Background This section provides information on the electricity provider, impact of 2017 hurricanes, and status of electricity restoration in Puerto Rico and the U.S. Virgin Islands. Also, it describes FEMA’s Public Assistance Program. Puerto Rico Electricity provider. PREPA is a public power utility owned by the Commonwealth of Puerto Rico and a monopoly supplier of electricity in the commonwealth. It is also one of the nation’s largest public power utilities, serving approximately 1.5 million customers. PREPA was approximately $9 billion in debt prior to Hurricanes Irma and Maria, and its electric power infrastructure was known to be in poor condition, largely due to underinvestment and poor maintenance practices. In May 2018, we found that inadequate management of PREPA’s financial condition contributed to Puerto Rico’s persistent deficits. Specifically, PREPA did not update or improve its electric generation and transmission systems, which hampered their performance and led to increased costs of producing electricity that it did not fully pass on to consumers. In addition, Puerto Rico’s economy is in a prolonged period of economic contraction, and according to U.S. Census Bureau estimates, its population declined from a high of approximately 3.8 million people in 2004 to 3.3 million people in 2017, a decline of 12.8 percent. Along with the declining population, demand for electricity declined 18 percent from 2007 to 2017, according to PREPA. Impact of 2017 hurricanes. Hurricanes Irma and Maria in September 2017 left Puerto Rico’s entire electricity grid inoperable, according to the economic and disaster recovery plan for Puerto Rico. According to a report by a working group that included utilities and national laboratories, among others, because of the extended and unprecedented damage, a significant portion of the generation, transmission, and distribution system must be rebuilt, including high-voltage transmission lines that often survive lower category hurricanes. While Puerto Rico’s population had already been declining, the migration of people from Puerto Rico accelerated following the hurricanes, according to PREPA. Status of electricity restoration. According to PREPA, it took roughly 11 months for power to be restored to all of the customers able to receive power safely in Puerto Rico following the hurricanes. A PREPA official told us that PREPA’s estimates of customers with power restored are based on the number of meters that it knows are served by a given power line and on the number of meters it can read currently. Power has been restored to 100 percent of customers that are able to receive power safely, but this does not mean that all pre-storm customers have power restored, as some structures may not have been deemed safe for power restoration, according to PREPA officials. Figure 1 shows the percentage of customers with electricity restored in Puerto Rico beginning in January 2018 when PREPA was able to start estimating this information. Although PREPA estimates that electricity had been restored to all customers by August 2018, in some instances electricity service has been supported by temporary generators, and outages have continued. For example, as of December 11, 2018, USACE was supporting seven generators that were supporting micro grids for the island municipalities of Vieques and Culebra. These islands had previously been served by an undersea transmission line connecting the islands to PREPA’s main grid on Puerto Rico. According to the U.S. Energy Information Administration, total electricity sales in Puerto Rico returned to pre–Hurricane Maria levels as of April and May 2018, although residential electricity sales appear to continue to lag historical levels, reflecting some continued outages. U.S. Virgin Islands Electricity provider. VIWAPA, a public utility, is a monopoly provider of electric power services in the U.S. Virgin Islands and serves approximately 55,000 customers throughout the territory. Like PREPA, VIWAPA faced financial challenges before the hurricanes. The USVI Hurricane Recovery and Resilience Task Force Report noted that VIWAPA has a 17 percent non-payment rate across its customer base, a significant unfunded pension liability, and long-term debt commitments of $265 million. In addition, the report states that the U.S. Virgin Island’s energy system faces many challenges that have led to higher rates and a historically unreliable grid. These include an aging, inefficient, and oversized infrastructure and heavy reliance on imported fossil fuels. The report also says that peak demand declined 18 percent from 2011 through 2017, driven by a variety of factors, including population decline. In addition, the report says that VIWAPA’s high energy rates and reliability issues have led some customers— particularly larger commercial and industrial ones—to leave the grid. Impact of 2017 hurricanes. Hurricanes Irma and Maria damaged more than 90 percent of VIWAPA’s aboveground power lines and over 20 percent of VIWAPA’s generation capacity, according to the USVI Hurricane Recovery and Resilience Task Force Report. Specifically, the hurricanes damaged more than 20,000 poles and 1,100 miles of transmission and distribution lines, according to the report. Although 90 percent of VIWAPA’s above ground power lines were damaged, this was far fewer than the miles of transmission and distribution lines damaged in Puerto Rico. Electricity status. According to VIWAPA, following the hurricanes, it took roughly 5 months for power to be restored to all of the eligible customers in the U.S. Virgin Islands. Eligible customers were those whose homes were safely able to receive power. Some homes had suffered substantial damage to their electrical infrastructure from the hurricanes and were not able to receive power safely until their electrical equipment was repaired. VIWAPA’s estimates of customers with power restored are based on the number of meters that VIWAPA knows are served by a given power line, as VIWAPA’s automated system for determining the percentage of customers without power was destroyed and is still being restored, according to a FEMA official. Although electricity service has been restored, electricity demand has not recovered to prestorm levels. According to the USVI Hurricane Recovery and Resilience Task Force Report, VIWAPA’s peak demand—the maximum energy load consumed by customers at any point in a year—was approximately 107 megawatts before the storms, but as of May 2018 it was 66 megawatts. The report says that demand will likely rebound to some degree as the territory rebuilds and recovers; however, it is unclear how quickly or by how much. FEMA’s Public Assistance Program FEMA, in leading the coordination of federal disaster response efforts, provides assistance through its Public Assistance Program to state, territorial, local, and tribal governments and certain types of private nonprofit organizations to assist them in responding to and recovering from major disasters or emergencies. FEMA Public Assistance Program funds can be provided for emergency work, such as for emergency protective measures that must be done immediately to protect public health and safety; permanent work, which includes the restoration of disaster-damaged management costs, which include indirect costs, administrative expenses, or other expenses that are not directly chargeable to a specific project and that a recipient or subrecipient incurs in administering and managing Public Assistance awards. Generally, emergency work takes place for about 6 months following a disaster, while permanent work can take place over a decade, according to FEMA officials. FEMA can provide grants for both emergency and permanent work, and it can also provide direct federal assistance for emergency work. Under direct federal assistance, federal agencies directly perform or contract for the emergency work. FEMA’s Public Assistance Program allows for the federal government to provide direct assistance at the request of the state, territorial, and local governments when the impact of an incident is so severe that the state, territorial, and local governments lack the capability to perform or contract eligible emergency work. Under the Public Assistance Program and the Stafford Act, FEMA may mission assign—issue a work order that directs another federal agency, such as DOE or USACE to utilize its authorities and the resources granted to it under federal law—in support of this direct assistance to state, local, and territorial governments. FEMA’s Community Disaster Loan Program The Community Disaster Loan program provides loans to local governments that have suffered substantial loss of tax and other revenue in areas included in a major disaster declaration. The loan funding may be used for existing essential municipal functions and expanded functions required to meet disaster-related needs, but not for capital improvements or repair or restoration of damaged public facilities. The Federal Role in Electricity Grid Restoration Was Unprecedented in Puerto Rico, and Various Factors Affected the Support Provided in Puerto Rico and the U.S. Virgin Islands Federal agencies provided traditional support to restore electricity in response to Hurricanes Irma and Maria in both Puerto Rico and the U.S. Virgin Islands—such as providing temporary power for critical facilities. They also provided unprecedented support in Puerto Rico by helping to coordinate efforts to repair Puerto Rico’s electricity grid rather than primarily supporting the local utility’s efforts. Factors that affected the electricity grid restoration efforts in Puerto Rico and the U.S. Virgin Islands included logistical constraints, availability of materials, the financial condition of local utilities, and the unprecedented and extensive role of federal agencies. Appendix I provides timelines of federal and other efforts to support electricity grid restoration in Puerto Rico and the U.S. Virgin Islands after the 2017 hurricane season. Federal Support Provided to Restore Electricity in Puerto Rico and the U.S. Virgin Islands in Response to the 2017 Hurricanes Included an Unprecedented Role for the Federal Government Federal agencies assisted in the restoration of electricity after Hurricanes Irma and Maria in a variety of ways. FEMA provided billions in grants and direct federal assistance for electricity restoration. DOE provided subject matter expertise and coordination assistance. USACE provided temporary emergency power in Puerto Rico and the U.S. Virgin Islands. In addition, FEMA and USACE undertook unprecedented roles to help coordinate and directly assist with grid restoration in Puerto Rico. Grants, direct federal assistance, and loans from FEMA. FEMA provided billions in grants and direct federal assistance to support electricity restoration in Puerto Rico and the U.S. Virgin Island through its Public Assistance Program. As public utilities, both PREPA and VIWAPA are eligible applicants for federal assistance through FEMA’s Public Assistance Program for the repair, restoration, and replacement of public facilities damaged or destroyed by a major disaster. As of July 20, 2018, FEMA had obligated approximately $3.2 billion for direct federal assistance through mission assignments and Public Assistance grant funds for electricity restoration in Puerto Rico and approximately $795 million for the U.S. Virgin Islands. This includes $2 billion that FEMA obligated for direct federal assistance through mission assignments to USACE for temporary emergency power and grid restoration efforts in Puerto Rico. In the U.S. Virgin Islands, FEMA obligated $63 million for direct federal assistance related to electricity restoration, most of which was obligated to USACE and DOE. Table 1 shows FEMA funding obligations for electricity restoration efforts in Puerto Rico and the U.S. Virgin Islands. In addition, FEMA provided $75 million to VIWAPA through the Community Disaster Loan program as of July 20, 2018, according to FEMA officials. FEMA officials said that the most common use for Community Disaster Loan funds is payroll, and other examples of eligible uses include employee benefits, facilities maintenance costs, and normal operating materials. Coordination and technical assistance from DOE. DOE received mission assignments from FEMA and deployed staff from its headquarters, site offices, and power marketing administrations to provide subject matter expertise and technical assistance in support of electricity grid damage assessments and power restoration efforts in both Puerto Rico and the U.S. Virgin Islands. According to DOE officials, DOE’s primary role in the response efforts on Puerto Rico and the U.S. Virgin Islands was coordination and provision of subject matter experts, as is typical for DOE’s role as the lead agency for the energy sector emergency support function. In Puerto Rico, however, DOE provided more advisors for a longer period of time than would be typical because of the extent of the damage to the electricity grid in Puerto Rico and PREPA’s limited capacity to respond, according to DOE officials. Specifically, DOE staffed up to 12 project support advisors to Puerto Rico from October 18, 2017, to August 8, 2018, and one supply chain support advisor from December 18, 2017, to March 16, 2018. These advisors provided subject matter expertise to USACE by reviewing construction plans and providing recommendations for prioritization, and scheduling and assisting in inventory management for incoming electrical grid equipment, among other things, according to DOE. In addition, in the U.S. Virgin Islands DOE deployed a team of 36 people from the Western Area Power Administration along with trucks and materials to help rebuild the electricity grid through a FEMA mission assignment. DOE officials told us that the department is also providing ongoing support on how to improve grid resilience as part of grid restoration and recovery efforts in both Puerto Rico and the U.S. Virgin Islands. Temporary power from USACE. USACE provided temporary emergency power for critical facilities in Puerto Rico and the U.S. Virgin Islands. These temporary emergency power missions provided and maintained generators to deliver electricity to critical public facilities, such as hospitals and relief centers. After receiving a FEMA mission assignment to provide temporary emergency power in Puerto Rico, USACE deployed its Emergency Power Planning and Response Team, USACE government employees, soldiers from the 249th Engineer Battalion, and contractors. USACE installed a record number of emergency electric generators in Puerto Rico—over 2,300—through the end of May 2018. The previous record was 310 emergency generators installed in response to Hurricane Katrina. On May 17, 2018, FEMA approved the extension of the USACE mission assignment for emergency power to November 30, 2018. This extension permitted USACE to continue its support for the more than 700 generators still in use throughout Puerto Rico at that time. FEMA later extended the mission assignment until April 8, 2019. As of December 11, 2018, USACE was supporting 24 generators in Puerto Rico, seven of which were supporting micro grids for the island municipalities of Vieques and Culebra. In the U.S. Virgin Islands, USACE installed 180 generators as a part of its temporary emergency power mission. USACE’s temporary emergency power mission for the U.S. Virgin Islands was completed in February 2018, and USACE is no longer supporting generators there. Unprecedented Roles by FEMA and USACE in Puerto Rico. In addition to the typical roles federal agencies undertake in restoration activities, FEMA and USACE undertook unprecedented roles in Puerto Rico because of the severe and widespread impacts of Hurricane Maria and PREPA’s limited capacity. For the first time in its history, FEMA undertook the role of helping to coordinate major electricity grid restoration because PREPA did not have the necessary capability, capacity, or structure to respond, according to FEMA officials. FEMA officials also noted that PREPA’s workers were not only engaged in restoration work but were also victims dealing with the same post- hurricane effects as the rest of the population. As part of its response, FEMA mission assigned USACE to lead federal efforts to repair Puerto Rico’s electricity grid—a role USACE had not played in the past during a domestic disaster response. Specifically, on September 30, 2017, the FEMA Administrator tasked USACE with leading the planning, coordination, and integration of the grid restoration. FEMA assigned USACE to lead federal efforts and provide direct support for grid restoration because PREPA was overwhelmed and had liquidity issues and USACE had the structures in place to award contracts with and bring in grid restoration crews, according to FEMA officials. In order to carry out its mission assignment, USACE issued contracts to bring lineworkers and materials to Puerto Rico to support the reinstallation and repair of transmission and distribution lines, among other power restoration activities. As of June 30, 2018, USACE had obligated approximately $1.5 billion on these contracts. Figure 2 shows USACE and its contractors working to restore electricity in Puerto Rico. USACE’s grid restoration mission assignment from FEMA ended on May 18, 2018, because, according to FEMA officials, power had been restored to approximately 98 percent of customers and PREPA, with its remaining contractors, had adequate capability to do the remaining work. In addition to the federal response, PREPA issued its own contracts to bring in additional lineworkers, received assistance from the New York State Utility Contingent, and requested and received mutual assistance from other utilities. PREPA did not initially reach out for mutual assistance. About 6 weeks following Hurricane Maria, on October 31, 2017, PREPA formally requested aid from other utilities on the mainland through the American Public Power Association and the Edison Electric Institute. The electric power industry sent two individuals to Puerto Rico on November 3, 2017 and they began assessing storm damage and working with PREPA, FEMA, USACE, and DOE officials to develop a restoration plan. On November 22, 2017, the Governor of Puerto Rico appointed one of these individuals as Power Restoration Coordinator to oversee the multipronged restoration effort. According to the Power Restoration Coordinator, as a first step he worked to create an incident command structure, and incident management teams began arriving in December. Once the incident command structure was in place, the industry deployed additional crews, equipment and materials in January to accelerate the ongoing restoration efforts across the island. As discussed previously, local utilities are typically responsible for restoring service, with federal agencies providing financial and other support. In contrast, approximately half of the lineworkers working to restore the electricity grid in Puerto Rico were USACE or USACE contractors at the peak of restoration efforts in February 2018, as shown in figure 3. FEMA established a unified command structure to coordinate efforts of federal agencies, PREPA, PREPA’s contractors, the New York State Utility Contingent, and utilities providing mutual assistance to PREPA, to help target priority work, ensure that crews could get to the work, and identify needed materials. Figure 4 shows the unified command structure. Logistical Challenges and Other Factors Affected Federal Support to Restore Electricity According to documents we reviewed and our interviews with officials and representatives, the most commonly cited factors that affected federal electricity grid restoration efforts in Puerto Rico and the U.S. Virgin Islands included (1) logistical challenges, (2) availability of materials, (3) financial condition of local utilities and poor condition of existing infrastructure, and (4) the extensive and unprecedented role of federal agencies. Logistical challenges. Responding to disasters on islands presents a number of logistical challenges. Specifically, according to federal officials, getting the crews, equipment, and materials needed to support restoration efforts to an island was more difficult and time- consuming than doing so on the mainland. This includes prepositioning assets, such as generators, and delivering equipment and materials in advance of a storm. The difficulties were greater in the days following the hurricanes since neither the ports nor the airports in Puerto Rico and the U.S. Virgin Islands had power, which prevented the delivery of materials to the islands. In Puerto Rico, the Port of San Juan reopened for daylight operations 3 days after Hurricane Maria made landfall; every airport and seaport had limited capacity after reopening for approximately 7 days post-landfall, according to FEMA’s 2017 Hurricane Season After-Action Report. Federal officials in the U.S. Virgin Islands told us that they faced further delays locating key supplies because of inadequate labelling of shipping containers at the port. For example, some containers were marked only as disaster supply equipment, which did not sufficiently identify the contents within them. According to USACE’s 2018 Remedial Action Program Senior Leader Briefing, USACE lacked the expertise and capabilities to manage the large operational logistics requirements to support the Puerto Rico and U.S. Virgin Islands response. Availability of materials. The sequence of three hurricanes making landfall in the United States in 2017 and the need to restore electricity service in Texas, Florida, and elsewhere, in addition to Puerto Rico and the U.S. Virgin Islands, complicated the restoration effort in the two territories. Since utilities in all affected areas were acquiring materials to restore electricity service, demand for these materials increased and available supplies were generally low; in some instances materials were only available as they were manufactured. Few, if any, materials were stockpiled locally on Puerto Rico. In addition, some of the equipment used in Puerto Rico was not standard in the continental United States and required ordering of specialized materials, resulting in delays in the restoration process. The U.S. Virgin Islands also faced supply issues, which became worse once grid recovery work in Puerto Rico began. Financial condition of local utilities and poor condition of existing infrastructure. Electric utilities in both Puerto Rico and the U.S. Virgin Islands were insolvent, which led to a lack of maintenance and presented its own challenges for restoring the grids after the storms. Specifically, PREPA was approximately $9 billion in debt before the 2017 hurricane season, with annual costs that exceeded its revenues. Puerto Rico’s electric power infrastructure was in poor condition before the 2017 hurricane season largely because of PREPA’s underinvestment and poor maintenance practices. For example, PREPA canceled its vegetation management program because of its financial situation; this contributed to the destruction of transmission and distribution lines when the hurricane arrived, according to FEMA officials. Similarly, in the U.S. Virgin Islands, financial challenges contributed to the extent of the damage to grid infrastructure. Specifically, VIWAPA officials told us that VIWAPA’s financial challenges prevented certain infrastructure improvements and a large proportion of the electricity poles were at or above their weight capacity, increasing the likelihood and extent of wind damage during the hurricanes. According to VIWAPA officials, VIWAPA was aware that there were too many lines and heavy transformers on old poles, but was not in a position to address this concern prior to the hurricanes. Extensive and unprecedented role of federal agencies. FEMA did not anticipate or plan for the extensive role that it and USACE played in grid restoration in Puerto Rico. According to FEMA’s after action report for the 2017 hurricane season, FEMA’s planning assumptions for a hurricane, earthquake, or tsunami striking Puerto Rico and the U.S. Virgin Islands underestimated the actual requirements. As discussed above, prior to Hurricane Maria in Puerto Rico, USACE had never worked on a large-scale power restoration as part of a domestic disaster response and did not have expertise in this area, according to USACE officials. This affected grid restoration efforts. For example, USACE did not have a grid restoration contract in place to immediately initiate grid repair efforts, according to USACE officials. Rather, USACE issued an order off of a pre-existing contract that it had under its public works and engineering support function to bring electric utility lineworkers to Puerto Rico. According to USACE officials, a bid protest against one of USACE’s contracts delayed its ability to increase the contract to bring more lineworkers to Puerto Rico. In addition, the contract review and approval process USACE used to obtain supplies took longer than it would typically take utilities to get supplies, according to FEMA officials we interviewed. According to USACE officials, USACE followed federal acquisition regulations, which is a slow process compared to private party purchases. USACE officials said that USACE is considering looking at what would be needed to create an advance grid restoration contract. FEMA, USACE, and DOE identified potential actions to address these challenges. According to its after action report, FEMA plans to establish a standing interagency Power Task Force to coordinate with DOE, USACE, and state and local governments and provide crisis planning for the energy sector emergency support function to support the restoration of power during future national response efforts. USACE’s 2018 Remedial Action Program Senior Leader Briefing made recommendations to improve contingency contracting and operational logistics, among other things. Specifically, recommendations included that USACE review existing and planned advance contracts and make adjustments as necessary to increase capacity and improve capabilities, and that USACE work with FEMA to convene an interagency logistics planning team and identify logistics contracting gaps and propose government and private sector solutions. DOE’s after action report for the 2017 hurricane season says that the lessons learned from the response to Hurricane Maria may prompt some programmatic improvements to the energy sector emergency support function roles and responsibilities related to island response, among other potential improvements. In addition, the report states that because of the extensive damage to grid infrastructure and the length of the restoration and recovery, there is an increasing need to incorporate resilience and hardening into restoration, recovery, and mitigation planning and execution. Agency Comments We provided a draft of this report to the Department of Defense (DOD), the Department of Homeland Security (DHS), DOE, and the governments of Puerto Rico and the U.S. Virgin Islands for review and comment. In its comments, reproduced in appendix II, DHS indicated that a top priority of DHS, FEMA and the entire federal government has been to provide life safety and life-sustaining resources to Puerto Rico and the U.S. Virgin Islands, including efforts to restore power and stabilize critical infrastructure. DHS, DOD, and DOE also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of Energy, the Secretary of Homeland Security, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Appendix I: Timelines of Federal and Other Efforts to Support Electricity Grid Restoration See figures 5 and 6 for a timeline of federal and other efforts to support electricity grid restoration in Puerto Rico and the U.S. Virgin Islands after the 2017 hurricane season. Appendix II: Comments from the Department of Homeland Security Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Quindi Franco (Assistant Director), Marya Link (Analyst in Charge), Janice Ceperich, William Gerard, Cindy Gilbert, Joseph Maher, David Marroni, Bolko Skorupski, Sheryl Stein, and Jarrod West made key contributions to this report.


Background Throughout the course of a construction project, small and large contract changes can be expected after the contract is awarded. These changes are made through modifications to a contract. There are two types of contract changes discussed in this report: bilateral and unilateral. Bilateral change. A bilateral change (also called a supplemental agreement) is a contract modification that is signed by the contractor and the contracting officer. In these cases, the contractor and contracting officer come to an agreement on the price of a contract change prior to the execution of work. Unilateral change. The contracting officer may direct a unilateral change, executed through a change order, without the contractor’s agreement on the terms and conditions of the change. A unilateral contract modification is signed only by the contracting officer. The contractor is generally required to perform the related work. When change orders do not include an agreed-upon price for the work, they may also be referred to as an unpriced change. If a contract change causes an increase or decrease to the cost of performing the work or the scheduled time for performing the work, the contractor will communicate these price and schedule changes to the contracting officer. For there to be an adjustment to the contract’s price, the contractor must submit a specific request or proposal seeking reimbursement for the change. If the contract change has been ordered unilaterally by the government, the contractor may submit a request for equitable adjustment (REA) that reflects these cost and schedule changes and requests reimbursement. In other circumstances, the contractor may submit a proposal in response to a request by the agency that similarly reflects the contractor’s estimate for that increased or decreased cost and the schedule changes. Bilateral and unilateral contract changes typically begin with a similar set of activities, but then the processes diverge once the bilateral or unilateral determination is made. Initial process steps include: identifying the need for a change; determining that the change is within the scope of the existing receiving a cost estimate; and verifying that funds are available for the change. It is generally after this point that the contracting officer determines the type of change—unilateral or bilateral—required. See figure 1 for a notional representation of a change process. Individual contract changes may involve circumstances and process steps that are not outlined below. Agency regulations and policies provide additional direction for managing the construction contract change process (see table 1). Prior GAO Work, Industry Concerns, and Recent Congressional Action In prior work at the Department of Veterans Affairs (VA), we identified challenges and made several recommendations related to the time required for the construction contract modification process. In 2013, we found that VA had not developed guidance to ensure that change orders were approved in a prompt manner, and recommended that officials implement guidance on streamlining the change-order process. VA agreed with our recommendations and has implemented them. In 2017, we found that VA did not collect sufficient information to determine if new guidelines intended to ensure the timely processing of change orders were being followed. We also found that it did not have a mechanism in place to evaluate data on time frames to process change orders. Without such a mechanism, VA could not determine how processing time frames and design changes affect costs and schedules, and thus was at risk for unexpected cost increases and schedule delays. We recommended that VA establish a mechanism to monitor the extent that major facilities projects were following guidelines on change orders’ time frames and design changes. VA has also addressed this recommendation. In 2018, we found that the Veterans Health Administration, a component of the VA, had not established time frames for processing contract changes, and did not have a way to monitor the length of time or the reason contract changes occur. We recommended that officials collect information on contract modifications, establish target time frames that trigger a higher-level review of contract modifications, and centrally establish a mechanism to monitor and review certain contract modifications that were taking longer than the established target time frame. To date, the Veterans Health Administration has not yet fully implemented the recommendations. At a May 2017 congressional hearing before two subcommittees of the House Committee on Small Business, witnesses from the construction industry identified the contract change process as a challenge. They stated that the change process negatively affects cash flows, increases administrative and legal costs, and creates a risk of not receiving reimbursement for completed work. Industry representatives we spoke with reiterated these concerns. Industry representatives also explained that while contract changes were a challenge for businesses of all sizes, small business were likely to be more susceptible to challenges due to their having fewer financial and administrative resources. One resource for small businesses is an agency’s Office of Small and Disadvantaged Business Utilization or Office of Small Business Programs. These offices are responsible for working with agency officials to facilitate participation of small businesses in procurement. However, the small business advocates at GSA and USACE told us that their offices had a limited role in the construction contract change process. According to small business advocates at GSA, for example, their office may get involved in a limited manner when a small business contractor is having difficulty receiving payment by providing guidance on how to make a claim. Congress recently took action that will prompt agencies to gather information on the time it takes to make certain contract changes. Section 855 of the Fiscal Year 2019 National Defense Authorization Act includes a provision that requires agencies to make available information about the agency’s past performance in finalizing, or “definitizing,” REAs with certain construction solicitations. The provision also requires agencies to provide information about its policies and practices associated with how the agencies comply with Federal Acquisition Regulation requirements to definitize REAs in a timely manner. Agencies must start including this information no later than August 13, 2019. Multiple Factors Affect Time Frames for Finalizing Contract Changes A variety of factors affect how long it takes to process a contract change. The factors include the time needed for making a change determination, creating a cost estimate, identifying funds, negotiating with the contractor, completing reviews, and processing the change. According to agency officials, some of these steps play a role in protecting the government’s best interests. For example, creating robust cost estimates helps provide the government with information to inform negotiations with the contractor. Unauthorized work—resulting from unauthorized direction or miscommunication—is another factor that can affect the change process timelines. When the contractor performs unauthorized work, the agency must then take additional steps, such as reviewing the work to determine if it should be reimbursed. Data we reviewed from USACE indicate that a majority of contract changes made from January 2013 through August 2018 were finalized in fewer than 60 days, and a little more than 3 percent took more than 1 year. Contractors and the government sometimes have different perceptions about when the contract change process begins—and therefore how long it takes—based on when the change begins to impact the work. Contract Change Steps Add Time to the Process The construction contract change process includes a number of steps that can factor into the time frames for finalizing a contract change, depending on the facts and circumstances surrounding an individual change. For example, USACE officials stated that obtaining a complete proposal from the contractor—with sufficient information on cost and schedule changes to begin negotiations—is a significant factor affecting contract change time frames. Figure 2 illustrates where these factors fall in a notional change process and describes how they may affect time frames. Agency contracting officials at both PBS and USACE note that some of these procedural steps are necessary to protect the government’s interests—which includes negotiating a fair and reasonable price for the work related to the change. According to USACE and PBS contracting officials, any unauthorized work undertaken by the contractor is another factor that can extend contract change process timelines. When unauthorized work is done, the government must take steps such as determining (1) if the work was required; (2) if the work constituted a change to the existing contract; and (3) if so, a fair and reasonable price for the work. Unauthorized work may occur, for example, when the contractor receives direction from a person who is not authorized to direct work, like a project manager. An authorized individual, such as the contracting officer, must provide such direction. Agency officials explained that unauthorized work can be the result of miscommunication between a government project official and the contractor. The contractor may interpret instructions from the unauthorized official as a formal direction to proceed with a change. In other cases, the contractor may begin work in anticipation of a contract change, before receiving any direction at all. One contractor representative told us that, at times, contractors feel pressured to start work without authorized direction to avoid disruption to the overall project that may result in negative performance reviews from the agency. USACE Data Show That More than Half of Construction Contract Changes Are Finalized Within 60 Days, but Some Take Much Longer According to USACE contracting officials, the agency compiles and reviews data on construction contract changes on an ad hoc basis to gain insight into time frames for the contract change process within that agency. The data and analysis show that the majority of changes from 2013 through 2018 at that agency were finalized within 60 days; however, a smaller percentage took substantially longer. Approximately 45 percent of the completed contract changes took more than 60 days to finalize, and a little more than 3 percent took more than 1 year. See figure 3 for information on USACE contract changes by the number of days taken to finalize the change. Agency Officials and Industry Representatives Report Differing Perceptions of When the Process Begins Contracting officials at USACE, as well as industry representatives, told us that government officials and contractors often have different perspectives on when the contract change process begins and, therefore, the time needed to complete it. For example, one industry representative said that the process begins for some contractors when the need for a contract change is identified. The representative explained that this is the point that the project work can change and the contractor begins to experience an impact on cost and schedule. Another industry representative said that some businesses think that the process begins when they submit their request for equitable adjustment, but that the government may not start measuring the process until a government official actively begins to address the request. Meanwhile, USACE contracting officials stated that process time should be measured from when they receive a complete proposal from the contractor, with no missing information. USACE officials told us that the data collected in its contract information system do not always reflect this metric, however. USACE contracting officials told us that, when recording the proposal receipt date that it uses as the start date for the contract change process, some contracting officers enter the date that the initial proposal was received, and others enter the date that a complete proposal was received. USACE contracting officials stated that they plan to address this issue in the future as part of a larger system upgrade. An industry representative explained that these varying viewpoints between government contracting officials and contractors are exacerbated by the contractors’ lack of understanding about the contract change process. The representative also stated that contractors find that the process is not transparent and implementation of the process varies by agency and even by district within the same agency, increasing confusion. Selected Agencies Do Not Regularly Monitor Contract Change Time Frames While the amount of information on contract changes varies between USACE and PBS, neither agency regularly monitors contract change time frames. In addition to agency guidance that establishes time frames for certain contract change order actions, federal standards for internal control state that an organization should obtain quality information to achieve management objectives and establish monitoring activities. Neither GSA nor USACE has fully established such controls over the contract change process at the headquarters level, limiting management’s ability to identify and respond to problems. USACE information systems have data on contract changes for its more than 40 districts that are sufficient to calculate time frames for finalizing contract changes, but the agency does not regularly aggregate or monitor the information. Officials explained that this was in part due to the manual process required to compile the data centrally and perform calculations. A user must pull data for each USACE district from its contract information system and then manually manipulate the data to determine the time frames. As a result, the data are not reviewed by officials at headquarters on a routine basis. The contracting officials we spoke with said that contract change time frames are reviewed at the local level, specifically by project teams, typically on a weekly basis. Contracting officials also stated that contract change time frames are a factor in performance reviews for contracting personnel. There is currently no agency guidance or documentation for how often contract changes should be reviewed at either the project or district levels, the officials said. USACE contracting officials noted that they are in the early stages of planning for a system upgrade that they hope will automate the process of compiling and analyzing construction contract change data. However, these plans are preliminary. USACE has not yet determined which systems will be involved, nor has it documented these planning efforts to date. PBS contracting officials cannot track time frames for contract changes. While GSA’s contract information system does track and centrally compile data on all contract modifications, PBS contracting officials said there was no efficient way to separate the types of contract changes that we included in our review from other modifications, such as administrative changes or the exercise of options, preventing the calculation of time frames for contract changes. Our review of the GSA data confirmed that the data cannot be used to distinguish between the various types of contract changes. According to PBS contracting officials, to identify a contract change type, a reviewer would have to seek information at the local level by going into the individual contract file and reviewing the modification. Given these limitations, USACE and PBS cannot centrally identify emerging problems with contract change time frames or monitor compliance with existing Department of Defense (DOD) and GSA requirements. As noted above, DOD and GSA have established time frames for certain contract changes. USACE contracting officials said that they would likely establish additional, broad goals for finalizing contract changes in future policy revisions because more targeted goals were often not practical due to the unique circumstances that may affect process times. PBS contracting officials said that compliance with those time frames should be monitored by local staff, such as the contracting officer assigned to the project; however, there is no regular monitoring of that data or systematic way for contracting officers to track this information at the local level. There is currently no effort under way to develop a strategy to address data limitations at the local and headquarters level via information technology system upgrades, according to GSA officials. Further, USACE and GSA anticipate, and our analysis of available data confirms, that system limitations at both agencies are likely to make implementing section 855 of the Fiscal Year 2019 National Defense Authorization Act more difficult. This provision generally requires agencies to include information on recent time frames for definitizing REAs with any construction solicitations anticipated to be awarded to small businesses no later than August 2019. For example, GSA officials stated that to implement this provision would require substantial changes to their contract information system, which they must plan for 2 years in advance. USACE officials said that staff level discussions were ongoing on potential ways to comply with the requirement. They added, however, that in the absence of a system change making the data readily available, they would likely compile data manually, similar to what was provided to us, as an ad hoc substitute. In addition, both agencies said that they had questions about what information they would include in solicitations. Specifically, while section 855 refers to REAs, a USACE contracting official stated that REA could be interpreted differently by the government and industry. Similarly, GSA contracting officials said that the statutory language potentially covers a broad category of information, making it difficult to decide what data to capture and report. USACE officials stated that they will wait for DOD and the Department of the Army to provide direction before changing their system. GSA officials stated that they were not going to take action until further information is provided. One potential source of additional direction is Federal Acquisition Regulation (FAR) case 2018-020, which is developing a proposed FAR rule to implement section 855. The proposed rule is anticipated to be released in the first quarter of fiscal year 2020. Conclusions Routine, central data collection on the construction contract change process can help agencies understand the scope of any problems encountered. While USACE can compile and review construction contract change information on an ad hoc basis, the agency does not conduct regular monitoring at the headquarters level and must manually manipulate data to review this information. GSA lacks information on the contract change process and its time frames at the headquarters, regional, and local levels. Without regular collection and review of information on the contract change process, contracting officials may be unable to spot potential problems—such as long process times that may affect project schedules—as they occur and respond accordingly. In addition to needing data for management purposes, agencies must also implement new legislative requirements when issuing certain construction solicitations starting in August 2019. While the proposed FAR rule, when issued, should provide agencies with more information on how to implement the new requirements, GSA and USACE could immediately begin to develop strategies to support routine collection and monitoring of time frames. Pursuing preliminary strategies on basic issues—such as what systems may need to be updated and what groups or individuals should be involved—would help these agencies better position themselves to comply with the requirement in a timely manner, and more quickly expand the data available for management purposes. Recommendations for Executive Action We are making the following two recommendations: The Administrator of General Services should ensure that the Commissioner of the Public Buildings Service develops a strategy that outlines the steps needed to routinely collect information on and monitor the time frames for finalizing construction contract changes at the headquarters level. The strategy could address issues such as the types of construction contract changes that should be included, when the measurement of the contract change process should begin, and the information systems that will be affected. (Recommendation 1) The Secretary of the Army should direct the Chief of Engineers and Commanding General of the U.S. Army Corps of Engineers to develop a strategy to expand on existing data and systems to routinely collect information on and monitor the time frames for finalizing construction contract changes at the headquarters level. (Recommendation 2) Agency Comments We provided a draft of this product to DOD, GSA, and OMB for comment. DOD and GSA provided written comments, reproduced in appendixes II and III, respectively. DOD concurred with our recommendation and provided a technical comment, which we incorporated as appropriate. GSA also concurred with our recommendation, and noted that the agency is developing a plan to address it. OMB provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Director of the Office of Management and Budget, the Acting Secretary of Defense, and the Administrator of General Services. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or woodsw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report were Tatiana Winger (Assistant Director); Betsy Gregory-Hosler (Analyst-in-Charge); Michael Dworman; Gail-Lynn Michel; Peter Anderson; George Depaoli; Lorraine Ettaro; Lori Fields; Gina Hoover; Sam Portnow; Bill Shear; and Anne Louise Taylor. Appendix I: Objectives, Scope, and Methodology This report (1) identifies factors that affect the time it takes to finalize contract changes at selected agencies, and (2) assesses the extent to which selected agencies monitor time frames for finalizing contract changes. In this report we examined the process for managing unilateral and bilateral contract changes, but exclude certain types of contract modifications to focus on the issues of payments and cash flow challenges. Specifically, we excluded (1) administrative modifications because they do not entail changes to contract costs or time frames; (2) contract changes that go beyond the scope of the existing contract, referred to as cardinal changes; (3) contract options because exercising an existing priced option does not entail the same type of negotiations that unilateral and bilateral changes require; (4) contract disputes and claims because they follow a separate and distinct process; (5) the payment process after a contract change has been finalized because that process is directed by the Prompt Payment Act; and (6) any processes taking place between a prime contractor and its subcontractors because that is outside the focus of this review. To identify agencies for our review, we analyzed Federal Procurement Data System – Next Generation (FPDS-NG) data on construction contract obligations for fiscal year 2017, the most recent data available at the time. This allowed us to identify defense and civilian agencies that had large amounts of construction contract obligations and a relatively significant portion of those obligations going to small business. The data that we used assigned the contract obligations to the agency that managed the construction project rather than the funding agency. We found that the Department of the Army’s U.S. Army Corps of Engineers (USACE) obligated approximately $10.5 billion for construction contracts, with approximately $3.9 billion going to small business concerns. This obligated amount is more than any other federal agency or service within the Department of Defense. We found that the General Services Administration’s (GSA) Public Buildings Service (PBS) obligated approximately $1.9 billion for construction contracts, with approximately $870 million going to small business concerns. To assess the reliability of the FPDS-NG data we used, we (1) performed electronic testing of selected data elements, and (2) reviewed existing information about the FPDS-NG system and the data it produces. Specifically, we reviewed the data dictionary, data validation rules, and other documentation. Based on these steps, we determined the data were sufficiently reliable for the purposes of this report. To identify federal construction industry representatives for this engagement, we collected information on potential associations from various sources including previous congressional testimony and our prior work. From this list of options, we sought organizations that were focused on federal construction contracting, included a small business focus, represented a large number of contractors, and had performed previous advocacy work on the issues of under review in this engagement. Based on these criteria, we selected two organizations to interview: the Associated General Contractors of America and the National Association of Small Business Contractors. The Associated General Contractors of America, which sent a representative to a congressional hearing on the contract change process, represents 26,000 member firms and includes a division dedicated to federal construction as well as a small business committee. The National Association of Small Business Contractors specializes in small business contractors working with the federal government, and is affiliated with the American Small Business Chamber of Commerce. We interviewed representatives from these associations to confirm background information about how the change process impacts industry and further discuss the factors that affect process time frames. To identify the factors which affect the time it takes to finalize contract changes at selected agencies, we reviewed relevant legislation such as the John S. McCain National Defense Authorization Act for Fiscal Year 2019, regulations including the Federal Acquisition Regulation (FAR), the Defense Federal Acquisition Regulation Supplement, GSA Acquisition Regulation, and the GSA Acquisition Manual and relevant agency policies and guidance. We interviewed staff from the Office of Management and Budget’s Office of Federal Procurement Policy—the Administrator of which serves as the Chair of the FAR Council—and contracting officials from the PBS and USACE. In addition, we interviewed officials from GSA’s Office of Small Business Utilization and USACE’s Office of Small Business Programs to discuss their role in the change process and their perspective on possible impacts to small business concerns. To assess the extent to which selected agencies monitor time frames for finalizing contract changes, we collected and reviewed available GSA data on contract modifications. We also collected available data and analysis from USACE on construction contract changes from January 1, 2013 to August 17, 2018—representing more than 62,000 changes from the more than 40 USACE districts and one office that execute construction contracts—obtained from the USACE’s Resident Management System. We reviewed USACE analysis of those data that calculated time frames for the contract changes by measuring the time elapsed from the date a proposal is received to when the contract change is finalized by the signature of Standard Form 30, which officially modifies the contract. We also reviewed system documentation on the requirements for users to enter data into the systems. We interviewed PBS and USACE officials at the headquarters level to discuss the time frames for contract changes, including on how long officials believe the process takes, what data are available, and who reviews any data collected on the contract change process. We discussed the provided USACE data with knowledgeable USACE officials who performed the calculations to understand their process, assumptions, and methodology. We determined the data were sufficiently reliable for the purposes of describing what is known about the time frames for finalizing construction contract changes. We also interviewed an official in GSA’s Office of Government-wide policy, to discuss any GSA-wide plans for system changes. We conducted this performance audit from August 2018 to July 2019 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 based on our audit objectives. Appendix II: Comments from the Department of Defense Appendix III: Comments from the General Services Administration