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The act establishes a fund for use in design, construction or acquisition, repair, alteration, and operation of real property for the Government. The major receipts of the fund are to be in the form of “rent” paid by users, mainly the Federal agencies, for space provided by GSA. Previously, agencies normally occupied GSA-controlled space without charge to their appropriations.

Our studies included a review of significant problems relating to the basic construction process. Serious shortcomings have been prevalent in the policies regarding initial decisions whether to lease or buy facilities, and in the funding of construction. Since our studies began, major changes have been made to cope with these shortcomings in public building programs. It is too early to assess how well these policy revisions will work in practice.

In recent years, construction by the General Services Administration (GSA) of a $10 million office building has taken an average of almost 5 years. The average construction period for comparable private buildings is 2 years. Citing "incremental funding” as a main cause of this disparity, the Administrator of GSA sought congressional approval for an improved pattern of approval and funding of public works."

Under the incremental funding process, de

PROJECT APPROVAL

Until the passage of Public Law 92-313, in order to proceed with acquisition of public buildings estimated to cost more than $100,000, GSA was required to obtain specific authorization and appropriation actions by the Congress. Now, the threshold is $500,000, and GSA need only obtain approval by the Public Works Committees of the House and Senate and wait 30 days after notifying the Appro

1 Testimony of Robert L. Kunzig, Administrator, GSA, in Hearing before the House Subcommittee on Public Buildings and Grounds, Committee on Public Works, on H. R. 10488 and related bills, 92d Cong., 1st sess., Sept. 22, 1971, pp. 16–38.

? For a discussion of delays in the budget process, see Part A, Chapter 7. 386 Stat. 216, approved June 16, 1972. • Kunzig, note 1, supra.

priations Committees of its plans to acquire a building by purchase contract. The project can then be funded from the public building fund.

PURCHASE CONTRACTS

In lieu of having public buildings built under direct Federal contract, the Administrator of GSA is authorized to contract with private entities who will construct buildings and lease them to the Government for periods of up to 30 years. At or before the end of the lease period, the building becomes the property of the United States. In the interim, the buildings are subject to State and local property taxes, unlike buildings belonging to the Government. The lease charges will take into account the fair market value of the site, cost of construction, interest charges, and other costs.

Public Law 92–313 is expected to expedite the provision of needed building space for Federal activities and reduce overall costs by greatly simplifying the construction process. We urge continuing review to assure that these new procedures fulfill their apparent promise.

30, 1972, the estimated current rate of inflation in the construction industry, using the Department of Commerce Composite Cost Index for construction, appears to lie between three percent and four percent per year.?

In practice, the Federal Government has often not adjusted its construction cost estimates to reflect the fact that these cost increases may be expected to occur. A directive of the Office of Management and Budget (OMB) 8 requires Federal agencies to estimate the cost of a construction project at current prices, not at the price expected to be in effect during actual construction. In other words, agencies are told to estimate the cost at “today's” prices, even though the cost will probably be higher at the time construction begins. With certain exceptions, this estimatenot including inflation—is the one shown in the President's budget, the one announced to the public, and the one submitted to Congress for approval of the project.

The pertinent section of OMB Circular A-11 reads as follows:

It will be assumed that, on the average, the general level of prices will be the same during the budget year as at the time the estimates are prepared, except where increases will result directly from laws already enacted (such as increases in FICA tax rates effective at future dates).

Recently, OMB has begun to modify its policy in certain cases, but it has not done so uniformly. The Department of Defense (DOD) now includes in its budget anticipated increases due to inflation by estimating costs on the basis of projected conditions at the date when contracts may reasonably be expected to be awarded. GSA follows the same general practice. But other agencies are still required by OMB to make their estimates in terms of current prices. The practice of permitting some agencies to include varying rates of escalation is experimental and apparently is being used only in controlled and monitored situations.

Planning and Programming

A large Federal construction project may cover five years or more from the decision to include it in an agency's budget until completion. More than half of this time can be spent before construction starts. It is consumed in the budget process within the executive branch, by congressional review, apportionment of funds, detailed design, advertising and award of the contract, and construction.

The rate of construction industry inflation from 1969 through 1971 ran roughly one percent per month or 12 percent per year. During this period, in the typical case, beginning with an agency decision to include a project in its budget, the cost of the project would increase approximately 24 percent by the time Congress appropriated funds and nearly 37 percent by the time construction began. As of July

5 As noted above, Public Law 92-313, Public Building Amendments of 1972, is designed in part to reduce delays caused by these steps in the budget process.

• Calculated by the Commission.

7 Ibid.

8 OMB Circular A-11 (rev. June 1971), Subject: Instructions for the Preparation and Submission of Annual Budget Estimates, sect. 13.5, p. 11.

U.S. Congress, House, Committee on Armed Services, Military Construction Authorization, fiscal 1971. Report by the Committee on Armed Services, House, H. Rept. 91–1098, 91st Cong., 2d sess., 1970, pp. 3-4.

The rationale for not permitting escalation to be included in construction program requests includes the difficulty in accurately predicting the rate of escalation, or of increased productivity, and the anticipated beneficial effects of fostering economy by holding estimates to low levels.

This situation poses a dilemma. From the standpoint of the procuring agency, the use of estimates which ignore the realities of inflation can have several bad effects. It can mean that agencies, during construction, must go back to Congress for more money, physically trim a construction project to fit the unrealistic estimate, cancel a project, or face costly, stop-and-go construction. From a broader perspective, Government-wide projection of inflation in preparing and executing budgets could obviously spur inflation rather than curtail it.

There is no simple answer to this problem. It is, nevertheless, important that it be recognized in considering construction procurement.

In the second method, agencies run some risk of designing projects which may not be authorized and appropriated in the current year's program, or possibly ever. They will carry construction project designs to 15 percent, 30 percent, 75 percent, or 100 percent of completion and stop at any of these or other points deemed reasonable based on the project's progress through the authorization and appropriation reviews. Failure of a project to receive favorable consideration during congressional review will generally cause design of the project to stop; if the project is later revived, then design will be completed. This start, stop, start routine is costly, and so is abandoned design; however, the rewards are potentially larger than costs if the agency is skilled in predicting which projects are likely to be authorized and funded by Congress.

Early design can considerably shorten the leadtime of the entire construction program, thereby reducing total cost and providing required facilities earlier. Federal agencies with construction programs should consider requesting funds for this advance planning and design.

Design Prior to Authorization

Supplemental Views*

One way to shorten the timespan for completion of a construction project is to begin designing it before congressional approval of the project through use of design funds previously approved by Congress as a budget item.

Some agencies do little advance planning and design work. They normally await funding by Congress for both design and construction. Design is initiated after receipt of construction funds, and when the design is completed, the project is advertised and a contract awarded. The major construction agencies design prior to approval of construction by Congress, so that construction can begin soon after funds are apportioned. The advantage of the first method is that if Congress does not approve the project, no design expenses have been wasted. The disadvantage is that, since design can take up to a year, the timespan of the project is prolonged, during which time inflation is at work and the project is denied to the user.

The basic text points out that serious shortcomings have been prevalent regarding Federal policy and procedures governing the financing and actual conduct of construction projects. Recent improvement attempts, also discussed in the basic text, hopefully will prove worthwhile, as experience is gained in their application. Generally such improvements, if forthcoming, will result from the adoption of proven commercial/industrial techniques to the field of Government construction contracting. As discussed in the concluding paragraphs of the introductory chapter to this part, private industry in general makes wider use of alternative techniques than does the Government, frequently using to advantage such construction procedures as concurrent design and construction and various combinations of owner/ designer/builder/operator interests to achieve beneficial and desired results.

•Commissioners Horner, McGuire, Sanders, and Staats.

agencies should carefully evaluate the alternative use of turnkey for facility acquisition and increasingly utilize the technique where circumstances so warrant.

CONTRACTING PROCEDURES

In Part A of this report, we make a number of recommendations for overall improvements in the procurement process. Many of the recommendations in that part and elsewhere in this report 10 would be of considerable benefit in facilitating economical, efficient, and effective construction contracting. The most significant of these general recommendations are discussed below.

Contracting Methods

It is becoming increasingly apparent that procedures traditionally in use by the Federal Government require further continuous critical examination. Concerted steps should be taken by the various concerned agencies to explore and apply all techniques which offer potential improvement to the Federal construction process.

In our view, concerted effort should specifically be directed toward the increased use of design/construction (commonly referred to by many as turnkey) procedures. Such procedures rely on the use of a performance specification to describe facility requirements in gross terms, rather than through the use of detailed definitive plans and specifications generated either by the Government itself or by an A-E firm employed specifically for that purpose.

In the Department of Defense, the turnkey concept has been employed either by use of one-step competitive negotiation or two-step formal advertising procedures. Both procedures have been utilized in somewhat limited fashion for the acquisition of family housing, recreation facilities, and certain other facilities which are commonly provided in the commercial marketplace. The advantage of the procedure is that, with proper selection of projects, the contractors may under competitive conditions directly apply their production, manufacturing, and/or specialized construction expertise to the design and construction of a facility. In many

nstruction of a facility. In many cases, direct application of such contractor expertise and existing systems for construction produce savings in construction costs and in construction time.

Under the turnkey procedures customary control of significant details of the design are passed from the owner to the contractor. For example, finite details which affect the longterm maintenance and operation costs of the facility are left to the general discretion of the design/build contractor. Turnkey procedures are thus very attractive and offer significant potential savings when it can be established that existing industry standards and designs in use by design/build contractors will adequately provide for the Government's facility requirements in terms of both initial acquisition and life-cycle cost considerations.

In view of the advantages obtainable, Federal

Existing statutes require that contracts for construction shall be formally advertised whenever the sealed-bid method of procurement is feasible under existing conditions, even though such conditions would also make competitive negotiation an acceptable contracting method." Thus, the contracting officer must justify the use of other competitive methods on the basis that formal advertising was not feasible. This justification requires a great deal of time. effort, and paperwork.

Representatives of the construction industry take the position that because of the Government's reliance on formal advertising and its preference in most situations for the use of fixed-price contracts, the Government construction process has become an adversary procedure between the Government and the contractor. In their opinion the inflexibility of Government contract administration places a strong emphasis on litigation-rather than on

10 of particular importance to construction are the recommendations in Part G, on Legal and Administrative Remedies. A sample of over 2,000 Board of Contract Appeals cases indicated that about one-half of all contract disputes arise under construction contracts. although construction is only 9 percent of the dollar value of Federal procurement (calculated by the Commission).

11 In addition to the preference for formal advertising in all Government procurement expressed in 10 U.S.C. 2304(a) and 41 U.S.C. 252 (a), special treatment is given construction, See, for example, 10 U.S.C. 2304 (c) (1) and 41 U.S.C. 252 (e) which limit exceptions available for construction; and annual military construction appropriation acts.

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