PBS’s Administration of Construction Manager as Constructor Contracts Needs Improvement

Why We Performed This Audit

The Public Buildings Service (PBS) is the landlord for the federal government, acquiring space on behalf of its tenants through new construction and leasing. PBS uses the Construction Manager as Constructor (CMc) project delivery method as one of its primary methods for performing capital construction projects. From June 2009 to May 2024, PBS used the CMc project delivery method for 90 construction projects, totaling approximately $7.4 billion.

Under the CMc project delivery method, PBS awards a construction contract for design-phase services at a fixed price with an option to perform the construction-phase services at a ceiling price, known as the Guaranteed Maximum Price (GMP). The GMP has three components: the estimated cost of work, the fixed fee that includes overhead and profit, and contingency.

During the design phase of a construction project, PBS engages the construction contractor to:(1) collaborate with the project’s architect-engineer firm and (2) establish a final estimated cost of work. The design-phase services work allows the contractor to work with the architect- engineer firm to evaluate market conditions and identify potential challenges to construction during the design phase.

When the design phase is complete, PBS can exercise the option for construction-phase services at the GMP ceiling price. However, the contractor can refuse to perform the construction-phase services if the GMP is no longer viable because of increases to the estimated cost of work. If this happens, PBS will need to recompete the construction-phase services as a fixed-price contract.

If the construction-phase services contract option is exercised, PBS will pay up to the GMP for construction-phase services. If the contractor completes the project for less than the GMP, the contractor is generally entitled to a percentage of the shared savings, which is calculated as a percentage of the difference between its actual cost and the GMP amount. If the project exceeds the GMP, the contractor assumes the risk of making up the difference. Therefore, PBS must track and reconcile costs as they are incurred.

One unique aspect of CMc contracts is that the GMP can be converted to a firm-fixed price prior to the end of construction. The conversion typically occurs after the construction phase begins—when the contractor has most of the subcontracts in place and the cost to complete the construction can be reasonably estimated by both PBS and the contractor. This relieves PBS of the administrative burden of tracking and reconciling the construction costs.

To ensure that the government does not overpay for construction, PBS must follow specific regulations and guidance to award and administer the cost-based components of the GMP. However, our previous audits have found that PBS struggles to follow those regulations and guidance. As a result of our past audit findings, our audit objective was to determine whether PBS followed the General Services Administration Acquisition Regulation (GSAR), the Federal Acquisition Regulation (FAR), and PBS policy to award and administer CMc contracts.

What We Found

PBS is failing to properly use the CMc project delivery method, resulting in excessive costs and violations of federal law and regulations. In our sample of projects, PBS noncompetitively awarded construction cost increases of more than $126 million because of changes made during the design phase of CMc contracts. PBS also failed to properly negotiate the fee for contract changes, resulting in violations of federal law and acceptance of unallowable costs. Finally, PBS did not ensure that construction contractors properly accumulated and recorded project costs, which increased the risk of overpayments.

Since 2009, we have issued 52 audit reports and memorandums identifying issues related to CMc contracts. Through these reports, we have recommended cost savings of approximately $68 million and identified critical improvements to PBS’s management and oversight of CMc contracts. In response to these reports, PBS has taken steps to improve its implementation of regulations and internal policies. Nonetheless, PBS continues to improperly manage CMc contracts—primarily because contracting officers and project teams do not fully understand the unique requirements of these contracts.

Accordingly, PBS should update training and strengthen existing controls to improve its administration of the CMc project delivery method. PBS should also implement a comprehensive review and approval process governing the use of the CMc project delivery method for new projects and those in the early stages of development (e.g., acquisition planning). At a minimum, the process should ensure that the assigned project teams clearly understand the requirements of the CMc project delivery method and that effective controls are in place to properly award and administer the underlying CMc contract. Finally, PBS should review open CMc contracts to determine if it can make retroactive adjustments to recover taxpayer dollars used to pay excessive fees.

What We Recommend

We recommend that the Acting PBS Commissioner:

1. Provide PBS project teams with annual training on the CMc project delivery method and any updated policies or guidance implemented in response to the audit findings. Training should provide PBS project teams with sufficient information to:
   1. Obtain adequate price competition for construction work under the GMP.
   2. Negotiate fees for contract modifications (overhead and profit) based on actual overhead rates and the degree of cost risk for each change.
   3. Comply with FAR and GSAR accounting and auditing requirements to ensure that the government only pays actual costs under the GMP.
2. Update existing controls to ensure proper award and administration of CMc contracts.
   1. Revise the existing contract file checklist to include specific requirements for CMc contracts.
   2. Implement procedures to review, authorize, and monitor all contract changes that impact the GMP.
   3. Implement procedures to delegate Cost Accounting Standards administration responsibilities within PBS to a cognizant federal agency official.
   4. Implement procedures for interagency coordination when PBS is not the cognizant federal agency for a contractor.
   5. Develop and implement consistent monthly reconciliation procedures to ensure that contractors properly accumulate and record incurred project costs. PBS should also incorporate these procedures in the scope of work for all contracts involved in the monthly reconciliation process.
3. Implement a comprehensive review and approval process governing the use of the CMc project delivery method for new projects and those projects in the early stages of development (e.g., acquisition planning phase). At a minimum, the process should ensure that:
   1. The assigned project teams clearly understand the requirements of the CMc project delivery method.
   2. Effective internal controls are in place to properly award and administer the underlying CMc contracts.
4. Review PBS’s open CMc contracts to determine if PBS can make retroactive adjustments to recover the taxpayer dollars that have been used to pay excessive fees on CMc contracts.

The Acting PBS Commissioner agreed with our recommendations.