Bureau of Engraving and Printing: Options for and Costs of a Future Currency Production Facility

BEP, within Treasury, designs and produces U.S. currency notes at BEP's facilities in Washington, D.C., and Fort Worth, Texas. The Federal Reserve pays for BEP's operational expenses, including currency production. BEP is requesting legal authority to purchase land and construct a new production facility in the D.C. area. BEP officials told GAO that, if it does not receive the necessary legal authority for a new production facility, it will renovate the D.C. facility.

GAO was asked to review BEP's facility planning process. This report: (1) describes the results of facility studies that BEP has funded and factors that led BEP to propose a new production facility, (2) examines the extent to which BEP's actions align with leading capital planning and cost estimating practices, and (3) describes other factors that could affect total federal costs of BEP's actions.

GAO analyzed BEP documents and data from 2010-2017 on currency note production, visited both BEP production facilities, assessed BEP's actions against leading capital planning and cost estimating practices, and interviewed officials from BEP, GSA, the Federal Reserve, and Treasury.

GAO provided the draft report to BEP, GSA, the Federal Reserve, and Treasury for review. BEP coordinated with Treasury in its comments. In the comments, reproduced in Appendix I, BEP emphasized the factors that led BEP to determine that a new facility is the preferred alternative. BEP and the Federal Reserve also provided technical comments, which we incorporated as appropriate. GSA did not provide comments.

The Bureau of Engraving and Printing's (BEP) studies and research determined that a new production facility would be less expensive and better address BEP's need for secure, efficient, and flexible currency production than a renovation of its Washington, D.C. facility. According to 2017 cost estimates, BEP's preferred option—a new production facility in the Washington, D.C., area and some renovated administrative space in its current D.C. facility—would cost approximately $1.4 billion, while a renovation of its current facility for both production and administrative functions would cost approximately $2.0 billion. A new facility similar to BEP's Texas facility could have a secure perimeter that meets federal building security standards. Such a perimeter is not possible with the current facility. A new facility could also house production on a single production floor to allow for a more efficient production process.

BEP generally followed leading capital-planning practices, and its 2017 cost estimate of a new production facility partially met the characteristics of a reliable cost estimate. BEP's capital planning followed leading practices, for example, by including a needs assessment, a link to BEP's strategic plan, and a long-term capital plan. BEP's cost estimate partially followed leading practices, for example, by including most life-cycle cost components and documentation of the data used for the estimate. However, it did not include sufficient sensitivity analyses, which identify a range of costs-based on varying assumptions. BEP officials stated that they plan to follow the updated GSA guidance that includes GAO's cost-estimating leading practices when updating this early stage estimate.

The ability to sell or repurpose any part of the current D.C. facility could affect the total federal costs of BEP's actions. According to officials from the Department of the Treasury (Treasury) and the General Services Administration (GSA), there could be savings if Treasury could consolidate staff or operations into the vacated facility. There could also be savings if the unneeded facility could be sold to a private buyer. However there would be costs to prepare the facility for use by other entities or if the unneeded facility does not sell. Agency officials said that it is too early to determine specific costs and savings.

For over 150 years, the Bureau of Engraving and Printing (BEP) within  the U.S. Department of the Treasury (Treasury) has been responsible for  designing and producing U.S. currency notes. BEP prints the notes for  the Federal Reserve System (Federal Reserve), which is BEP’s primary  client. BEP reported that in fiscal year 2018, it plans to produce 7.4  billion notes worth about $233 billion at its facilities in Washington, D.C.,  and Fort Worth, Texas. The D.C. facility is over 100 years old, and  currency production primarily takes place on different floors in one of its  two multi-wing, multi-level buildings. The Fort Worth facility is less than 30  years old and includes a large, one-level open space for producing  currency.

BEP has explored renovating the D.C. facility or replacing it with a new  facility in the D.C. area to bring its currency production up to 21st -century  production standards. BEP has proposed building a new currency  production facility in the D.C. area and repurposing one of its current D.C.  buildings for administrative functions. According to Treasury officials,  while BEP has the legal authority to use its revolving fund to renovate an  existing facility, it does not have legal authority to purchase land and  construct a new facility, nor the authority to use the revolving fund to pay  for such a project. As a result, BEP is seeking the necessary legal  authority to purchase land and construct a new building in the D.C. area,  as part of the fiscal year 2018 President’s budget proposal. BEP officials  have stated that if BEP does not receive this legal authority and funding, it  will begin a renovation of the current D.C. facility. According to BEP, it  would be designed to address the facility’s deficiencies and to  accommodate new, larger printing equipment that BEP anticipates needing over the next few years for security features being developed for  new currency notes.

You asked us to review BEP’s proposal to build a new production facility  in the Washington, D.C., area. This report: describes the results of the facility studies that BEP has funded and  factors that led BEP to propose a new production building; examines the extent to which BEP’s actions align with leading capital- planning and cost-estimating practices; and describes other factors that could affect total federal costs if BEP were  to construct a new production facility or renovate its existing D.C.  facility.

To describe the results of the facility studies that BEP has funded and the  factors BEP considered in proposing a new currency production facility,  we reviewed studies and cost estimates BEP undertook between 2010  and 2017, its strategic plans, and pertinent BEP operations and  production data. Specifically, we reviewed workers’ compensation claims  and manufacturing costs from fiscal years 2013 through 2016. We also  reviewed employee staffing levels as of September 2017. While we did  not independently assess the validity of these data, we reviewed the data  for outliers and obvious errors. We found the data to be sufficiently  reliable for our purposes. We conducted a literature review of research on  currency demand. We reviewed the President’s 2017 and 2018 budget  proposals as well as relevant statutes and regulations. We visited BEP’s  facilities in Washington, D.C., and Fort Worth, Texas, to examine the  production process at both facilities. We interviewed officials from BEP,  the Federal Reserve, and Treasury. We also interviewed officials from the  General Services Administration (GSA), which is responsible for helping  federal agencies acquire and dispose of office space, among other things.

To determine the extent to which BEP’s actions aligned with leading  capital-planning and cost-estimating practices, we first identified leading  capital-planning and cost-estimating practices from a variety of federal  sources. In particular, we reviewed the leading capital investment  decision-making practices identified by GAO and OMB in their respective  guides, as well as leading cost-estimating practices identified in GAO’s  Cost Estimating and Assessment Guide. We focused on the capital- planning processes that would be most applicable to BEP, which has  limited real property. The applicable processes include:  conducting an assessment of current and future needs; evaluating alternatives to determine how to best bridge performance  strategically linking capital investments to a strategic-planning  process; and documenting the agency’s goals and objectives, among other things,  in a long-term capital plan.

We compared these leading practices against actions BEP took since  2010 that led BEP to conclude that the agency would be best served by a  new production facility. Specifically, we reviewed BEP’s 2010 and 2013  feasibility studies, BEP and Treasury strategic and long-term capital  plans, and other relevant documents. Regarding cost estimating, we  focused on four broad characteristics of high quality, reliable cost  estimates identified in the Cost Estimating and Assessment Guide. These  characteristics include that the estimates are comprehensive, well- documented, accurate, and credible. We compared BEP’s 2017 estimate  for the cost of BEP’s proposal for a new facility to these practices  because it was BEP’s most recent cost estimate for constructing a new  facility. As part of our work, we reviewed the cost information that BEP  used to develop its 2017 cost estimate and interviewed senior BEP  officials on the estimates.

To describe other factors that could affect the overall cost to the federal  government if BEP were to construct a new production facility or renovate  its existing D.C. facility, we reviewed BEP studies and discussed potential  uses of BEP’s current buildings with BEP, Treasury, and GSA officials.  We reviewed GSA documentation and previous GAO work on the building  disposal process, and interviewed officials at BEP, Treasury, and GSA on  their plans for the use of each BEP building depending on the selected  alternative.

We conducted this performance audit from April 2017 to April 2018 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.

BEP produces notes at the request of the Federal Reserve. Each year,  the Federal Reserve determines how many currency notes are needed to  meet the demand for currency. Federal Reserve and BEP officials then  agree on a payment amount for note production, including costs  associated with maintaining BEP’s facilities. The Federal Reserve’s  payments are deposited into BEP’s revolving fund; the revolving fund is  used for BEP’s operational expenses, including note production.  According to Treasury officials, the revolving fund can pay for renovations  and retrofitting of a production facility, but not for land purchase or new  building construction. In 2016, the Federal Reserve paid around $660  million for note production.

In order to cover all expenses associated with the Federal Reserve’s  needs, including currency production, the Federal Reserve generates  income primarily from the interest on their holdings of U.S. government  securities, agency mortgage-backed securities, and agency debt acquired  through open market operations. The Federal Reserve is required to  transfer any surplus funds over $7.5 billion to the General Fund of the  U.S. Treasury. Increases or decreases in operating costs or BEP’s  currency production could affect these surpluses and subsequent  transfers to the General Fund. Historically, the Federal Reserve has had  significant surpluses. In 2016, the Federal Reserve transferred $92 billion  to the General Fund.

BEP’s Washington, D.C., facility consists of a 104-year old, multi-story,  multi-wing Main Building and an 80-year old multi-story, multi-wing Annex  Building (see fig. 1). The Main Building is the primary production building,  and the Annex Building is used primarily for administrative functions. Both  buildings qualify for historic designation and thus any alterations would be  subject to certain requirements under the National Historic Preservation  Act of 1966, as amended. In addition to these buildings, BEP leases a  warehouse in Landover, Maryland, to store production supplies in part  because the two Washington, D.C., buildings do not have the necessary  infrastructure to accommodate shipments carried by large commercial  trucks.

BEP’s Fort Worth facility was built in order to ensure reliable currency  production in the event of any disruption of operations at the D.C. facility.  BEP was able to obtain donated land and a building in Fort Worth and  therefore did not need to purchase land or construct a new facility.  Specifically, in 1986, BEP accepted a proposal from the City of Fort  Worth that included 100 acres of donated land and a donated building  shell to be built to BEP’s specifications. BEP then used its revolving fund  to pay for the building’s interior retrofitting, including a central energy  plant and installation of currency presses. The Fort Worth facility began  producing notes in December 1990 and was intended to produce around  25 percent of U.S. notes. According to BEP officials, as a result of  increased demand for U.S. notes and production limitations associated  with the D.C. facility, the Fort Worth facility has produced an increasingly  large share of notes. In fiscal year 2016 the Fort Worth facility produced  nearly 60 percent of notes, while the D.C. facility produced the remaining  40 percent.

BEP’s Proposal for a New Production Facility Considered Project Costs and Feasibility, Security, Efficiency, Safety, and Future Flexibility BEP Studies from 2010 to 2017 Determined the Cost and Feasibility of Multiple Alternatives

From 2010 through 2017, BEP contracted for various studies to  investigate alternatives, costs, potential sites, and program requirements  to ensure future currency production in the D.C. area (see table 1 for  details of the studies). In BEP’s 2013 study and since then, the agency  has focused on three alternatives:  “Renovation”—a major renovation of the current facility  “New build”—a new building in a different location that would house  currency production and all administrative functions  “Hybrid”—a new building in a different location that would house  currency production, but having administrative functions in one of its  current buildings  According to BEP officials, the cost estimates in the 2013 study were an  important factor in their preference for a new facility instead of a  renovation.

The 2013 study concluded that BEP should pursue the new build  alternative because it was estimated to be the least costly option, could  be completed in the shortest time frame, and promised the greatest  efficiencies. The study found that the renovation alternative would be the  most costly option and take the longest time to complete because it would  require BEP to produce currency at its current location while it was being  renovated. BEP officials told us this would require moving production  equipment from the Main Building to the Annex during the renovation and  back to the Main Building once it was renovated. According to GSA  officials, renovations are often more costly than new construction.  According to Federal Reserve officials, moving large, complex printing  presses and machines from one building to another and then back again  significantly expands the renovation’s timeframe, as time would be  needed to test the machines to get them back into specification. The  Federal Reserve further noted that some modern presses will not fit into  the Main Building without significant structural alterations, which would  add cost and time to a renovation.

Following the release of the 2013 study, BEP proposed to the Secretary  of Treasury, with the support of Treasury officials, that Treasury and BEP  pursue the hybrid alternative as their first choice (see table 2 for details  on BEP’s proposal). BEP officials told us that they, along with Treasury, selected the hybrid alternative even though the hybrid was more  expensive than the new build alternative. According to BEP officials, the  cost difference between the hybrid and new build was outweighed by the  value of maintaining administrative functions in Washington, D.C., to  facilitate the day-to-day decision-making process among BEP, Treasury,  and Federal Reserve officials. According to Treasury officials, the ability  for other Treasury employees to co-locate in the Main Building after the  repurposing is completed would also provide long-term cost benefits to  Treasury because Treasury could save on expensive lease agreements  in downtown Washington, D.C. Further, Treasury officials noted that it is  important that the Treasury Department maintain the Main Building as an  asset because of its location and history, and Treasury officials prefer that  BEP maintain some functions in the building. The 2017 study provided  cost estimates of BEP’s and Treasury’s preferred hybrid option, as well as  the renovation option that BEP officials said they would pursue if BEP  does not receive the necessary legal authority to construct a new facility.  The study estimated that the hybrid option would cost approximately  $1.389 billion and that the renovation option would cost approximately  $1.957 billion.

Federal Reserve officials told us they concur with the 2013 study that a  new facility is warranted, that a renovation of the existing facility would be  more costly than a new facility, and a renovation would not provide the  same degree of efficiency. Federal Reserve officials said that they prefer  the new build alternative because the 2013 study identified this alternative  as the least expensive option, and would provide a modern, efficient  manufacturing process. These officials also told us that, whatever  alternative BEP pursues, the Federal Reserve will be financially  responsible —whether it is for a new building, a renovated building, or  the continuation of the currency production process in the D.C. facility.

BEP officials stated that they support a new building over a renovation  because the new build would both be less expensive and have greater  benefits than a renovation. Furthermore, BEP officials told us that while  they prefer to remain in the D.C. area, they would approve of the  construction of a new facility in a different location if necessary. However,  BEP officials also told us that if BEP does not get the legal authority  necessary to use its revolving fund to purchase land and build a new  facility in 2018, BEP will pursue a renovation of the existing D.C. facility  beginning at the end of 2018.

BEP Considered Other Factors in Deciding to Propose a New Production Facility

As a federal facility, BEP must meet physical security standards  established by the Interagency Security Committee (ISC). According to  an assessment conducted by BEP’s Office of Security, the D.C. facility  does not meet many of the necessary requirements for a facility of its  security level. While certain security improvements, such as blast  resistant windows or vehicle barriers, could be installed if the facility is  renovated, other standards could only be addressed with a new facility.  Specifically, the current buildings are located in an urban center  surrounded by buildings (see fig. 1 above). As a result, according to the  assessment, the facility does not have a secure perimeter because it  lacks the required setback between the building and any point where an  unscreened vehicle can travel or park. BEP officials said that even after a  renovation, the facility would continue to have inadequate setback  distance. According to the assessment, the facility’s designation as a  historic building also limits BEP’s ability to make changes to the current  facility to meet the necessary level of protection. For example, the  facility’s placement on the historic registry limits BEP’s ability to make  certain structural changes that could mitigate the building’s chances of  progressively collapsing in the event of certain types of destructive  attacks or actions. BEP’s Office of Security attributed certain security  deficiencies to the facility’s limited setback distance and the buildings’  structure, and determined that the D.C. facility is at relatively high risk to  threats such as an externally-placed portable explosive device.

BEP aims to provide quality banknotes in an efficient, cost effective  manner. However, BEP officials concluded that the layout of the D.C.  facility makes production less efficient than the Fort Worth facility.  According to BEP production data, from 2013 to 2016, manufacturing  costs were higher at the D.C. facility for all comparable denominations.  For example, in 2016, production costs of $1 and $20 notes were 23  percent and 7 percent higher, respectively, at the D.C. facility compared  to the Fort Worth facility. Additionally, the D.C. facility employs more  manufacturing personnel than Fort Worth, even though it produces fewer  notes (see table 3). BEP officials attributed the difference in the costs to  the D.C. facility’s multi-floor, multi-wing production layout. Specifically, in  D.C., after notes are printed on one side, they are moved to another floor  to dry for at least 72 hours, brought back to the original floor to be printed  on the opposite side, and again moved to the other floor to dry. In Fort  Worth, because the production occurs in one large room on one floor,  these processes occur in adjacent spaces on the same floor. As a result,  according to BEP, notes travel more than twice as far during production in  the D.C. facility.

According to BEP, Treasury, and Federal Reserve officials, a new  production facility would offer greater efficiency gains than a renovated  facility. According to BEP officials, maintaining production on one floor in  an open space improves production efficiency. They added that a  renovation of the D.C. facility could include tearing down some walls and  raising ceilings, steps that could improve some production processes.  However, they also noted that because the D.C. facility qualifies for a  historic designation, according to BEP officials, a renovation could not  alter the building’s shape. As a result, production would still occur on  multiple levels and in separate wings if the facility were renovated. We  have reported in the past that agencies faced challenges in rehabilitating  and modernizing historic buildings for contemporary use because of their  age, specific design characteristics, and their particular historical  features.

According to its Strategic Plan, BEP is committed to providing a safe and  positive work environment for its employees. However, BEP officials said  that manufacturing employees at the D.C. facility face greater injury risk  than at the Fort Worth facility. According to BEP workers’ compensation  claim data, approved workers’ compensation claims at the D.C. facility  accounted for approximately 67 percent of BEP’s approved claims from  fiscal year 2013 through fiscal year 2016, or 200 of 297 approved claims.  BEP officials attributed the higher number of workers’ compensation  claims in the D.C. facility to the relatively high number of employees  needed to produce fewer notes (see table 3) and the increased  opportunity for employee injury because production material must be  transported farther and between floors. BEP officials estimated that  approximately 65 to 70 percent of all worker injuries are related to  materials handling.

BEP officials noted that there is an estimated $196-million deferred- maintenance backlog at the D.C. facility. This backlog includes  maintenance to the facility’s electrical and architectural systems. Even if  BEP had taken care of these maintenance issues in the past, it would not  negate the need for a renovation or a new facility. BEP officials noted that  a renovation would reduce some safety concerns, such as upgrading the  facility’s electrical systems and adding more fire-rated exits as required by  Occupational Safety and Health Administration regulations; however, a  renovation would not be able to address the multi-floor production  process that BEP officials attributed to employee injuries.

According to BEP officials, it is important for BEP to maintain flexible  currency production to respond to production needs that may change  over time. Specifically, BEP officials said that a production facility should  have the ability to adapt to changes in production equipment. Both BEP  and Federal Reserve officials told us that the new equipment likely will be  larger than current machinery. According to a representative from a  leading currency printing equipment manufacturer from which BEP buys  its printing equipment, future equipment is unlikely to decrease in size.  BEP officials said that, while the D.C. facility could be renovated to  accommodate larger equipment, it would not be possible to replicate the  large, open production floor of the Fort Worth facility, which allows for  simple installation of equipment. BEP officials told us that, unlike the  current D.C. facility, a new production facility would be able to easily  accommodate the printing equipment necessary for security features that  BEP is currently developing for the next currency redesign.

Flexibility is also an important factor when considering the future demand  for currency. The demand for currency fluctuates, and recent changes in  how the public makes purchases could affect the demand for currency.  Some observers have noted that the increased use of new payment  technologies—such as online banking and phone applications—as well  as the rise in online purchases may lead to a substantially reduced  demand for currency. In a few countries, such as Sweden, noncash  transactions have become common and the demand for currency has  fallen substantially.

In the United States, there are several indications that currency demand  will not substantially decline within the next decade. For example, the  yearly number of U.S. currency notes in circulation increased by 43  percent from 2008 to 2016. In addition, the number of ATMs in the United  States continues to grow, and a 2016 Federal Reserve study of consumer  payment choice found that cash still accounted for 32 percent of all  transactions, and more than 50 percent of transactions under $25. This  continued strength in the demand of cash has several sources. Cash  can be seen as a hedge against uncertainties, such as natural disasters  or political or economic turmoil, and also has advantages related to  privacy, anonymity, and personal data security. Moreover, according to  the Federal Deposit Insurance Corporation, approximately 25 percent of  U.S. households have limited access to the products and services of the  banking industry, and therefore, these “unbanked” and “underbanked”  populations, who may not have many alternative means of payment, rely  largely on cash.

Federal Reserve and Treasury officials we spoke with do not believe that  the use of cash in the U.S. will decline in any significant way over the next  decade. In particular, the Federal Reserve predicts a continued rise in  demand for cash over the next 10 years, despite the increased availability  of noncash payment options, indicating that a new or renovated facility  will still be required for currency production. According to BEP officials, a  new production facility would better manage the ebbs and flows in the  future demand for currency than a renovation of the current facility.  Specifically, should production demand increase, a new production facility  could be designed to easily scale to meet new production requirements.  Conversely, should the demand for currency decline in the coming years  or substantially decline in the future, unused space in a new facility could  be partitioned off and be used for other purposes or by another Treasury  agency.

BEP Generally Followed Leading Capital-Planning Practices, and Its 2017 Cost Estimate Partially Met the Characteristics of a Reliable Cost Estimate

BEP Generally Followed Applicable Leading Capital-Planning Practices

Capital investments in infrastructure can require significant resources to  construct, operate, and maintain over the course of their life-cycle.  Leading capital-planning practices can help agencies determine the  resources needed to meet their mission, goals, and objectives and how to  efficiently and effectively satisfy those needs throughout the capital  decision-making process. As shown in table 4, we found that BEP’s  capital investment decision-making process that resulted in its decision to  pursue a new currency-production facility (as part of the previously  described hybrid option) followed three applicable capital-planning  leading practices and substantially followed the fourth.

Needs assessment: BEP followed this leading practice, which calls for  comprehensively assessing the resources needed as a basis for  investment decisions. BEP conducted a facility condition assessment in  2004 that contributed to BEP’s effort to seek a new production facility,  resulting in the studies from 2010-2017 discussed above. The  assessment identified the current condition of the facility and the facility’s  capabilities, including production inefficiencies that led BEP to begin a  multi-year effort to determine its immediate and future infrastructure  needs. BEP also determined in 2004 that the agency had almost $200  million in deferred maintenance needs. BEP officials told us that they  consulted with Federal Reserve officials and concluded that it would not  be prudent to spend substantial funds to address this deferred  maintenance. For example, officials determined that it would not be  prudent to replace the heating and plumbing systems while pursuing a  new production facility. As a result, BEP deferred some maintenance  items, such as replacing heating systems, which would not compromise  safety and production. However, BEP officials said that they prioritized  and maintained critical items, such as its cleaning and recycling systems,  and implemented energy conservation initiatives to help reduce costs. As  of October 2017, BEP’s deferred maintenance backlog was about $196  million.

Alternatives evaluation: BEP substantially followed this leading practice,  which calls for a determination of how best to bridge performance gaps by  identifying and evaluating alternative approaches. As noted above, BEP  first considered multiple alternatives on how to achieve its mission to  efficiently produce banknotes. Further, BEP considered different methods  to fund and obtain land and a shell for a new production facility (see table  5). To evaluate alternatives for the location of a new facility, a contractor  identified, in 2015, potential construction sites in the D.C. area and  compared each site to a set of criteria. However, BEP officials told us that  they discounted locations outside the metropolitan D.C. area because  they believed it would be costly to relocate employees or hire and train  new manufacturing personnel to replace employees who do not relocate.  BEP officials said that the few employees who relocated from the D.C.  facility to the Fort Worth facility when it first opened were paid $50,000  each for their move. Based on these factors, BEP focused on a D.C-area  location and did not conduct an analysis of the financial implications of  building a new facility outside the D.C. area, where construction or other  costs could be less expensive.

Strategic linkage: BEP followed this leading practice, which stresses the  importance of linking plans for capital asset investments both to an  organization’s overall mission and to its strategic goals. In the 2014-2018  Strategic Plan, BEP noted that it would seek approval to proceed with the  2013 study’s recommendation to construct a new production facility.  According to the strategic plan, a new production facility would help  achieve BEP’s long-articulated strategic goal of being a printer of world- class currency notes, providing its customers and the public with superior  products through excellence in manufacturing and technological  innovation. Furthermore, Treasury concurred with BEP’s assessment and  added its request for legal authority to purchase land and build a new  facility in the fiscal year 2018 President’s Budget proposal.

Long-term capital plan: BEP followed this leading practice, which calls for  a capital plan that documents an agency’s decisions and describes its  mission, planning process, and risk management, among other things.  BEP completed all of the key activities associated with this practice. For  example, in its fiscal year 2018 capital investment plan, BEP lays out the  purpose, goals, and benefits of a new currency production facility. It also  notes the implications of exposing currency production to vulnerabilities  relating to potential facility systems failures and inefficiencies.

BEP’s 2017 Cost Estimate Partially Met the Four Characteristics of a High- Quality, Reliable Estimate

A reliable cost estimate—a summation of individual cost elements—is  critical to support the capital planning process by providing the basis for  informed investment decision-making, realistic budget formulation and  program resourcing, and accountability for results. BEP’s 2017 cost  estimate includes a contractor-developed estimate of the cost for the  construction of a new production plant and the repurposing of the Main  Building for BEP’s administrative offices (the hybrid alternative) and a  BEP-developed estimate of additional project costs, such as additional  production equipment and real estate acquisition. We found this estimate  partially met the four characteristics of a high-quality, reliable cost  estimate (see table 6). In developing this estimate, BEP relied on GSA  guidance that was available at the time. That guidance did not refer to  leading practices for cost estimates that are identified in GAO’s Cost  Guide. GSA has recently updated its guidance to refer to the leading  practices in GAO’s Cost Guide, and BEP officials told us that they will  follow this updated GSA guidance when developing any future cost  estimates.

Comprehensive: BEP’s 2017 cost estimate substantially met the  comprehensive characteristic. For example, the estimate included most  life-cycle cost components, defined the program and its current schedule  and included a consistent work breakdown structure. However, the  estimate did not include operating and sustainment costs or information  regarding the ground rules and assumptions used to develop the costs.

Well documented: BEP’s 2017 cost estimate partially met the well- documented characteristic. For example, the estimate documented the  source data and the technical assumptions used for the construction  costs, which were reviewed by GSA and BEP personnel. However,  documentation for the contractor’s estimate and its sources for the factors  used in the estimate did not include details to enable an outside cost  analyst to replicate the work. According to BEP officials, the cost data are  the contractor’s proprietary data. BEP officials also told us that sources  for the factors used were based on subject matter expert opinion.

Accurate: BEP’s cost estimate partially met the accurate characteristic.  While we found minor rounding errors and no errors in the model build-up  calculations and did not find any calculation or adjustment errors in the  estimate, the estimate nonetheless did not provide information regarding  the bias of the costs and the appropriateness of the estimating technique  used. However, BEP did follow industry standards to develop contingency  costs for a pre-design estimate for a program that has not yet been  authorized. We also found that $515 million of the internal estimate (37  percent of the program’s total cost estimate) was based on  undocumented subject matter opinion or escalated incorrectly from the  2013 study estimate. Further, BEP’s estimate did not use the same  construction year mid-point as its contractor for the inflation assumptions.  According to BEP officials, that lack is because BEP’s costs were  projected based upon the contractor’s estimate of fiscal year 2022, while  the production equipment was escalated to fiscal year 2021 because this  is the projected year for purchasing equipment. The officials also  acknowledged that this rationale, however, was not documented in the  cost estimate. BEP clarified that the estimates did not explicitly state a  confidence level because the estimate is in the pre-planning stage. They  added that it is common in the design and construction industry that  contingencies are applied to the estimate based on the completeness of  design, and as the design progresses, these contingencies are reduced  as more becomes known about the project. As there have not been actual  costs yet, variances between planned and actual costs have not been  documented, explained, and reviewed.

Credible: BEP’s 2017 cost estimate partially met the credible  characteristic. For example, BEP provided documentation showing that  both BEP and GSA reviewed the contractor’s construction estimate and  its technical assumptions. However, the estimate did not include a  sensitivity analysis for the construction costs, a risk and uncertainty  analysis, or cross-checks to see whether similar results could be  obtained. A cross-check could include an independent cost estimate  conducted by an outside group to determine whether other estimating  methods would produce similar results, but BEP officials told us that no  independent cost estimate was developed because this was too early in  the project to do such a comparison and that the construction estimate  was developed in response to a government contract statement of work  to prepare a preliminary budget forecast for BEP. Rather, BEP relied on  what it characterized as an extensive review by BEP management and  GSA officials.

Ability to Sell or Repurpose Potentially Vacant Space Could Affect the Total Cost to the Federal Government

The alternative that BEP pursues could have a financial effect on the  federal government and ultimately taxpayers. Below, we discuss potential  costs and potential savings associated with the disposition of the three  buildings under the different scenarios based on our review of BEP  documents and interviews with Treasury and GSA officials (see fig. 2).  For example, Treasury, which has custody and control over the Main  Building and the Annex, could experience costs if it needs to spend  money to upgrade these buildings, but could also experience savings if it  can repurpose the buildings or consolidate its employees into fewer  buildings. GSA, which serves as the federal government’s primary real  property and disposal agent, could incur costs for the marketing and  disposal process, but could create savings for the government if it could  repurpose or sell any vacated buildings. Proceeds from sales of Treasury- controlled facilities would benefit the federal government.

While it is possible to identify some potential costs and benefits, it is too  early to determine which costs or benefits may be realized or to attempt  to quantify them. GSA and Treasury officials told us that the actions of  other agencies or interested third parties (e.g., those potentially interested  in purchasing the Annex) would affect the costs and cost-savings of any  alternative. In addition, there are factors outside of the government’s  control, such as timing and market conditions, that could affect costs and  cost-savings. For example, changes in the Washington, D.C., real estate  market could affect the opportunity to sell the Annex. Based on interviews  with officials at GSA, Treasury, the Federal Reserve, and BEP, we have  identified the following potential costs and savings for each building.

Potential costs and savings associated with the Main Building: Both BEP  and Treasury officials told us that the Main Building will remain under  Treasury’s custody and control, regardless of which alternative BEP  undertakes.

Renovation: BEP would use its revolving fund to replace existing  heating/cooling systems and windows in the Main Building with higher  efficiency ones. Ideally, there would be some long-term cost savings  because the new systems would be less costly to operate. However,  BEP officials told us that a renovation may be more expensive than  currently estimated because the Main Building is over 100 years old  and there could be unforeseen expenses depending on what is found  once walls and ceilings are removed.

New build: Treasury would likely pay to renovate the Main Building  once BEP vacates it because the Main building would remain under  Treasury’s custody and control. The cost of this renovation could be  partially offset by savings associated with co-locating other Treasury  offices in the Main Building after the renovation is complete. For  example, Treasury bureaus currently have 15 leased facilities with  about 1.9-million square feet in the downtown D.C. area. The annual  cost of these facilities is $91.7 million. While, not all of the employees  currently in leased space could move into a renovated Main Building,  the Main Building’s 530,000 square feet could provide opportunities to  reduce leasing costs. However, because these potential renovations  and staff moves are not likely to occur for several years, Treasury  officials told us that they are not able to determine either the costs or  benefits of moving Treasury staff to the Main Building.

Hybrid: BEP’s revolving fund would pay for the renovation of one- third of the Main Building that would serve as BEP’s administrative  office and a future visitors’ center. This step would leave the  remaining two-thirds to be renovated to a “warm lit shell” to allow  others to occupy the building. At this time, Treasury does not know  what entity or account would pay for the renovation of the remaining  two-thirds because, according to Treasury officials, they have not  determined what the use of the balance of the Main Building would  be, including what entity would fund any modifications needed for new  occupants. If Treasury decided to use the Main Building for its own  staff, then Treasury could fund the cost to convert to offices for other  Treasury agencies. Under this scenario, there is both a cost to  Treasury to renovate the space it plans to use as well as a savings in  having Treasury staff vacate other leased space and move to a  Treasury-controlled building.

Potential costs and savings associated with Treasury’s Annex: The Annex  could either remain for BEP’s administrative offices or could be declared  excess and transferred to GSA for disposal.

Renovation: BEP’s revolving fund would cover the cost of renovating  the entire Annex as a “warm lit shell” and a more extensive renovation  of the portion of the Annex that BEP would use first as temporary  space for its currency printing equipment and then permanently for its  administrative office. According to BEP officials, the Annex would be  renovated to accommodate currency-printing lines that would be  relocated from the Main Building in order for the Main Building to be  renovated. Once the Main Building is renovated, the Annex would  then be renovated to become administrative space for BEP. This  process could be quite costly and take more time as the Annex would  be renovated twice for different purposes. However, if the unused part  of the Annex could be used by Treasury for other Treasury offices,  there could be some cost savings to Treasury. According to BEP  officials, while BEP would use its revolving fund to renovate the Annex  to a “warm lit shell,” the agency that ultimately occupies the unused  space would be responsible for the costs associated with repurposing  that space for its own purposes.

New build and Hybrid: BEP’s revolving fund would pay for any  necessary environmental clean-up needed in order for the Annex to  be declared as excess and transferred to GSA for disposal. GSA, as  part of its mission, would incur costs such as marketing, conducting  the disposition process, and concluding the property transfer. GSA’s  disposal process can result in the building being transferred for use by  another Federal agency, being sold to a local or state government via  a negotiated sale, being conveyed to a public entity or eligible non- profit for public uses (e.g. homeless use), or being sold to a private  party via a public sale. As the Annex is centrally located in  Washington, D.C., the building could be attractive to potential  developers. GSA recently sold another federal building near the  Annex for over $30 million. GSA officials believe that there would be  significant market interest in the Annex due to the Annex’s location  and recent private development in the area. Treasury and GSA  officials stated that proceeds from the sale of the Annex would be  deposited into the Land and Water Conservation Fund to benefit the  federal government.

On the other hand, there is no guarantee that GSA would be able to  sell the Annex: our previous work found that the most frequent  method of disposal for federal buildings from fiscal years 2011  through 2015 was demolition (57 percent) rather than sale (14  percent). Federal buildings identified for disposal may not be suitable  for sale for reasons such as their age, location, and condition, factors  that often make demolition the preferred disposal method. The unique  configuration of the Annex with its five wings, its age and condition,  and historic-designation eligibility could deter some potential buyers.  The future demand for the building, interest from private-sector  buyers, and the general economic and real estate market are  uncertain and can change quickly. If the Annex is not sold and  remains on the government’s real property inventory, generally BEP  or Treasury would be responsible for any annual maintenance costs  for the building. Alternatively, the unsold Annex could be donated to  a state or local government that would then be responsible for  maintenance costs.

Potential costs and savings associated with the leased warehouse: The  warehouse is a GSA-leased property.

Renovation: BEP would continue its annual leasing of the  warehouse, which would still be needed to accommodate large trucks  that cannot access the D.C. facility. The current lease costs  approximately $3.4 million each year, and BEP recovers about  $500,000 per year of these costs by permitting other Treasury  components to use the building through interagency agreements.

New build and Hybrid: If BEP discontinued its lease after a new  facility is completed, it would save approximately $2.9 million per year.  If BEP ended its lease prior to the end of the lease term, GSA would  need to find another entity to occupy the warehouse for the remainder  of the lease term.

We provided copies of the draft report to the BEP, GSA, the Federal  Reserve, and Treasury for review and comment. BEP coordinated with  Treasury in providing comments. In these comments, reproduced in  Appendix I, BEP emphasized the factors that led BEP to determine that a  new facility is the preferred alternative for its currency production process  and acknowledged our findings on those factors. BEP and the Federal  Reserve also provided technical comments, which we incorporated as  appropriate. GSA did not provide comments.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Director of the Bureau  of Engraving and Printing, the Secretary of the Treasury, the Chair of the  Federal Reserve Board, and the Administrator of the General Services  Administration. In addition, the report will be available at no charge on the  GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or RectanusL@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix II.

Appendix I: Comments from the Department of the Treasury

In addition to the individual named above, John W. Shumann (Assistant  Director); Martha Chow (Analyst in Charge); Amy Abramowitz; Lacey  Coppage; Delwen Jones; Jennifer Leotta; Josh Ormond; and Tomas  Wind made key contributions to this report.

The Bureau of Engraving and Printing produces U.S. currency in Washington, D.C., and Fort Worth, Texas. It wants to build a new production facility in the D.C. area, which it estimates would cost $1.4 billion. This facility would include a secure perimeter and meet new security standards, something the current D.C. facility cannot do.

If the Bureau can't build a new facility, it plans to renovate the D.C. facility, which it estimates would cost $2 billion.

We found the Bureau's planning efforts generally followed leading practices and included some sound cost estimating practices. However, the overall cost to the government is unknown.