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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

January 2009: 

Embassy Construction: 

Additional Actions Are Needed to Address Contractor Participation: 

GAO-09-48: 

GAO Highlights: 

Highlights of GAO-09-48, a report to congressional committees. 

Why GAO Did This Study: 

To provide safe and secure workplaces for overseas posts, the 
Department of State (State) has built 64 new embassy compounds (NEC) 
and other facilities since 1999, has 31 ongoing projects, and plans to 
build at least 90 more. In 2007, State reported the U.S. contractor 
pool for building NECs had reached its limit and proposed legislation 
to amend the criteria to qualify for NEC awards. GAO was asked to 
examine (1) how contractor participation in the NEC program changed in 
recent years, (2) the degree to which State assessed the need for and 
potential outcomes of its proposed amendment, (3) factors contractors 
consider when deciding to participate in the program, and (4) actions 
State has taken to address reported declines in contractor 
participation. GAO examined two indicators of contractor participation; 
reviewed State documents and proposed legislation; and interviewed 
State officials and U.S. firms that won NEC awards from 2001-2007. 

What GAO Found: 

State received at least two bids—the legislatively specified minimum 
for adequate competition—for 60 of the 61 NEC projects it awarded from 
1999-2008, and received three or more bids for at least 49 of the 61. 
Nonetheless, there was a statistically significant decline in the 
number of bids per NEC project from 2002 to 2008. GAO also found that 
the number of firms prequalified to bid on NEC projects also declined 
during this period. While many factors could affect contractor 
participation, GAO found the declines in the number of prequalifying 
firms and bids received were due, in part, to rising construction 
costs, which made it more difficult for some firms to meet 
qualification criteria. In addition, officials from five firms cited 
insufficient profits and State management practices as reasons for 
their recent withdrawals from the program. 

State has not systematically assessed the need for, or the possible 
outcomes of, its legislative proposal that would open competition for 
NEC awards to construction firms that cannot meet current qualification 
criteria. Although State identified several factors it believed reduced 
contractor participation, it has not assessed whether a sufficient 
number of contractors capable of meeting current requirements exists or 
how its legislative proposal would affect the NEC program. 
Specifically, State has not assessed the potential benefits or 
identified the potential risks of its legislative proposal, and has not 
stated how the risks would be mitigated. Absent these analyses, it is 
unclear whether the proposed amendment, including its December 2008 
revision, would benefit State’s embassy construction program. 

Contractors interviewed by GAO cited various incentives and challenges 
that affected their decision to participate in the NEC program. 
Although making profits was cited as the primary incentive for 
participating, contractors reported losing money on 42 percent of the 
contracts they performed. Contractors also cited several significant 
challenges that affected their decisions to submit contract proposals, 
including meeting State’s shortened construction schedules, supplying 
labor and material to remote locations, finding and retaining cleared 
American workers, managing financial constraints, and dealing with 
foreign governments. Firms also expressed concerns with State’s 
processes, including unclear solicitation documents and contract 
requirements, laborious design reviews, and State’s 2001 decision to 
end formal partnering relationships with contractors. 

State has made several recent efforts to encourage contractors’ 
participation in the NEC program. State has begun new outreach efforts 
to improve relations with contractors, and undertaken several changes 
to its management practices and organizational structures, including 
lengthening project schedules, improving clarity of contract 
requirements, and establishing a project management group to provide 
coordination and oversight throughout each phase of a project. While 
these changes address some contractor complaints, their full effects 
may not be apparent for a number of years. 

What GAO Recommends: 

GAO recommends the Secretary of State systematically review the 
adequacy of the NEC contractor base, the benefits and risks of its 
proposed legislation, and how it would mitigate the risks. State 
commented that the contractor base is adequate but could benefit from 
expansion, and that a recent revision of its legislative proposal 
removes the need for a cost-benefit analysis. GAO believes the 
recommendation is still valid. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-48]. For more 
information, contact Jess T. Ford at (202) 512-4128 or fordj@gao.gov or 
Terrell G. Dorn at (202) 512-6923 or dornt@gao.gov. To view the-e-
supplement online, click on [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-09-47SP]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

State Has Generally Met the Adequate Competition Requirement for 
Awarding NEC Contracts, but the Level of Contractor Participation Has 
Declined: 

State Has Not Systematically Assessed the Need for or Possible Outcomes 
of Its Legislative Proposal: 

Financial Incentives, Risks of Overseas Construction, and State's 
Management Practices Affect Contractors' Willingness to Participate in 
the NEC Program: 

State Has Acted to Encourage Incumbent Contractors' Continued NEC 
Program Participation: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Contractor-Reported Challenges to Completing State 
Construction Projects: 

Appendix III: Comments from the Department of State: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Size and Construction Time Frames for the Five Classes of 
Standard Design Embassies: 

Table 2: Number of Prequalifying Firms and Number of Bids Received for 
NEC Projects, Fiscal Years 2002-2008: 

Table 3: Number of Top 100 Design-Build Firms with Existing Operations 
in Planned 2009 NEC Project Countries: 

Table 4: Rank-Ordered Incentives to Participate in the NEC Program, as 
Reported by 17 Contractors. 

Table 5: Contractor-Reported Challenges to Completing State 
Construction Projects: 

Table 6: U.S. Construction Firms Participating in GAO Structured 
Interviews: 

Table 7: Contractor-Reported Challenges to Completing State 
Construction Projects: 

Figures: 

Figure 1: Features of Notional New Embassy Compounds Constructed Under 
Standard Embassy Design: 

Figure 2: Wedge Barrier at Entrance to a U.S. Facility: 

Abbreviations: 

AGC: Association of General Contractors of America: 

CAC: compound access control: 

COR: Contracting Officer's Representative: 

ENR: Engineering News Record: 

FAC-P/PM: Federal Acquisition Certification for Program and Project 
Managers: 

FAR: Federal Acquisition Regulations: 

FE/BR: forced entry/ballistic resistant: 

GSM: gross square meters: 

IOB: interim office building: 

LROBP: Long-Range Overseas Buildings Plan: 

MSGQ: Marine Security Guard Quarters: 

NAB: newly acquired building: 

NCC: new consulate compound: 

NEC: new embassy compound: 

NOB: new office building: 

NOX: new office annex: 

OBO: Bureau of Overseas Buildings Operations: 

OMB: Office of Management and Budget: 

PDC: Project Development and Coordination Division: 

PCS: Office of Program Coordination and Support: 

PRE: Office of Planning and Real Estate: 

REA: request for equitable adjustment: 

RFP: request for proposals: 

SED: Standard Embassy Design: 

SSMC: Standard Secure Mini Compound: 

USAID: U.S. Agency for International Development: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

January 16, 2009: 

The Honorable John F. Kerry: 
Chairman: 
The Honorable Richard G. Lugar: 
Ranking Member: 
Committee on Foreign Relations: 
United States Senate: 

The Honorable Howard L. Berman: 
Chairman: 
The Honorable Ileana Ros-Lehtinen: 
Ranking Member: 
Committee on Foreign Affairs: 
House of Representatives: 

Following the 1998 terrorist bombings of the U.S. Embassies in Nairobi, 
Kenya, and Dar es Salaam, Tanzania, which killed 220 people and injured 
thousands more, the Department of State (State) began an unprecedented 
effort to replace more than 180 overseas diplomatic facilities. From 
1999-2008, State awarded contracts worth approximately $5.8 billion to 
construct new embassy and consulate compounds (NEC) and diplomatic 
annexes at 79 overseas posts, with the majority of these facilities 
being built under management and construction reforms first implemented 
in 2001.[Footnote 1] State reported that, as of December 2008, it had 
constructed 64 new embassies, consulates, and annexes; had another 31 
projects under way; plans to construct 90 more facilities from 2009 to 
2023; and, after 2023, would need to replace facilities at 
approximately 50 overseas posts. However, in the summer of 2007, 
State's Bureau of Overseas Buildings Operations (OBO) told several 
congressional committees that the current pool of American contractors 
qualified and able to carry out diplomatic construction projects 
overseas had nearly reached its capacity and that the subsequent 
reduced competition for contracts would result in increased contract 
costs. To increase competition for NEC contracts, State proposed 
legislation to amend the Omnibus Diplomatic Security and Antiterrorism 
Act of 1986 to give State the discretion to allow more participation by 
construction firms which currently cannot meet the qualifying criteria 
for NEC awards.[Footnote 2] 

At your request, this report addresses the status of the contractor 
base for State's embassy construction program, including: (1) how 
contractor participation in the NEC program has changed in recent 
years, (2) the degree to which State has assessed the need for or 
potential outcomes of its proposed amendment to the Omnibus Diplomatic 
Security and Antiterrorism Act of 1986, (3) factors that affect 
contractors' decisions to participate in the program, and (4) actions 
State has taken to address the reported decline in the number of 
contractors willing to participate in the program. 

To complete our review, we examined two indicators of contractor 
participation in the NEC program: (1) the number of companies 
prequalifying to bid on projects per year from 2002-2008 and (2) the 
number of firms that submitted bids on NEC projects from 2002-2008. 
[Footnote 3] These two indicators help to measure contractors' 
willingness to participate in State's program since both prequalifying 
for and bidding on contracts require active efforts on the contractor's 
part. We also reviewed State's proposed amendment to the Omnibus 
Diplomatic Security and Antiterrorism Act of 1986, reviewed documents 
and interviewed State officials on analyses the agency conducted in 
support of the proposed amendment, and researched ongoing overseas 
construction operations of the 100 largest U.S. design-build 
construction firms.[Footnote 4] We determined that the data used to 
complete these analyses were sufficiently reliable for our purposes. To 
determine factors affecting contractors' decisions to participate in 
the program, we completed structured interviews with 17 U.S. 
contractors awarded NEC or diplomatic annex construction contracts from 
2001 to 2007 to obtain information about State's construction process 
and the incentives that encourage contractors to participate in the 
program.[Footnote 5] These contractors had completed, or were in the 
process of completing, a total of 78 separate construction contracts 
valued at approximately $4 billion dollars.[Footnote 6] Finally, to 
assess actions State has taken to expand its NEC contractor base, we 
reviewed (1) reports on State's embassy construction program issued by 
GAO and State's Office of the Inspector General; (2) OBO's past six 
annual Long-Range Overseas Buildings Plans; (3) relevant laws and 
regulations, including the Omnibus Diplomatic Security and 
Antiterrorism Act of 1986, federal acquisition regulations, and State 
reports and decision memos; and (4) delivery methods and partnering 
policies employed by other federal agencies and supported by leading 
industry groups. We also attended OBO's quarterly Industry Advisory 
Panel meetings, met with State staff familiar with contracting and 
construction processes, and spoke with representatives of the 
Associated General Contractors of America and the American Council of 
Engineering Companies. This report does not contain all of the 
responses to our interview questions. The full responses to our 
questions can be viewed at GAO-09-47SP. 

We conducted this performance audit from October 2007 to January 2009, 
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. 

Results in Brief: 

State documents show, and State officials reported, that from 1999 to 
2008, the department received at least two bids for all but one of the 
61 NEC projects awarded through a competitive process, and three or 
more bids for at least 49 of the 61 awards.[Footnote 7] Despite 
generally having adequate competition for NEC projects, we found a 
statistically significant decline in the number of bids State received 
per NEC contract from 2002 to 2008. We also found that the number of 
firms per project prequalified to bid also declined during this period. 
Noticeable fluctuations occurred in both the annual average numbers of 
firms per project that prequalified to bid on NECs and bids received 
from 2002-2008, including a 69 percent decline (from 13 to 4) from 2006 
to 2008 in the annual average number of prequalifying firms per 
project, and a 38 percent decline (from 5 to 3) from 2006 to 2008 in 
the annual average number of bids received per project.[Footnote 8] 
Many factors could have influenced the decline in contractor 
participation. Among them, we found that as State's estimated project 
costs increased, both the actual numbers of firms prequalifying for NEC 
awards and the actual number of bids received decreased. In addition, 
from 2006 to 2008, five firms--which, combined, built a total of 27 
embassies, consulates, and annexes--reported they would no longer bid 
for OBO projects, citing as reasons insufficient profits and State's 
overall management of the program. 

State has not systematically assessed the need for or possible outcomes 
of its proposed amendment to the Omnibus Diplomatic Security and 
Antiterrorism Act of 1986. According to State, the proposed amendment 
is intended to expand competition for NEC awards to companies that 
currently cannot meet financial, technical, and security requirements 
prescribed by the Act. In October 2007, State identified for Congress 
several factors it believed discouraged contractors from participating 
in the program, such as the profitability of State's projects compared 
with other clients, the challenging and sometimes dangerous locations 
of NEC projects, the high cost of skilled American workers with 
security clearances, dissatisfaction with firm, fixed-priced contracts, 
and the then relatively robust domestic construction market. However, 
State has completed no systematic analyses that demonstrate whether a 
sufficient number of contractors capable of meeting current 
requirements exist or how its legislative proposal would affect the NEC 
program. Specifically, State has not assessed the potential benefits or 
identified the potential risks of its legislative proposal, and has not 
stated how the risks would be mitigated. Absent these analyses, it is 
unclear how the proposed amendment would affect State's embassy 
construction program. 

Contractors we interviewed cited various incentives and challenges that 
affect their decision to participate in the NEC program, including the 
potential for profits, the risks associated with NEC projects, and 
State's overall management of the program.[Footnote 9] Most contractors 
indicated that making a profit was the strongest incentive for 
participating in State's NEC projects; however, most contractors we 
interviewed stated that their profits on State projects were not 
commensurate with the risks of building in challenging overseas 
locations. For example, contractors reported they lost money on 22 of 
the 53 completed NEC and annex projects and broke even on two other 
projects. In addition, more than three-quarters of the contractors 
reported they lost, or expected to lose, money on at least one project. 
Contractors also cited several significant challenges that affect their 
decisions to submit contract proposals, including meeting OBO's 
shortened construction schedules; supplying material to remote 
locations; finding and retaining cleared workers; managing financial 
constraints, such as currency fluctuations, material cost escalation, 
and performance bonding; and dealing with foreign governments. In 
addition, although State has made a number of changes to the 
construction processes, resulting in a greater number of projects being 
completed in less time than in past embassy construction programs, 
[Footnote 10] these reforms may have diminished incumbent contractors' 
willingness to continue participating in the NEC program. For example, 
firms indicated that they cannot meet the reduced construction 
schedules due to unclear solicitation documents and contract 
requirements, laborious design reviews, and State's 2001 decision to 
end formal partnering with contractors.[Footnote 11] As a result, 14 of 
the 17 firms we interviewed rated State's management of the NEC program 
as poor or fair, and 10 of the firms rated State as a poor or fair 
business partner.[Footnote 12] 

In recent months, State has acted to encourage contractors' 
participation in the NEC program by working to improve communications 
with contractors, refining its management practices by implementing 
process reforms and mitigating project risks, and reorganizing OBO's 
management structure. State has taken steps to improve communications 
with the contractor community in an effort to repair strained relations 
that stemmed from its management of the program. For example, State 
engaged with industry groups and individual contractors to solicit 
specific concerns about its management practices. Although State 
indicated it would examine whether it should reestablish partnering 
agreements with contractors, it has made no decision if or how such 
agreements would be implemented. In addition, State has made procedural 
changes to improve its construction and project management processes 
and to mitigate project risks. For example, State lengthened the 
schedules for NEC projects and has begun to address conflicts within 
project documents that define requirements. State also recently 
announced changes to its design-build delivery method that would, upon 
awarding an NEC contract, provide the contractor with a "bridging" 
design, which provides greater detail and incorporates critical 
requirements to expedite the contractor's final design. State believes 
this new approach would enable contractors to complete the project's 
design and begin construction in less time than under State's previous 
process. However, OBO has not yet reached agreement with State's Bureau 
of Diplomatic Security on how the bridging design would address 
critical security requirements so that congressionally-required 
security certifications will be met and preserved through the course of 
construction. Finally, to improve its project management and enhance 
its accountability to contractors and other stakeholders, State 
established a new project management group. According to OBO, the role 
of the new Project Development and Coordination Division is to 
coordinate and provide oversight throughout each phase of the project, 
from planning through construction and commissioning; however, it 
remains to be seen whether this division will provide continuity 
throughout project phases, as intended. Moreover, while the actions 
State has taken address a number of contractors' complaints and could 
improve contractor participation, the full effects of these changes on 
the NEC construction process may not be apparent for a number of years. 

We are recommending that the Secretary of State conduct a systematic 
review of the embassy construction contractor base that (1) 
demonstrates whether the U.S. contractor base that is both capable of 
meeting current requirements and willing to participate in the NEC 
program is adequate; (2) estimates the expected benefits and identifies 
the potential risks associated with State's legislative proposal; and 
(3) details how the risks would be mitigated. 

In commenting on a draft of this report, State said it believes its 
contractor base is adequate, but could benefit from expansion. It also 
commented it plans to revise its legislative proposal by opening 
competition for NECs only to U.S. companies that meet the specified 
security requirements. State also said that, since full and open 
competition is a central principle for Federal acquisitions, a cost- 
benefit analysis is unnecessary. We disagree with State's view. State 
initiated a process to revise the qualifying criteria for NEC awards, 
but it has provided no compelling analytical support for why the 
criteria should be amended, how such an amendment would be implemented, 
or the expected benefits and potential risks associated with the 
changes. Absent such support, it is unclear how the proposed changes 
would affect State's program. We, therefore, believe our recommendation 
remains valid. State's comments, along with our responses to specific 
points, are reprinted in appendix III. State also provided technical 
comments which were incorporated into the report, as appropriate. 

Background: 

From 1987-1997, U.S. diplomatic facilities overseas were attacked on 
more than 200 occasions. On August 7, 1998, terrorist bombings of the 
U.S. embassies in Dar es Salaam, Tanzania, and Nairobi, Kenya, killed 
220 people and injured thousands more. Subsequent investigations into 
these attacks and on the conditions of U.S. overseas facilities 
determined that U.S. embassies and consulates worldwide were insecure, 
unsafe, overcrowded, deteriorating, and "shockingly shabby." Unless 
security vulnerabilities were addressed, employees and the public using 
these facilities would remain at risk of terrorist attacks.[Footnote 
13] 

In the wake of these reports, State embarked on an unprecedented effort 
to construct diplomatic facilities at 214 overseas posts. The goal of 
this effort is to replace insecure, dilapidated, and dysfunctional 
embassies, consulates, and other overseas diplomatic office buildings 
with safe, secure, functional, and modern facilities as quickly as 
possible. As of December 2008, OBO had completed construction for 64 
new embassies, consulates, and annexes and had relocated more than 
19,500 U.S. employees into these new facilities. State has 31 
additional ongoing construction contracts for new facilities and plans 
to build approximately 90 more facilities from 2009 to 2023. Beyond 
this effort, State officials said that after 2023, OBO would need to 
replace facilities at approximately 50 posts. The total award value for 
all construction contracts for new office facilities awarded since 1999 
is approximately $5.8 billion.[Footnote 14] 

Efforts to Speed Construction and Contain Costs: 

In 1986, in response to terrorist threats, State began an embassy 
construction program, known as the Inman program, to better protect 
U.S. personnel and facilities overseas. However, due to systemic 
weaknesses in program management, as well as subsequent funding 
limitations, State completed only 24 of the 57 construction projects 
planned under the Inman program. Following the demise of the Inman 
program in the early 1990s, State initiated very few new construction 
projects, until the 1998 embassy bombings in Africa prompted additional 
funding for security upgrades and the construction of secure embassies 
and consulates. 

In response to the performance problems experienced under the Inman 
program, State implemented numerous reforms to its management structure 
and contracting, planning, and construction processes. These reforms 
were designed to speed completion of projects, reduce costs, and 
standardize processes, and they had the cumulative effect of reducing 
the average construction cycle time by 2 years and 9 months.[Footnote 
15] Among the most prominent reforms were: 

* elevating the former Office of Foreign Buildings Operations to OBO; 

* relying on the design-build delivery method, which reduces the number 
of solicitation, proposal, and award processes from two to one and 
allows contractors to begin basic construction before the design 
process is completed; 

* convening the Industry Advisory Panel on a quarterly basis to advise 
OBO on industry best practices in the construction sector;[Footnote 16] 
and: 

* holding an annual industry day event to solicit a broader pool of 
contractors.[Footnote 17] 

Starting in 2002, OBO also implemented the Standard Embassy Design 
(SED) to expedite the planning, awarding, design, and construction of 
NECs. The SED is a series of documents that outline site and building 
plans, specifications, and design criteria, and explain how to adapt 
these specifications to a particular project and contract requirements. 
The SED is not an actual building design but rather a template that 
standardizes the basic plans for the structural, spatial, safety, and 
security requirements for each NEC, including the following: 

* main office buildings and annexes; 

* security features, such as the Compound Access Control (CAC) 
buildings and perimeter walls; 

* utility buildings, warehouses, and General Services annex; 

* living quarters for Marine Security Guards (MSGQ); and: 

* employee and visitor parking. 

The SED also identifies ways to allow for future building expansion on 
the site; establishes minimum permissible baseline standards for 
materials and interior finishes; and factors in environmental concerns 
such as temperature, humidity, dust, rain, and air quality when 
designing and selecting mechanical equipment. Figure 1 shows the 
general features for a standard design NEC. 

Figure 1: Features of Notional New Embassy Compounds Constructed Under 
Standard Embassy Design: 

[Refer to PDF for image] 

This figure is an illustration of the features of notional new embassy 
compounds constructed under standard embassy design. 

Source: State Department. 

[End of figure] 

Since 2002, there have been three primary classes of standard design 
embassy and consulate compounds--small, medium, and large--based on the 
size and cost of the facility, each of which have predefined 
construction schedules and total project durations associated with 
them. In 2004, State introduced a fourth class of SED, called Extra 
Large or Special SEDs, which generally exceed the size and cost of 
large SEDs. Finally, in 2007, State introduced the Standard Secure Mini 
Compound, which is generally smaller and less costly than a small SED. 
In addition, OBO has developed standard designs for MSGQs, and stand- 
alone unclassified annexes. Table 1 shows the allowable size and 
construction time frames for each of the five classes of NECs 
constructed using the standard embassy design. 

Table 1: Size and Construction Time Frames for the Five Classes of 
Standard Design Embassies[A]: 

Class: Standard Secure Mini Compound; 
Size, cost, and time frames: 
* Size: 3,000 gsm[B] and 45 desks.
* Construction duration: 24 months. 

Class: Small; 
Size, cost, and time frames: 
* Size: 3,001-4,300 gsm.
* Construction duration: 28 months. 

Class: Medium; 
Size, cost, and time frames: 
* Size: 4,301-7,400 gsm.
* Construction duration: 30 months. 

Class: Large; 
Size, cost, and time frames: 
* Size: 7,401-11,300 gsm.
* Construction duration: 32 months. 

Class: Extra large and special; 
Size, cost, and time frames: 
* Size: greater than 11,300 gsm.
* Construction duration: 36 months. 

Source: OBO. 

[A] Construction duration, inclusive of design, includes the period of 
time between the issuance of the Limited Notice to Proceed with 
Construction to the date that construction is certified as 
substantially complete. 

[B] Gross square meters. 

[End of table] 

Qualifications for Submitting Contract Proposals: 

The Omnibus Diplomatic Security and Antiterrorism Act of 1986 states 
that, where adequate competition exists, only U.S. persons and 
qualified U.S. joint-venture persons may (1) bid on diplomatic 
construction or design projects with estimated total project values 
exceeding $10 million and (2) bid on diplomatic construction or design 
projects involving technical security, unless the project involves low- 
level technology, as determined by the Secretary of State.[Footnote 18] 
The act defines adequate competition as the presence of two or more 
qualified bidders submitting responsive bids for a specific project. In 
this context, a U.S. person is defined, in part, as a company that: 

* is incorporated or legally organized under the laws of the United 
States; 

* has its principal place of business in the United States; 

* has performed within the United States or at a U.S. diplomatic or 
consular establishment abroad administrative and technical, 
professional, or construction services similar in complexity, type, and 
value to the project being bid; 

* has total business volume equal to or greater than the value of the 
project being bid in 3 years of the 5-year period before the specified 
date; 

* employs U.S. citizens (1) in at least 80 percent of its principal 
management positions in the United States and (2) in more than half of 
its permanent, full-time positions in the United States; 

* will employ U.S. citizens in at least 80 percent of the supervisory 
positions on the project site; and: 

* has the existing technical and financial resources in the United 
States to perform the contract. 

Contracts for construction projects that do not involve technical 
security requirements may be awarded to foreign firms. However, the 
Percy Amendment to the Foreign Buildings Act of 1926 enables American 
firms to be more competitive with foreign firms by reducing the 
evaluated price of offers from American firms by 10 percent for such 
projects expected to exceed $5 million.[Footnote 19] 

State's Proposed Amendment to the Omnibus Diplomatic Security and 
Antiterrorism Act of 1986: 

In 2007, State proposed an amendment to the Omnibus Diplomatic Security 
and Antiterrorism Act of 1986 that would allow the Secretary of State 
to waive financial, U.S. citizenship, and other requirements for NEC 
awards, when necessary and appropriate. According to State, the 
proposed amendment was necessary because "the current pool of American 
contractors qualified and able to carry out diplomatic construction 
projects overseas has nearly reached its capacity" and the subsequent 
reduced competition for contracts would result in increased contract 
costs. When proposing the amendment, State argued that amending the law 
would increase competition for NEC awards by opening the contractor 
pool to smaller U.S. construction companies and to foreign companies 
that previously could not qualify for NEC projects. Congress did not 
act on the proposed amendment. In December 2008, State officials told 
us the department plans to revise the 2007 proposal by opening 
competition for NECs only to U.S. companies that meet the specified 
security requirements. 

State's Contracting and Construction Processes: 

State uses a two-phase solicitation process for awarding contracts for 
NECs.[Footnote 20] In the first phase, the prequalification of 
offerors, contractors submit documentation attesting how they meet the 
legal, technical, and financial qualifications for each project on 
which they wish to bid. State then reviews this documentation to 
certify whether contractors do, in fact, meet the criteria. Once State 
completes these reviews, it issues a list of contractors eligible to 
bid for each contract award. Only companies that State certifies as 
prequalified under the first phase receive, and may respond to, 
subsequent requests for proposals (RFP) for major construction awards. 
In the second phase, RFPs, State solicits and evaluates contractors' 
bids for construction awards, including technical and price proposals. 
Contractors bid a firm, fixed price for a project; therefore, the 
winning contractor will deliver the defined scope of the project for 
the price of the contract. 

After State awards a design-build contract, the contractor must develop 
a project design and work plan that incorporates all construction and 
security features outlined in the RFP and contract documents. During 
this design phase, the contractor must also begin preparing for 
construction by obtaining local building permits, buying or ordering 
materials, and mobilizing workers. In addition, under the design-build 
delivery method, contractors can begin construction of some buildings 
and systems that do not require security clearances-- such as perimeter 
walls, warehouses, and mechanical support buildings--before the full 
design is approved. However, construction of the main office building--
the chancery or consulate--generally does not proceed until the design 
is approved and State certifies to Congress that it meets all security 
requirements.[Footnote 21] During the construction phase, OBO monitors 
contractors' schedules, inspects and reviews contractors' work, and 
certifies that construction is substantially complete once contractors 
meet all requirements of the contract.[Footnote 22] Once construction 
is certified as being substantially complete, State conducts final 
commissioning to ensure that building systems--such as fire protection, 
electrical, and mechanical--were installed properly and operate 
according to design criteria and manufacturer specifications. Once all 
systems pass the commissioning process, the building is certified to be 
occupied and post staff may move in. 

State Reports That NEC Costs Are Rising: 

In September 2008, State reported that construction costs had increased 
dramatically since 2001 and that the trend was likely to continue. 
State reported that from 2001-2008 total construction costs for new 
embassy and consulate compounds increased, on average, 9 percent per 
year, from approximately $5,000 per gross square meter in 2001 to more 
than $13,000 per gross square meter in 2008.[Footnote 23] In an earlier 
analysis, State attributed the overall cost increases to two factors: 
inflation for construction materials and the decrease in the value of 
the dollar. State reported that, overall, prices for construction 
materials rose 44 percent from December 2003 to July 2008. In addition, 
State reported that the significant decline in the value of the dollar 
resulted in additional construction-cost increases of approximately 2 
percent per year since 2003. 

State Has Generally Met the Adequate Competition Requirement for 
Awarding NEC Contracts, but the Level of Contractor Participation Has 
Declined: 

Although State has generally received at least two bids for NEC 
projects since 1999, which meets the adequate competition clause, the 
number of contractors participating in the State's program has 
declined. State documents show, and State officials reported, that from 
1999 to 2008, the department received at least two bids for all but one 
of the 61 NEC projects awarded through a competitive process, and three 
or more bids for at least 49 of the 61 awards. Table 2 shows the number 
of firms prequalifying to bid on NEC projects and the number of bids 
submitted for each NEC project from 2002 to 2008.[Footnote 24] Despite 
having adequate competition for all but one NEC award, we found a 
statistically significant decline in the number of bids State received 
per NEC contract from 2002 to 2008. We also found that the number of 
firms per project prequalified to bid also declined during that period. 
These results demonstrate that the level of contractor participation in 
the NEC program has declined. 

Table 2: Number of Prequalifying Firms and Number of Bids Received for 
NEC Projects, Fiscal Years 2002-2008A: 

Year: 2002; 
Project: Abuja, Nigeria; 
Number of prequalifying firms: 5; 
Number of bids received: 3. 

Year: 2002; 
Project: Cape Town, South Africa; 
Number of prequalifying firms: 9; 
Number of bids received: 6. 

Year: 2002; 
Project: Conakry, Guinea; 
Number of prequalifying firms: 6; 
Number of bids received: 4. 

Year: 2002; 
Project: Phnom Penh, Cambodia; 
Number of prequalifying firms: 9; 
Number of bids received: 4. 

Year: 2002; 
Project: Tashkent, Uzbekistan; 
Number of prequalifying firms: 10; 
Number of bids received: 6. 

Year: 2002; 
Project: Tbilisi, Georgia; 
Number of prequalifying firms: 10; 
Number of bids received: 4. 

Year: 2002; 
Project: Yaounde, Cameroon; 
Number of prequalifying firms: 6; 
Number of bids received: 3. 

Year: 2002; Per project average: 
Number of prequalifying firms: 7.9; 
Number of bids received: 4.3. 

Year: 2003; 
Project: Astana, Kazakhstan; 
Number of prequalifying firms: 7; 
Number of bids received: 5. 

Year: 2003; 
Project: Bamako, Mali; 
Number of prequalifying firms: 6; 
Number of bids received: 3. 

Year: 2003; 
Project: Beijing, China; 
Number of prequalifying firms: 4; 
Number of bids received: 3. 

Year: 2003; 
Project: Freetown, Sierra Leone; 
Number of prequalifying firms: 8; 
Number of bids received: 3. 

Year: 2003; 
Project: Kingston, Jamaica; 
Number of prequalifying firms: 7; 
Number of bids received: 4. 

Year: 2003; Per project average; 
Number of prequalifying firms: 6.3; 
Number of bids received: 3.5. 

Year: 2004; 
Project: Accra, Ghana; 
Number of prequalifying firms: 5; 
Number of bids received: 5. 

Year: 2004; 
Project: Algiers, Algeria; 
Number of prequalifying firms: 5; 
Number of bids received: 2. 

Year: 2004; 
Project: Belmopan, Belize; 
Number of prequalifying firms: 10; 
Number of bids received: 6. 

Year: 2004; 
Project: Berlin, Germany; 
Number of prequalifying firms: 5; 
Number of bids received: 4. 

Year: 2004; 
Project: Kathmandu, Nepal; 
Number of prequalifying firms: 5; 
Number of bids received: 4. 

Year: 2004; 
Project: Lome, Togo; 
Number of prequalifying firms: 4; 
Number of bids received: 4. 

Year: 2004; 
Project: Managua, Nicaragua; 
Number of prequalifying firms: 7; 
Number of bids received: 5. 

Year: 2004; 
Project: Panama City, Panama; 
Number of prequalifying firms: 7; 
Number of bids received: 4. 

Year: 2004; 
Project: Rangoon, Burma; 
Number of prequalifying firms: 4; 
Number of bids received: 4. 

Year: 2004; Per project average; 
Number of prequalifying firms: 5.8; 
Number of bids received: 4.2. 

Year: 2005; 
Project: Ciudad Juarez, Mexico; 
Number of prequalifying firms: 9; 
Number of bids received: 4. 

Year: 2005; 
Project: Khartoum, Sudan; 
Number of prequalifying firms: 5; 
Number of bids received: 2. 

Year: 2005; 
Project: Kigali, Rwanda; 
Number of prequalifying firms: 5; 
Number of bids received: 4. 

Year: 2005; 
Project: Mumbai, India; 
Number of prequalifying firms: 8; 
Number of bids received: 4. 

Year: 2005; 
Project: Port-au-Prince, Haiti; 
Number of prequalifying firms: 6; 
Number of bids received: 4. 

Year: 2005; 
Project: Quito, Ecuador; 
Number of prequalifying firms: 8; 
Number of bids received: 5. 

Year: 2005; 
Project: Skopje, Macedonia; 
Number of prequalifying firms: 6; 
Number of bids received: 3. 

Year: 2005; Per project average; 
Number of prequalifying firms: 6.7; 
Number of bids received: 3.7. 

Year: 2006; 
Project: Johannesburg, South Africa; 
Number of prequalifying firms: 14; 
Number of bids received: 4. 

Year: 2006; 
Project: Libreville, Gabon; 
Number of prequalifying firms: 12; 
Number of bids received: 4. 

Year: 2006; 
Project: Surabaya, Indonesia; 
Number of prequalifying firms: 15; 
Number of bids received: 6. 

Year: 2006; 
Project: Suva, Fiji; 
Number of prequalifying firms: 12; 
Number of bids received: 6. 

Year: 2006; Per project average; 
Number of prequalifying firms: 13.3; 
Number of bids received: 5.0. 

Year: 2007; 
Project: Addis Ababa, Ethiopia; 
Number of prequalifying firms: 6; 
Number of bids received: 3. 

Year: 2007; 
Project: Antananarivo, Madagascar; 
Number of prequalifying firms: 8; 
Number of bids received: 3. 

Year: 2007; 
Project: Brazzaville, Republic of Congo; 
Number of prequalifying firms: 12; 
Number of bids received: 4. 

Year: 2007; 
Project: Jeddah, Saudi Arabia; 
Number of prequalifying firms: 6; 
Number of bids received: 3. 

Year: 2007; 
Project: Karachi, Pakistan; 
Number of prequalifying firms: 6; 
Number of bids received: 2. 

Year: 2007; 
Project: Ouagadougou, Burkina Faso; 
Number of prequalifying firms: 6; 
Number of bids received: 2. 

Year: 2007; 
Project: Riga, Latvia; 
Number of prequalifying firms: 7; 
Number of bids received: 3. 

Year: 2007; 
Project: Sarajevo, Bosnia; 
Number of prequalifying firms: 5; 
Number of bids received: 3. 

Year: 2007; 
Project: Tijuana, Mexico; 
Number of prequalifying firms: 10; 
Number of bids received: 1. 

Year: 2007; 
Project: Valletta, Malta; 
Number of prequalifying firms: 9; 
Number of bids received: 5. 

Year: 2007; Per project average; 
Number of prequalifying firms: 7.5; 
Number of bids received: 2.9. 

Year: 2008; 
Project: Bucharest, Romania; 
Number of prequalifying firms: 5; 
Number of bids received: 3. 

Year: 2008; 
Project: Djibouti, Djibouti; 
Number of prequalifying firms: 5; 
Number of bids received: 4. 

Year: 2008; 
Project: Dubai, United Arab Emirates; 
Number of prequalifying firms: 5; 
Number of bids received: 4. 

Year: 2008; 
Project: Guangzhou, China; 
Number of prequalifying firms: 3; 
Number of bids received: 2. 

Year: 2008; 
Project: Kyiv, Ukraine; 
Number of prequalifying firms: 2; 
Number of bids received: 2. 

Year: 2008; 
Project: Lusaka, Zambia; 
Number of prequalifying firms: 5; 
Number of bids received: 4. 

Year: 2008; Per project average; 
Number of prequalifying firms: 4.2; 
Number of bids received: 3.2. 

Source: GAO analysis of State data. 

[A] The table includes only projects labeled by State as NECs, NCCs, 
and NOBs. 

[End of table] 

In addition, from 2002 to 2008, noticeable fluctuations occurred in 
both the annual average numbers of firms per project that prequalified 
to bid on NECs and bids received. From 2002 to 2005, the annual average 
number of firms that prequalified to bid ranged from approximately 6 to 
approximately 8 (see table 2). In 2006, the average increased to more 
than 13, then declined by 69 percent to about 4 in 2008. The average 
number of bids submitted per project from 2002 to 2005 ranged from 3.5 
to approximately 4, increased to 5 bids per project in 2006, then 
decreased by 38 percent, to approximately 3 bids per project in 2008. 

Although the declines in contractor participation can be attributed to 
many factors, we found that project costs partly explained the 
declines. In statistical analyses, we found that State's estimated NEC 
project cost is a strong predictor of the actual number of firms that 
prequalify to bid on projects, such that higher estimated costs result 
in fewer prequalifying firms and lower estimated costs result in more 
prequalifying firms. We also found that the actual number of 
prequalifying firms per project showed a strong positive correlation 
with the number of bids submitted per project. Thus, estimated project 
costs directly affect the number of prequalifying firms and indirectly 
affect the number of bids submitted.[Footnote 25] 

To illustrate these relationships, we compared the annual average 
estimated costs for NECs with the annual average numbers of 
prequalifying firms and bids submitted. As noted previously, State 
reported that NEC costs have more than doubled from 2001 to 2008. 
Although there were yearly variations between 2002 and 2005 in the 
average estimated costs for NECs and the average numbers of 
prequalifying firms and bids submitted, the changes during these years 
were not large. However, from 2005 to 2006, the average estimated costs 
for NECs declined by 28 percent from $69 million to $50 million. 
Because the financial criteria in 2006 were lower than in 2005, it was 
easier for firms to demonstrate the capacity to meet those 
requirements. As a result, the number of prequalifying firms per 
project rose from approximately 7 in 2005 to more than 13 in 2006, and 
the number of bids per project increased from 3.7 to 5. However, from 
2006 to 2008, the average estimated NEC project cost more than doubled, 
rising to approximately $110 million per project. This increase made it 
more difficult for firms to meet the financial requirements to bid for 
and win NEC awards. As a result, fewer firms prequalified for and bid 
on NEC projects in those years. 

The profitability of NEC projects for contractors and State's overall 
management of the NEC program may also have affected contractor 
participation, particularly in recent years. For example, the decline 
in the prequalification rate also reflects five firms, which, combined, 
built a total of 27 embassies, consulates, and annexes for a total 
value of $1.63 billion, withdrawing from the NEC program from 2006 to 
2008. Although each of these five firms prequalified to bid on NECs in 
2005, none of them chose to prequalify for 2008 projects, with one 
company withdrawing in 2006, two in 2007, and the remaining two in 
2008. Officials from these companies cited insufficient profits and 
disagreements with State's management of the program as factors 
contributing to decisions to withdraw. However, three of the firms 
indicated they would consider participating in future years but would 
base such decisions on the resolution of outstanding issues with 
current and past contracts and State's willingness to reform its 
management practices.[Footnote 26] 

State Has Not Systematically Assessed the Need for or Possible Outcomes 
of Its Legislative Proposal: 

State has conducted no systematic analyses in support of its proposed 
amendment to the Omnibus Diplomatic Security and Antiterrorism Act of 
1986, including whether such legislative changes are needed to maintain 
an adequate contractor base or how such changes would affect the 
program. Although State asserts that the declining contractor base has 
created a less competitive and less cost-effective program, the 
department reported no systematic efforts to analyze the relationship 
between competition for NEC contracts and actual contract awards. State 
officials did report that from 1999-2008, the department received at 
least two bids--the legislatively defined minimum number for adequate 
competition--for all but one NEC project solicited as an open 
competition. However, they did not comment on whether this minimum 
standard was sufficient to receive optimal prices for the government. 

In support of its initial legislative proposal, in October 2007, State 
identified several factors that it believed discouraged contractors 
from participating in the program, including: (1) working with State 
was not as profitable as working with private companies or with other 
federal agencies, (2) the challenging and sometimes dangerous locations 
of NEC projects, (3) the high cost of skilled American workers with 
security clearances, (4) dissatisfaction with firm fixed-price 
contracts for NECs, and (5) the relatively abundant domestic 
construction market. However, State did not provide any detailed 
analyses in support of these conclusions. 

State's initial legislative proposal indicates that the number of U.S. 
companies capable of meeting the current requirements to qualify for 
NEC awards is nearing capacity. However, State has not systematically 
analyzed the extent to which the U.S. contractor community can meet 
these requirements. Therefore, we reviewed the degree to which some of 
the largest U.S. construction companies have participated in the NEC 
program. We compared the list of the top 100 U.S. design-build firms 
for 2008 compiled by Engineering News Record with the list of firms 
that have either prequalified for or won NEC awards since 2002. 
[Footnote 27] The ranking is based on companies' total 2007 revenues 
from design-build contracts where the projects were designed and 
constructed by employees of the company in whole or in joint-venture 
partnership with other firms and subcontractors. The total revenues for 
these firms ranged from $104 million to $11.2 billion. [Footnote 28] 

We found that only 14 of the top 100 companies prequalified for NECs in 
at least one year from 2002-2008, and only 7 won at least one NEC 
award. In addition, only 3 of the top 100 companies prequalified for 
2008 NEC projects--B.L. Harbert International, LLC; Caddell 
Construction Co. Inc.; and Weston Solutions Inc. While not all of the 
100 companies may be interested in pursuing overseas construction, some 
firms not currently engaged in the NEC program are capable of working 
in overseas locations. For example, the top 100 list shows that 34 of 
the 100 firms derived income from overseas construction contracts. Ten 
of these 34 firms prequalified to bid on at least one occasion from 
2002-2008, and two of these 34 firms prequalified to bid for 2008 NEC 
projects. 

In addition, we examined company Web sites and conducted Lexis-Nexis 
searches to determine the extent to which companies listed among the 
top 100 design-builders for 2008 and that have never won NEC awards 
have experience in countries where State plans to build NECs in 2009. 
[Footnote 29] We found that at least 16 of the 93 companies that have 
not received NEC contracts under the current program have ongoing 
operations in eight of the nine locations planned for 2009 (see table 
3).[Footnote 30] However, none of those 16 companies prequalified to 
bid on State's 2008 projects, and only two of those companies 
prequalified for projects in past years. 

Table 3: Number of Top 100 Design-Build Firms with Existing Operations 
in Planned 2009 NEC Project Countries: 

2009 project country: Afghanistan; 
Number of top 100 firms operating in the country: 6. 

2009 project country: Azerbaijan; 
Number of top 100 firms operating in the country: 3. 

2009 project country: Dominican Republic; 
Number of top 100 firms operating in the country: 4. 

2009 project country: Equatorial Guinea; 
Number of top 100 firms operating in the country: 2. 

2009 project country: Mauritania; 
Number of top 100 firms operating in the country: 1. 

2009 project country: Mozambique; 
Number of top 100 firms operating in the country: 4. 

2009 project country: Senegal; 
Number of top 100 firms operating in the country: 0. 

2009 project country: South Africa; 
Number of top 100 firms operating in the country: 6. 

2009 project country: Thailand; 
Number of top 100 firms operating in the country: 8. 

Source: GAO analysis of State data and company Web sites. 

[End of table] 

A greater reliance on foreign firms, as specified in State's 2007 
legislative proposal, could increase security risks for NECs. 
Currently, foreign companies may not bid on projects that involve 
technical security unless it involves only low-level technology. 
State's initial legislative proposal would provide the Secretary with 
discretion to waive the preference for U.S. contractors so long as the 
Secretary determined that it is more economical or efficient to do so 
and that the security of the project would not be compromised in doing 
so. However, State has not yet reported how it would ensure project 
security would not be compromised, including providing a clear 
explanation of how the controlled access areas would be securely 
constructed and identifying the additional safeguards needed to oversee 
construction. 

Finally, amending the requirements to allow greater access to small 
U.S. companies and foreign companies could also affect construction 
management on site. However, because small firms may not have the 
technical capacity to construct all facets of NECs and, because foreign 
firms cannot currently construct controlled access areas of embassies 
and consulates, it is unclear how construction of highly technical 
areas would be accomplished. Although State has not yet determined how 
to resolve these items, it could choose to award multiple contracts to 
complete targeted areas of work. State has taken an approach somewhat 
similar to this for some NEC contracts, to date, by awarding small 
projects, primarily annexes, to small U.S. and foreign construction 
firms, which sometimes proceed simultaneously with a larger NEC project 
previously awarded to other companies. State has also awarded separate 
contracts to construct unclassified and classified areas of some NECs, 
such as for the Baghdad, Iraq, and Suva, Fiji, embassies. OBO officials 
noted that this multiple contracting is inefficient and leads to 
frequent conflicts between contractors over precedence of work. Relying 
on small contractors in a similar approach, with multiple contracts, to 
complete a typical NEC project may multiply these problems, and State 
has not yet reported how it would mitigate this concern. 

In December 2008, State informed us that it has drafted a revised 
legislative proposal to allow for more U.S. firms to qualify as U.S. 
persons, noting that all U.S. companies that can meet the specified 
security requirements should be permitted to bid for and win NEC 
contracts. In addition, State said that it would no longer pursue 
greater access to NEC contracts for foreign firms. State's revised 
proposal would, in effect, open competition for NEC awards to smaller 
U.S. firms.[Footnote 31] However, according to State officials, the 
projects planned through the remainder of the program are expected to 
be more complex and more costly, in general, than the projects awarded 
to date. Given that State's experience with multiple contractors 
working independently at a construction site has not worked well, it is 
unclear how State could increase smaller firms' participation without 
significantly increasing the government's risk. However, as of the date 
of its comments, State had conducted no analyses in support of its 
proposal, including on the benefits and risks of a greater reliance on 
smaller firms. 

Financial Incentives, Risks of Overseas Construction, and State's 
Management Practices Affect Contractors' Willingness to Participate in 
the NEC Program: 

U.S. contractors we interviewed ranked financial incentives as the most 
important factor in determining their participation in the construction 
program; however, many contractors told us they were not making as much 
profit as anticipated. Once participating in the program, all 
contractors reported encountering significant challenges, such as the 
logistics of getting labor and materials to a construction site, 
meeting State's construction schedules, coping with currency 
fluctuations and price increases, finding skilled American workers with 
security clearances, and handling relations with foreign governments. 
In addition, a majority of contractors favored using the combination of 
design-build delivery and the standard embassy design, and stated that 
neither firm fixed-price contracting nor the domestic and international 
construction markets affect their participation in the program. Most 
contractors also expressed concerns about State's on-site project 
directors, the implementation of the design-build process, and the 
project guidance provided by State. 

Financial Incentives Ranked as Highest Factor in Decision to 
Participate in the NEC Program, but Profits Did Not Meet Expectations: 

Most of the 17 contractors we interviewed cited most often the 
potential to make money, the expectation that State would be a reliable 
customer, and the steady continuity of State's building projects, even 
during difficult economic times, as the top three incentives to 
participate in the program (15 of the 17 contractors for each 
incentive). The desire to serve the United States and the prestige of 
building for the United States were also cited as strong incentives for 
some contractors (see table 4). 

Table 4: Rank-Ordered Incentives to Participate in the NEC Program, as 
Reported by 17 Contractors. 

Incentives: State projects allow us (the contractor) to make money; 
Major or moderate incentive: 15; 
Minor or not an incentive: 2. 

Incentives: State is a reliable customer; 
Major or moderate incentive: 15; 
Minor or not an incentive: 2. 

Incentives: State projects continue through difficult times in the rest 
of the economy; 
Major or moderate incentive: 15; 
Minor or not an incentive: 2. 

Incentives: Desire to serve our country; 
Major or moderate incentive: 12; 
Minor or not an incentive: 5. 

Incentives: Prestige of building something for our country; 
Major or moderate incentive: 10; 
Minor or not an incentive: 7. 

Incentives: Challenge of building to high standards in often difficult 
environments; 
Major or moderate incentive: 9; 
Minor or not an incentive: 8. 

Incentives: Experience with State projects may improve access to other 
government contracts; 
Major or moderate incentive: 7; 
Minor or not an incentive: 10. 

Incentives: Working with State provides opportunities to train project 
managers in challenging situations; 
Major or moderate incentive: 6; 
Minor or not an incentive: 11. 

Incentives: Potential for generating new business in overseas markets; 
Major or moderate incentive: 6; 
Minor or not an incentive: 11. 

Incentives: Experiences learning about and using different construction 
methods or materials in different parts of the world; 
Major or moderate incentive: 5; 
Minor or not an incentive: 12. 

Source: GAO. 

[End of table] 

In spite of the importance of reliably earning money as an incentive 
for program participation, many contractors said that making a profit 
had become difficult under the NEC program.[Footnote 32] The 
contractors defined profit as the monetary returns received after all 
charges have been paid, including regular salaries.[Footnote 33] Ten of 
14, or 71 percent of the contractors also said that, in general, State 
projects were less profitable than their other construction projects. 
[Footnote 34] Specifically, contractors told us that 22 of the 53 total 
contracts they completed lost money, and two more did not earn a 
profit; they expected to lose money or break even on 11 of the 26 
projects that were being built at the time of our fieldwork. In all, 13 
of the 17 contractors, or more than 76 percent, reported they lost 
money or expected to lose money on at least one contract.[Footnote 35] 
Some contractors noted, however, that depending on the resolution of 
open requests for contract modifications--also called requests for 
equitable adjustment (REA)--some of the projects that lost money or 
broke even could show a profit.[Footnote 36] 

Contractors Cite Major Challenges Including Logistics and Time: 

Although contractors have potentially meaningful incentives to 
participate in the program, they each reported facing significant 
challenges once in the program and when building the facilities. 
[Footnote 37] Contractors ranked the greatest challenges as (1) the 
logistics of getting labor and material to the construction sites, 
which are often in very remote locations; (2) meeting State's 
construction schedules; (3) financial considerations, such as managing 
currency fluctuations; (4) labor issues, such as finding qualified 
workers with security clearances (cleared workers); and (5) relations 
with foreign governments (see table 5). These challenges reflect 
contractors' comparatively greater risk when constructing facilities 
for State, compared to other clients. Thirteen of 16 contractors, or 
over 80 percent, said that their firms' profits from the NEC program 
have not been commensurate with the risks involved.[Footnote 38] 

Table 5: Contractor-Reported Challenges to Completing State 
Construction Projects: 

Challenges: Logistics (getting labor and materials to the site); 
Major or moderate challenge: 16; 
Minor or not a challenge: 1. 

Challenges: Meeting State construction schedule; 
Major or moderate challenge: 16; 
Minor or not a challenge: 1. 

Challenges: Currency fluctuations; 
Major or moderate challenge: 16; 
Minor or not a challenge: 1. 

Challenges: Finding qualified workers with security clearances; 
Major or moderate challenge: 15; 
Minor or not a challenge: 2. 

Challenges: Dealing with foreign governments (permitting issues, 
clearing materials through customs, paying tariffs); 
Major or moderate challenge: 11; 
Minor or not a challenge: 6. 

Source: GAO. 

[End of table] 

Logistics and Location: 

Twelve of 17 contractors said handling the logistics of getting labor 
and materials to the construction site was a major challenge while four 
said it was a moderate challenge. Many of the construction sites are in 
relatively remote locations and are difficult to access from the United 
States. However, despite logistics being cited by contractors as a 
challenge and, in many cases, a consideration to bid for specific 
projects, none of the contractors cited it as a determining factor when 
considering whether to participate in State's construction program. 
Contractors did not report project locations as a disincentive to 
participate in the program. On the contrary, the challenge of building 
to high standards in often difficult environments was cited by 12 of 
the 17 contractors as an incentive for participating in the program. 
Contractors did confirm that location can be a factor in deciding to 
bid on specific projects, but it also was a consideration generally for 
the purpose of assessing the competition for projects. For example, a 
company may avoid bidding on projects in locations where it believes 
another company has a clear competitive advantage, such as by already 
being mobilized in the country or having extensive experience in a 
given region. 

Schedule: 

Fourteen of the 17 contractors viewed meeting State's construction 
schedules for new embassies as a major challenge. The two contractors 
who rated meeting the schedules as a moderate challenge, and the one 
contractor who said the schedules were a minor challenge had not yet 
completed a building project for State. Even a successful contractor, 
whose entire business model is built around meeting State's schedules, 
said they are a major challenge. Contractors described the building 
schedules as unrealistic, a "problem," "absolutely insane," "warped," 
and "ridiculous." 

Some of the contractors stated that completing the design of the 
facilities, together with building the facilities took more time than 
was allowed by State. The goal of the NEC program is to get U.S. 
government employees overseas out of hazardous, insecure buildings and 
into safe and secure buildings as quickly as possible. From 2002 to 
2007, State aggressively shortened the time allowed to complete the 
buildings. The contractors raised concerns that State reviews designs 
in greater detail and later in the process than is typical for design- 
build construction. Nearly all the contractors said that they were 
challenged to meet State's shortened project schedules, considering, 
among other factors, the difficulty of producing an approved design 
that will enable State to provide the necessary security certification 
to Congress. According to these contractors, designs were often 
certified for construction significantly later than planned due to 
complex and extensive project requirements, the application and 
delivery of which had to be validated through State's design reviews. 
According to several contractors, much of the allowed construction time 
is spent obtaining approval of the completed design, leaving less time 
for the actual construction of the facility, and increasing the 
contractors' risk of not meeting project completion dates. A few 
contractors said that if they were building in cities of the high- 
income countries in the world, they could more reliably meet the 
schedules. However, most of the NEC locations are in lower-middle and 
lower-income countries where finishing a design acceptable to State, 
getting materials and equipment to remote locations, and actually 
building the structure may take more time than State allows. If 
anything goes wrong, according to contractors, they are likely to miss 
the deadlines. 

Financial Considerations: 

Financial considerations, including currency fluctuations, rising costs 
for construction materials, and the need to obtain performance bonds to 
fulfill U.S. government requirements provide another set of challenges 
to contractors. As previously noted, in September 2008, State reported 
that the price increases for construction materials and the weakening 
of the dollar more than doubled NEC construction costs since 2001. A 
few contractors referred specifically to rising costs for construction 
materials as a concern. Contractors reported on strategies to mitigate 
inflation, such as factoring inflation into their contract proposals or 
purchasing materials in advance. Moreover, given that labor and 
materials procured overseas generally must be paid in local currencies, 
and that the dollar has weakened against many other world currencies, 
managing currency fluctuations has become a significant challenge, 
according to contractors with whom we spoke. As with inflation, 
contractors regularly manage this risk by including a contingency for 
potential dollar devaluation in their bids. Several contractors also 
seek protection from currency fluctuations by purchasing exchange rate 
futures to lock in a rate. However, these measures can not fully ease 
the effect of wider-than-expected currency swings. Ten contractors told 
us that currency fluctuations are a determining factor in their 
decision to compete for State building contracts. Five others said that 
currency fluctuations had not been a factor that determined whether or 
not to compete for a given contract in the past. However, currency 
fluctuations could become a factor in the future, given the relative 
strength or weakness of the U.S. dollar.[Footnote 39] 

Obtaining performance bonds was seen as either a major or moderate 
challenge by 9 of the 17 contractors we interviewed, and its importance 
may be growing.[Footnote 40] Factors determining whether a contractor 
needs performance bonding include the contractor's revenues and State's 
experience with the contractor. Larger contractors, in general, can 
more easily obtain a performance bond than smaller contractors. Also, 
there have been instances where State has waived the need for a 
performance bond for contractors with whom it has extensive, successful 
experience, according to the contractors.[Footnote 41] As of the date 
of this report, no bonding company has ever had to assume 
responsibility for a contractor's failure to perform on an NEC project. 
Nonetheless, smaller contractors told us about problems obtaining 
performance bonds for State contracts, and State told us that at least 
one bonding company had begun refusing to provide performance bonds to 
State contractors. If State succeeds in changing the law to allow 
smaller contractors to prequalify for competition, the availability of 
performance bonds could become a more prevalent concern. 

Labor Issues: 

Labor issues, in general, were rated high on the list of challenges. 
Contractors said that finding and keeping workers willing to work 
overseas poses a challenge. In particular, contractors explained that 
"cleared" workers --those with security clearances--who are willing to 
live overseas in often unappealing locations are in relatively short 
supply. Moreover, because of the low supply and high demand, these 
cleared workers command the labor market. For example, several 
contractors complained that cleared workers will frequently move to 
another contractor for a higher salary or a more appealing location, 
even if their current project is not finished. To complete work, 
contractors must sometimes match or exceed competing offers from other 
contractors to keep the cleared workers on site. Contractors also rated 
finding and retaining workers who do not have clearances as a 
challenge, though not as critical a challenge as finding and retaining 
cleared workers. 

Relations with Foreign Governments: 

Contractors also cited problems dealing with foreign governments as a 
challenge. Understanding and dealing with issues related to obtaining 
building permits, clearing materials through customs, or paying tariffs 
on imported goods, as well as obtaining reliable information about the 
local country, are challenges and risks of building overseas. However, 
contractors generally accept these challenges and a majority of 
contractors said they believe that State could provide more helpful 
information about the locality. For more challenges faced by 
contractors, see appendix II. 

Majority of Contractors Favored Design-Build Delivery and Standard 
Embassy Design: 

We asked contractors to characterize State's approach to the design- 
build delivery of NECs, using the standard embassy design and firm 
fixed-price contracts, in terms of effectiveness and economy.[Footnote 
42] With many caveats, 11 contractors favored the combination of design-
build delivery and the standard embassy design as a good method for 
building new embassies. Although contractors cited problems with 
aspects of the design-build delivery method and SED, they generally 
expressed support for both. Two contractors stated that bidding on the 
completed NEC design would improve the accuracy of bids and allow 
contractors to better predict how long building would take. Having 
contractors bid on a completed design would be essentially using a 
design-bid-build process, a delivery method that separates design and 
construction activities into two distinct contracts.[Footnote 43] The 
majority of contractors did not raise concerns about firm fixed-price 
contracts, and only one contractor reported not bidding on one occasion 
because of the type of contract. 

Domestic and International Construction Markets Have Little Effect on 
Contractor Participation: 

Neither a relatively robust domestic construction market nor an active 
international construction market were cited as factors causing 
contractors to leave the program. We asked contractors how much the 
activity level of the construction industry in the United States 
affects firms' decisions to compete for State building projects. Ten of 
the 17 contractors said the domestic construction market had some or no 
effect on their decisions to participate in overseas construction, in 
general, or compete for State projects, specifically. A few contractors 
added that their firms were either primarily international or that they 
worked in the international division of their firms and that they would 
be in the international market regularly, regardless of domestic market 
conditions. Some of the contractors agreed that the domestic market 
affected their decisions to bid for State projects but only because 
important resources, such as performance bonding capacity or staff, 
were already allocated to domestic projects and, therefore, not 
available for competition in the international market. Thus, it was 
these firms' current commitments for domestic-based work, rather than 
the U.S. construction market in general, that influenced their firms' 
decisions to bid on State projects. We also asked contractors how much 
the activity level of the construction industry overseas affects firms' 
decisions to compete for State building projects. In this case, 13 of 
the 17 contractors said the international construction market had some 
or no effect on their decisions to compete for State projects. For a 
few contractors, State projects are their preference in overseas work. 

State's Management Practices Also Affect Contractors' Decisions: 

Fourteen contractors characterized State's management of its embassy 
construction program as fair or poor. Several management practices 
adopted after the 1998 bombings may have contributed to problems cited 
by the contractors, including (1) strengthening the role of the project 
director and limiting access to State management by contractors, (2) 
the design-build project delivery method as implemented by State, and 
(3) unclear project guidance within various documents that detail 
construction requirements.[Footnote 44] Moreover, contractors reported 
these practices inhibit their ability to complete projects on time and 
with a profit. 

Project Director: 

Beginning in 2001, State took measures to limit partnering with 
contractors as it had existed, including strengthening the role of the 
on-site project directors.[Footnote 45] However, the action may have 
had unanticipated effects on the NEC program. A few long-standing 
contractors reported that the customer-client atmosphere at State 
changed and that distrust between contractors and State's staff, 
particularly project directors, frequently resulted in adversarial 
relationships. Overall, 10 of the 17 contractors we interviewed rated 
State as a poor or fair business partner--6 rated State as poor, 4 as 
fair. In addition, 4 of the 7 contractors who rated State as a good or 
excellent business partner had not completed a construction project as 
of the dates of their interviews. 

Project directors are the targets of many contractors' concerns about 
the State process. Most contractors we spoke with said that, because of 
the project director's role in providing information to and from 
Washington and making or, at least, conveying project execution 
decisions, project success is greatly dependent on the project 
directors. The contractors provided mixed views on their levels of 
satisfaction with individual project directors. Contractors also 
expressed concerns about the professional qualifications of project 
directors and their experience managing construction and said they 
would like project directors to have significant construction 
experience.[Footnote 46] In discussing relationships with project 
directors, two contractors noted they will avoid bidding on projects 
they know will be headed by a particular project director with whom 
they or other contractors have had past troubles. 

We asked contractors a number of questions regarding their experiences 
with various State bureaus and offices. Contractors were asked to what 
extent they had experienced project delays because of various State 
officers and entities, and they responded that project directors are 
the greatest source of delays. Contractors also rated the State project 
directors on the timeliness of their decisions in a variety of areas 
and on the level of authority that project directors currently have for 
making certain types of decisions. A majority of contractors reported 
that project directors are generally timely in responding to requests 
for information, and contractors were about evenly split on whether 
project directors are timely in providing answers to work approvals and 
general decision making. However, for timeliness on contract 
modifications or REAs, project directors were perceived by the majority 
of contractors to be only sometimes, rarely, or never timely. 

Even as project directors are the targets of many contractors' 
concerns, they often have no authority to make decisions in specific 
areas cited by contractors. Contractors rated project directors' 
decisions and authorities for a number of types of contract 
modifications. For example, a majority of the contractors, typically 10 
to 12, rated project directors' decisions as fair or poor in areas such 
as modifications exceeding $25,000, technical changes, and changes that 
require more time.[Footnote 47] In fact, project directors do not have 
the authority to make decisions on changes above $25,000 for any single 
modification,[Footnote 48] on accepting technical changes, or on 
providing more time, as each of these decisions must be made in 
Washington. However, according to what contractors told us, as many of 
them were satisfied as were not with the authority given project 
directors on changes above $100,000, material substitutions, or 
accepting technical changes. State officials said that, under the 
former director's policy of limiting contractors' access to various 
offices at State, all requests had to be communicated to the project 
director. The project director would then either take individual 
action, or seek assistance or approvals from Washington and, 
subsequently, deliver and enforce decisions made by others. As a 
result, it appears that project directors, rightly or wrongly, bear the 
brunt of contractors' concerns and disapproval of decisions that 
negatively affect contractors. 

Design-Build Delivery Process: 

A majority of the 17 contractors also said that State's implementation 
of the design-build process is flawed, and some said that the time 
required to complete design and design reviews significantly affects 
the project delivery schedule. Eleven contractors had favorable views 
of the design-build process in general because it is supposed to erect 
buildings more quickly, and some indicated the method can result in 
lower construction costs. In addition, as previously noted, contractors 
thought design-build delivery worked well with the standard embassy 
design. However, during our interviews, contractors offered the 
following concerns about State's implementation of the design-build 
method: [Footnote 49] 

* State's protracted design phase is lengthier than that of their other 
government clients (four contractors); 

* State becomes too heavily involved in the project design (three 
contractors); 

* State's design review comments--which range from 500 to 1,000 
comments per project, each of which must be addressed--are excessive 
(four contractors); 

* Some contractors feel unable to proceed with construction until they 
have received a fully approved, 100 percent design from State (six 
contractors); and: 

* Contractors do not have sufficient time to actually build once State 
has finally approved a design, given the time limits on completing the 
projects (four contractors). 

Project Guidance: 

In addition, 13 contractors expressed concerns about unclear and 
contradictory guidance and information within and among critical 
components of State solicitation and design documentation. Eight 
contractors reported a number of problems with the RFPs, including 
sections where information and requirements were unclear, inconsistent, 
or in conflict with other sections and, in some cases, incorrect. Five 
contractors cited examples of poor project documentation, including 
inaccurate space plans, and incomplete information provided on existing 
site conditions related to local utility service layouts and soil 
conditions. In addition, 2 of the 11 contractors said State's answers 
to contractors' technical questions about specific RFPs were not 
incorporated as amendments to the solicitations, even though those 
answers were considered binding. 

Finally, contractors told us that guidance often conflicts with actual 
practice. Most contractors raised specific complaints about being 
unable to substitute local materials for U.S. or U.S.-standard 
materials. Although the RFP states that local materials may be 
substituted for U.S. materials; however, in practice, this occurs only 
after State has approved the specific substitution, based on the 
contractor's documenting that the substitute meets U.S. standards. 
[Footnote 50] According to what 13 contractors told us and what we have 
reported in the past,[Footnote 51] obtaining approval to use substitute 
material is difficult. Six of these 13 contractors told us that the 
process for obtaining approval is too onerous and time-consuming to be 
worth the effort--for example, one said that money saved through using 
local materials is essentially lost by the time spent getting the 
approval. In a specific example of guidance on another issue 
conflicting with practice, according to contractors, the SED allows 
contractors to install either a wedge barrier or a sliding gate at the 
vehicle entrance. (See figure 2 for an illustration of a wedge 
barrier.) Although State prefers to have the wedge barrier, contractors 
prefer the sliding gates because they are less expensive. However, 
State routinely overrules this choice and requires wedge barriers, even 
though the sliding gate meets the requirement. State officials reported 
they are attempting to reconcile the guidance and practice on vehicle 
barriers. 

Figure 2: Wedge Barrier at Entrance to a U.S. Facility (photograph): 

[Refer to PDF for image] 

Source: GAO. 

[End of figure] 

State Has Acted to Encourage Incumbent Contractors' Continued NEC 
Program Participation: 

In recent months, State has reached out to the contractor community in 
an effort to repair strained relationships and to encourage 
contractors' continued participation in the NEC program. To support 
improved relationships with contractors, State has implemented, or is 
in the process of implementing, several procedural changes to increase 
the effectiveness of its project delivery and contract management 
processes and to mitigate project risks. In addition, State has created 
a new project management group within OBO to improve internal 
coordination and communication and enhance its accountability to 
contractors and all other project stakeholders. 

State Is Reaching Out to Contractors: 

State has taken steps to reach out to the contractor community to 
improve relationships. In February 2008, for example, State officials 
met with the president of the Associated General Contractors of America 
(AGC), along with a group of five contractors who had completed NEC 
projects to discuss specific concerns of the industry. The discussions 
sought to identify reasons for contractors ending their participation 
in the NEC program and covered several industry concerns with technical 
and administrative aspects of State's contractor prequalification, 
contract procurement, and project management practices. At the 
conclusion of the meeting, the parties identified several follow-up 
items and agreed to hold future task force meetings to discuss the 
issues. 

In another outreach effort, State reported it intends to examine 
partnering concepts and to consider the extent to which they may be 
reintroduced to future contracts. While State discussed its intent to 
examine partnering in September 2008, it has not yet drafted guidance 
or policy on how partnering would be reintroduced into its processes in 
general or applied to specific projects. Prior to 2001, State had used 
partnering on some contracts and found that it generally contributed to 
project success. State's use of partnering agreements on these 
contracts helped facilitate the government and contractors working 
together as a cohesive team to complete projects on time and in 
accordance with State requirements, while providing contractors 
opportunity to earn a fair profit. In particular, partnering agreements 
were used to ensure such outcomes as timely decisions and the 
resolution of problems at the lowest level possible. As previously 
discussed, OBO's Director eliminated the formal use of partnering in 
2001, in part because he thought contractors had taken advantage of 
partnering to gain access to OBO's upper management, which served to 
bypass the project directors and undermined their ability to 
effectively manage projects. During OBO's September 2008 Industry 
Advisory Panel meeting, OBO and AGC began a preliminary discussion on 
partnering and how its principles could be incorporated into contracts 
and used to foster better collaboration between State and contractors 
on current projects. At the conclusion of the discussion, OBO's 
Director acknowledged that State needed to do more work and obtain a 
better understanding of how partnering could be applied in contracts. 

State Is Making Procedural Changes to Improve Its Management Processes 
and Mitigate Project Risks: 

To respond to contractors' concerns identified through its outreach 
efforts, State has implemented, or is in the process of implementing, 
several procedural changes to increase the effectiveness of its project 
delivery and contract management processes and to mitigate project 
risks. The changes being made by State--which are influenced by 
recommendations of an internal working group that was established in 
July 2008 to review State's capital project acquisition process 
[Footnote 52]--include: 

* improving design-build project delivery, 

* adjusting project schedules, 

* streamlining RFPs and staggering their issue dates so contractors 
have more time to respond to each solicitation,[Footnote 53] 

* developing a database of non-U.S. materials that meet project 
requirements, and: 

* being more responsive to contractors' requests for equitable 
adjustments. 

OBO began implementing some of these changes in its fiscal year 2008 
NEC program. Other changes are ongoing, and improvements will not be 
achieved until fiscal year 2009 and later. 

Improving Design-Build Project Delivery: 

At the recommendation of its internal working group and after 
discussions with its industry advisors,[Footnote 54] State intends to 
modify its approach to design-build project delivery. Because of 
security concerns, State requires that its projects pass a rigorous 
design review prior to being certified for construction. Under State's 
former approach to design-build delivery, contractors needed to 
complete design, respond to review comments--which typically numbered 
several hundred--and await State's certification of the design for 
construction. As previously discussed, some contractors said that they 
expended comparatively more time completing a design for State and 
having it certified for construction than on a design for other owners' 
projects, which precluded them from beginning construction as early as 
they wanted and prevented State from fully realizing the time-saving 
potential of design-build delivery. 

In its revised approach, State will use the "bridging" design method to 
provide more focused design detail to construction contractors. 
[Footnote 55] By providing more design detail up front, State expects 
to more effectively translate project requirements to contractors, 
speed the design certification process, and enable construction to 
begin sooner. Under the bridging method, State would first contract 
with a design firm--referred to as either the bridging architect, 
criteria architect, or the owner's design consultant--to develop an 
initial design that incorporates critical requirements and that can be 
certified for construction. State would then contract with a design-
build contractor to complete the design for the project--which should 
take less time than it did under State's former process because more up-
front design work will have been completed--and carry out its 
construction. According to industry experts, the advantage to this 
approach is that an owner, in this case, State, can initiate design 
sooner and ensure critical requirements are incorporated into a 
bridging design. Moreover, because the bridging architect will have 
developed the project to the point of being ready for construction 
certification, and because contractors can begin construction 
activities shortly following contract award, rather than having to wait 
for State to certify the project for construction, design-build 
contract durations can be shorter. In addition, industry experts 
indicate that an owner may potentially receive a better price for 
design-build services by using this method. Because there would be 
fewer unknowns regarding the owner's intent as a result of requirements 
being more clearly delineated in the bridging design, contractors' 
proposals should contain fewer allowances for uncertainties. 

Prior to implementing this approach to its fullest effect, OBO must 
reach an agreement with the Bureau of Diplomatic Security on how this 
bridging design approach would address the security requirements 
associated with NEC facilities and construction--such as building 
setback, Forced Entry/Ballistic Resistant (FE/BR) requirements, and 
technical security systems, among others--and whether the bridging 
designs would be certified to Congress as meeting all security 
requirements. Moreover, State's working group noted that State must 
also ensure that the portions of the design that are certified as 
meeting all security requirements are contractually binding and 
preserved through the continuation of design and completion of 
construction by the design-build contractor. Keeping the bridging 
architect involved with the project through the design-build phase, for 
example, is one option that State may consider using to ensure the 
integrity of security features, upon which certifications made to 
Congress are preserved during the final design and construction by the 
design-build contractor. 

Adjusting Schedules: 

Starting with the fiscal year 2008 contract awards, State is generally 
extending the time frame within which projects must be built. Instead 
of basing a project's schedule on its SED size classification, State's 
new approach will set the schedule based on a variety of factors. In 
particular, this approach will draw upon recent experience from 
completed projects of similar scope and size, as well as project- 
specific considerations such as geographic location and host country 
conditions to tailor schedules for new projects. As a result of having 
more time to complete projects, contractors are more likely to meet 
contract completion dates and will bear less risk of having to pay 
liquidated damages for delayed completion. 

Streamlining RFPs and Staggering Their Issuance: 

At the recommendation of its internal working group, State is examining 
options to streamline its RFPs to better integrate requirements and 
convey information to contractors that respond to them. A typical RFP 
consists of over 6,000 pages and contains elements such as the Space 
Requirements Program, which details square footage space needs of 
planned occupants, and test-fit drawings, which provide a notional 
layout of floor space. Because of their sheer size, RFP documents are 
difficult to maintain and often contain conflicting information that 
can inhibit contractors' understanding of requirements and increase 
project risks. For example, the Space Requirements Program and the 
blocking and stacking documents--the latter providing a notional 
vertical stacking and floor-by-floor layout of office suites--provided 
in the RFP for the Managua NEC project misrepresented the actual size 
of the building. As a result of this discrepancy, State settled with 
the contractor on a $4.3 million modification that included a 165-day 
time extension. 

The working group also recommended that State establish a single RFP 
coordinating entity to maintain a "model RFP," with appropriate 
document change control mechanisms from which project-specific RFPs 
would be developed. Individual model RFPs specific to certain project 
types and delivery methods may also be developed. In addition, State 
intends to leverage technology by using automated applications to 
consolidate, update, and maintain its RFP documents--creating what it 
terms an "e-RFP." State officials believe that the majority of 
improvements may not be seen until State's fiscal year 2010 RFPs are 
issued because implementation will require enhancements to State's 
information technology processes and applications. In the longer term, 
State intends to explore ways to make greater use of evolving Building 
Information Modeling (BIM) technologies--to include the migration of 
all RFP design and criteria data into a structure conducive to these 
technologies--to allow for more integration and exchange of project- 
specific information between State and contractors throughout every 
stage of the project.[Footnote 56] 

In addition, State established a goal to stagger the RFPs for its 
fiscal year 2008 projects so that contractors would have more time to 
respond to each solicitation. For its fiscal year 2008 projects, State 
staggered RFP issuance between May and July. In addition, when 
contractors asked for additional time, State generally granted their 
request by providing a 10-day extension to the standard 45-day response 
time. 

Developing a Database of Acceptable Local Materials: 

State is working to develop a database of acceptable materials from 
foreign sources that contractors could use in construction. We first 
reported on this effort in 2006.[Footnote 57] State construction 
contracts require contractors to use U.S. materials and products unless 
contractors can demonstrate the proposed substitute meets U.S. 
performance standards. Benefits to contractors of using materials 
available within the country include, for example, reduced shipping 
costs. However, to maintain schedule, contractors must obtain a timely 
approval from State to use and to procure materials within that 
schedule. A few contractors we spoke with note that State neither 
consistently approves the use of substitutes, nor consistently provides 
timely decisions, even in cases where certain products or materials 
have been approved for use on another State project. While State 
reports it is continuing with its efforts to develop such a database, 
contractors have yet to see evidence that State's approach to approving 
substitutions is more efficient and timely. 

Being More Responsive to Requests for Equitable Adjustment: 

In 2006, State issued policy and procedures for processing a 
contractor's request for equitable adjustments (REA). State reports it 
has recently implemented a new centralized system of receiving, 
processing, and tracking all REAs at OBO headquarters. REAs are visible 
to senior managers--REA status is reviewed monthly at Program 
Performance Review meetings--who hold project directors accountable for 
providing a timely response. Under this process, State seeks to 
receive, assess the merits of, and respond to contractors' REAs within 
55 days. However, if State requires additional information following 
the receipt of an REA, the time needed for the ensuing information 
exchange and related discussions may affect State's ability to achieve 
final resolution within 55 days. Given that State may, in certain 
instances, be unable to address an REA within 55 days, some contractors 
with whom we spoke said that State still takes too long in responding 
to REAs. In addition, one contractor indicated that State purposely 
defers its decisions on REAs so that it can use them as leverage in 
future negotiations. For example, State might negotiate waiving or 
reducing liquidated damages that it could assess for a contractor's 
late completion in exchange for the contractor withdrawing its REA. 
While we did not examine the merits of these allegations, contractors' 
concerns suggest that State's continued attention to REA management is 
needed. 

State Is Making Organizational Changes to Improve Internal Coordination 
and Communication and Enhance Accountability: 

In September 2008, State created a dedicated project management group 
responsible for providing coordination and oversight from planning 
through construction and commissioning. State initiated this effort 
based on a recommendation of its internal working group that was based, 
in part, on State's Office of the Inspector General's finding that 
OBO's former organizational structure--in which project management 
responsibility passed sequentially from a planning office[Footnote 58] 
to an executing office[Footnote 59]--allowed for marginally effective 
coordination, communication, and accountability. Under the former 
organizational structure, project executives responsible for 
construction and commissioning were not heavily involved in planning 
efforts conducted by planning managers. Similarly, planning managers 
who typically spent at least a year developing project requirements 
prior to the contract award were normally not involved in design and 
construction oversight efforts managed by project executives. As a 
result, no one in OBO maintained comprehensive knowledge of a project 
from start to finish, which may have contributed to accountability gaps 
when a project passed from one office to the next. 

The new project management group, the Project Development and 
Coordination (PDC) Division, resides within the Office of Program 
Development, Coordination, and Support--formerly called the Office of 
Project Execution.[Footnote 60] Project managers in the PDC Division-- 
who will be required to obtain project management certification, in 
accordance with Office of Management and Budget (OMB) requirements 
[Footnote 61]--will lead a multidisciplinary team of subject matter 
experts in performing project management functions. During the 
project's planning and design phases, project managers will be 
responsible for efforts such as developing the RFP, overseeing 
procurement of the design bridging contract, chairing design review 
meetings, and approving design changes. During the construction phase, 
project managers will coordinate with construction executives from the 
Office of Construction, Commissioning, and Maintenance to support on- 
site project directors in administering NEC construction contracts. The 
working group noted that during construction the three individuals-- 
project director, project manager, and construction executive--must 
have clearly defined roles that are properly coordinated to avoid 
confusion and to ensure that resources are being used efficiently. 
Under the new organizational structure, the project director is State's 
on-site representative who routinely interfaces with the contractor and 
serves in the key role of contracting officer's representative. 
[Footnote 62] The construction executive is the Washington-based focal 
point for all communications from the project director and performs key 
functions, such as serving as the alternate COR, and processing 
invoices and project change requests. At the same time, the project 
manager serves as leader of the Washington-based team and is 
responsible for tasks such as leading integrated design reviews; 
managing contract documents; and, in conjunction with the construction 
executive, reporting to senior management on project performance at 
monthly review meetings. However, because the organizational change was 
only recently implemented, it is too early to determine whether it 
enables project directors, project managers, and construction 
executives to effectively coordinate efforts and optimize project 
management efficiencies. 

Conclusions: 

From 1999 to December 2008, State constructed 64 new embassies, 
consulates, and annexes and relocated more than 19,500 U.S. government 
employees to safe, secure, and functional state-of-the-art office 
buildings. In 2007, State concluded that "the current pool of American 
contractors qualified and able to carry out diplomatic construction 
projects overseas has nearly reached its capacity." In 2007, State 
proposed amendments to the Omnibus Diplomatic Security and 
Antiterrorism Act of 1986 that would allow smaller U.S. companies and 
foreign companies to compete for projects for which they currently 
would not qualify. Congress did not act on the proposed amendment. In 
December 2008, State indicated it would modify that proposal to extend 
greater opportunities only to U.S. construction firms that currently 
cannot meet the U.S. persons definition. However, State has completed 
no systematic analysis in support of its conclusion and legislative 
proposal, including assessments of the significance and cause of 
changes in contractor willingness to participate in the NEC program, 
how these changes have affected its construction program, how its 
proposed amendments would address those causes and effects, the risks 
associated with its proposed amendments, or how it would mitigate those 
risks. In addition, State has not assessed the extent to which 
companies comprising the U.S. construction sector are capable of 
meeting the current criteria. Absent such support, it is unclear how 
State's proposed amendment would affect the NEC program. 

In our analysis, we found that contractor participation declined in 
recent years for two reasons. First, increasing construction costs have 
made it more difficult for some firms to qualify for awards. Second, 
contractors reported that State management and construction processes 
undermine their ability to turn a profit, which is their primary 
incentive for participating in the program. State has recently 
implemented a number of changes to its management of the NEC program by 
improving communications with the contractor community, refining some 
of its management practices by implementing process reforms and 
mitigating some of the risks associated with NEC projects, and 
reorganizing its management structure. These efforts are designed to 
improve State's overall management of the NEC program, including 
increasing the number of firms willing to participate in the program, 
and they address some of the important factors contractors reported as 
affecting their decisions to participate in the NEC program. While 
these changes may increase contractor participation, their full effects 
on the NEC construction process may not be apparent for a number of 
years, and State will need to monitor their effectiveness. 

Recommendations for Executive Action: 

We recommend that the Secretary of State conduct a systematic review of 
the embassy construction contractor base that (1) demonstrates whether 
the U.S. contractor base that is both capable of meeting current 
requirements and willing to participate in the NEC program is adequate; 
(2) estimates the expected benefits and identifies the potential risks 
associated with the legislative proposal; and (3) details how the risks 
would be mitigated. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, State said that although 
the contractor base has been adequate in the fact that it has met the 
legislatively specified minimum level of competition, the program could 
benefit from expanding competition. Additionally, State said it would 
revise its proposed amendment to the Omnibus Diplomatic Security and 
Antiterrorism Act of 1986 by opening competition for NECs only to U.S. 
companies that meet the specified security requirements for a project, 
rather than requiring them to meet the current statutory definition of 
a U.S. person. State also said that since full and open competition is 
a central principle for federal acquisitions, a cost-benefit analysis 
is unnecessary. We disagree with State's view. State initiated a 
process to revise the qualifying criteria for NEC awards, but it has 
provided no compelling analytical support for why the criteria should 
be amended, how such an amendment would be implemented, the expected 
benefits and potential risks associated with the changes, or how any 
identified risks would be mitigated. Absent such support, it is unclear 
how the proposed changes would affect State's program. We, therefore, 
believe our recommendation remains valid. 

In a draft of this report, we had a second recommendation that State 
assess how its efforts to improve communication with contractors, 
implement process reforms and mitigate project risks, and reorganize 
its organizational structure affect contractor participation. In a 
December 2008 meeting with State officials and in State's written 
comments, the department noted that it would continue to actively 
engage with contractors and assess its performance. However, State also 
noted that it may take a number of contract cycles for its recent 
outreach efforts and procedural and organizational reforms to achieve 
their full impact. We agree that it may take time before the overall 
effectiveness of State's recent efforts can be fully assessed. 
Therefore, we decided to delete the recommendation. 

State's comments, along with our responses to specific points, are 
reprinted in appendix III. State also provided technical comments, 
which were incorporated into the report, as appropriate. 

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, sending copies of this report to 
interested congressional committees and the Secretary of State. The 
report also is available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact Jess T. Ford at (202) 512-4128 or fordj@gao.gov, or Terrell G. 
Dorn at (202) 512-6923 or dornt@gao.gov. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report are listed in 
appendix IV. 

Signed by: 

Jess T. Ford: 
Director, International Affairs and Trade: 

Signed by: 

Terrell G. Dorn: 
Director, Physical Infrastructure: 

[End of section] 

Appendix I: Scope and Methodology: 

To address the first objective--how the contractor participation in the 
NEC program changed in recent years--we assessed the number of firms 
that prequalified and the number of contract proposals (bids) submitted 
for each new embassy compound (NEC), new consular compound (NCC), and 
new office building (NOB) awarded from 2002 to 2008. Collectively, we 
refer to this class of projects as NECs. Data for prequalifying firms 
were derived from the Department of State's (State) Office of Logistics 
Management and were cross-referenced with prequalification records 
derived from the Federal Business Opportunities Web site [hyperlink, 
http://www.fbo.gov]. Data for the number of bids were also derived from 
State's Office of Logistics Management and, to the extent possible, 
were corroborated with contract information and State analyses obtained 
during previous GAO work. In cases where discrepancies occurred between 
the two sources, or where we could not confirm the data, we used the 
data provided by State. Data for the number of prequalifying firms and 
number of bids submitted for all 10 NECs awarded from 1999 to 2001, as 
well as for three projects from 2002 onward, were unavailable; thus, 
they were excluded from the analyses. Non-NEC projects, including those 
labeled by State as interim office buildings (IOB), newly acquired 
buildings (NAB), new office annexes (NOX), and Standard Secure Mini 
Compounds (SSMC), were also excluded from the analyses. Table 2 shows 
the NEC projects included in our analyses, and the numbers of 
prequalifying firms and bids submitted for each NEC award (see page 16 
of this report). We determined that these data on the numbers of 
prequalifying firms and bids received were sufficiently reliable for 
our purposes. 

To determine how contractor participation has changed over time, we 
tracked the variations in the yearly average number of firms per 
project that prequalified to bid for NECs and the yearly average number 
of bids submitted per NEC project. We also compared these averages with 
the yearly average estimated NEC project costs. Data for estimated 
costs derive from two sources. For fiscal years 2005 to 2008, the 
estimated costs for NECs derived from notices of solicitations for 
contractors to submit prequalification packages. In cases where a range 
was provided for the estimated cost, we used the maximum estimated 
value for our analysis. Estimated costs for 2002 to 2004 were 
calculated based on (1) a 2005 OBO analysis of variances between 
contractor bid prices and the government estimated prices for each NEC 
project and (2) the actual original value of the contract award. We 
determined that these cost data were sufficiently reliable for our 
purposes. 

We also developed two regression models to understand the factors that 
influence contractor participation. Each model was based on the 
individual NEC contracts (NEC, NOB, and NCC) that were awarded from 
2002 to 2008 (see table 2 on page 16 of this report). The first model 
used fiscal year and estimated project cost as independent variables to 
predict the number of firms that prequalify to bid per NEC project. We 
found a statistically significant inverse relationship between the 
estimated NEC project cost and the number of prequalifying firms 
(coefficient estimate = -0.09, p-value = 0.000), such that higher 
estimated costs result in fewer prequalifying firms, and lower 
estimated costs result in more prequalifying firms. However, the 
relationship between fiscal year and the number of prequalifying firms 
was not statistically significant (coefficient estimate = 0.34, p-value 
= 0.108). In the second model, we used the fiscal year and the number 
of prequalifying firms for each NEC project as dependent variables to 
predict the number of bids received per NEC project. We found a 
statistically significant inverse relationship between fiscal year and 
the number of bids per project (coefficient estimate = -0.19, p-value = 
0.020), such that the number of bids per NEC project declined 
significantly from 2002 to 2008. We also found that the number of 
prequalifying firms per project are significant predictors of the 
number of bids received (coefficient estimate = 0.18, p-value = 0.002), 
such that more bids are received when more firms prequalify to do so. 
In our modeling, we considered statistical significance to help specify 
the variables to include in our models. 

To address the second objective--the degree to which State has assessed 
the need for or potential outcomes of its proposed amendment to the 
Omnibus Diplomatic Security and Antiterrorism Act of 1986--we reviewed 
State documents on legal requirements to qualify for NEC awards, 
State's proposed amendments to these legal requirements, and State's 
contract solicitation and award processes. We also conducted interviews 
with State staff on the level of analyses State completed in support of 
the proposed amendment, the likely benefits that would be gained, how 
risks to the government would change, and how those risks would be 
mitigated. To test State's assertion that sufficient capacity no longer 
exists among the U.S. contractor base to complete NEC awards, we 
compared the extent to which firms listed by Engineering News Record 
(ENR) in its compilation of the top 100 U.S. design-build firms for 
2008 had prequalified for NEC awards from 2002 to 2008, and received 
awards from 2002 to 2008.[Footnote 63] The top 100 list is determined 
by ranking companies' total 2007 revenues derived from design-build 
contracts where those construction projects are designed and built by 
its own workforce or in conjunction with joint-venture partners and 
subcontractors. We also searched Web sites of, and conducted Lexis- 
Nexis searches on, the top 100 companies to determine whether these 
firms have ongoing operations in countries where State's Bureau of 
Overseas Buildings Operations (OBO) plans to build NECs in 2009, as 
listed in OBO's Long-Range Overseas Buildings Plan, FY 2008-2013. 
Underlying these analyses is our assumption that the companies on this 
list could meet at least the financial criteria, as outlined in the 
Omnibus Diplomatic Security and Antiterrorism Act of 1986, to qualify 
for NEC awards since (1) the 96TH-ranked firm prequalified to bid for 
NEC awards in fiscal year 2008 that were in excess of its 2007 revenues 
[Footnote 64] and (2) at least four other firms not on the list--
American International Contractors Inc. (Special Projects), Aurora LLC, 
Environmental Chemical Corporation International, and Framaco 
International--prequalified for the 2008 awards. We did not 
independently confirm the validity of ENR's methodology for developing 
its top 100 ranking, nor did we independently verify the accuracy of 
information derived from the company Web sites or Lexis-Nexis searches. 
However, because our analysis was designed to illustrate a potential 
for untapped contractor capacity, we determined that the data we used 
were sufficiently reliable. 

To address the third objective--factors that affect contractors' 
decisions to participate in State's construction program--we identified 
the universe of 21 U.S. construction firms that won awards to build 
U.S. embassies, consulates, and diplomatic annexes since 2001. Foreign 
firms and U.S. firms awarded only contracts for construction other than 
office buildings, such as Marine Security Guard quarters, staff 
housing, and other construction projects were not included in our 
census. Three of the 21 U.S. firms were excluded from our interviews 
for various reasons--one company is no longer in business, while two 
others received sole-source contracts that would make them unable to 
respond to a number of the competitiveness questions in our interview 
instrument. A fourth company was excluded because we could not arrange 
a meeting with that company. As a result, we interviewed 17 U.S. 
contractors from March-June 2008 (see table 6). From 2001 to 2007, 
these 17 companies were awarded 78 NEC and related contracts with 
original values totaling approximately $4 billion. This latter value 
represents 81 percent of all embassy, consulate, and annex construction 
contracts awarded through 2007. 

Table 6: U.S. Construction Firms Participating in GAO Structured 
Interviews: 

Firm: B.L. Harbert International, LLC; 
Location: Birmingham, Ala.; 
Number of awards: 17; 
Total original award value: 2001-2007: $941.4 million. 

Firm: Fluor Intercontinental, Inc.; 
Location: Greenville, S.C.; 
Number of awards: 17; 
Total original award value: 2001-2007: $773.1 million. 

Firm: Caddell Construction Co., Inc.; 
Location: Montgomery, Ala.; 
Number of awards: 14; 
Total original award value: 2001-2007: $768.7 million. 

Firm: H. B. Zachary Company; 
Location: San Antonio, Tex.; 
Number of awards: 5; 
Total original award value: 2001-2007: $462.9 million. 

Firm: Aurora, LLC; 
Location: Rockville, Md.; 
Number of awards: 3; 
Total original award value: 2001-2007: $221.7 million. 

Firm: Kellogg, Brown & Root, Inc.; 
Location: Arlington, Va.; 
Number of awards: 2; 
Total original award value: 2001-2007: $178.4 million. 

Firm: American International Contractors (Special Projects), Inc.; 
Location: Arlington, Va.; 
Number of awards: 2; 
Total original award value: 2001-2007: $173.3 million. 

Firm: Hensel Phelps Construction Co.; 
Location: Greeley, Col.; 
Number of awards: 2; 
Total original award value: 2001-2007: $126.1 million. 

Firm: Framaco International; 
Location: Rye Brook, N.Y.; 
Number of awards: 4; 
Total original award value: 2001-2007: $87.9 million. 

Firm: W. G. Yates & Sons Construction Co.; 
Location: Philadelphia, Miss.; 
Number of awards: 1; 
Total original award value: 2001-2007: $86.9 million. 

Firm: Telesource International, Inc.; 
Location: Lombard, Ill.; 
Number of awards: 1; 
Total original award value: 2001-2007: $42.6 million. 

Firm: Gilford Corporation; 
Location: Beltsville, Md.; 
Number of awards: 2; 
Total original award value: 2001-2007: $26.2 million. 

Firm: Contracting, Consulting, Engineering, LLC; 
Location: Annapolis, Md.; 
Number of awards: 2; 
Total original award value: 2001-2007: $23.3 million. 

Firm: Desbuild, Inc.; 
Location: Hyattsville, Md.; 
Number of awards: 2; 
Total original award value: 2001-2007: $23.0 million. 

Firm: Dynamic Corp.; 
Location: Hyattsville, Md.; 
Number of awards: 1; 
Total original award value: 2001-2007: $21.2 million. 

Firm: HITT Contracting; 
Location: Fairfax, Va.; 
Number of awards: 1; 
Total original award value: 2001-2007: $14.8 million. 

Firm: Montage, Inc.; 
Location: Washington, D.C.; 
Number of awards: 2; 
Total original award value: 2001-2007: $6.8 million. 

Source: GAO. 

[End of table] 

To obtain consistent information from the contractors, we developed a 
structured interview instrument that included approximately 70 closed- 
and open-ended questions designed to assess contractor views and 
experiences on a wide range of construction-related topics, including, 
(1) construction experience and experience with State and other federal 
agencies; (2) State's program-level and on-site construction management 
policies and processes; (3) incentives for pursuing construction 
awards; (4) challenges in completing NEC and related construction 
projects; and (5) profitability of NEC and related projects. To ensure 
that respondents understood the questions in the same way, that we had 
phrased the questions appropriately for this population, and that we 
had covered the most important issues, we pretested our instrument with 
three contractors and made revisions based on their input. Prior to 
fully implementing the instrument, it was reviewed by the staff from 
the U.S. Naval Facilities Engineering Command and State's Office of the 
Inspector General. In addition, we briefed staff from OBO and State's 
Office of Logistics Management on the instrument's content, 
implementation schedule, and intended respondents. 

To address the fourth objective--actions State has taken to address the 
reported decline in contractors willing to participate in the NEC 
program--we reviewed documentation and conducted interviews with 
knowledgeable State officials on (1) rules and regulations outlining 
the embassy construction process, including public laws, Federal 
Acquisition Regulations, the Foreign Affairs Manual, and State reports 
and decision memos; (2) delivery methods and partnering policies 
employed by other federal agencies and supported by leading industry 
groups; (3) State's efforts to improve communications with the 
contractor community, including meetings with industry groups and 
individual contractors; (4) State's reorganization of planning offices, 
including the development of a new project management group and project 
manager positions; and (5) State efforts to improve construction 
processes, including lengthening project schedules, streamlining the 
contract solicitation process, and clarifying contract documents. We 
also attended State's monthly program performance meetings, its 
quarterly Industry Advisory Panel meetings, and its annual Industry Day 
meeting, at which information about contract opportunities was 
presented to firms who attended the event. Finally, we reviewed past 
GAO work on embassy construction and met with and reviewed the report 
of a State Inspector General inspection team reviewing OBO operations. 

We conducted this performance audit from October 2007 to January 2009, 
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. 

[End of section] 

Appendix II: Contractor-Reported Challenges to Completing State 
Construction Projects: 

Contractors rated 24 challenges as "Major," "Moderate," "Minor," or 
"Not a Challenge." Then, they rank-ordered their major challenges. We 
created the challenge categories to facilitate analysis and discussion. 
Table 5 in the main text shows the rank-ordered major challenges. Table 
7 displays how contractors rated all the challenges. 

Table 7: Contractor-Reported Challenges to Completing State 
Construction Projects: 

Challenge category: Logistics; 
Challenge: Logistics (getting labor and materials to the site); 
Major challenge: 12; 
Moderate challenge: 4; 
Minor challenge: 1; 
Not a challenge: 0. 

Challenge category: Logistics; 
Challenge: Obtaining housing for workers; 
Major challenge: 0; 
Moderate challenge: 5; 
Minor challenge: 10; 
Not a challenge: 2. 

Challenge category: Schedule; 
Challenge: Meeting State/OBO's construction schedule; 
Major challenge: 14; 
Moderate challenge: 2; 
Minor challenge: 1; 
Not a challenge: 0. 

Challenge category: Financial; 
Challenge: Currency fluctuations; 
Major challenge: 12; 
Moderate challenge: 4; 
Minor challenge: 0; 
Not a challenge: 1. 

Challenge category: Financial; 
Challenge: Obtaining performance bonds; 
Major challenge: 5; 
Moderate challenge: 4; 
Minor challenge: 2; 
Not a challenge: 5. 

Challenge category: Financial; 
Challenge: Timeliness of payment; 
Major challenge: 0; 
Moderate challenge: 2; 
Minor challenge: 5; 
Not a challenge: 9. 

Challenge category: Labor; 
Challenge: Finding qualified workers (cleared); 
Major challenge: 10; 
Moderate challenge: 5; 
Minor challenge: 1; 
Not a challenge: 1. 

Challenge category: Labor; 
Challenge: Keeping qualified workers (cleared); 
Major challenge: 10; 
Moderate challenge: 4; 
Minor challenge: 2; 
Not a challenge: 1. 

Challenge category: Labor; 
Challenge: Finding qualified workers (noncleared); 
Major challenge: 8; 
Moderate challenge: 6; 
Minor challenge: 3; 
Not a challenge: 0. 

Challenge category: Labor; 
Challenge: Keeping qualified workers (noncleared); 
Major challenge: 2; 
Moderate challenge: 8; 
Minor challenge: 7; 
Not a challenge: 0. 

Challenge category: Foreign government relations; 
Challenge: Dealing with foreign governments (permitting issues, 
clearing materials through customs, paying tariffs); 
Major challenge: 6; 
Moderate challenge: 5; 
Minor challenge: 6; 
Not a challenge: 0. 

Challenge category: Foreign government relations; 
Challenge: Obtaining reliable information about local country 
conditions (e.g., requirements to register firm, value added tax 
reimbursement, availability of local workers and materials); 
Major challenge: 5; 
Moderate challenge: 6; 
Minor challenge: 5; 
Not a challenge: 1. 

Challenge category: Foreign government relations; 
Challenge: Obtaining visas for contractor employees; 
Major challenge: 3; 
Moderate challenge: 7; 
Minor challenge: 6; 
Not a challenge: 1. 

Challenge category: State approvals; 
Challenge: Obtaining approval to use substitute materials; 
Major challenge: 5; 
Moderate challenge: 8; 
Minor challenge: 2; 
Not a challenge: 1. 

Challenge category: State approvals; 
Challenge: Obtaining timely design reviews from OBO or the Bureau of 
Diplomatic Security; 
Major challenge: 7; 
Moderate challenge: 4; 
Minor challenge: 5; 
Not a challenge: 1. 

Challenge category: State approvals; 
Challenge: Obtaining timely response from State/OBO on accepting site 
changes; 
Major challenge: 5; 
Moderate challenge: 6; 
Minor challenge: 3; 
Not a challenge: 2. 

Challenge category: State approvals; 
Challenge: Obtaining timely response from State/OBO staff on material 
submittals; 
Major challenge: 4; 
Moderate challenge: 5; 
Minor challenge: 7; 
Not a challenge: 0. 

Challenge category: State approvals; 
Challenge: Excessive changes requested by State/OBO; 
Major challenge: 4; 
Moderate challenge: 5; 
Minor challenge: 5; 
Not a challenge: 3. 

Challenge category: State approvals; 
Challenge: Obtaining timely response from State/OBO on final 
commissioning inspections; 
Major challenge: 3; 
Moderate challenge: 4; 
Minor challenge: 2; 
Not a challenge: 6. 

Challenge category: State approvals; 
Challenge: Obtaining timely response from State/OBO staff on requests 
for information; 
Major challenge: 2; 
Moderate challenge: 5; 
Minor challenge: 8; 
Not a challenge: 1. 

Challenge category: State approvals; 
Challenge: Obtaining timely responses from State/OBO on progress 
inspections; 
Major challenge: 1; 
Moderate challenge: 3; 
Minor challenge: 7; 
Not a challenge: 4. 

Challenge category: SED/design requirements; 
Challenge: Resolving instances of differing site conditions; 
Major challenge: 6; 
Moderate challenge: 4; 
Minor challenge: 6; 
Not a challenge: 1. 

Challenge category: SED/design requirements; 
Challenge: Conforming to the standard embassy design; 
Major challenge: 6; 
Moderate challenge: 3; 
Minor challenge: 7; 
Not a challenge: 1. 

Challenge category: SED/design requirements; 
Challenge: Adapting the standard design to accommodate site conditions; 
Major challenge: 3; 
Moderate challenge: 5; 
Minor challenge: 6; 
Not a challenge: 3. 

Source: GAO. 

[End of table] 

[End of section] 

Appendix III: Comments from the Department of State: 

Note: GAO comments supplementing those in the report text appear at the 
end of this appendix. 

United States Department of State: 
Assistant Secretary for Resource Management and Chief Financial 
Officer: 
Washington, DC 20520: 

Ms. Jacquelyn Williams-Bridgers: 
Managing Director: 
International Affairs and Trade: 
Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548-0001: 

Dear Ms. Williams-Bridgers: 

We appreciate the opportunity to review your draft report, "Embassy 
Construction: Actions Are Needed to Address Contractor Participation," 
GAO Job Code 320560. 

The enclosed Department of State comments are provided for 
incorporation with this letter as an appendix to the final report. 

If you have any questions concerning this response, please contact 
Christina Maier, Program Management Analyst, Bureau of Overseas 
Buildings Operations at (703) 875-5752. 

Sincerely, 

Signed by: 

Sid Kaplan (Acting): 

cc: GAO - Sam Bernet: 
OBO - Richard Shinnick: 
State/OIG - Mark Duda: 

Department of State Comments on GAO Draft Report: 

Embassy Construction: Actions Are Needed to Address Contractor
Participation (GAO-09-48, GAO Code 320560): 

Introduction: 

The Department of State appreciates the opportunity to review the 
subject draft report. Overall, the report is informative and supportive 
of OBO's on-going initiatives to increase participation in the Embassy 
Construction Program and facilitate contract execution. We will use the 
findings and information to further our efforts to improve the 
efficiency and effectiveness of OBO's operations and increase the 
participation of contractors. We offer the following comments: 

* The Department of State asks that the title of the report be changed 
to "Additional Actions Are Needed to Address Contractor Participation." 
The report highlights a number of actions previously initiated by State 
to reduce contractor risk by streamlining the contract documents, 
adjusting the contract period of performance, and to improve outreach 
to the contractor community. State agrees that the addition of more 
interested, responsible bidders for State projects would benefit the 
program and continues to strive towards enlarging the contractor pool, 
but the conclusions drawn in the report regarding a reduced number of 
bidders and a need for many of the actions recommended in the body of 
the report are not currently supported by the facts presented. We would 
like the "history" to be separated from the present. [See comment 1] 

Comments on Text: 

Construction Schedules: 

The report states "firms indicated that they cannot meet the reduced 
construction schedules due to unclear solicitation documents and 
contract requirements, laborious design reviews ... " (Page 6); [State 
notes that these schedules have already been extended.] 

*The Department would like to emphasize that the period of performance 
for contracts were explicitly spelled out in the Request for Proposals 
(REPO and the contractors considered that when preparing the proposals 
that ultimately became contracts. Consequently, the RFP and the 
subsequent contract include the requirements for design reviews and 
provide an established timeframe within which the US Government is to 
perform this function. If the government exceeds this timeframe, it is 
liable for the delay assuming no culpability on the contractor's part 
(i.e. an incomplete design submission). As a result, the Department's 
initiative to streamline the RFP documents and use bridging should 
reduce the conflicts within the contract documents, any confusion of 
interpretive requirements, and perhaps reduce the number of design 
comments. We have reviewed the historical performance of the projects 
completed between 2001 and 2007 and increased the durations for future 
projects to more closely align with both historical averages and our 
trend towards better performance. We have developed a standard form to 
use to develop the duration for each of our design/build projects, 
however, as starting points, we give an unclassified annex or an SSmC 
24 months, a small SED 28 months, a medium 30 months, a large 32 
months, and a extra large/special 36 months for design and 
construction. [See comment 2] 

Cleared Workers: 

The report states "contractors explained that "cleared" workers - those 
with security clearances - who are willing to live overseas in often 
unappealing locations are in relatively short supply." (Page 31) 

* OBO can provide the GAO with additional information on how OBO 
captures risk and increase in salaries to demonstrate that the 
"estimating" is not arbitrary but rather a calculation based on a 
demonstrated financial criteria. Less competition arguably results in 
higher pricing, however, higher pricing results in fewer firms meeting 
the financial criteria. Perhaps, a solution would be to draw in larger 
contractors that have the financial capacity for the work, in 
accordance with GAO's recommendations. We have reached out to one of 
the largest U.S. construction contractors, and will continue outreach 
efforts to other large U.S. construction firms. [See comment 3] 

Project Location: 

The report suggests "contractors believe that State could provide more 
helpful information about the locality." 

* The Department welcomes the opportunity to work with the contractor 
community to identify information that would be helpful to them and 
structure our initial planning phase to collect and package information 
for their use. However, it will ultimately be our contractors' 
responsibility to establish the local conditions upon which they base 
their bids. 

Recommendations for Executive Action: 

The GAO recommends that the Secretary of State take two actions: 

* Conduct a systematic review of the embassy construction contractor 
base that (1) demonstrates whether the US contractor base that is both 
capable of meeting current requirements and willing to participate in 
the NEC program is adequate, (2) estimates the expected benefits of 
State's legislative proposal to allow greater participation by foreign 
and smaller US firms, including how such an expanded contractor base 
would affect actual NEC awards, and (3) identifies the potential risks 
associated with the proposal and details how they would mitigated; and 
[N.B. - as explained below, State will not pursue legislative action to 
allow more participation by foreign firms.] 

* Assess how State's actions to improve communications with 
contractors, implement process reforms and mitigate project risks, and 
reorganize its organizational structure affect contractor 
participation. 

Construction Contractor Base: 

* Recognizing the continuing need to ensure NEC project security, we 
have reconsidered our pursuit of the legislative proposal to allow 
foreign firms greater levels of participation in our projects. We 
would, however, propose to seek amendment of Section 402 of the Omnibus 
Diplomatic Security and Antiterrorism Act of 1986 to allow more U.S. 
firms to qualify as a "United States person" for work on diplomatic 
construction projects overseas in order to increase competition and 
decrease costs. All responsible U.S. firms who can meet the specified 
security requirements should be permitted to bid, rather than requiring 
firms to meet the current complicated statutory definition of "U.S. 
person." Since competition on such a basis would follow the full and 
open competition principles central to Federal acquisition, we do not 
think it should be necessary to present a cost-benefit analysis 
justifying such a change. 

* We believe that the contractor base has been adequate, in that it has 
consistently met the legislatively specified minimum level of 
competition. However, we agree with the GAO's findings that the program 
would benefit from expanding the pool of participating contractors, 
thereby increasing the level of competition. We will continue to work 
actively towards expanding our bidding pool, and we are reaching out to 
industry for recommendations. For example, we have recently held a 
series of meetings with one of the largest American contractors, who is 
not currently bidding our projects, to review our contract documents 
and solicit feedback to reduce and/or properly apportion risk in our 
contracts. This review is ongoing. 

* We agree that it is important to improve communications with 
contractors and will continue to actively engage our contractors and 
assess our performance in these areas. We believe it may take several 
contract cycles for the recent changes at OBO to achieve their full 
impact. 

The report says that State has met the legislatively required minimum 
number of bidders for all but one of 61 of its NEC projects from 1999 - 
2008. 

* State is not pleased that one of its projects received only one bid, 
but in this particular case, the project had 10 pre-qualified firms. 
This is more than most of the other projects in the same year (2007) 
and the contractors may have lost interest due to the perceived level 
of competition. 

* It is important to note that although there is apparently a decrease 
in the number of bids for OBO capital projects, this is likely also due 
to the deteriorating condition of the global economy and its impact on 
the construction industry. State understands that many owner 
organizations have seen similar, or worse, levels of decreased 
competition for their work. 

* State questions why GAO, in the executive summary, chose to highlight 
the dramatic change in the number of pre-qualifying firms between 2006 
and 2008, while also stating in Appendix 1 that "the relationship 
between fiscal year and the number of pre-qualifying firms was not 
statistically significant?" State believes that 2006 may be an anomaly 
and that it could be misleading to draw any conclusions based on a 
spike in a single year. [See comment 4] 

According to GAO in Appendix 1, one of our contractors was excluded 
from the population of contractors interviewed because "significant 
legal issues between it and OBO that we deemed would likely inject bias 
into the results." 

* Presumably this was a particular smaller firm, who is in litigation 
with State over a $3.7M claim. One of our former large contractors was 
not excluded from the contractors interviewed despite the fact that 
this contractor currently has more than $96M in claims against State, 
comprising 92% of all of State's current certified claims. Note that 
this former large contractor has performed 19.5% of the work listed in 
GAO table 6. State has no access to the actual responses made by this 
large contractor and cannot determine whether bias has been introduced, 
but does ask that the consideration of bias be consistently applied. 
[See comment 5] 

Assessing State's Actions and Reforms: 

GAO has characterized State's poor performance with the Inman program 
projects and the reasons for this poor performance, to include 
"systemic weaknesses in program management." GAO has also highlighted 
some of the reforms made by OBO to its management structure and 
contracting, planning and construction processes as the current 
construction program was initiated just after the bombings of the 
Embassies in East Africa. Comparison of the Inman era project 
performance and the project performance during the 2001-2008 by any 
measure strongly validates the effectiveness of these reforms. 

* Two of the most important aspects of these reforms were the 
elimination of formal partnering and of the project management function 
as they existed during the Inman era. This does not mean that the 
principles of partnering or project management were eliminated, but 
that the lines of communication, responsibility, authority, and 
accountability within the organization were improved and clarified. 
Partnering, as it was then implemented, tended to undermine the Project 
Directors' ability to manage the projects in the field. The project 
management function, as implemented by the Project Management Division 
at the time, had become ineffective. 

* State does not agree with many of the comments included in the latter 
part of the report regarding the recent creation of the Project 
Development and Coordination Division (PDC) and the role of the new 
Project Coordinators/Managers. State believes that the creation of PDC 
will bring much needed leadership to the development phase of our 
projects and result in better bidding documents - a constant complaint 
cited by the contractors both directly and as part of this survey. 
State's convinced that Project Coordinators will help ensure that the 
project teams in planning and design functions stay engaged on the 
project throughout the entire execution cycle. Project Coordinators are 
not intended in any way to replace existing oversight during the 
construction phase as stated in the report, but to stay engaged in 
Washington to the extent necessary to provide effective support to the 
Project Director in the field, and ensure that lessons learned can be 
brought into future projects quickly. State believes that the roles 
established for the Project Coordinators, Construction Executives, and 
Project Directors will prove effective, eliminate accountability gaps, 
and bring improvements to a program that results demonstrate is already 
performing well in moving foreign affairs staff to safer facilities. 
Only by maintaining distinct lines of accountability between the 
Project Coordinators responsible for the RFP and the Project 
Director/Contracting Officer representative responsible for executing 
the contract in the field can the accountability for errors be 
maintained. [See comment 6] 

* State has noted the contractor's responses regarding their level of 
satisfaction with the Project Directors. Interestingly, they appear 
satisfied with the Project Directors on issues within the Project 
Directors' authority and ability to control. State believes that the 
Project Coordinators will help by providing improved support from 
Washington. State will also review the current level of the standard 
contracting officer's warrant provided to the Project Directors. It is 
currently set at $25,000 per change, $250,000 per year for most of our 
Project Directors (as it has been for more than 20 years) and it is 
possible that raising this amount would be beneficial to execution of 
the projects. [See comment 7] 

* State is somewhat surprised at the level of the losses being reported 
by our contractors on our projects. However, State believes, and has 
received confirmation from some of its contractors, that the primary 
reasons for these losses are the devaluation of the dollar and the 
inflation of construction material costs over the last few years. State 
has seen significant increases in bid costs over the last two years 
that reflect these market changes. 

* State reiterates its request for copies of the contractors' responses 
to the open-ended questions. State has received the multiple choice 
responses, but has reason to believe that there may be valuable 
insights in the actual comments made by the contractors and is very 
interested in reviewing them to glean lessons learned. 

The following are GAO's comments on the Department of State's letter 
dated December 31, 2008. 

GAO Comments: 

1. We have adjusted the title of this report to reflect State's 
comments that although State has taken actions designed, in part, to 
increase contractor participation, the addition of more interested, 
responsible bidders for State projects would benefit the program. 

2. State notes that it has recently increased the construction 
schedules for each class of SED, and streamlined the RFP process and 
reformed some design processes to help contractors better understand 
requirements and begin construction more quickly. State also said that 
contractors should be aware of the period of performance when preparing 
bids for State projects. We acknowledge in the body of the report that 
State has increased the time allotted to construct the various 
categories of SEDs. We agree with State that, based on the RFP 
documents, contractors should be aware of the planned construction time 
frame and the associated risk prior to submitting contract proposals. 
The report acknowledges State's efforts to streamline RFP documents and 
improve the design process; however, it may take a number of years and 
completed projects to determine how the changes affect contractors' 
ability to complete construction according to schedule. 

3. State said that its methodology for estimating risk and salary 
increases is not arbitrary, but rather based on demonstrated financial 
criteria. Since we did not analyze how risks and salaries are 
estimated, we make no explicit or implicit statement on the validity of 
the methodology used. State also said that a solution to less 
competition for NEC awards could be to draw in larger U.S. firms that 
have the financial capacity for the work, in accordance with GAO 
recommendations. As a result, it has recently reached out to one of the 
largest U.S. construction contractors and would continue outreach 
efforts with other large firms. Although we do present an analysis that 
shows a significant number of large contractors with overseas 
experience have not been part of the NEC program, we do not recommend 
that State rely solely on large contractors. 

4. State questioned why we chose to highlight the declines in the 
number of firms prequalifying to bid on NECs from 2006 to 2008 when 
that decline was not statistically significant. We explain within the 
text that there was an overall decline in the number of firms 
prequalified to bid on NEC projects from 2002 to 2008. We also state 
that the large number of firms that prequalified in 2006 is likely 
explained by the relatively low cost for the projects awarded that 
year. We also note that from 2006 to 2008, the average number of firms 
prequalfied per project decreased by 69 percent from 13 to 4. When 
considered with the declines in the number of firms bidding on 
projects, these declines indicate a decrease in contractor 
participation, especially in recent years. 

5. State commented that the results of our contractor interviews could 
be biased from our exclusion of a small contractor with a limited-sized 
claim and our inclusion of a large contractor with current claims of 
more than $90 million. We do not believe our analysis was affected by 
contractor bias. The draft report incorrectly stated the reason for 
excluding the first contractor State cited from the structured 
interviews. The contractor was excluded primarily because its only 
contract from 2001 to 2007 was awarded as a sole-source contract. 
Because the contractor received a sole-source contract, we believed it 
could not address many of the questions involving competition for NEC 
awards. We have made this correction in appendix I. We note this same 
contractor was terminated from its contract for nonperformance and 
subsequently filed for and received bankruptcy protection as a result 
of the termination. As a result, we felt its inclusion could risk 
biasing our work, but the contractor was not excluded for this reason. 
The second contractor State cited was a major participant in the NEC 
program, having completed 17 NEC and other projects from 1999 to 2008. 
We are aware of the claims the contractor has filed for a number of 
projects it performed, but we do not believe the existence of those 
claims biased our discussions with that firm or our findings, in 
general. 

6. State disagreed with many of our comments in a draft of this report 
on the role of the new project manager positions. In particular, State 
commented that project managers are not intended in any way to replace 
existing oversight during the construction phase as stated in our 
report. Our draft report did not, in fact, indicate that project 
managers should replace existing oversight. Rather, our intent was to 
question whether the project manager's effectiveness in performing 
lifecycle oversight of a project could be compromised by sharing 
reporting responsibilities with the construction executive during 
construction phase. Nonetheless, in light of State's comments, and to 
avoid confusion, we deleted the paragraph on which State's comments are 
based. 

7. State clarified that project directors could approve contract 
modifications of up to $25,000 per change and up to $250,000 per year. 
Changes were made to the text based on State's comment. 

[End of section] 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Jess T. Ford, (202) 512-4128 or fordj@gao.gov, Terrell G. Dorn, (202) 
512-6923 or dornt@gao.gov. 

Staff Acknowledgments: 

In addition to the individuals named above, Michael Courts, Assistant 
Director; Michael Armes; John Bauckman; Sam Bernet; Eugene Beye; Paola 
Bobadilla; and Joseph Carney made key contributions to this report. 

Ashley Alley, Martin De Alteriis, Colleen Candrl, Jonathon Fremont, 
Elizabeth Helmer, Cardell Johnson, Dae Park, and William Tuceling 
provided key technical support to this report. 

[End of section] 

Footnotes: 

[1] GAO, Embassy Construction: State Department Has Implemented 
Management Reforms, but Challenges Remain, [hyperlink, 
http://www.gao.gov/products/GAO-04-100] (Washington, D.C.: Nov. 4, 
2003). 

[2] Where adequate competition exists, construction projects estimated 
at over $10 million or that include technical security require that 
firms meet the definition of a U.S. person or U.S. joint-venture person 
to bid on a project. See 22 U.S.C. 4852. 

[3] State utilizes a two-phase process for awarding construction 
contracts. In the first phase, prequalification, State certifies that 
companies interested in bidding for construction awards meet the legal, 
technical, and financial requirements associated with such projects. In 
the second phase, State reviews contract proposals from companies that 
submitted bids and awards the contract. Only companies certified as 
prequalified in the first phase may submit bids in the second phase. 

[4] Ranking is based on 2007 revenues from design-build contracts where 
the project is designed and constructed by employees of the company in 
whole or in joint-venture partnership with other firms and 
subcontractors. See McGraw-Hill Construction, Engineering News Record, 
(June 9, 2008). 

[5] We interviewed 17 of the 21 U.S. contractors awarded contracts to 
construct major diplomatic facilities from 2001-2007. See appendix I of 
this report for further details on our methodology. 

[6] Although our census included only companies winning a NEC award 
from 2001 to 2007, some of these companies had received NEC contracts 
dating back to 1999. The contractors in our census represent more than 
81 percent of the total value for NEC and related construction projects 
awarded from 1999 to 2007. 

[7] Data on the number of bids received were unavailable for the 
Baghdad, Iraq; Kabul, Afghanistan; and Luanda, Angola; projects. The 
Dushanbe, Tajikistan, project was excluded from the analysis because it 
was originally awarded as a sole source contract. 

[8] These analyses focus only on projects labeled as NECs, new 
consulate compounds (NCC), and new office buildings (NOB). We excluded 
projects labeled by State as interim office buildings (IOB), newly 
acquired buildings (NAB), new office annexes (NOX), and standard secure 
mini compounds (SSMC). In addition to excluding the NEC projects for 
Baghdad, Iraq; Dushanbe, Tajikistan; Kabul, Afghanistan; and Luanda, 
Angola; we excluded 9 additional NEC projects awarded from 1999-2001 
and the 2002 NEC projects for Abidjan, Cote d'Ivoire, due to unreliable 
or missing data on the number of prequalifying firms per NEC project or 
the number of bids submitted per NEC project. As a result, there were 
48 total projects included in these analyses. 

[9] See appendix I for details of our methodology. 

[10] GAO, Embassy Construction: State Has Made Progress Constructing 
New Embassies, but Better Planning Is Needed for Operations and 
Maintenance Requirements, [hyperlink, 
http://www.gao.gov/products/GAO-06-641] (Washington, D.C.: June 30, 
2006). 

[11] Partnering is an agreement in principle between a contractor and 
the government to share risks, promote favorable attitudes, and create 
a cooperative environment. 

[12] Firms were asked to rate State's management of the program on a 
four point scale. Response categories included poor, fair, good, and 
excellent. 

[13] Department of State, Report of the Accountability Review Boards on 
the Embassy Bombings in Nairobi, Kenya and Dar es Salaam, Tanzania on 
August 7, 1998 (Washington, D.C.: January 1999); and Admiral William J. 
Crowe, Press Briefing on the Report of the Accountability Review Boards 
on the Embassy Bombings in Nairobi and Dar es Salaam (Washington, D.C.: 
Jan. 8, 1999). 

[14] This value represents the sum of the original contract awards for 
each project. Actual total values typically change through the course 
of construction. 

[15] See [hyperlink, http://www.gao.gov/products/GAO-06-641]. 

[16] OBO hosts a quarterly Industry Advisory Panel meeting that brings 
together private sector and State design, construction, and facilities 
management experts to discuss leading practices applicable to OBO's 
embassy construction and management responsibilities. OBO assigns both 
government and industry leads for each of the panel discussion topics 
for the purpose of discussing challenges and issues, examining how 
industry may be managing similar issues, and integrating lessons 
learned into OBO policies and procedures, as appropriate. 

[17] See [hyperlink, http://www.gao.gov/products/GAO-04-100] and 
[hyperlink, http://www.gao.gov/products/GAO-06-641]. 

[18] 22 U.S.C. § 4852. 

[19] The reduction is applied only to determine competitive status of 
American firms. It does not affect the value of an offer should the 
reduction result in a winning bid for an American firm. See 22 U.S.C. § 
302 (b)(2). These requirements do not apply if the foreign country's 
laws prohibit the use of U.S. contractors on the project. 

[20] Contracts for overseas construction, including capital 
improvements, alterations, and major repairs, may be excepted, where 
necessary, from the provisions of the Federal Acquisition Regulations 
(FAR), with the approval of the OBO Director. 

[21] Section 160 of the Foreign Relations Authorization Act, Fiscal 
Years 1988 and 1989, as amended, requires that, before undertaking a 
new construction project intended for the storage of classified 
materials, State shall certify to the Committee on Foreign Relations, 
U.S. Senate, and the Committee on Foreign Affairs, House of 
Representatives, that appropriate steps have been taken to ensure the 
security of the project to include: (1) protection of classified 
information and national security-related activities, (2) protection 
for the personnel working in the facility, and (3) a plan for the 
continued evaluation and maintenance of security at such facility. See 
22 U.S.C. § 4851 note, Pub. L. No. 100-204, § 160 (Dec. 22, 1987), 12 
FAM 360 "Construction Security Certification Program," and 15 FAM 
1012.3 "Construction Security." 

[22] Although State certifies that a contractor has met all 
requirements of the contract, minor items may still need completion. 

[23] We did not independently verify State's methodology or 
conclusions. 

[24] State did not provide data on the number of prequalifying firms 
and bids submitted for 13 NEC projects, including the 10 projects 
awarded from 1999 to 2001, the 2002 NEC projects for Abidjan, Cote 
d'Ivoire, and Kabul, Afghanistan, and the 2006 project for Baghdad, 
Iraq. Although State documents and State officials indicated that two 
or more bids were submitted for all 13 of these projects, and three or 
more bids were received for at least 8 of the 13 projects, we could not 
confirm the actual numbers; thus, they were excluded from the table. 
The Dushanbe, Tajikistan, NEC project was also excluded because it was 
awarded as a sole-source contract. 

[25] See appendix I for a description of these analyses. 

[26] See the third and fourth sections of this report for discussion of 
factors affecting contractors' decisions to participate in the program 
and State's efforts to improve contractor participation. 

[27] See footnote 4, p. 2. 

[28] In this analysis, we assume that companies on the top 100 list 
would meet the total business volume requirements to prequalify to bid 
on NECs, given the magnitude of their 2007 revenues and given that 
Weston Solutions Inc., the 96TH ranked firm with 2007 total revenues of 
$108 million, prequalified for at least three of the 2008 NEC projects 
with estimated award values ranging from $80 million to $120 million. 
We note that at least four companies not on the top 100 list 
prequalified for these same 2008 projects. However, our analysis is 
based solely on whether a company was certified as prequalified to bid 
for at least one NEC award in any year from 2002 to 2008. We did not 
confirm how many, if any, of the companies applied for, but were 
denied, prequalification. 

[29] The analysis excludes the seven companies that previously won at 
least one NEC award. 

[30] Planned projects include those outlined in OBO's Long-Range 
Overseas Buildings Plan, FY 2008-2013. In technical comments on a draft 
of this report, State reported that projects listed in the Long-Range 
Overseas Buildings Plan are subject to change. State also said that 
while the projects used in the analysis were current at the time of the 
analysis, table 3 does not reflect the current list of 2009 planned 
projects. State suggested inserting this qualification, rather than 
redoing the analysis with the current list. 

[31] As of December 2008, State was reviewing the draft language of 
this modified proposal, and planned to submit it for consideration for 
its next authorization bill. 

[32] We did not attempt to confirm contractor claims of profits and 
losses. 

[33] Some contractors told us they do not determine profits until after 
the one-year warranty period following construction. 

[34] Three contractors reported having no basis to judge. 

[35] However, 71 percent of the contractors reported earning money or 
expecting to earn money on at least one contract. 

[36] REAs are requests by contractors for compensation for expenses or 
delays incurred due to the actions or lack of action of the owner or 
other occurrences. If approved, REAs result in changes to the contract 
price or duration. 

[37] In our discussions with contractors, we asked both closed-ended 
questions, the responses to which could be easily counted, and open- 
ended questions, which generated many useful comments. 

[38] One contractor who did not know was not included in the analysis. 

[39] When we conducted the interviews in May and June 2008, the dollar 
was at a low point in relationship to other currencies. 

[40] In qualifying for NEC projects, U.S. contractors must demonstrate 
they are backed by a bonding agency. 

[41] The Miller Act permits the waiver of bonding requirements for 
contracts performed overseas. See 40 U.S.C. § 3131 (d). According to 
State officials, contracting officers have the option to waive the 
performance bond at their discretion. 

[42] In our discussions with contractors, we asked both closed-ended 
questions, the responses to which could be counted, and open-ended 
questions, which generated many useful comments. 

[43] See 48 C.F.R. 36.102. 

[44] In our discussions with contractors, we asked both closed-ended 
questions, the responses to which could be counted, and open-ended 
questions, which generated many useful comments. 

[45] OBO assigns a full-time, on-site project director and technical 
support staff for capital construction projects. The project director 
is responsible for the construction management and engineering 
oversight of the project and is the Contracting Officer's 
Representative (COR). The project director also coordinates all project-
related communications between the construction site and Washington. 

[46] State generally requires its project directors to have an 
engineering degree and at least one full year of specialized 
professional engineering experience so that they are equipped with the 
particular knowledge, skills, and abilities to successfully perform the 
duties of a construction engineer. These individuals are typically 
first hired as construction engineers and, as they gain experience, can 
advance into a project director position. 

[47] In contrast, contractors generally approved of project directors' 
decisions on no-cost changes. 

[48] Project directors may approve up to $25,000 per modification and 
up to $250,000 in modifications per year. 

[49] These comments arose from explanatory answers to closed-ended 
questions. The comments were unstructured and wide-ranging. 

[50] OBO generally requires that U.S. materials be used; however, 
substitute products and materials that are locally sourced may be 
economically advantageous for contractors if necessary approvals can be 
achieved in a timely manner. 

[51] [hyperlink, http://www.gao.gov/products/GAO-06-641]. 

[52] In response to industry feedback and reports from State's Office 
of the Inspector General and GAO concerning operational problems 
affecting the bureau, the OBO Director established a working group on 
July 24, 2008, to review the capital projects acquisition process. 
Subject matter experts in programming, planning, design, contracting, 
and construction management comprised the 29-person team. The team 
reported its findings and recommendations in September 2008. OBO's 
Director immediately approved some organizational and procedural 
changes and deferred decisions on other recommendations to allow for 
further study of underlying issues. 

[53] Previously, RFPs--which contractors have 45 days to respond to-- 
had been released on back-to-back days, making it difficult for 
contractors to effectively respond to multiple solicitations. 

[54] Industry groups that OBO coordinated with include AGC, Design- 
Build Institute of America, American Institute of Architects, and the 
American Council of Engineering Companies. 

[55] The bridging method provides a high level of design for those 
requirements that are the most important to the owner and provides the 
design-build contractor flexibility for the design associated with less 
critical project requirements. 

[56] BIM uses computer-based models to increase the efficiency of 
exchanging information such as design drawings, "as-built" construction 
details, and building systems' operations and maintenance instructions 
among all project stakeholders. BIM supports both the initial design 
and construction, as well as the follow-on operation and maintenance of 
a facility. Within the federal government, its use is led by the 
General Services Administration, with input and support from the 
National Institute of Building Sciences and private industry partners. 

[57] [hyperlink, http://www.gao.gov/products/GAO-06-641]. 

[58] The project planning and RFP development process resided within 
the Office of Planning and Real Estate. The planners within that office 
were the principal project proponents responsible for gathering and 
formulating the planning information required to support the RFPs. 
These planners coordinated with stakeholders at the post and regional 
bureau and with other interested agencies. The planning manager was the 
effective accountable person for this front-end project planning and 
RFP development phase. 

[59] Construction and commissioning efforts were managed by the 
Construction and Commissioning Division within the Office of Project 
Execution. Two OBO staff members--the project executive in Washington 
and the project director at post--worked jointly to manage the project 
from design-build contract award through construction and 
commissioning. 

[60] Some of the new positions in the PDC Division may be staffed by 
former planning managers who have been transferred from the Office of 
Planning and Real Estate (PRE) to the new Office of Program 
Coordination and Support (PCS). The organizational realignment 
effectively moves detailed project development and coordination 
functions from PRE to PCS. PRE will retain responsibilities for 
strategic planning functions, such as the development of the Long-Range 
Overseas Building Plan (LROBP). 

[61] OMB Circular No. A-11, Part 7, Planning, Budgeting, Acquisition, 
and Management of Capital Assets (June 2008) requires that project 
managers meet training and experience requirements defined by Federal 
Acquisition Certification for Program and Project Managers (FAC-P/PM) 
guidelines. Agencies must be compliant with FAC-P/PM beginning in 
fiscal year 2008. OBO staff performing project management functions in 
the PDC Division will hold the title of "project coordinator" until 
they meet the OMB requirements to be designated as a "project manager." 

[62] The COR directly supports the Contracting Officer. The COR is 
typically involved in coordinating the development of project 
requirements, certifying that funds are available for contract award, 
participating in preaward negotiations with prospective contractors, 
and performing other activities to support the contracting officer in 
soliciting offers from contractors and making an award. Following the 
contract award, the COR, among other activities, monitors a 
contractor's cost and schedule performance, advises on contract change 
requests, conducts quality assurance inspections, approves contractor 
invoices for payment, and accepts completed work. 

[63] See footnote 4, p. 2. 

[64] Our analysis is based solely on whether a company was certified as 
prequalified to bid for at least one NEC award in any year from 2002 to 
2008. It is unclear whether the companies that have not prequalified to 
bid have shown interest in participating in the NEC program, or whether 
some companies, if any, were denied prequalification in some years. 

[End of section] 

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