Defense Infrastructure: Action Needed to Increase the Reliability of Construction Cost Estimates

Between fiscal years 2005 and 2016, Congress annually appropriated between $2.5 to $9.6 billion in MILCON funding for the active component of the U.S. military to use for projects worldwide. Reliable project construction cost estimates are of great importance, since those estimates drive these appropriations.

House Report 114-537 accompanying a proposed bill authorizing national defense activities for fiscal year 2017 included a provision for GAO to report on DOD's MILCON cost estimating. This report examines the extent to which (1) the active component obligated and expended the MILCON appropriations received during fiscal years 2005-2016, (2) the active component reprogrammed MILCON appropriations during fiscal years 2010 through 2016, and (3) DOD's MILCON cost estimates are reliable for selected projects and DOD's guidance for developing estimates fully incorporates the steps needed for developing reliable estimates. GAO analyzed the active components' MILCON execution data and reviewed DOD's guidance for cost estimating and compared it with the best practices identified in GAO's Cost Estimating and Assessment Guide .

During fiscal years 2005 through 2016, Congress appropriated about $66 billion in military construction funds (MILCON) to the active duty Army, Navy, and Air Force (referred to as the active component) for projects. As of September 30, 2016, the active component had obligated all but about $5.1 billion and expended all but about $11 billion of those funds. Of the $5.1 billion remaining unobligated, about $4.6 billion was still available to be obligated because MILCON appropriations are generally available for new obligations for 5 years. According to Department of Defense (DOD) officials, available but unobligated amounts no longer needed may be either taken back by Congress or reprogrammed to other MILCON projects that the active component identifies as needing additional funding.

During fiscal years 2010 through 2016, the active component reprogrammed about $1.6 billion in MILCON appropriations to fund emergency projects, projects that were authorized but did not receive specific appropriations, and projects needing additional funding. Of this amount, the Army reprogrammed about $789 million; the Navy, about $535 million; and the Air Force, about $295 million.

DOD's guidance does not fully incorporate the steps needed for developing reliable estimates and the estimates for three projects that GAO reviewed were not reliable. Specifically, two of the three high-value projects GAO examined experienced a more than 30-percent increase from the initial cost estimates submitted to Congress. GAO determined that DOD cost estimators did not follow all the best practices associated with the four characteristics—comprehensive, well-documented, accurate, and credible—of a reliable estimate for these projects. GAO's Cost Estimating and Assessment Guide identifies 12 steps that, if used, are more likely to result in reliable and valid cost estimates. However, as shown below, DOD's construction guidance—the Unified Facilities Criteria—does not include all of these steps. Until DOD incorporates these steps, DOD and congressional decision-makers may not have reliable estimates to inform their decisions regarding appropriations and the oversight of projects.

GAO recommends that DOD ensure that its cost estimating guidance fully incorporate the steps needed for developing reliable cost estimates. DOD partially concurred with GAO's recommendation and stated that it will issue revised cost guidance in fiscal year 2019 that more fully incorporates those steps that would benefit the military construction program.

In fiscal year 2016, Congress appropriated $3.9 billion in military  construction (MILCON) funding for the active component of the U.S.  armed forces to use for projects in the United States and overseas. The  Department of Defense (DOD) receives a MILCON appropriation annually  and uses it for the planning, design, and construction of facilities  worldwide. To use these appropriations for specific projects, DOD  submits proposals and cost estimates for approval by stakeholders  including Congress and the Secretary of Defense. DOD guidance states  that DOD must prepare the cost estimates as accurately as possible to  reflect the budgetary cost of providing facilities. However, DOD regularly  experiences differences between initial cost estimates and final costs  which, in some instances, necessitate changes to project schedules and  budgets or requests for additional funding from Congress in order to  award construction contracts and complete projects. Some differences  between initial estimates and final costs for MILCON projects can be  attributed to factors outside of DOD’s control, such as unforeseen  environmental and site conditions. However, some projects have raised  congressional concerns regarding the quality of DOD’s MILCON cost  estimating practices.

Obtaining approval and funding for MILCON projects requires DOD to  annually submit requirements and justifications in support of its funding  requests to Congress. After congressional decision-makers approve  projects and appropriate MILCON amounts, DOD may award contracts  and obligate and disburse funds for projects. DOD designates  construction agents for the military departments and defense agencies  with the primary responsibility for developing and refining these proposals  and cost estimates and for managing the design and construction of  projects. If amounts designated for a specific construction project are  unobligated and remain available at the project’s completion, the amounts  are considered savings and may be reprogrammed. Reprogrammed  amounts may be used to fund other projects where there are shortfalls,  projects authorized by Congress but not specifically funded through the  appropriations process, and emergency projects, such as facilities  destroyed by fires.

House Report 114-537 accompanying a proposed bill authorizing national  defense activities for fiscal year 2017 included a provision for us to review  and report on DOD’s MILCON cost estimating and project management  processes. We examined the extent to which (1) the active component  obligated and expended the MILCON appropriations received during  fiscal years 2005-2016, (2) the active component reprogrammed MILCON  appropriations during fiscal years 2010 through 2016, and (3) DOD’s  MILCON cost estimates for select projects are reliable and DOD’s  guidance for developing estimates fully incorporates the steps needed for  developing reliable estimates.

For our first objective, we reviewed MILCON appropriations and  congressional designated amounts for projects included in appropriation  acts and accompanying explanatory statements, committee reports, and  conference reports accompanying the appropriations acts for fiscal year  2005 through fiscal year 2016 because these data were available  electronically. Further, we analyzed the obligation and disbursement data  of the active component’s MILCON accounts using appropriation status  by fiscal year program and subaccount reports, bid savings reports, and  annual reports from the U.S. Department of the Treasury. We also  collected and compared project data from each of the military  departments on projects that had been initiated and completed during  fiscal year 2010 through fiscal year 2016, including the initial project  estimate submitted on Form 1391 (i.e., the form DOD uses to submit  project-level requirements and justifications in support of its MILCON  funding requests to Congress) and the contract award amount and  analyzed any differences between the two.

For our second objective, we reviewed DOD’s requests to Congress for  prior approval to move MILCON funds from one project to another within  a MILCON appropriation account, known as “reprogramming.” We  calculated the total number of times such requests were made and for  what dollar amounts for fiscal year 2010 through fiscal year 2016.  Furthermore, we selected one project from each military department from  this same time frame and reviewed the accompanying Form 1391 and the  reprogramming requests associated with the projects to illustrate how  savings from one MILCON project may provide funds for another project.  For both our first and second objectives, we assessed the reliability of the  data by interviewing knowledgeable officials about the data and the steps  that they had taken to verify the data’s accuracy. We determined that the  data were sufficiently reliable for our objectives.

For the third objective, we compared the process for developing the cost  estimate for three selected projects with the characteristics and best  practices for developing a reliable cost estimate as identified in our Cost  Estimating and Assessment Guide: Best Practices for Developing and  Managing Capital Program Costs (the Cost Guide). This guide is a  compilation of cost estimating best practices drawn from across industry  and federal government. We selected our projects from the universe of  projects that we reasonably expected could have begun execution (i.e.,  projects initiated during fiscal years 2012-2014); projects that were  underway, but not substantially completed (i.e., between 10- and 75- percent complete); and projects that constituted a significant financial  investment (i.e., projects with appropriations of $75 million or greater).  Ultimately, of the 690 total projects we identified DOD-wide, 13 met these  criteria. From the 13 projects, we judgmentally selected 3: (1) the  construction of a replacement elementary school at Marine Corps Camp  Foster, Japan; (2) the construction of a Strategic Command operations  building at Offutt Air Force Base, Nebraska; and (3) the construction of a  Marine Corps command headquarters and cyberspace operations  building in Fort Meade, Maryland. These projects are not intended to  constitute a projectable sample, but rather are intended to provide in- depth information about how cost estimates are developed, compared  with best practices, across the active component.

In conducting the assessments for these three projects, we examined the  processes used to develop both the Form 1391 estimate and the  independent government estimate (i.e., the estimate used to award the  contract) to determine whether the project cost estimates reflected the  characteristics of a high-quality and reliable cost estimate, as defined in  the Cost Guide. We also reviewed DOD’s Unified Facilities Criteria and  the military departments’ respective guidance related to MILCON cost  estimating and compared them with the steps needed for developing  reliable cost estimates identified in Cost Guide. We interviewed officials  and military project cost estimators at headquarters and at the Air Force’s  Engineering Division, and we also interviewed DOD’s construction agents  to discuss DOD’s cost-estimating requirements and the guidance they  follow in preparing, documenting, and reviewing project cost estimates.  We provide further details on our scope and methodology in appendix I.

We conducted this performance audit from January 2016 to March 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.

MILCON Appropriation and Obligation Process

DOD’s MILCON appropriations are used to fund the acquisition,  construction, installation, and equipping of temporary or permanent public  works, military installations, facilities, and real property needed to support  U.S. military forces in the United States and overseas. As with other DOD  activities, no funds may be appropriated in any fiscal year or obligated or  expended for MILCON activities unless such funds have been specifically  authorized by law. Each year, the National Defense Authorization Act  authorizes amounts to be appropriated in each of the 18 programmatic  MILCON appropriations accounts. Individual or conference committee  reports accompanying each fiscal year’s National Defense Authorization  Act provide specific congressional direction on authorized funding levels  designated for specific construction projects supported by the various  MILCON accounts. Similarly, conference committee reports or  explanatory statements accompanying each fiscal year’s appropriations  acts establish appropriated funding levels for MILCON projects.

The process through which the active component requests funding for  construction projects is supported by DOD’s Form 1391 Military  Construction Project Data (Form 1391). The Form 1391 is to be used to  support each project proposed for inclusion in the MILCON appropriations  request submitted concurrently with all other DOD appropriations  requests annually. The forms are to be used for both new projects as well  as urgent unforeseen projects. The Form 1391 describes the scope, total  project costs, and estimates of specific project elements. Costs  associated with other project elements such as contingency and  supervision, inspection, and design are also to be captured and included  in the total requested amount. Finally, the Form 1391 is to include a  description of the proposed construction and a requirements statement  indicating what requirement the project provides. Project budget  estimates are initially developed at the installation level and are provided  to the next responsible level for review, validation, refinement,  prioritization, and approval. Administrative support is to be provided when  requested across the departments, but ultimately the installation is the  originator and the primary responsible entity in developing the completed  Form 1391.

MILCON appropriations are generally available for obligation for 5 fiscal  years, at which time the appropriation expires. For 5 years after they  expire, appropriations are available for limited purposes, such as  liquidating obligations made during the period of availability or adjusting  contract costs. After these 5 years, any remaining unexpended amounts,  whether obligated or unobligated, are canceled and returned to the U.S.  Treasury. Once funds are returned to the U.S. Treasury, they are no  longer available for any purposes.

DOD obligates its appropriations throughout the period in which the  appropriation is available. An “unobligated balance” is the difference  between the total appropriation amount and total obligations made  against the appropriated amounts. An “unexpended balance” is the total  of obligated but unliquidated and unobligated amounts. According to  DOD officials, available but unobligated amounts no longer needed may  be either rescinded by Congress or reprogrammed to other MILCON  projects that the active component identifies as needing additional  funding. Reprogrammed amounts may be used to fund other projects  where there are shortfalls; for projects authorized by Congress but not  specifically funded through the appropriations process; for emergency  projects, such as for facilities destroyed by fires. DOD’s flexibility to  reprogram without congressional approval is limited by the amount to be  reprogrammed to a particular project. DOD’s Financial Management  Regulation requires prior congressional approval for a reprogramming  that would result in an increase exceeding 25 percent of a project’s  authorized base amount or $2 million, whichever is less. Prior approval  is not required when established costs or project-related thresholds are  not reached. According to DOD officials, reprogrammings requiring  congressional approval are called “above-threshold reprogrammings” and  those that do not are called “below-threshold reprogrammings.”

DOD designates construction agents for the military departments and  defense agencies with primary responsibility for developing and refining  MILCON proposals and cost estimates, and to manage the design and  construction of projects. Typically, the Army Corps of Engineers is the  construction agent for Army MILCON-funded projects and the Naval  Facilities Engineering Command is the construction agent for Navy and  Marine Corps MILCON-funded projects. Either of those DOD entities can  be the construction agent for the defense agencies and activities, such as  for the Missile Defense Agency or Defense Education Activity, with the  approval of the military department having jurisdiction of the real property  facility. However, both the Army and the Navy may use each other’s  construction agent if it is in the interest of efficiency and cost- effectiveness or when otherwise considered appropriate. The Air Force  may use either the Army Corps of Engineers or Naval Facilities  Engineering Command for its projects. Additionally, the Air Force Civil  Engineer Center, although not a designated construction agent, reviews  and approves requirements for Air Force MILCON cost estimates, and in  some cases may design and construct Air Force projects where both the  Air Force and the commander of the assigned construction agent agree  that it is the most efficient, expeditious, and cost-effective means to  complete the project.

Within DOD there are two levels of military construction guidance: the  Unified Facilities Criteria and component-level guidance. The Unified  Facilities Criteria are overarching, DOD-wide technical manuals and  standards used for planning, design, construction, restoration, and  maintenance of DOD facility projects. The Unified Facilities Criteria was  designed to standardize and streamline the process for developing,  maintaining, and disseminating criteria in support of MILCON. The Unified  Facilities Criteria contains guidance describing methods, procedures, and  formats for the preparation of construction cost estimates and  construction contract modification estimates, among other types of  guidance. The Unified Facilities Criteria is to be used to the greatest  extent possible by all the DOD regardless of funding source. In addition to  the Unified Facilities Criteria, the military departments and agencies have  also developed their own internal guidance on MILCON, providing further  direction on conducting activities such as cost analysis and determining  facility requirements.

We developed the GAO Cost Estimating and Assessment Guide: Best  Practices for Developing and Managing Capital Program Costs (Cost  Guide) to assist federal agencies in developing reliable cost estimates  and also as a tool for evaluating existing cost estimating procedures.   To develop the Cost Guide, our cost experts assessed measures applied  by cost estimating organizations throughout the federal government and  industry and considered best practices for the development of reliable  cost estimates. While the Cost Guide has a focus on developing cost  estimates in the context of government acquisition programs, it outlines  best practices that are generally applicable to cost estimation in a variety  of circumstances. These best practices can be used to assess (1) the  specific project cost estimates an agency develops to determine whether  they meet the four characteristics—comprehensive, well-documented,  accurate, and credible—for being reliable and (2) an agency’s cost  estimating guidance and procedures to see how well they incorporate all  the steps needed for producing a high-quality cost estimate. Figure 1  shows the four characteristics and associated best practices for each that  define a reliable cost estimate and table 1 shows the 12 steps identified in  the Cost Guide that, if followed correctly, should result in high-quality cost  estimates that management can use for making informed decisions.

The Active Component Obligated and Expended Most of Its Military Construction Appropriations Received during Fiscal Years 2005 through 2016

During fiscal years 2005 through 2016, Congress appropriated about $66  billion in MILCON funds to the active component and, as of September  30, 2016, the active component had obligated all but about $5.1 billion  and expended all but about $11 billion of those funds. Of the $5.1 billion  that remains unobligated, about $4.6 billion was unexpired and available  for new obligations (i.e., from fiscal year 2013 through 2016  appropriations). Table 2 shows the active component’s combined  MILCON appropriations, obligations, and unexpended funds from fiscal  year 2005 through fiscal year 2016.

In general, during the early first few years of a MILCON appropriation  available for 5 years, it is often likely that most of the funds will remain  unobligated. For example, as shown in table 2 above, of the nearly $3.9  billion appropriated for military construction for the active component from  the fiscal year 2016-2020 appropriation, only about $1.1 billion had been  obligated as of September 30, 2016. This is not surprising given the time  that it takes to award, obligate and disburse funds for projects. Ultimately,  though, as an appropriation nears its expiration date, all or nearly all of  the amounts have generally been obligated. In fact, as shown in table 2,  for each MILCON appropriation received by the active component prior to  fiscal year 2013 (fiscal years 2005 through 2012), less than 2 percent of  each year’s appropriation was unexpended as of September 30, 2016. In  appendix II, we provide additional analysis of the active component’s  unexpended and unobligated balances, by appropriation year and by  military department.

Although ultimately, the active component obligates and expends most of  its MILCON appropriations, the active component can experience a wide  range of differences between initial cost estimates and final costs during  the execution of individual MILCON projects, resulting in savings or  shortfalls depending on the project. For example, we found that from  fiscal year 2010 through fiscal year 2016, the active component achieved  about $4.2 billion in MILCON project savings as a result, for example, of  canceled projects, projects with lower than expected contractor bids, or  the use of less expensive building materials. In appendix III, we provide  additional analysis of the active component’s estimated initial costs and  the contract award amounts that were funded by MILCON appropriations  for fiscal year 2010 through fiscal year 2016.

The Active Component Reprogrammed Hundreds of Millions of Dollars in Military Construction Appropriations in Fiscal Years 2010- 2016

The active component reprogrammed about $1.6 billion in MILCON  appropriations to fund shortfalls caused by emergency projects, projects  that were authorized but did not receive specific appropriations, and  projects needing additional funding in fiscal years 2010 through 2016. Of  this amount, the Army reprogrammed about $789 million of about $14  billion in appropriated MILCON funds; the Navy, about $535 million of  about $14 billion in appropriated MILCON funds; and the Air Force, about  $295 million of about $7 billion in appropriated MILCON funds. Table 3  shows the number and amounts of above-threshold reprogrammings by  the active component for fiscal years 2010 through 2016.

As seen in table 3, for any given year there are typically hundreds of  millions of dollars reprogrammed. There are generally multiple active or  canceled projects that result in cost savings, which may be used to fund  authorized but not specifically funded projects. Below are three examples  where the active component funded MILCON projects with amounts  reprogrammed from other projects:

Repair Shop at Andersen Air Force Base, Guam: This is an Air  Force project to construct a pacific air resiliency low  observable/corrosion control/composite repair shop in Guam. It is an  authorized project that did not receive specific funding during the  appropriation process but was fully funded by reprogrammed cost  savings from active construction projects. Congress authorized $34.4  million for the repair shop in fiscal year 2015; however, no funds were  specifically appropriated for the project. According to Air Force  officials, since this was their top unfunded military construction  priority, they used $34.4 million in savings achieved from other  projects to construct the repair shop. Table 4 lists the three projects  whose MILCON funds were reprogrammed for the repair shop at  Andersen Air Force Base in Guam.

Training Facility at the Naval Air Station at Mayport, Florida: This  is a Navy project to construct a littoral combat ship training facility in  Florida. It is a specifically funded project requiring additional funds  that received reprogrammed amounts from a canceled project. In  fiscal year 2014, the initial cost as listed on the Form 1391 was  estimated to be $20.5 million, but project costs increased by 41  percent to an estimated $28.9 million, according to a fiscal year 2016  reprogramming request to Congress. As detailed in the  reprogramming request, the Navy attributed the increased cost to  underestimated mission simulator and communication line  requirements. To fund the increased costs, the Navy used $8.3 million  in savings from a canceled project to complete the facility. Table 5  lists the canceled project that resulted in funds being reprogrammed  for the training facility at Mayport.

Barracks at Presidio of Monterey, California: This is an Army  project to construct a trainee barracks in California. It is a specifically  funded project in need of additional funds that received  reprogrammed amounts from active and canceled construction  projects. In fiscal year 2011, the initial cost for the project as listed on  the Form 1391 was estimated to be $63 million, but project costs  increased by 51 percent to $95 million, according to a fiscal year 2015  reprogramming request to Congress. As detailed in the  reprogramming request, the Army attributed the increased costs to a  3-year delay in construction and the need to move the project to a  small, steep-terrain site. The reprogramming request further noted  that the delay in construction was due to the discovery at the  proposed construction site of a seismic fault and a plant that is an  endangered species. To fund the increased costs, the Army sought to  reprogram funds from the savings achieved from the active and  canceled projects. Table 6 lists the projects that generated the  reprogrammed funds used for the barracks at Presidio.

DOD’s Cost Estimates for Selected Construction Projects Were Not Reliable and DOD’s Guidance Does Not Fully Incorporate the Steps Needed for Developing Reliable Estimates

Our analyses of the cost estimates for three selected projects shows that  the cost estimates were not reliable, and DOD’s cost estimating guidance  does not fully incorporate all the steps needed for producing reliable  estimates. We examined the cost estimates of three high-value military  construction projects and noted that the initial cost estimates increased  for all three projects, with cost estimates for two of the projects increasing  by over 30 percent and the other, by about 7 percent. Specifically:

Strategic Command Operations Building, Offutt Air Force Base,  Nebraska. The project to construct a nuclear, space, and network  command and control operations building for the command at Offutt  Air Force Base, Nebraska, increased from an initial cost estimate in  fiscal year 2012 of $564 million to $601 million in fiscal year 2014 (or  a 7-percent increase). According to a fiscal year 2014 reprogramming  request to Congress, the Air Force attributed the increased cost to the  fact that the project team did not appreciate the full scope, complexity,  and risk of such an information technology- intensive project. These  cost issues are similar to challenges we have reported on for other  information technology-intensive MILCON projects. The Air Force is  the project owner and the Army Corps of Engineers is the construction  agent for this project.

Command Headquarters and Cyberspace Operations Building,  Fort Meade, Maryland. The project to construct a command  headquarters and cyberspace operations building with sensitive  compartmented information facility in Fort Meade, Maryland,  increased from an initial cost estimate in fiscal year 2013 of $84  million to $110 million in fiscal year 2015 (or a 31-percent increase).  As detailed in the fiscal year 2015 reprogramming request, the Navy  attributed the increased cost to higher than expected construction  costs due to increased demand on the labor workforce in the  Washington, D.C./Baltimore area and underestimated electrical power  requirements. The Navy is the project owner and the Army Corps of  Engineers is the construction agent for this project.

Elementary School Camp Foster, Japan. The project to replace an  elementary school at Camp Foster, Japan increased from an initial  cost estimate in fiscal year 2012 of $79 million to $107 million in fiscal  year 2014 (or a 35-percent increase). As detailed on the fiscal year  2014 reprogramming request, the Department of Defense Education  Activity attributed the increased cost to the volatile construction  climate in Japan caused by natural disasters; Japanese government  policies, economic stimulus, and reform; and the planned  developments for the 2020 Tokyo Olympic Games. Although this  project is not owned by any of the military departments, it is being  managed by the Army Corps of Engineers in its role as a DOD  construction agent through which it plays an important role in the  development of the construction cost estimate. The Department of  Defense Education Activity is the project owner and the Army Corps  of Engineers is the construction agent.

To determine the reliability of the cost estimates for these three selected  projects, we assessed the cost estimates against the best practices for  developing a reliable estimate in our Cost Guide. As previously  discussed, the Cost Guide defines the four characteristics— comprehensive, well documented, accurate, and credible—of a reliable  cost estimate and the associated best practices related to each  characteristic. In conducting these assessments, we examined both the  Form 1391 estimate (i.e., the estimate used to develop the budget) and  the independent government estimate i.e., (the estimate used to award  the contract) for each project. Our analysis of the cost estimates for the  three selected projects shows that the cost estimators did not follow all  the best practices listed for each of the four characteristics. As a result,  none of the characteristics were fully or substantially met. To be reliable,  a cost estimate must substantially or fully meet each of the four  characteristics. As the Cost Guide states, if any of the characteristics are  not met, minimally met, or partially met, then the cost estimate does not  fully reflect the characteristics of a high-quality estimate and cannot be  considered reliable. Table 7 provides the results of our assessment of the  cost estimates for each of the three selected projects.

The Cost Guide also identifies 12 steps that, when incorporated into an  agency’s cost estimating procedures and guidance, are more likely to  result in reliable and valid cost estimates. However, our analysis of DOD’s  department-wide cost estimating guidance—the Unified Facilities  Criteria—found that the criteria did not include all of these 12 steps. The  Unified Facilities Criteria incorporates some of the 12 steps to some  degree, but not others, and as a result DOD is at a greater risk of  developing estimates that are not reliable. Table 8 provides our  assessment of the extent to which DOD’s Unified Facilities Criteria  incorporates the 12 steps needed to develop a high-quality, reliable cost  estimate.

Each of the military departments is required to follow the Unified Facilities  Criteria to the greatest extent possible when designing and constructing  facilities. However, as shown by the table above, there are shortcomings  in these criteria when compared with our Cost Guide. Despite these  shortcomings, the military departments have gone beyond the Unified  Facilities Criteria and developed their own guidance that more closely  aligns with our Cost Guide. For example, for both the “determining the  estimating structure” and “obtain the data” steps, we found that all three  military departments had developed their own guidance that more closely  aligned with the 12 steps than the Unified Criteria did. In addition, some  military departments are also making improvements to their cost  estimating processes, but these improvements have not been fully  implemented yet. For example, the Air Force Civil Engineer Center is  implementing a cost estimate improvement plan to include the training of  nearly 700 airmen and has conducted a study that directly ties the 12  steps in the Cost Guide to the associated tasks to be completed by the  Air Force cost estimator to meet each individual step. However, the  actions contained in the cost improvement plan have not been fully  implemented and still remain in the concept phase. Similarly, although the  Army Corps of Engineers is investigating expanding the use the of cost  and schedule risk analysis—which could align with the best practices in  the Cost Guide—that the Army currently conducts for selected civil work  construction projects to its high-cost military construction projects, the  Army has not formally required the use of these tools. In appendix IV, we  describe the guidance the military departments have developed beyond  the Unified Facilities Criteria.

The Cost Guide is designed to establish a consistent methodology that is  based on best practices and that can be used across the federal  government for developing, managing, and evaluating capital program  cost estimates. Air Force and Army Corps of Engineers officials noted  that there may be instances in which following all the 12 steps of the Cost  Guide for every MILCON project would not be appropriate to the risk level  of the project. For example, it may not be realistic or to the military  departments’ benefit for the military departments to conduct a sensitivity  and uncertainty analysis or develop an independent cost estimate for all  the construction projects they initiate every year, especially for low-cost  projects. We agree that it may not be suitable to fully apply all 12 of the  cost estimating steps in the Cost Guide to all MILCON projects. However,  incorporating the 12 steps into the Unified Facilities Criteria would  establish consistency across DOD in the cost estimating process by  ensuring that, for each MILCON project, each step in the Cost Guide  would at least be considered. Furthermore, DOD could choose to  establish thresholds—based on, for example, the dollar values of the  projects—to guide the services in implementing the 12 steps for the most  valuable projects. Skipping or not considering any step of the 12-step cost  estimating process, especially for high-value projects such as those in our  case studies, increases the risk that cost estimates may use improper  assumptions, lack appropriate definition, or be otherwise unreliable.  Without improving the Unified Facilities Criteria with respect to cost  estimating processes, DOD and the services will not be positioned well to  provide reliable cost estimates to DOD and congressional decision- makers.

Each year DOD receives billions of dollars in MILCON appropriations to  use for projects in the United States and overseas. The quality of project  cost estimates are of great importance since those estimates are the  basis for DOD’s requests for appropriations. While DOD’s policy is that  MILCON cost estimates be prepared as accurately as possible in order to  reflect the full cost of constructing DOD facilities, DOD’s Unified Facilities  Criteria—the department’s primary construction criteria for developing  cost estimates—does not fully incorporate all of the steps needed for  producing reliable cost estimates. Until DOD incorporates the 12 steps of  high-quality, reliable cost estimating into this department-wide  construction criteria, DOD and congressional decision-makers may not  have reliable estimates to inform their decisions regarding appropriations  and the oversight of projects.

We are making one recommendation to DOD:  The Secretary of Defense should ensure that the Assistant Secretary of  Defense for Energy, Installations, and the Environment work with DOD’s  construction agents, military departments, and other offices to improve  DOD’s MILCON cost estimating guidance (i.e., DOD’s Unified Facilities  Criteria) by fully incorporating all the steps needed for developing high- quality reliable cost estimates. (Recommendation 1)

We provided a draft of this report to DOD. In written comments, which are  reprinted in their entirety in appendix VI, DOD partially concurred with our  recommendation.  DOD also provided technical comments that have  been incorporated into the report as appropriate.

DOD partially concurred with our recommendation to improve its cost  estimating guidance by fully incorporating all 12 steps needed for  developing high-quality, reliable estimates. DOD stated that it did not  believe that it is suitable to fully apply all 12 steps to any construction  project due to characteristics of the military construction program that  DOD believes differ from those of major system or weapon acquisition  programs. However, DOD also stated that it concurred with the intent and  general applicability of the twelve steps to military construction and that  DOD cost estimating guidance lacks specificity in several of these areas.   DOD acknowledged that expanding its cost guidance to more fully  incorporate these steps would benefit the military construction program,  and that it is planning to address this by revising its cost guidance during  Fiscal Year 2019.

In our report, we recognize that it may not be appropriate to fully apply all  12 steps to each construction project. For example, it may not be realistic  or to the military departments’ benefit to conduct a sensitivity and  uncertainty analysis or develop an independent cost estimate for all the  construction projects they initiate every year, especially for low-cost  projects. Accordingly, we did not recommend that DOD fully apply all 12  steps to each construction project, but rather that it fully incorporate the  12 steps into the Unified Facilities Criteria so that, at least, each step is  considered for each project. DOD could then choose to establish  thresholds—based on, for example, the dollar values of the projects—to  determine for which the 12 steps should be fully applied or other  circumstances in which some steps might not be applicable.  We believe  DOD’s planned revisions will meet the general intent of our  recommendation.

We are sending copies of this report to the appropriate congressional  committees; the Secretary of Defense, the Secretaries of the Army, Navy,  and Air Force. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff has any questions about this report, please contact me  at (202) 512-4523 or leporeb@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 key contributions to this report are  listed in appendix VI.

To examine the active component’s military construction (MILCON)  obligations and expended balances, we reviewed MILCON appropriations  found in appropriations acts, including accompanying explanatory  statements and conference committee reports from fiscal year 2005  through 2016. Further, we analyzed the obligation and disbursement data  of the active component‘s MILCON accounts, appropriation status  reports, bid savings reports, as well as annual reports from the U.S.  Department of the Treasury. We also collected and compared project  data from each of the active component on projects that had been  initiated and completed during fiscal year 2010 through fiscal year 2016.  Specifically, we compared the initial estimate as shown on the Form  1391—the form DOD uses to submit requirements and justifications in  support of its funding requests to Congress—with the contract award  amount and analyzed any differences between the two.

To examine the amount of MILCON reprogramming during fiscal years  2010 and 2016 by the active component, we reviewed DOD’s requests to  Congress to reprogram MILCON funds from one project to another. We  calculated the total number of times such requests were made and the  dollar amounts for fiscal year 2010 through fiscal year 2016. We selected  this time frame because the reprogramming requests were readily  available from DOD. In addition, we judgmentally selected three projects  from this same time frame and reviewed accompanying Forms 1391 and  the reprogramming requests associated with the projects to illustrate  instances in which savings from one MILCON project funded another  project. We collected and analyzed data for fiscal years 2005 through  2016 on the active component MILCON appropriations, obligations, and  disbursements and we collected reprogramming data for fiscal years  2010 through 2016. We assessed the reliability of the data by interviewing  knowledgeable officials about the data and the steps that they had taken  to verify the data’s accuracy. We determined that the data were  sufficiently reliable for our objectives.

To determine the extent to which DOD’s MILCON cost estimates are  reliable and DOD’s guidance for producing estimates fully incorporates all  of the steps needed for developing reliable estimates, we compared the  process for developing three selected projects with the characteristics  and best practices for developing a reliable estimate identified in GAO’s  Cost Estimating and Assessment Guide: Best Practices for Developing  and Managing Capital Program Costs (the Cost Guide). This guide is a  compilation of cost estimating best practices drawn from across industry  and federal government. We selected our projects from the universe of  projects that we reasonably expected could have begun execution (i.e.,  projects initiated during fiscal years 2012-2014); projects that were  underway, but not substantially completed (i.e., between 10- and 75- percent complete); and projects that constituted a significant financial  investment (i.e., projects with appropriations of $75 million or greater).  Ultimately, of 690 total projects we identified DOD-wide, 13 met these  criteria and, from this sample, we selected the 3 projects included in this  report: (1) the construction of a replacement elementary school at Camp  Foster, Japan; (2) the construction of a Strategic Command operations  building at Offutt Air Force Base, Nebraska; and (3) the construction of a  Marine Corps command headquarters and cyberspace operations  building in Fort Meade, Maryland.

In conducting the assessments for these three selected projects, we  examined the processes used to develop both the Form 1391 estimate  (i.e the form DOD uses to submit project-level requirements and  justifications in support of its MILCON funding requests to Congress ) and  the independent government estimate (i.e., the estimate used to award  the contract)  to determine whether the project cost estimates had the  characteristics of a high-quality and reliable cost estimate, as defined in  the Cost Guide. These projects are not intended to be a projectable  sample, but to illustrate how cost estimates are assessed against best  practices. Although the Camp Foster project is not owned by any of the  active component, the construction and planning of the project is being  led by the Army Corps of Engineers in its capacity as a DOD construction  agent and, as such, we decided to include it in our review. Additionally,  we reviewed DOD’s Unified Facilities Criteria and the active component’s  respective guidance related to MILCON cost estimating and compared  them with the steps needed for developing reliable estimates identified in  the Cost Guide. We also interviewed military project cost estimators and  active component construction agents to discuss the requirements and  guidance they follow in preparing, documenting, and reviewing project  cost estimates. Table 9 details the documents we reviewed for our cost  estimating assessments.

Appendix II: Active Component’s Unobligated, Unexpended Balances, and Execution of Military Construction Appropriations, Fiscal Years 2005 through 2016

In this appendix we provide the supporting details on the active  component’s unobligated and unexpended balances of military  construction (MILCON) appropriations for fiscal years 2005 through  2016. We include details on unobligated and unexpended balances by  appropriation year and include individual tables for each military  department of the active component. Overall, the active component had  high obligation and expenditure rates associated with MILCON  appropriations that have expired or been canceled. The Army, the Air  Force, and the Navy consistently expended over 90 percent of amounts  appropriated in fiscal years 2005 through 2011.

This appendix also provides supporting details on the active component’s  execution of MILCON appropriations for fiscal years 2010 through 2016.  Using Department of Defense (DOD) data, we identified two groups of  MILCON projects: congressionally directed and other. “Congressionally  directed” projects are those MILCON projects specifically identified in an  appropriation act, explanatory statement, and/or committee reports  accompanying the appropriation act for a specific fiscal year. “Other”  projects refer to congressionally directed MILCON projects identified in an  appropriation act, explanatory statement, and/or conference committee  reports in a previous fiscal year. Overall, the active component obligated  about 89 percent of its fiscal years 2010 through 2012 appropriations for  congressionally directed projects whose appropriations expired on  September 30, 2017.

Tables 10 through 12 present detailed information on unexpended and  unobligated balances for each military department of the active  component’s MILCON appropriation for fiscal years 2005 through 2016,  as reported by DOD as of September 30, 2016.

Table 10 shows that for fiscal years 2005 through 2012, the Army  expended almost all of its MILCON appropriations. Specifically, with the  exception of fiscal year 2012, the Army expended at least 90 percent of  its appropriations received each fiscal year for 2005 through 2011.  Unexpended rates for amounts appropriated for fiscal years 2014 through  2016 vary and unobligated amounts for these years remain available for  new obligations.

Table 11 shows that, for fiscal years 2005 through 2013, the Air Force  expended almost all of its MILCON appropriations. Specifically, the Air  Force expended at least 95 percent of its appropriations received each  year for fiscal years 2005 through 2011 and also in fiscal year 2013.  Unexpended rates for amounts appropriated for fiscal years 2014 through  2016 vary and unobligated amounts for these years remain available for  new obligations.

Table 12 shows that for fiscal years 2005 through 2012, the Navy  expended almost all of its MILCON appropriations. Specifically, the Navy  expended at least 90 percent of its appropriations received each fiscal  year for 2005 through 2011. Unexpended rates for amounts appropriated  for fiscal years 2014 through 2016 vary and unobligated amounts for  these years remain available for new obligations.

Execution of Military Construction Appropriations

Tables 13 through 15 provide detailed information on budget execution  for each active duty military department’s MILCON appropriation for  “congressionally directed” and “other” MILCON projects for fiscal years  2010 through 2016, as reported by DOD as of September 30, 2016.

Table13 shows the obligations made by the Army for MILCON  appropriations for fiscal years 2010 through 2016. We analyzed the  obligations made during these appropriations’ period of availability for  congressionally directed and other MILCON projects. For fiscal year  2010, using data in the table, we found that about 97.2 percent of  obligations were for congressionally directed projects and 2.8 percent  were for other projects, as discussed above. In fiscal year 2011, about 94  percent of obligations were for congressionally directed projects and 4.2  percent were for other projects; and in fiscal year 2012, about 86.5  percent of obligations were for congressionally directed projects and 7.2  percent were for other projects.

Table 14 shows the obligations made by the Air Force for MILCON  appropriations for fiscal years 2010 through 2016. We analyzed the  obligations made during these appropriations’ period of availability for  congressionally directed and other MILCON projects. For fiscal year  2010, using the data listed in the table, we found that 90.5 percent of  obligations were for congressionally directed projects and 7.3 percent  were for other projects, as discussed above. In fiscal year 2011, about  84.3 percent of obligations were for congressionally directed projects and  12.9 percent were for other projects; and in fiscal year 2012, about 87.5  percent of obligations were for congressionally directed projects and 9.0  percent were for other projects.

Table 15 shows the obligations made by the Navy for MILCON  appropriations for fiscal years 2010 through 2016. We analyzed the  obligations made during these appropriations’ period of availability for  congressionally directed and other MILCON projects. For fiscal year  2010, using data in the table, we found that 84.7 percent of obligations  were for congressionally directed projects and 15.0 percent were for other  projects, as discussed above. In fiscal year 2011, about 87.7 percent of  obligations were for congressionally directed projects and 11.8 percent  were for other projects; and in fiscal year 2012, about 85.5 percent of  obligations were for congressionally directed projects and 13.4 percent for  other projects.

Appendix III: Comparison of Completed Military Construction Projects’ Initial Cost Estimates with Contract Award Amounts, Fiscal Years 2010 through 2016

This appendix provides information on our analysis of DOD’s estimated  initial costs and contract award amounts of projects that had been  initiated and completed during fiscal year 2010 through fiscal year 2016  by the active component. An official from the Office of the Assistant  Secretary of Defense for Energy, Installations, and Environment told us  that, to determine whether initial cost estimates were over- or  underestimated, a comparison between initial Form 1391 estimates and  contract award amounts would be a valid approach since contract award  amounts are, in general, estimates of the same requirements identified on  a Form 1391. The official also noted that supervision, inspection,  overhead, and contingency costs included on a Form 1391 are not  included in contract award amounts, which could create differences  between the Form 1391 cost estimates and contract award  prices. Because of this, we excluded the supervision, inspection,  overhead, and contingency costs from the Form 1391 estimates in the  table below to eliminate those differences. Form 1391 cost estimates may  also vary from contract award amounts for reasons such as changes in  project size or scope, changes in project characteristics, unexpectedly  high or low contractor bids, or differences in expected building material  costs, among other things. A negative percent change from the Form  1391 estimate to the contract award amount indicates the estimated  project cost was overestimated and a positive percent change indicates  the project was underestimated. We did not determine the precise  reasons for any differences between estimated costs and contract award  amounts. Table 16 lists information on 414 completed projects funded  with military construction (MILCON) appropriations during fiscal year 2010  through fiscal year 2016 sorted by largest percentage overestimated to  largest percentage underestimated.

Appendix IV: Military Department Guidance for Developing Military Construction Cost Estimates

The military departments of the active component have gone beyond the  Unified Facilities Criteria and developed their own guidance for military  construction (MILCON) that more closely aligns with the 12 steps needed  for developing high-quality, reliable estimates. Table 17 describes the  guidance developed by the military departments to align with those steps.

Appendix V: Comments from the Department of Defense

Appendix VI: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Maria Storts, Assistant Director;  Bonita Anderson; Shawn Arbogast; Ronald Bergman; Brian Bothwell;  Robert Brown; Farrah Graham; Mae Jones; Jennifer Leotta; Amie Lesser;  Felicia Lopez; Carol Petersen; Vikki Porter; Steve Pruitt; and Karen  Richey made key contributions to this report.