s (GSA’s) P-120 Project Estimating Requirements for the Public Buildings Service (GSA P-120)11—Presents the technical and administrative requirements for routine cost-estimating and cost-management tasks involved in the construction project planning and execution stages and defines cost-estimating practices and standards for professional services.
Industry Standards
  • Construction Specifications Institute (CSI) Format12—The format required for contractor submissions in the Board’s A/E contract.
  • Escalation Guidance—Guidance for calculating escalation is available from a variety of sources, including RSMeans13 and the U.S. Department of Labor’s price indexes.
Board Guidance

In addition to the laws, regulations, and guidance for developing construction estimates noted above, the Board has established policies and procedures for recordkeeping. The Board’s Records Policy and Procedures Manual includes records classification definitions and records storage and retention requirements.

  • 1. The Board’s performance report is available at A list of the Board’s strategic themes is available in appendix B.  Return to text
  • 2. Office of Inspector General, Audit Observations on the Board’s Planning and Contracting Process for the Martin Building Construction, Renovation, and Relocation of Staff, OIG Report No. 2013-AA-B-007, March 29, 2013,  Return to text
  • 3. Please see appendix C for a timeline that illustrates project and cost-estimate history relevant to this report.  Return to text
  • 4. The CBA, which consists of three Board Governors, is responsible for providing oversight of the Board’s planning and budgetary process; coordinating the work of the oversight committees as they plan and budget for their particular areas of oversight; presenting a plan and budget to the Board for discussion and decision; monitoring budget formulation and planning execution over the budget cycle; providing planning guidance as appropriate; and providing oversight of the Chief Operating Officer, the Management Division, the Division of Financial Management, and the Division of Information Technology.  Return to text
  • 5. During this period, the organizational structure of the Board was modified and the Division of Financial Management and the Office of the Chief Operating Officer were created. In addition, there was turnover in the senior management in the Management Division, as well as a new CBA chair and a new Chief Operating Officer.  Return to text
  • 6. URS Corporation is an integrated engineering, construction, and technical services organization that offers a range of services, including planning, design, and engineering.  Return to text
  • 7. For additional detail on the Martin Building project schedule and milestones, see our March 29, 2013, report at  Return to text
  • 8. Escalation is the anticipated increase in a project’s cost due to inflation from the time the estimate is prepared to a designated future point in time.  Return to text
  • 9. A program review and verification report presents the A/E firm’s design recommendations for the project and the historical reports, studies, drawings, and other pertinent data supporting these recommendations.  Return to text
  • 10. The Board contracted with Hill International in 2013 to function as the Board’s construction administrator. The construction administrator provides the Board with comprehensive construction management services in connection with the design, estimating, scheduling, permitting, procurement, construction, commissioning, and certification of the project.  Return to text
  • 11. GSA provides workplaces for federal employees and oversees the preservation of historic federal properties. Public Building Services, which is part of GSA, acquires space on behalf of the federal government through new construction and leasing and acts as a caretaker for federal properties across the country.  Return to text
  • 12. CSI develops specification best practices and promulgates standards and formats, including those used for cost estimates.  Return to text
  • 13. RSMeans maintains databases of cost data on construction materials, equipment, and labor for a variety of building types. The Martin Building project team used RSMeans information in parts of its construction cost estimate calculations.  Return to text