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Testimony:



Before the Subcommittee on Transportation, Treasury, and Related 

Agencies, Committee on Appropriations House of Representatives:



United States General Accounting Office:



GAO:



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:



GAO Highlights:



Highlights of GAO-03-609T, a testimony for the Subcommittee on 

Transportation, Treasury, and Related Agencies, House Committee on 

Appropriations



Why GAO Did This Study:



The General Services Administration (GSA) has responsibility for more 

than 8,000 owned and leased buildings nationwide, together encompassing 

about 338 million square feet of space. Understanding construction and 

operating costs for these buildings is important, as the increased 

federal budget deficit has led to intensified competition for federal 

resources and recent events have highlighted security needs. 



GAO examined (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.



What GAO Found:



Several factors have affected GSA’s construction, leasing, and 

operating costs for federal buildings. For example, new security 

requirements for federal buildings developed after the 1995 bombing of 

a federal building in Oklahoma City and the September 11, 2001, 

terrorist attacks have led to increased costs for such measures as 

strengthening the ability of buildings to sustain a bomb blast and 

limiting building access. According to a GSA official, security costs 

for courthouses have increased from about $8 a square foot to about $24 

a square foot. Another factor affecting costs is budget scorekeeping 

requirements meant to ensure full recognition of the government’s 

financial commitments. The scorekeeping requirement that GSA must 

include in its budget the entire cost of constructing a building in 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 cost to the taxpayer. For example, a GSA present value cost 

analysis estimated that the recently leased U.S. Patent and Trademark 

Office complex shown below, currently being constructed in Alexandria, 

Virginia, 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.



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 

GSA officials. We also reviewed a GSA contractor’s March 2002 report on 

courthouse construction costs. [Footnote 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.[Footnote 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 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,[Footnote 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.



Security, Budget Scorekeeping Requirements, and Other Factors Have 

Affected Federal Building Costs in Recent Years:



In managing the costs of constructing, leasing, and operating federal 

buildings, GSA has faced pressures in a number of areas in recent 

years. Many factors driving costs, such as security requirements, have 

tended to increase costs for construction, leasing, and operations. In 

addition, budget scorekeeping requirements have resulted in pressure to 

lease rather than construct, when in many cases leasing is more 

expensive over the long term. Another factor--implementing a federal 

mandate encouraging environmentally sound construction and renovation 

techniques--may result in higher initial construction costs but lead to 

lower operating costs.



Security Requirements Have Raised Costs of Constructing, Leasing, and 

Operating Federal Buildings:



As a result of the Oklahoma City bombing in 1995, President Clinton 

directed the Department of Justice to assess the vulnerability of 

federal office buildings to attack, which resulted in a 1995 report 

entitled Vulnerability Assessments of Federal Facilities. The study 

designated five levels of security needs into which federal office 

buildings could be categorized, depending on the number of federal 

employees housed in the facility and the responsibilities of the 

agency; identified minimum 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. [Footnote 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 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.[Footnote 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;



* 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.[Footnote 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 

program[Footnote 7] 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 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. [Footnote 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 

shorter time periods.[Footnote 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.[Footnote 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 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.[Footnote 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.[Footnote 12] We found that at least 13 leases or 

lease project[Footnote 13] 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 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.[Footnote 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,[Footnote 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.[Footnote 16]



Geographic Location of Buildings:



Three aspects of where a building is located can affect its costs. The 

first 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. 

[Footnote 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 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. [Footnote 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.[Footnote 19] For example:



* 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.[Footnote 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:



* 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.[Footnote 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.[Footnote 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:



* 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, Construction Finishes, Contract Modifications, 

and Inflation:



Failure to adequately maintain buildings may also affect operating 

costs. In 2001, we reported that 44 buildings in GSA’s inventory each 

had $20 million or more in repair and alteration backlogs.[Footnote 23] 

Many of the repair and alteration needs in these buildings had a direct 

impact on the energy 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 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.[Footnote 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.[Footnote 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.[Footnote 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 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.



We Have Designated Federal Real Property as High-Risk:



In January 2003, we designated federal real property as a high-risk 

area.[Footnote 27] As you know, our high-risk update is provided at the 

start of each new Congress in conjunction with a special series we have 

issued biennially since January 1999, entitled the Performance and 

Accountability Series: 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 Affairs (VA) space was costing as 

much as $35 million to maintain each year.[Footnote 28] Costs 

associated with excess DOE facilities, primarily for security and 

maintenance, exceed $70 million annually.[Footnote 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.[Footnote 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.[Footnote 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 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.



Contact:



For questions regarding this testimony, please contact Bernard L. Ungar 

at (202) 512-2834 or at ungarb@gao.gov.



FOOTNOTES



[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).



[3] U.S. General Accounting Office, High-Risk Series: Federal Real 

Property, GAO-03-122 (Washington, D.C.: January 2003).



[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. 



[5] GAO-03-8. 



[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.



[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).



[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).



[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.



[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. 



[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).



[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)



[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).



[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). 



[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).



[27] GAO-03-122. 



[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).