<DOC> [110th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:44635.wais] WASTE, FRAUD, AND ABUSE AT K-TOWN: HOW MISMANAGEMENT HAS DERAILED DOD'S LARGEST SINGLE FACILITY CONSTRUCTION PROJECT ======================================================================= HEARINGS before the COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST AND SECOND SESSIONS __________ JUNE 28, 2007 AND JUNE 25, 2008 __________ Serial No. 110-77 __________ Printed for the use of the Committee on Oversight and Government Reform Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE 41-043 PDF WASHINGTON DC: 2008 --------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092104 Mail: Stop IDCC, Washington, DC 20402ÿ090001 COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HENRY A. WAXMAN, California, Chairman TOM LANTOS, California TOM DAVIS, Virginia EDOLPHUS TOWNS, New York DAN BURTON, Indiana PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California MICHAEL R. TURNER, Ohio STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California BRIAN HIGGINS, New York KENNY MARCHANT, Texas JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina Columbia BRIAN P. BILBRAY, California BETTY McCOLLUM, Minnesota BILL SALI, Idaho JIM COOPER, Tennessee JIM JORDAN, Ohio CHRIS VAN HOLLEN, Maryland PAUL W. HODES, New Hampshire CHRISTOPHER S. MURPHY, Connecticut JOHN P. SARBANES, Maryland PETER WELCH, Vermont Phil Schiliro, Chief of Staff Phil Barnett, Staff Director Earley Green, Chief Clerk David Marin, Minority Staff Director C O N T E N T S ---------- Page Hearing held on: June 28, 2007................................................ 1 June 25, 2008................................................ 199 Statement of: Dorn, Terrell G., Director, Physical Infrastructure, Government Accountability Office; Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations, Government Accountability Office; and Bruce A. Causseaux, Senior Level Contract and Procurement Fraud Specialist, Forensic, Government Accountability Office................. 224 Dorn, Terrell G.......................................... 224 Kutz, Gregory D.......................................... 225 Garber, Judith, Deputy Assistant Secretary of State, Bureau of European and Eurasian Affairs, U.S. Department of State. 214 Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, Government Accountability Office and Terrell G. Dorn, Director, Physical Infrastructure, Government Accountability Office; Bruce A. Causseaux, Senior Level Contract and Procurement Fraud Specialist, Forensic Audits and Special Investigations, Government Accountability Office; and Brigadier General Danny K. Gardner, Director of Installations and Mission Support, U.S. Air Forces in Europe.................................. 140 Dorn, Terrell G.......................................... 141 Gardner, Brigadier General Danny K....................... 168 Kutz, Gregory D.......................................... 140 Rogers, Major General Marc E., USAF, Vice Commander, U.S. Air Forces in Europe........................................... 214 Letters, statements, etc., submitted for the record by: Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statements of..................... 138, 210 Dorn, Terrell G., Director, Physical Infrastructure, Government Accountability Office; Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations, Government Accountability Office; and Bruce A. Causseaux, Senior Level Contract and Procurement Fraud Specialist, Forensic, Government Accountability Office, prepared statement of............................................... 143 Gardner, Brigadier General Danny K., Director of Installations and Mission Support, U.S. Air Forces in Europe, prepared statement of.............................. 171 Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, Government Accountability Office and Terrell G. Dorn, Director, Physical Infrastructure, Government Accountability Office, prepared statement of.... 228 Rogers, Major General Marc E., USAF, Vice Commander, U.S. Air Forces in Europe, prepared statement of.................... 217 Watson, Hon. Diane E., a Representative in Congress from the State of California, prepared statement of................. 277 Waxman, Chairman Henry A., a Representative in Congress from the State of California: Fact sheet and audit report.............................. 4 Letter from Hubert Heimann............................... 213 Prepared statements of................................ 127, 202 WASTE, FRAUD, AND ABUSE AT K-TOWN: HOW MISMANAGEMENT HAS DERAILED DOD'S LARGEST SINGLE FACILITY CONSTRUCTION PROJECT ---------- THURSDAY, JUNE 28, 2007 House of Representatives, Committee on Oversight and Government Reform, Washington, DC. The committee met, pursuant to notice, at 10 a.m. in room 2154, Rayburn House Office Building, Hon. Henry A. Waxman (chairman of the committee) presiding. Present: Representatives Waxman, Cummings, Davis of Illinois, Tierney, Watson, Higgins, Davis of Virginia, Shays, Platts, Duncan, Issa, and Sali. Staff present: Phil Schiliro, chief of staff; Phil Barnett, staff director and chief counsel; Karen Lightfoot, communications director and senior policy advisor; David Rapallo, chief investigative counsel; John Williams, deputy chief investigative counsel; Margaret Daum and Suzanne Renaud, counsels; Molly Gulland, assistant communications director; Earley Green, chief clerk; Teresa Coufal, deputy clerk; Caren Auchman, press assistant; Zhongrui ``JR'' Deng, chief information officer; Leneal Scott, information systems manager; Sam Buffone, staff assistant; David Marin, minority staff director; Larry Halloran, minority deputy staff director; Jennifer Safavian, minority chief counsel for oversight and investigations; John Brosnan, minority senior procurement counsel; Emile Monette, minority counsel; Patrick Lyden, minority parliamentarian and member services coordinator; Brian McNicoll, minority communications director; and Benjamin Chance, minority clerk. Chairman Waxman. The meeting of the committee will please come to order. I would like to ask unanimous consent that the chairman and the ranking member or his designee each have 10 minutes of time for questioning when we begin this morning. Today's hearing will be the seventh hearing the Oversight Committee has held this year on waste, fraud, and abuse in the Federal Government. We are holding this hearing to examine what has gone wrong at the K-Town Mall, a $200 million Defense Department construction project. On September 28, 2006, this committee held a hearing on the Baghdad Police College. This was a U.S. project to build new barracks and classrooms to educate and train Iraqi police forces. As we learned at that hearing, the project was in shambles. I have some pictures of that project which I would like to show. At the hearing we heard testimony from the Special Inspector General for Iraq Reconstruction that construction was so deficient that toilets were draining through the reinforced concrete floors and literally raining on the cadets. Auditors told us about light fixtures so full of urine and feces that they would not operate. The excuse from the Defense Department was that this was a war zone. Today we consider a different construction project. This project is not in a war zone. It is not in Iraq or Afghanistan. This project is being built on a U.S. military base in Germany. U.S. project officials live and work every day next to the facility. It is called the Kaiserslautern Military Community Center, also referred to as the K-Town Mall. Yet, it is also over budget, behind schedule, and falling apart. The K-Town Mall is the Pentagon's largest single facility construction project in the world. It will have a hotel, sports bar, slot machines, and over 800,000 square feet of retail space. But, just like the Baghdad Police College, the construction has been deficient, and U.S. oversight has been wholly inadequate. I have some pictures of this project, and the similarities are striking. Here is one showing how the roof is leaking continually and is causing damage to the finished construction underneath. This will cost millions of dollars to replace. Here are some additional pictures of the faulty construction, and here is another picture showing how flammable sealant was used in kitchen exhaust ducts. How could this have happened? How could construction of a modern-day facility in a western country on a U.S. military base resemble the shoddy and makeshift practices of a war zone? That is what we are here to find out. Certainly there are problems with the contractor on this project, which is a German government-controlled entity called LBB, and we will hear about some of these deficiencies today. But the bottom line is that this is a U.S. Government project. We are spending over $200 million in U.S. funds to build the K- Town Mall, yet the Air Force has failed in its responsibilities to conduct proper planning and oversight. The project is millions of dollars over budget, has no validated cost estimate. The project was supposed to be done last year, but now there is no working completion date in sight. I want to introduce for the record an audit issued by the Air Force Audit Agency just last week on June 22nd. This audit report is the European Area Audit Office, June 22, 2007. This report details literally dozens of oversight defects by the U.S. Government in the K-Town Mall project. Let me just read a few from it. ``The Air Force did not provide adequate oversight of the planning procedures. The Air Force did not establish a process for the contractors to provide contractor qualification for U.S. review. The Air Force did not establish procedures directing project managers to review and validate cost estimates and did not properly monitor and approve contractor payments. The U.S. Air Force paid for materials in excess of approved contract quantities and did not properly appoint certifying and accountable officials.'' This is a long report, over 100 pages, so I asked my staff to prepare a short fact sheet with the key auditor findings, and that fact sheet is available to Members, and I ask unanimous consent it be included in the record. Without objection. 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GAO investigators also visited the K-Town Mall. We are fortunate that they can be here today to tell us what they learned. As we will hear, they saw irresponsible management, shoddy work, and millions of dollars in waste. The Federal Government spent a record amount, over $400 billion, on Federal contracts last year. Over 40 cents of every discretionary Federal dollar now goes to a private company, but far too much of this spending is being squandered. The report I released yesterday identified 187 contracts worth over $1 trillion that had been plagued by waste, fraud, abuse, or mismanagement since 2000. The same pattern happens over and over again. The contractors get rich, the work doesn't get done, and the taxpayers get soaked. As the main oversight committee in the House we have an essential job to do. We need to examine what went wrong so we can hold officials accountable and enact reforms, and that is what I hope we can begin to do today by holding this important hearing. [The prepared statement of Chairman Henry A. Waxman follows:] [GRAPHIC] [TIFF OMITTED] T4635.125 [GRAPHIC] [TIFF OMITTED] T4635.126 [GRAPHIC] [TIFF OMITTED] T4635.127 [GRAPHIC] [TIFF OMITTED] T4635.128 [GRAPHIC] [TIFF OMITTED] T4635.129 [GRAPHIC] [TIFF OMITTED] T4635.130 [GRAPHIC] [TIFF OMITTED] T4635.166 [GRAPHIC] [TIFF OMITTED] T4635.167 [GRAPHIC] [TIFF OMITTED] T4635.168 Chairman Waxman. I want to recognize Representative Shays, who will deliver the opening statement on behalf of Congressman Tom Davis, the ranking member. Mr. Shays. Thank you, Mr. Waxman. This is, in fact, Representative Tom Davis' statement. Good morning. Let me first commend Chairman Waxman for holding a hearing on acquisition issues that does not involve Halliburton. We hope today's broader perspective marks the beginning of a trend. As the chairman said, we need today to discuss the challenges facing the Department of Defense's largest ongoing facilities construction project, the Kaiserslautern Military Community Center at Ramstein Air Base in Germany. The facility was designed as a massive, multi-use complex featuring retail, hotel, and entertainment space to service American personnel stated in Germany and for others passing through Ramstein, but today the project stands unfinished after chronic delays, lax management and oversight, huge cost overruns, dangerous design flaws, vandalism, and allegations of corruption. According to the Government Accountability Office, which brought this matter to the committee's attention, these problems go well beyond the risks inherent in foreign construction projects. This acquisition effort seems to have collapsed under the combined weight of several daunting but not altogether unique complications. First, the project is supported by four different funding sources, each with different spending rules, currently valued at over $170 million. The acquisition requires coordination of expenditures from Air Force working capital funds, other non- appropriated accounts, and $21 million in appropriated military construction funding. Second, the facility is being built under a riskier fast track design/build process. Third, the project must be constructed in accordance with a NATO status of force agreement which requires the German government to manage construction using German contractors to perform the work. Fourth, the Air Force decided not to use the U.S. Army Corps of Engineers, the Defense Department's resident construction management experts, to oversee the project. And, finally, to top it all off, the Air Force Project Management Office was under-staffed. The result was a high- risk, high-visibility project managed by too few people. Any one of these factors presents significant management challenges. Together, they spell disaster in the form of inadequate and unfocused high-level leadership, poor planning, poor design requirements, and an inadequate number of trained personnel overseeing the project. The Air Force recognizes the project has serious problems in management and oversight, and it is in the process of taking steps to get control of the situation. Some of the identified challenges have been mitigated; others remain works in progress. There is still a great deal of money committed to the project and substantial funding remains in the pipelines in Germany for other construction endeavors. We need to be sure this project is completed properly and that the future projects do not fall prey to the same oversight mistakes that steered this project into a cost and scheduling ditch. I hope this hearing will focus on what needs to be done to get this project back on track and what should be done to protect the integrity of future projects built under the existing status of force agreement in Germany. We need to know what has gotten better, what is still being fixed, and what is still broken, and we need to refine our understanding of the difference between interim findings that may make this complex process look bad now, and the real problems that will actually affect the cost to taxpayers in the end. I do need to sound a note of caution, however. The GAO audit findings being presented today are only preliminary. Criminal and administrative investigations of the project are still underway. Without the final results of those efforts, we are not in a position to get the full story in this hearing. It might have been wiser to wait, but as we proceed today we should take care not to jeopardize the hard work of the Department of Justice and the Air Force in pursuing serious allegations of civil and criminal violations in connection with this project. Investigators from the GAO are here today to provide their initial views on these issues, and we commend them for their hard work. We also value the experience and the perspectives our Air Force witnesses bring to this discussion of the critical challenges faced by this construction project. Much is at stake in terms of U.S. tax dollars and in terms of ensuring our troops get the best possible services and accommodations while deployed overseas. We look forward to the testimony of all the witnesses and to a frank, constructive discussion. That is the end of his statement. [The prepared statement of Hon. Tom Davis follows:] [GRAPHIC] [TIFF OMITTED] T4635.131 [GRAPHIC] [TIFF OMITTED] T4635.132 Chairman Waxman. Thank you very much. I want to welcome now our witnesses for this hearing, Greg Kutz, who is joined by Bruce Causseaux and Terrell Dorn from the Government Accountability Office, who will present the interim results of their investigation into deficiencies at the K-Town Mall. We also want to welcome Brigadier General Danny Gardner, who is the Director of Installations and Mission Support for the U.S. Air Forces in Europe. Hopefully we will get an explanation of what has been happening at the K-Town Mall. I thank you all very much for being here. It is the practice of this committee to ask all witnesses to take an oath before they testify. [Witnesses sworn.] Chairman Waxman. The record will indicate that each of the witnesses answered in the affirmative. Your prepared statements are going to be in the record in their entirety. We would like to ask you to proceed in any way you wish in your oral presentation to us. Mr. Kutz. STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; TERRELL G. DORN, DIRECTOR, PHYSICAL INFRASTRUCTURE, GOVERNMENT ACCOUNTABILITY OFFICE; BRUCE A. CAUSSEAUX, SENIOR LEVEL CONTRACT AND PROCUREMENT FRAUD SPECIALIST, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; AND BRIGADIER GENERAL DANNY K. GARDNER, DIRECTOR OF INSTALLATIONS AND MISSION SUPPORT, U.S. AIR FORCES IN EUROPE STATEMENT OF GREGORY D. KUTZ Mr. Kutz. Mr. Chairman and members of the committee, thank you for the opportunity to discuss our initial findings relating to the KMCC project. The bottom line of our testimony today is that the KMCC project is in serious trouble. Ineffective management and oversight have resulted in a situation with no good solutions. Our testimony has three parts: first, the current problems; second, the causes of these problems; and, third, the effects of the problems and implications for future projects in Germany. First, it was initially estimated that the KMCC would cost about $150 million and be completed in early 2006. Today neither the Air Force nor the German construction agency, LBB, have a reliable cost estimate or completion date. KMCC currently faces a multitude of problems that threaten the completion of this important project. For example, German contractors are leaving the constructionsite in part because they aren't getting paid. The number of workers has dwindled from hundreds to what we understand to be about 50 today. Construction flaws include significant water leaks, as you mentioned, related to the roof, which will require millions of dollars to fix. Examples of other problems include vandalism in over 200 of the hotel rooms, turnover in key LBB personnel, and the firing of a company that LBB hired to manage the project, and ongoing fraud investigations. Under the causes of the problems, from the beginning KMCC was a high-risk overseas project. Key risk factors, which are also shown on the monitor, include an accelerated schedule due to the need for the 350 hotel rooms; LBB having control over contracting and management; in effect, a cost-plus percentage of cost agreement; scheduling and coordination of over 30 German trade contractors; currency exposure due to a Euro- denominated contract; and financial risks borne by the Air Force and its funding partners. However, rather than beef up financial contract and construction oversight, the Air Force provided minimal oversight. For example, it appears that millions of dollars of invoices and alleged change orders were paid for by the Air Force with little or no supporting documentation. We refer to this as a pay-and-chase process, which is highly vulnerable to fraud, waste, and abuse. Unfortunately, LBB failed to effectively design the project and oversee the work of the trade contractors. Ironically, LBB will receive a 5.6 percent fee on top of every dollar of construction cost overruns for this project. Let me now turn to Terry Dorn, who will discuss the effects of the problems and implications for future projects in Germany. STATEMENT OF TERRELL G. DORN Mr. Dorn. Mr. Chairman, failure of the Air Force and LBB to meet the project's construction schedule affects all of the funding partners. For example, Air Force estimates it is losing $10,000 per day because the hotel rooms being built by this project are not available, requiring many transiting service members from places such as Iraq and Afghanistan to stay off base in higher-cost German hotels. AAFES, which uses non-appropriated funds, bears the heaviest burden. Not only is their proportional share of both current and future construction and possible delay costs the largest, but because they are a retail operation they also suffer from lost profits and lost opportunities. Their ability to plan future operations also suffers without a firm opening date, because they don't know when to stock the shelves and they don't know when to hire new employees. Additionally, AAFES is returned a portion of those profits as dividends, which are used to support morale and welfare activities for our service members and their families. Because of the double hit of increased construction cost from this project and lost sales, AAFES will not be able to return as much money to morale and welfare activities as they had planned. They may also have to delay construction of two shopping centers on other military bases and delay renovation of other facilities. Air Force officials estimate that there is at least $400 million in additional military construction and operations and maintenance projects slated for Germany over the next 5 years. Absent better controls, these projects face the same type of heightened risks associated with the Kaiserslautern construction project. In summary, the Kaiserslautern Military Community Center project is in serious trouble and needs serious attention by Air Force and LBB to mitigate the risks. While both recognize some of the issues and are taking some steps to address them, due to inadequate internal controls and mounds of unprocessed change requests, there is an increased risk of fraud and waste. Due to reported design issues, the lack of a construction schedule, shoddy construction work requiring rework, work stoppages, and the large backlog of unprocessed change requests, the project's schedule and consequently its budget are at risk of large increases. The largest share of those budget increases will be passed along by Air Force to AAFES, affecting their available capital for new projects and reducing the amount of dividends they can provide for the morale and welfare funds for our service members and their families serving overseas. Mr. Chairman. that concludes our opening statement this morning. We are prepared to answer any questions for the committee. 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Mr. Causseaux, you are here to answer questions? Mr. Causseaux. Yes, sir. Chairman Waxman. OK. Thank you. General Gardner. STATEMENT OF BRIGADIER GENERAL DANNY K. GARDNER General Gardner. Good morning, Chairman Waxman and distinguished members of the committee. It is an honor for me to be here today. Mr. Chairman, I have a brief opening statement, but my written statement presents the facts of this situation to the best of my knowledge. In opening, I would like to state that the Kaiserslautern Military Community Center project [KMCC], remains a cornerstone requirement for U.S. Enduring Presence in the European Theater. It will help provide quality of life transit capability to America's finest going to, coming from, or supporting any EUCOM or CENTCOM area of responsibility. This project is governed by the ABG-75 administrative agreement, a bilateral agreement between the United States and the Federal Republic of Germany. This agreement details the roles, responsibilities, and procedures of all parties in the acquisition of U.S. facilities projects in Germany. As you are all aware, this project is experiencing management, technical, and fiscal issues which are significantly delaying its completion. Mr. Chairman, if you will indulge me for a moment, I would like to explain the contractual relationships of the parties involved in construction in the Federal Republic of Germany in terms of a football team, something we can all relate to. This is not to suggest, Mr. Chairman, that this is a game, but the analogy will serve to better illustrate the roles and responsibilities of the various parties. In my analogy, the players are the contractors. The quarterback is the construction manager, JSK. The coach is our German construction agent, LBB Kaiserslautern. The owners and investors are the German and U.S. Government, respectively. Our quarterback, or our construction manager, is our key player. JSK is responsible for orchestrating the plays while working the field. Our coach, LBB Kaiserslautern, developed a strategy to be successful on the field and responsible for evaluating and adjusting performance of the quarterback and players. The owners and investors provide resources for the coach to hire players, develop strategy, and succeed in the field. The owners and investors can be somewhat involved in the pre-game strategy, but in Germany once the game begins or contracts are awarded the success of the team lies with the coach, the quarterback, and the players. In the case of KMCC, we have experienced several weaknesses, and in some cases complete failure in our quarterback, JSK, and our coach, LBB Kaiserslautern. These weaknesses and failures have brought us to where we are today. The owners and U.S. officials are working hand-in-hand to determine solutions to the challenges our team is facing. It is my belief that the challenges surrounding the KMCC project are deeply rooted in an irreversible decision by our German construction agent to use an acquisition methodology known as trade lots. Although the decision was well intended, it was ill fated. Simply defined, trade lots dispense with the use of single general contractor normally fiscally responsible for all aspects of single contract. Instead, trade lots award numerous contracts to individual trades, such as electrical, mechanical, and architectural, to finish this. This method was touted as offering two strategic advantages. First, it would better serve the local economy surrounding Ramstein Air Base by allowing smaller, local firms to bid and perform on numerous smaller contracts. Second, this method of contracting would afford the opportunity to fast track construction. Early trades such as site work, foundation, structural work could therefore be designed and constructed while subsequent trades continued with design efforts. Barring a very costly full termination and re-solicitation, this decision cannot be undone. With few exceptions, most of the project challenges can be linked to the weaknesses of our construction agent to properly develop and manage the execution of this project. One manifestation was an exceptional number of construction change orders due to design errors and omissions. This led to the agent's inability to orchestrate the schedule and maintain quality control on more than 35 different contracts across seven projects and four funding sources. Further, they were not structured or resourced to process this large number of change orders in a manner that would keep construction on time and within budget. The resulting haste in change order processing then led to accountability issues. In December 2005 I began to see indications that the project was not going as smoothly as we had hoped, specifically in regards to scheduling work. We began engaging with our agent to find ways to influence changes on the constructionsite. In September 2006 LBB replaced JSK and assumed the role of a general contractor. Simultaneously, we ramped up our oversight to a level not required by our ABG-75. Though some effective corrections have been made, there are still many challenges ahead. We have learned many lessons from this project that we have applied to other projects across USAFE. Returning to my football analogy, great effort has been exerted by USAFE and our German partners to turn this team around. Our commander and vice commander, as well as our embassy staff, have personally engaged with senior German officials to find solutions in order to complete this project as quickly as possible and within United States and German laws governing construction. These efforts have led to additional changes within the leadership of the project and promise to bring fresh game plan to the players on the field. It is my belief that our current strategy represents the most attractive course of action. We must continue construction to avoid extensive delay costs and to bring the facilities to a point where they can generate income and provide vital mission support. Mr. Chairman, we appreciate your genuine concern in this effort and I respectfully request the committee's support as we work through the remaining challenges to complete this project as quickly as possible and bring this badly needed mission support facility online. Thank you. I look forward to your questions. [The prepared statement of General Gardner follows:] [GRAPHIC] [TIFF OMITTED] T4635.158 [GRAPHIC] [TIFF OMITTED] T4635.159 [GRAPHIC] [TIFF OMITTED] T4635.160 [GRAPHIC] [TIFF OMITTED] T4635.161 [GRAPHIC] [TIFF OMITTED] T4635.162 [GRAPHIC] [TIFF OMITTED] T4635.163 [GRAPHIC] [TIFF OMITTED] T4635.164 [GRAPHIC] [TIFF OMITTED] T4635.165 Chairman Waxman. Thank you very much for your testimony. We are going to proceed now, without objection, with questions in the regular order, 5 minutes each Member. I am going to start. General Gardner, on page 3 of your written statement you say that the K-Town Mall project was put on a fast track. I would like to ask you about this. According to your testimony, the Air Force had a major interest in completing the project by 2005. Why was this project so important? General Gardner. Sir, we have a Rhein Main transition program where we were closing our base in Frankfort, Rhein Main Air Base, and the objective was to close that base, transfer the missions from Rhein Main and duplicate those missions to the extent that we could at Ramstein and at Spangdahlem. The closure of that base was to happen in December 2005. It did happen in December 2005. And the opening of the facilities, the VQ area, the visiting quarters area of that facility was to open simultaneously with that. But I also point out to you, Mr. Chairman, that the December 2005 date was a desired date by USAFE for the facilities. It was never a contractual date that was set up by our contracting agent. Chairman Waxman. The Air Force audit also referred to this pressure. On page 3 the audit states, ``The senior management emphasis was on expediting design and schedule, rather than ensuring personnel conducted appropriate design reviews.'' What I don't understand is how a project that was so important could go so off course. Mr. Kutz, how would you answer this question? How did we end up with a $200 million white elephant when we were supposed to have an urgently needed facility for our troops? Mr. Kutz. Well, our testimony talks about three parts to that. There are inherent risks involved with overseas contracting. There is the limitations based upon the agreement with the German government. You have currency risks. Then, with respect to the actual German agency, LBB, they failed to provide effective oversight and management of the design and implementation. The third part of this is Air Force not having effective and proactive controls in place and oversight to identify and deal with the problems earlier, and we see it as all three being a combination of the perfect storm, if you will, creating this situation. Chairman Waxman. Was one of the factors the pressure to cut corners in order to get the job done quickly? If this were the case, this approach certainly produced the exact opposite result. What do you think about that? Mr. Kutz. I do believe that a lot of the oversight was relaxed, in part because they wanted to get it done, and so there was a tendency to want to pay the bill, and, as we mentioned in our statement, even if there was no support for the invoices or change orders. That was because of the schedule-driven project. Chairman Waxman. General Gardner, did any official involved in this project ever object to the proceeding on this risky fast track approach? General Gardner. There were some communications between the partners on the fast track approach, but in the end, in order to get the facility open in December 2005, all parties agreed that the fast track was an acceptable manner, with some stipulations that were identified in the long run. Chairman Waxman. We have a memo. We will make it available to you. This was sent in September 2004 to the civil engineer and the Director of Services for the U.S. Air Forces in Europe. This memo was sent by the two other key stakeholders in this project, the Army and Air Force Exchange Services and the Air Force Services Agency. In this memo they warn that the fast track process was eliminating ``the time needed to adequately review and resolve critical design issues.'' Have you ever seen this memo before? General Gardner. Yes, sir, I have seen it. Chairman Waxman. Let me read the next sentence. ``This accelerated process has contributed to critical design process omissions, design coordination problems, and schedule complications that may cause cost increases and project delays.'' General, this memo was written in 2004, well before the majority of the construction had taken place. Can you tell us why the Air Force disregarded the objections of these key officials and proceeded with this approach, despite these warnings? General Gardner. Yes, sir. This was before my time, but let me try to give you what I think happened based upon what I have been able to research. The individuals involved in this, we did actually go through a process of looking at it, analyzing it, and determined that the risk was--we knew that there was a risk involved. We would not have the idea it would be as risky as it has turned out, but we did know there would be a risk, and that all parties, again, involved agreed that the fast track method was an appropriate method to start this particular project. Chairman Waxman. Mr. Kutz, what is your view of the memo and the way it proceeded? Mr. Kutz. My staff had seen this memo before, and, again, I think it just showed that, I guess, the incentive was to get it done quickly rather than to get it done with the all controls and additional caution. You know that high-pressure schedules are oftentimes a problem that causes failure in a project. Chairman Waxman. Thank you. Mr. Davis. Mr. Davis of Virginia. Thank you, Mr. Waxman, for holding this hearing. This is a kind of microcosm of what goes wrong in contracting. Mr. Kutz, your statement here weaves a pretty woeful tale. You say the German government entity charged with managing the project performed poorly, as did many of the German contractors. You don't spare the Department of Defense, either, stated that the Air Force oversight was grossly inadequate for such a large, high-risk program. Did anyone or any entity perform well here? Mr. Kutz. I suppose some of trade contractors did because, again, I understand German trade contractors do good work generally and there is more of a history with German construction that I am not as well aware of, but certainly I am sure some of them did good work. I think it was more the oversight, the fast track, the design had flaws, and, of course, Air Force did not provide any oversight. Mr. Davis of Virginia. Is this a problem throughout the Air Force in the way they oversee these, or is this just one isolated case where the contracting officer, or whoever was responsible, just fell asleep? Mr. Kutz. I can't speak beyond this. Mr. Causseaux. No. We have no indication that this is indicative of systemic problems, but, again, we only looked at this project so we can only speak for this particular one at this time. Mr. Davis of Virginia. How much do you think American taxpayers are out on this? How much did we lose? Mr. Kutz. Only a fraction of this is coming from the MILCON appropriations. Most of this is not appropriated money. Mr. Davis of Virginia. Coming from where? Mr. Kutz. Soldier morale programs at the end of the day. Mr. Davis of Virginia. So how much was lost when you put all that through? Mr. Kutz. At the end of the day I don't think anybody knows. I mean, there is no estimate of the cost of the project right now, and the original estimate, Mr. Davis, was $150 million. There is no estimate today. Mr. Davis of Virginia. Let me ask you this: did anybody get fired over this? Mr. Kutz. I would defer to Air Force on that. Mr. Davis of Virginia. Anybody fired? General Gardner. No, sir. Not to my knowledge anyone has been fired. But I would like to say, if I could---- Mr. Davis of Virginia. Anybody promoted? General Gardner. Sir, could I set the record straight on the money? Mr. Davis of Virginia. Sure. General Gardner. We are within our budget authority on this project. We still have $55 million that we haven't spent on this project. The prognosis, even with the repairs of the roof, which is substantial, even with the prognosis we will be under our project program amount. Mr. Davis of Virginia. But you admit this wasn't very well handled, don't you? Or are you going to defend it? General Gardner. I am not defending our contracting agent. No, sir, I am not. The other thing, though, I will tell you---- Mr. Davis of Virginia. Did the contracting agent do their job in this case or did they fall down? General Gardner. The contracting agency obviously fell in this case. Mr. Davis of Virginia. Was anybody reprimanded for this? General Gardner. Sir, they have been---- Mr. Davis of Virginia. Was anybody demoted or fired? General Gardner. Sir, there have been people. I am sorry. I thought you were talking about the U.S. side being fired. No one on the U.S. side has been fired that I am aware of. On the contracting agent's side, yes, sir. JSK, which was a contracting agent for the LBB, was totally removed from the project. Four individuals have also been fired. Senior management onsite have been removed from the site, as well, per my assistants. Mr. Davis of Virginia. But from the government side, the people overseeing it, no heads rolled? Nothing? General Gardner. The individual, the contracting agent is a German organization, so yes, government organizations have---- Mr. Davis of Virginia. On the German side. General Gardner. Yes. Mr. Davis of Virginia. But I am saying---- General Gardner. Not on the U.S. side. Mr. Davis of Virginia. Right. Mr. Kutz, you point out that the Air Force provided minimal oversight, and in some cases actually circumvented payment processes. A major reason behind this seems to have been a Air Force's desire to complete the project on schedule; is that correct? Mr. Kutz. Yes. Mr. Davis of Virginia. Was the key element behind this mess an unreasonably ambitious schedule for project completion? Mr. Kutz. That was certainly one of the key elements. Again, I think there were a multitude of factors that contributed to this, including some that aren't under the control, like the currency exchange. The Euro dollar has gone up by 30 percent since the beginning of the project, so that is outside of anyone's control. Mr. Davis of Virginia. Right, and probably you could argue that wasn't even foreseeable. To your knowledge, nobody on the American side of this thing, though, was reprimanded, demoted? Mr. Kutz. No, none that we were aware of. I think the Air Force would know better, but we are not aware of any. Mr. Davis of Virginia. Do you think the problems were caused by the complexity of the various funding streams, which included both, as we noted, appropriated and non-appropriated funds, as well as some money from the German government? Mr. Kutz. Yes, that contributed. Mr. Davis of Virginia. Do you think the fact that a majority of the funds here were not DOD appropriated funds was a cause of some of the lax oversight? Mr. Kutz. That was one of the reasons they didn't engage the Corps of Engineers. Apparently, in most projects like this the Corps of Engineers would be engaged to provide oversight, at least certain elements of financial and construction oversight. Because it was not appropriated, in part, that was not done in this case. Mr. Davis of Virginia. My time is up. Thanks. Chairman Waxman. Thank you, Mr. Davis. Mr. Cummings. Mr. Cummings. I am confused. Mr. Kutz, you said from the very beginning there was no good solutions to this problem. General Gardner tells us that apparently he has a plan that this thing is going to come in under budget. I mean, do you agree with that? Mr. Kutz. No. Not at all. Mr. Cummings. Why not? Mr. Kutz. The project is already 18 months behind schedule and there is no estimate for cost and schedule. I am not sure how you can say you are going to be under budget. There is going to be significant litigation, claims responding. There is re-work, and there are replacement of the roof, not just to fix the leaks. They are going to have to tear out the roof, put a new roof in. I think it is very ambitious to say this is going to be within any budget at this point. Mr. Cummings. General, I am under the impression from your testimony that you believe the German agency and the German contractors are to blame for the problems with the project. I don't see one sentence in this testimony that acknowledges any fault on the part of the Air Force. Is that correct? You don't believe the Air Force did anything wrong here? I understand nobody has been demoted or dismissed. General Gardner. Sir, with the advantage of 20/20 hindsight, there are things that we could have done better or would do differently, and those things are what we call lessons learned that we have already instituted across USAFE in project management. But overall, again, we have trust in our contracting agent, which is LBB in this case, in accordance with international agreements, and in accordance with international agreements they are authorized or expected to build these facilities with their own right and under their own responsibilities, so we follow. We sit on the sideline once the game gets started, as I was pointing to earlier. Mr. Cummings. But--there is a big but here--we hold the money; is that right? General Gardner. That is correct. Mr. Cummings. We hold the money. General Gardner. That is correct, sir. Mr. Cummings. And so, because we hold the money, I assume there are certain controls that we should have; is that correct? General Gardner. We have that, sir. The oversight that was alluded to earlier, we have a program management office onsite. The program management office is the ones that identified the leak problems, for example, on the roof, and they are the ones that have identified the kitchen duct problem. Mr. Cummings. Are you telling this committee this morning that it is adequate, this oversight is adequate or has been adequate? General Gardner. The oversight, again in hindsight, we could have maybe have increased the number of people in the program office, but---- Mr. Cummings. Let's talk about it. You don't seem to want to admit that there are some major problems here with the Air Force, but I would like to ask about when the Air Force first became aware of the problems with construction and finances and the scheduling. On page 3 of your written testimony you state that the project indicators, both financial and schedule, began slipping in September 2006; is that correct? General Gardner. No. The schedule had already started skipping [sic] before September 2006. Mr. Cummings. I am sorry. And is---- General Gardner. But that is when we began to realize that there were more issues than just schedule slippage, because that is when we realized that we had a--well, actually it was before that when we had a number of change orders that our contracting agent had approved. Mr. Cummings. I would hope so, Brigadier General, because the hotel was supposed to be done by December 2005; is that correct? General Gardner. That is right. Yes, sir. Mr. Cummings. Yet you seem to be asserting that the Air Force had no idea there was anything wrong until after the date this project was supposed to be 100 percent complete. Can you explain that statement? General Gardner. The project was scheduled to be completed, the hotel was completed contractually April 2006. I began to realize that we were having some major issues with schedules in---- Mr. Cummings. You just got slipped a note. I want to make sure we are accurate here. Why don't you read your note. General Gardner. VQ was scheduled to open in April 2006. Mr. Cummings. OK. Let me ask you this, then, General. There was a press story running in Bloomberg News yesterday in which you were quoted. In it you made this statement, ``There had been an environment of trust between the U.S. forces and LBB until about 18 months ago, when significant coordination and scheduling problems on LBB's part became apparent.'' Eighteen months ago was December 2005, so according to your statement in Bloomberg yesterday, the Air Force became aware of the significant coordinating and scheduling problems in 2005, a year before the date you assert in your testimony today. Which statement is accurate? Did the Air Force become aware of these problems in September 2006 or were there indicators in 2005? General Gardner. As I stated in my verbal testimony, I became aware of significant problems with scheduling in December 2005. In the beginning of January 2006 is when I began to have a series of meetings with our contracting agent in order to determine what is the magnitude of these problems. Mr. Cummings. And so why do you take action then? General Gardner. We did take action. Mr. Cummings. What did you do? General Gardner. We worked with our contracting agent to determine why are we behind schedule and began to take action as to how we were going to get back on schedule. Chairman Waxman. The gentleman's time has expired. Mr. Shays. Mr. Shays. Thank you. General Gardner, I want to be fair to you, and I know this committee does, as well. Sometimes when people testify they don't do as well as they should, but this is almost bizarre to me, and so I want you to stop and maybe explain to us. Maybe we are thinking of something different than you are thinking. When was this facility supposed to be complete? General Gardner. The VQ was scheduled to be completed in April 2004. That is when we were to get BOD. Mr. Shays. April of---- General Gardner. I am sorry, April 2006. Mr. Shays. Let me say something to you. You do not need to speak quickly. General Gardner. April 2006. Mr. Shays. April 2006. And what you are saying to us is in December 2005 you began to be aware that there were some challenges in completing the project. It seems to me if it is supposed to be done just 5 months later, for you to be aware of it so late is stunning. Explain to me why you would be aware so late that there were delays. General Gardner. Because we were being told by our contracting agent that everything was on schedule. Mr. Shays. Well, being told by your contractor and having people there seeing that the contractor must be smoking something--in other words, did you not have anyone who was following this project and watching it and checking out to make sure that at least the contractor was saying things correctly? General Gardner. Sir, that is exactly what we were doing. That is, again, the reason we had a series of meetings with them. Mr. Shays. No, you weren't doing it, because you should have known before December 2005. Clearly you should have known. The other thing that just leaves me uncomfortable, and it is an impression that you wanted to leave with us but it doesn't make sense to me. I mean, when we read the document from GAO, this looks like a disaster of a project that is going to have significant cost overruns, and you are trying to give us the impression that you are under-budgeted. The way I think you are doing it is by not adding in the cost that will be needed just to get us up to a certain state of correction before you complete the project. For instance, the claims, what are the kinds of claims against this building right now? In other words, if you don't pay a contractor, you have money in the bank, but that is money that is allocated somewhere. I mean, are you trying to give us the impression that you have unallocated dollars that will make you feel comfortable and Air Force comfortable that you are going to be under budget? General Gardner. Sir, our prognosis, based upon our contracting agent, as well as the other government officials that looked at this, we agree that at this particular point in time we are under the budget. That is to include the repairs that have been identified in this committee this far. It does not include, however, the unknowns. We don't know what claims are out there yet as far as what the Germans would refer to as hindrance. We don't know what those may be and how that will account in here. But many of those claims costs, we are working with our German counterparts in order to recover some of those claims. Mr. Shays. Well, I became the general contractor of my house when my contractor left me a few years ago, and I would never feel comfortable saying that we are going to be under cost, because the fact is you have problems with your contractor because you are over cost. Rarely do you have problems with a contractor when you are under cost. Mr. Kutz, walk me through. And I want you to be candid on how you are reacting to General Gardner's response to us. Mr. Kutz. It is just optimistic. I mean, I just don't see facts behind it from what we can see. Let me give you an example. There are tens of millions of dollars of change orders in the pipeline that have not been reviewed. There is no support for most of those, or many of those. Some of them have been paid for, some of them haven't, and that is based on our own---- Mr. Shays. You have one change order, you have added cost and the change order they can charge you top dollar because it is a change order. How many change orders are there? Mr. Kutz. I don't know today, but as of February there were 500 or 600 that were in the pipeline, according to their consultant. Mr. Shays. 500 or 600 change orders? Mr. Kutz. That is what we understand, yes. Mr. Shays. Yes. OK. Mr. Dorn. Mr. Dorn. I would like to comment first to add to what Greg said. If you don't know the cost of the change orders and the cost of the claims that still haven't come in yet, there is no way you can know that you are going to be under budget under your programmed amount. Being under the programmed amount doesn't mean that there hasn't been any waste; it just means that your programmed amount was a lot higher than your initial contract. Mr. Shays. Well, my time has run out, but basically two issues right now. You are going to have claims and you are going to have change orders and, third, you are going to have repairs. Those three things are going to increase your cost, so you are going to have to find where did you save money in your project. At any rate, thank you, Mr. Chairman. Chairman Waxman. Thank you very much. Mr. Davis. Mr. Davis of Illinois. Thank you very much, Mr. Chairman. I want to thank you for calling this hearing. Following up pretty much the same line of questioning, Mr. Kutz, I want to try and understand exactly how much this project is going to ultimately cost. I am looking at the Air Force audit report, and it says that in 2003 the K-Town Mall project would cost $132 million. Is that correct? Mr. Kutz. That could be one of the early numbers. There are a number of numbers of what it was going to originally cost. Our best guess was 150, from what we could tell. Mr. Davis of Illinois. Then by January 2006 the audit says that the cost of the project had risen to about $180 million, and by September 2006 the estimate was $201.6 million. Now, I understand that some of that increase was because of the change in the value of the Euro, but a lot of that increase was for increased contractor cost; is that not correct? Mr. Kutz. That could be rework and other types of things, or just changes in quantity and other types of prices of materials. Mr. Davis of Illinois. General Gardner, do you agree with the Air Force auditors that the latest estimate for the cost of this project is approximately $200 million? General Gardner. I am glad you asked me that question, Mr. Congressman. If I could clear the record, the current amount is the PA amount. The program amounts for this project is $181,997. The cost prognosis, including all the repairs, all of the change orders, the 776 change orders, including all those, we are looking at roughly $174 million. I will tell you, however, that does not include the claims that we were referring to here. We have not gotten around to the claims. There is Article 18 of the ABG-75 says that the U.S. Air Force or U.S. Government will not be held, cannot be held responsible for faults caused by the German government or their representatives that they hire. Article 40 of ABG-75 says those discrepancies and disputes will be handled at the ministerial level. That is what we are in the process of doing. We are trying to work those disputes that were referred to, the claims that we are talking about, at the ministerial level. We have no idea what those numbers are going to be just yet. But I just wanted to make sure that the record is straight. These are prognoses from everybody who has looked at this other than our GAO and audit agency, is $174 million is where we are at the present time based on our best prognosis. Mr. Davis of Illinois. Now, are you getting any money for the project from the German government? General Gardner. There is a small amount. For the claims, no, but there is a small portion of this, about $11 million, that we get through a Rhein Main transition program which is paid for by the partners. This money is used to pay for 200 of the rooms in the VQ area, at least portions of the VQ area. Mr. Davis of Illinois. Mr. Kutz, in your testimony you say that even $200 million is an estimate that is too low. Do you still---- Mr. Kutz. We don't really have an estimate, but it is hard to believe there could be a valid estimate when there is no schedule completion date. I mean, no one has. Maybe the General has a new schedule completion date that he would like to go on record with, because I just don't know how you can make an estimate of cost when you don't know when it will be done. Mr. Davis of Illinois. General, let me ask you, is there a time for reassessing the ultimate cost of the project where you can come in with an amount that probably would get agreed to by the GAO or auditors who would look at it? General Gardner. We are constantly looking at funding because, contrary to what some might believe, we are good stewards of American dollars. We are constantly looking at our expenses, where do we need to make adjustments, and so forth. As we speak today, I can't predict what is going to happen into the future, but as we sit today the prognosis is just as I have just read it to you. That is where we are. And the $200 million that you have seen floating around is a figure that we use when we take people around visiting, this is a $200 million project. It is not a $200 million project. It is really about a $181 million project, but we have used the $200 million as a kind of a round figure for our tourists. Mr. Davis of Illinois. Could it be that you really don't know what the cost of the project is going to be? General Gardner. Ultimately, including the claims and the unknowns, no, we do not know. Mr. Davis of Illinois. Thank you, Mr. Chairman. Chairman Waxman. Thank you, Mr. Davis. Mr. Issa. Mr. Issa. Thank you, Mr. Chairman. I want to thank you for holding this hearing. It is always refreshing when we can have a totally bipartisan hearing, one in which we are looking at the kind of mistakes that are endemic in our large bureaucracy. I don't claim to be an expert on contracting. The biggest building I ever built was 200,000 square feet. But it will tell you that, given a budget of $200 a square foot, given the ability--General Gardner, let's start it off. Were you there at the start of the project? General Gardner. No, sir, I was not. Mr. Issa. OK. Where were you at the start of the project? General Gardner. I was on another assignment in Brussels. Mr. Issa. What were you doing? General Gardner. I was the Deputy U.S. military representative to NATO. Mr. Issa. OK. So you weren't in contracting? It wasn't a skill set you brought here today except what you have learned on the job? General Gardner. That is correct, sir. Mr. Issa. Isn't that one of the problems of the U.S. military is, with the exception of the Corps of Engineers, for the most part putting on that uniform doesn't give you the qualifications, graduating from the Air Force Academy with an engineering degree in aeronautical engineering doesn't make you a general contractor? Isn't that generally one of the problems of men and women in uniform? General Gardner. Sir, I can't comment to that. Mr. Issa. OK. We will take that as a yes. Did anyone ever consider doing a PPV type project, in fact, having a partnership? You know, Paris Hilton is in the news, but Baron Hilton built a lot of hotels with 350 rooms and he came in on time and under budget. Was this ever considered in the contracting? Mr. Kutz, did you see anything in the record that said that at the time the Germans and the Americans were figuring it out they considered the idea that they would go to somebody skilled in producing hotels? Mr. Dorn. Anybody? Because I will tell you I don't believe for a minute that you are going to do better the next time unless you start off with a different attitude on how we approach the project to begin with. Go ahead, sir. Mr. Causseaux. The U.S. Forces are obliged, under the ABG- 75 agreement, to contract through using essentially an indirect process where a German agent--in this case LBB--represents the American interest. That does not mitigate the U.S. obligation to provide general oversight of that venture. Mr. Issa. So you get to be in the airplane, but you don't get to touch the controls, but you get to complain about the altitude and direction? Mr. Causseaux. The German government---- Mr. Issa. I am not a football guy. I am going to have to do this in Air Force terms. Mr. Causseaux. Well, in all deference to the General, while---- Mr. Issa. This is a fly by wire with no connections. [Laughter.] Mr. Causseaux. With all respect to the General, I agree with his analogy that this is not a game; what I don't agree necessarily, however, is that the German government was an owner. I believe the United States is the owner. It is our money. We have a vested interest. The fact that this was a fast track process, there was a decision made not to engage a general contractor, driven, I believe, primarily by the fact that it was a fast track. The Air Force opted not to have the Corps of Engineers engaged. There were designers. The design was incomplete. And there were multiple funding sources collectively and, given the size and order of magnitude of the project, made this a high-risk project. The Air Force needed to have adequate oversight and they did not. Mr. Issa. OK. You know, did any of you see anywhere in the contract history somebody looking at what it would cost to buy Euros at the front end of the project, since this was clearly known as a Euro-denominated project? Does anybody think for a minute that they simply write checks for fuel around the world and they don't hedge it in any way, shape, or form? Mr. Kutz. I don't believe the Federal Government hedges, but any business would have hedged this kind of a project. There is no question about that. Mr. Issa. You mean the Federal Government just calls up every day and says what it is going to cost us for fuel? Mr. Kutz. I believe that is correct. Mr. Issa. There is no contracting ahead, no forcing the vendor to hedge? Mr. Kutz. I am pretty sure that is the case. Mr. Issa. OK. So for this committee, we should understand that all that talk about world class private sector type thinking is just bull; that, in fact, that is not going on; that what would normally go on--Southwest Airlines doesn't have a problem when they are dealing in buying fuel. They are going to have to buy at variable prices. They hedge it. They set a contract. You didn't do that. You didn't fix the contract cost or exposure, you didn't deal with the German government and say, Because we don't control this we are going to put a cap on meeting the performance. We will pay for change orders but we are not going to pay for the basic question of whether you build this right. Is that true that the basic contract the day it was signed was flawed and that the Air Force doesn't know how to write a contract that protects the interest of the American people? Is that true? Mr. Causseaux. Again, this was not a contract---- Mr. Issa. Yes or no. I don't have much time. Please. Mr. Causseaux. No. Mr. Issa. OK. Let's go through a couple more. I heard you say that you need more people, General Gardner. How much do those people cost and how are they scored? You need more people to do oversight, but I understand from the testimony that you don't really have control, so you can look at it and you can complain, but you can't get there. And don't answer that because I think it answers itself. I am looking at pictures from just a couple of weeks ago. Now, again, I haven't done a project of this size, but this is not within 3 months of completion today, even if it wasn't damaged. So I ask you, General Gardner, tell me why 3 months before the project was to be done was the first time you knew it wasn't 3 months of completion, because this is a recent picture. This means that today it is not within 3 months. Could you answer that for us, please, if the chairman will allow? General Gardner. Yes. The picture you are looking at is the mall portion of the complex. The VQ, itself, is in January of-- -- Mr. Issa. Wait a second. Just correct, if I can, this section here, this is the hotel. This high-rise section is not a mall. Chairman Waxman. Your time has expired---- Mr. Issa. Would the ranking member give me some of his time? Chairman Waxman [continuing]. But I want to give him the opportunity to answer the question. General Gardner. In December 2005 the hotel was still on schedule for BOD at the end of April. The hotel is different from the mall complex there. The mall complex we knew would be about 4 to 6 months later. Chairman Waxman. Thank you very much, Mr. Issa. Mr. Tierney. Mr. Tierney. Thank you, Mr. Chairman. I am curious when the General indicates that nobody on the Air Force side has been held accountable and no one has been disciplined or fired on that. We talked about the extraordinary number of change orders, many of which the Air Force didn't even know about. Mr. Kutz, in your report you mentioned that there were only eight offices in the U.S. project management office, none of whom, I understand, were warranted contract officers; is that right? Mr. Kutz. That is correct. Mr. Tierney. You then mentioned that the director of the office may have been responsible for some of the decisions that led to the situation today, correct? Mr. Kutz. Correct. Mr. Tierney. And in retrospect, when they were offered the help of the Army Corps of Engineers, the people who have expertise on that, that was rejected? Mr. Kutz. That was rejected. Yes. Mr. Tierney. Do you know if the director of the program management office played any role in recommending against seeking the additional contracting resources from the Army Corps of Engineers? Mr. Kutz. I don't know. Mr. Causseaux. My understanding was that the Air Force requested or decided not to engage the Army Corps of Engineers from a cost factor and because there had been indications that they had some difficulties dealing with the Corps of Engineers, and because this project is largely funded by non-appropriated funds versus MILCON or appropriated funds, it was not required that the Corps of Engineers be engaged. But they did have that option. Mr. Tierney. OK. And do we know what role the director of the program management office played in all those decisions? Mr. Causseaux. I do not. Mr. Tierney. I just want to explore the idea of this official that I would think that in that position that he had he had some responsibility in those decisions. When I look at page 11, Mr. Kutz, of your testimony, you say he left his position and left the Air Force in 2006; is that right? Mr. Kutz. That is correct. Mr. Tierney. Do you know why he left and what the circumstances were around his departure? Mr. Kutz. For another job with the contractor in Dubai, I believe. Mr. Tierney. I understand the Air Force is involved in a criminal investigation in this matter? Mr. Kutz. Of this individual, yes. Mr. Tierney. So I think we have to be a little delicate how we discuss it, but your testimony says that the Air Force officers have been searched and documents have now been seized; is that correct? Mr. Kutz. Correct. Mr. Tierney. General Gardner, do you know where this official is today? General Gardner. I believe he is somewhere in the Middle East, sir. Mr. Tierney. Do you know where he is specifically in the Middle East? General Gardner. I believe he is in Dubai, but I am not sure. Mr. Tierney. He is in Dubai? And I guess committee staff had the opportunity to track him down. They were interested in having him here today to testify. Do you happen to know what company he is working for in Dubai, General? General Gardner. I believe he is working with Jacobs. Mr. Tierney. And, in fact, isn't that the same company that the Air Force hired to help oversee this project? General Gardner. We do have two employees from Jacobs that work with our quality control assurance guys. Mr. Tierney. Well, this is serious stuff and I think we ought to let the Air Force and the investigators carry on their own investigation on that, but we push fast track schedule, we hire minimal oversight staff, reject the help of experienced agencies. It just seems to me like a recipe for disaster on that, and I would expect that somebody is going to take responsibility. I don't see a lot of responsibility acknowledged in your testimony, General. But just on the point of missing change orders, the 427 change orders I think is something of a stunning number for a project on this. Mr. Kutz, just so we understand that process, the Government has approved the overall scope of the work on the project, and if the contractor thinks a change is needed it submits a change order, then the U.S. Government has to approve that change order before the work can be done, and certainly before any bills are paid; is that right? Mr. Kutz. Actually, LBB would submit the change order. They would work on those with the contractors that they had effectively subcontracted with. Mr. Tierney. OK. Mr. Kutz. And then they would submit that to the Air Force. Mr. Tierney. And then the Air Force decides whether or not to approve it and to pay it? Mr. Kutz. Correct, although in many cases they paid before they got the change order. Mr. Tierney. Well, if they did that, that is not normal course of business, right? Mr. Kutz. No, not at all. Mr. Tierney. All right. I was going to say you caught me up there for a second. Because in general you submit it, it gets approved, only if it is approved it gets paid. Mr. Kutz. Well, keep in mind some of the change orders really aren't change orders. They are like one line that says something was done. They are still waiting for hundreds of supporting change orders for work that was supposed to have been done. Mr. Tierney. So the documentation was supposed to accompany it; it never did show up or hasn't shown up to this date on it? Mr. Kutz. Correct. Mr. Tierney. OK. I am looking through your report here. You found in a lot of cases the Air Force didn't even know about some of these change orders before they were paid. Mr. Kutz. That is correct. Mr. Tierney. At all. Mr. Kutz. Yes, because a large number of them came in, we understand, in the summer of 2006. Some of those dated back into 2005. Mr. Tierney. OK. Tell us a little bit about what kind of documentation would really usually accompany a change order request. General Gardner. The change orders, they can vary in size, but they are normally about this size. Mr. Tierney. It is hard to believe that somebody would miss that or not realize that it hadn't shown up at some point. Chairman Waxman. The gentleman's time is up, but you may answer that question. Mr. Tierney. It really wasn't a question. Thank you, Mr. Chairman. I guess I am just so stunned that over 400 of these fairly significant items here were just missed somewhere along the line. I yield back. Thank you. Chairman Waxman. Mr. Duncan. Mr. Duncan. Thank you, Mr. Chairman. I just want to see if I can come a little closer to an understanding about the cost of all this, because I think Mr. Kutz said he couldn't give an estimate of what the cost would end up being. We have a fact sheet given to us by the committee that says, as a result of these deficiencies, that auditors estimated that costs for the K-Town Mall have increased from $131.3 million to at least $201.6 million. Although the project was originally scheduled to be operational by the end of 2005, the auditors reported it is only 65 percent finished and has no determined completion date. Is that all correct and accurate? Mr. Kutz. That is the Air Force Audit Agency's report, I believe. We have not done sufficient work to have our own estimate. Mr. Duncan. And you said that only a small fraction, you said, of the money was coming from the MILCON program? Mr. Kutz. That is correct. Mr. Duncan. And I think I read someplace else where $21 million had come from that program? Mr. Kutz. Something along those lines, yes. U.S. dollars. Mr. Duncan. But then you said some of the rest of it or all of the rest of it or something was from soldier morale programs? What was the term you used? Mr. Kutz. Army/Air Force Exchange was the largest funding partner, and then Air Force Services is the second largest. Between the two of them, it is 75 or 80 percent. To the extent that there are issues with this program, it will impact soldier morale programs. Mr. Duncan. So the largest funds were coming from the Army and Air Force Exchange Program, which is subsidized by the taxpayers? Mr. Kutz. Most of that comes from profits from---- Mr. Causseaux. Revenue generated from the exchanges. Mr. Kutz [continuing]. Operating exchange programs. Mr. Duncan. Well, you know, I think what disturbs so many people is that when we hear about these cost overruns in almost every department of the Federal Government, but particularly in the Defense Department, nobody really seems to care because it is not coming out of their own pockets. I mean, you care when you are sitting here in front of the congressional committees and testifying because you don't like being here, but really, as several Members have pointed out, nothing seems to ever happen to anybody. As the term is, nobody seems to ever be held accountable and nobody seems embarrassed, nobody ever seems ashamed, nobody ever seems to--you know, we hold these hearings, but then we just have these things happen over and over and over again. And then what we hear, whenever we find a program in the Federal Government that is messed up, they always say one of two things or both. They always say they were under-funded, they need more people, or they need more money--you know, they need more money so they can lose even more--or their technology was out of date, their computers were out of date. You hear that over and over again. Yet, the technology owned by the Federal departments and agencies is far better and far more expensive and far advanced over what the private sector has. But when things like this happen in the private sector, things happen. Anyway, thank you. Thank you, Mr. Chairman. Chairman Waxman. Thank you, Mr. Duncan. Ms. Watson. Ms. Watson. I want to thank all of you gentlemen and the chairman for being here, but I think we are gagging at a gnat and swallowing an elephant. I have sat in this committee and I have heard and spoken of $9 billion missing in Iraq and moneys that were to be used for contracts and to be handed out to the workers and so on, and no one can explain. We even had the Ambassador who was there during that time said it was only Iraqi money. I am very, very familiar with this area of Germany. In fact, I worked for the Air Force and I was in France and spent my weekends over in Germany, so I am familiar with this area and I think it is commendable that we are building this mall. However, I am very, very upset about taxpayers' money disappearing. This is not even a war zone, not even a war zone, but I am talking about in theater, and taxpayers' money disappearing without the oversight, without the management, and so on. So, Mr. Kutz, I thank you for the work you do, but this is exemplary of a bigger, bigger problem that we are using this money without the proper management, oversight, and without people who have the expertise in place. You know, I don't have really any problem with this because, you know, we are trying to service the civilians and the military in a foreign country, and I am all for that, but what I have the problem with is the mismanagement of our moneys and the fact that currently tax cuts, where are we going to get the pool of money to really provide the construction and the needs and whatever domestically and in theater and in other places? So none of you have to respond, but I am frustrated, because when we talk about real dollars on projects that really would be meaningful in terms of outcomes, we don't get the answers. I want you to continue to give your reports. I want you to give us strong recommendations as to how we can look at the overall system of management accountability. We are the committee that looks at fraud, waste, and abuse, but we need to have some over-arching principles, and we need to have answers why they are not being followed. Thank you so very much. I give back my time, Mr. Chairman. Chairman Waxman. Thank you very much, Ms. Watson. Mr. Platts. Mr. Platts. Thank you, Mr. Chairman. I appreciate your holding this hearing. I appreciate our witnesses being here today. I apologize for coming in late from another commitment as this issue was addressed. When I look at the problems that are clearly identified with this project, it is kind of two-fold. One is the waste of those tax dollars and other dollars related to the operation of our facilities that support our men and women in uniform and their families, the exchanges and the projects that can be built, or in this case maybe not done because of the loss of money on this project. I see a double hit, that loss of money and the fact that the quality of life for our men and women who are courageously serving us along with their families and those who either pass through Germany or are there has not yet been improved because this project is far from completion. In my numerous visits overseas I have come through Ramstein a number of times and have seen this project underway, and the fact that we are now a year past when it was supposed to have been done, that is a year of lost quality of life improvements for our men and women in uniform and their families, and no date certain yet of when it will be done, so it is both a dollar issue and a quality of life. What I wanted to focus on specifically is my understanding from the audit that was done that there are recommendations, and specifically that--and, General, if you could address this--that there were recommendations from the auditors that would address internal controls relating to some of the change orders, as well as to the process for reviewing the invoices submitted and when the work was done, that recommendations were made, but those in charge of the project refused to accept those recommendations and act on them and said, No, we think we are doing what we need to do, even though the evidence tells us otherwise. I guess it is two-fold. One is, to the best of your knowledge, who made those decisions not to accept the recommendations of the auditors? And any basis for why they did not accept that, given the information we know today of the wrongs that were being committed? General Gardner. We are in the process of trying to figure out how do we get this project completed. We have contractors that have walked off the site because we haven't paid them. Our guys have refused to pay them because change orders have not been completed. We know now that these change orders that we are talking about, the work was done, the work was needed, and we will eventually pay for those change orders. We know that. What we did was set up a process to try to get money to the contractors to get them back to work so that we could finish up the project. For every day that these contractors are off the site they are actually charging us money, so we are incurring hindrance costs, delays, and all types of other types of costs as a result of contractors not being at work. So what we have done is tried to find ways within the law. This has all been coordinated with our legal staff, coordinated with our FM staff, and that was the process that we have used. So I feel comfortable with what we have done with that. Mr. Platts. You are addressing where change orders were reviewed and were accurately fulfilled and payment, but my understanding is there is significant evidence of improper oversight, of perhaps--I think one number is $13 million that could not be accounted for, expenditures, and at least $13.7 million in construction change orders that the auditors reported that the Air Force was not able to validate. Is that an inaccurate statement? General Gardner. I don't know the exact part that you are reading from, but it is true that in the summer timeframe of last year we received a register of modifications--the number was 549--of change orders that our agent had approved or someone had approved that we were not aware of. There were 549 of them. We have since gone back out on the site and worked with our organization or the German contracting agent to verify that the work had been done on these. The process to do a change order, according to the ABG-75, should take 30 days. Some cases, because the way you go through the process of the change order, verifying, negotiating the prices, checking the prices and so forth, especially when you have a change order this size--17,000 line items in this document here--it takes a while. That is what has happened, is that we have been trying to figure out a way. We know the work has been done. We can verify that. But we do not have a means to pay the contractor, get them onsite, so they are walking off. So we are in this catch-22. Mr. Platts. Mr. Chairman, could I do a followup here, if I may? Chairman Waxman. Yes. Mr. Platts. Thank you. I want to followup quickly with our GAO officials. General, one, I appreciate your efforts and your staff in trying to get this project back and for your and your fellow men and women in uniform's service. We want you to be successful getting this project back and success for the benefit of the taxpayers and for the families and our men and women in uniform. General Gardner. Thank you. Mr. Platts. I do want to followup on that issue of the auditors' recommendation. In your review, are there still significant recommendations of the auditors to prevent further problems that are not yet being implemented and accepted and pursued by those overseeing the project? Mr. Kutz. We don't know that. Our work is still ongoing. I would say this: this is the situation. There is no real good solution necessarily. Just as important as this project is really the hundreds of millions of additional projects that are going to be happening, and at the front end--now you are not the front end any more. You are now at the back end of this, trying to deal with a real kind of a mess. For the projects going forward, it would be more important to deal with the front end so we don't have these kinds of discussions. Granted, you could still have problems, but you have a better chance of preventing at the front end. Now you are really in a situation of having, in many cases, to pay, regardless of whether you are going to get the money back, for rework or other types of problems here. So the only thing I would just comment on is the General said that the work has been done, and I expect hopefully most of it has, but I am not sure how he can conclusively state that where there are change orders with--supposed change orders. I said alleged in my opening statement--with no support. Again, I trust that most of it has been done, but also some of the people that are involved in this process are under investigation for fraud. So to the extent of saying that the work has been done, you don't know for sure. General Gardner. I beg to differ with you, but we do know. Mr. Platts. I think your point that the work not being done up front. And, General, I understand that was prior to your time---- General Gardner. Right. Mr. Platts [continuing]. In your position, this change order with thousands of line items. If there had been a more thorough vetting and oversight up front we probably wouldn't have that type document. You are always going to have change orders, but probably not to this degree maybe if it was better laid out and overseen from the beginning. I think that is part of your point. Thank you, Mr. Chairman, for the time. Chairman Waxman. Thank you, Mr. Platts. As we conclude this hearing, General, I want to make it very crystal clear why this committee is so concerned with the failure of the Air Force. It doesn't matter who the contractor is, whether it is an Iraqi contractor or German contractor or an American contractor. As I understand, there are special rules for international agreements, but you are the U.S. Government. You hold the money, and with it you hold the responsibility to ensure that it is not wasted. Your written testimony says you are the third line of defense in protecting U.S. interests and resources. I disagree. You write the checks. You are the first line of defense for the American taxpayers. When you compare your testimony here today with this 112-page audit, you get a completely different picture. This Air Force audit report details at least 30 critical failures, not by contractors but by Air Force officials who were supposed to oversee this project, and these are fundamental, core responsibilities that have been disregarded. I don't have any further questions for you, but I just want you to take that back and understand that is why Congress is concerned. It is not just for you to point fingers; it is to make sure these kinds of things never happen again. Thank you very much. That concludes our hearing today. We stand adjourned. [Whereupon, at 11:30 a.m., the committee was adjourned.] WASTE, FRAUD AND ABUSE AT K-TOWN: ONE YEAR LATER ---------- WEDNESDAY, JUNE 25, 2008 House of Representatives, Committee on Oversight and Government Reform, Washington, DC. The committee met, pursuant to notice, at 10:05 a.m., in room 2154, Rayburn House Office Building, Hon. Henry A. Waxman (chairman of the committee) presiding. Present: Representatives Waxman, Cummings, Kucinich, Tierney, Watson, Sarbanes, Davis of Virginia, Shays, Platts, Duncan, and Sali. Staff present: Phil Barnett, staff director and chief counsel; Kristin Amerling, general counsel; Karen Lightfoot, communications director and senior policy advisor; David Rapallo, chief investigative counsel; John Williams, deputy chief investigative counsel; Margaret Daum, counsel; Earley Green, chief clerk; Jen Berenholz, deputy clerk; Caren Auchman and Ella Hoffman, press assistants; Lawrence Halloran, minority staff director; Steve Castor, minority counsel; Ali Ahmad, minority deputy press secretary; Patrick Lyden, minority parliamentarian and member services coordinator; Emile Monette, minority professional staff director; and John Ohly, minority professional staff member. Chairman Waxman. The committee will please come to order. On June 28, 2007, almost exactly a year ago today, this committee held an oversight hearing on the Defense Department's single largest construction project in the world, a massive 840,000 square foot mall being built in Germany called the Kaiserslautern Military Community Center, also referred to as the K-Town Mall. This facility will have an 8-story, 350-room hotel. It will have a movie theater with stadium seating and large retail areas. A military spokeswoman called the K-Town Mall a smaller version of the Mall of America in Minnesota. Last year, GAO testified that this project was in ``serious trouble.'' They told us it was millions of dollars over budget, had no validated cost estimate, and had no working completion date. GAO told us about the mall's defective and continuously leaking roof, which was going to cost millions of dollars to repair, and GAO told us about serious construction mistakes, like kitchen exhaust ducts sealed with flammable insulation. We also obtained a report from the Air Force Audit Agency detailing 35 different deficiencies in the Air Force's management of this project, and we were informed of several ongoing criminal investigations of U.S. officials involved in this project, including one official who fled to Dubai instead of agreeing to testify before this committee. During last year's hearing, officials from the Air Force essentially told us not to worry. They said that despite problems identified by GAO and the auditors, the project was under control. They promised that even if the project came in late, it would still be under budget. Part of good congressional oversight is sustained congressional oversight. So today we are having our second hearing on the K-Town Mall. Today we will hear from the GAO team that has been tracking this project closely. Unfortunately, their testimony will sound like the movie Groundhog Day. The project has gone further over budget and has been further delayed. Here is what today's GAO report says: ``With few visible changes, no reliable construction completion date, rising repair costs and continuing construction quality problems, the KMCC will continue to be a high-risk project.'' What is most troubling about this year's report is that new problems are compounding the old ones. In addition to the faulty roof and the dangerous kitchen exhaust ducts, GAO has now identified long cracks in the concrete foundation of the building. Nobody yet knows the full extent of this damage, how long it will take to repair, or how much these repairs will cost. Another new concern that GAO raises is that the Air Force is not counting millions of dollars of costs in its budget estimates. These include costs to design portions of the mall, cost to rework deficiencies like the roof and the foundation, and costs to assign additional Air Force personnel to this project. GAO has also raised serious questions about $38 million in German funds that have been provided for the project. Although the Air Force believes this is a grant from the German Government, the Germans believe apparently that it is only a loan and they expect to be repaid. Finally, GAO reports that the criminal investigations of U.S. officials involved with this project ``have matured significantly'' since our last hearing and that several officials are being investigated for dereliction of duty and bribery. Here is the bottom line. This facility was supposed to cost $120 million and be open by 2006. But today, GAO projects that the project will cost well over $200 million and may not be open for business until sometime in 2009. Even at that point, GAO predicts, ``it will likely take years before all issues related to this project, including litigation and potential construction quality problems, are resolved.'' As a result, 50,000 servicemen and women who live and work on or near Ramstein Air Base lack modern facilities. Soldiers traveling to and from Iraq and Afghanistan are deprived of promised amenities. And service members around the world have reduced funding for morale, welfare and recreation. At yesterday's hearing on Afghan ammunition contracts, I said that over the last 8 years there has been a complete breakdown in the procurement process. Today's hearing is more evidence of a pervasive dysfunction in Federal contracting. And this hearing is particularly frustrating because the glaring problems that we identified a year ago have not been fixed. We need accountability for problems like the ones that we have found at the K-Town Mall, and those responsible ought to face appropriate consequences. We urgently need a new approach that welcomes oversight and demonstrates a commitment to fixing problems and protecting taxpayers from waste, fraud and abuse. I look forward to working with all of my colleagues to make this goal a reality, and I want to recognize Mr. Davis. [The prepared statement of Chairman Henry A. Waxman follows:] [GRAPHIC] [TIFF OMITTED] T4635.169 [GRAPHIC] [TIFF OMITTED] T4635.170 [GRAPHIC] [TIFF OMITTED] T4635.171 [GRAPHIC] [TIFF OMITTED] T4635.172 [GRAPHIC] [TIFF OMITTED] T4635.173 [GRAPHIC] [TIFF OMITTED] T4635.174 Mr. Davis of Virginia. Thank you, Mr. Chairman. Good morning and thank you for returning to the subject of the Air Force's major construction project in Germany dubbed the K-Town Mall where I had the opportunity to visit a few months ago. This building has become such a lingering and costly mess, I think perhaps we should start calling it the Capitol Visitor Center NATO annex. A year ago we heard testimony on significant problems plaguing the massive, multi-purpose complex designed to feature retail, hotel and entertainment space for use by American personnel stationed in Germany and for others passing through Ramstein en route to and from other parts of the world. At that hearing, the GAO witnesses said mismanagement and lack of oversight had resulted in significant cost overruns, schedule delays and construction deficiencies. While any foreign construction effort is bound to involve unusual complexities and risks, those in charge of this development seem to have fallen into all of those inherent traps, and then they kept digging. Predictable difficulties were compounded by inadequate and unfocused high-level leadership early on, poor planning, badly designed requirements and an inadequate number of trained personnel overseeing the project. Now, that was last year. GAO went back to K-Town earlier this year and the new observations they bring us today don't describe a clear path out of this expensive international morass. Steps by the Air Force to augment oversight staff and strengthen internal controls have helped to gain some measure of control over the project, but those measures aren't enough to untangle the knot formed by--and we need to understand this--multiple funding sources, vaguely worded international agreements, and the need to navigate diplomatic process to resolve complex disputes involving German contractors and U.S. dollars. To break the logjam that stalled the project for so long, the German Government provided 25 million euro, or almost $39 million, to get construction workers back on the job. While all parties recognize the influx of money was necessary to get the project going and the status of that funding is not altogether clear, GAO has characterized it as a loan. The Air Force claims money--the United States won't have to pay back the money. The bilateral agreement between the United States and the German Governments calls the money prefinancing. No one is quite sure what it means. I hope this hearing will shed some additional light on that. But this lingering confusion about key issues doesn't bode well for completing construction by the end of this year, a forecast both the Air Force and the GAO already consider highly unlikely. In any case, we have a great deal of money invested in the project and substantial funds remain at risk. We need to be sure this project is completed properly and that future projects don't fall prey to the same oversight lapses and mistakes that steered this project into the ditch and kept it there. I hope this hearing will focus on what needs to be done to get this project back on track and the hard lessons that the Air Force and others need to learn to ensure the integrity of any future agreements governed by the terms of the current status of force agreement in Germany. And I think that is what is critical, is that you have international agreements here that have made this far more complex than ordinary--being just a government contracts problem. Investigators from the GAO are here today to provide their views on this issue. We commend them for their hard work. We also value the experience and the perspectives that the Air Force witnesses bring to this discussion. Much is at stake in terms of the U.S. tax dollars and in terms of providing our troops with the best possible overseas accommodations while deployed overseas. We look forward to today's testimony and to a frank and constructive discussion. Thank you, Mr. Chairman. [The prepared statement of Hon. Tom Davis follows:] [GRAPHIC] [TIFF OMITTED] T4635.175 [GRAPHIC] [TIFF OMITTED] T4635.176 Chairman Waxman. Thank you, Mr. Davis. We are pleased to welcome the following witnesses to our hearing today. Judith Garber is Deputy Assistant Secretary of the European and Eurasian Affairs Bureau at the Department of State. Major General Mark E. Rogers is the Vice Commander of the U.S. Air Forces in Europe. Greg Kutz is the Managing Director of the Office of Forensic Audits and Special Investigations at the Government Accountability Office. Bruce A. Causseaux is a Senior Level Contract and Procurement Fraud Specialist in the Office of Forensic Audits and the Special Investigations at GAO. And Terrell G. Dorn is the Director of Physical Infrastructure at GAO. The committee also requested testimony from Hubert Heimann, the managing director of LBB, the German Government office that supervises the KMCC construction project. Mr. Heimann wrote the committee a letter stating that he would not be able to participate in today's hearing. I ask unanimous consent that Mr. Heimann's letter be placed in the hearing record. And without objection, that will be the order. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T4635.177 Chairman Waxman. We welcome all of our panelists, witnesses today. We welcome all of you today to testify. It is the policy of this committee that all witnesses testify under oath. I'd like to ask you if you would, please, rise and raise your right hands. [Witnesses sworn.] Chairman Waxman. The record will indicate that each of the witnesses answered in the affirmative. Your prepared statements will be made part of the record in full. We would like to ask you, if you would, to limit your oral presentation to 5 minutes. And we will have a clock. It will be green. At the last minute it will turn yellow. And then after the 5 minutes is up, it will turn red. And when you see the red light, we would like to ask you to conclude. Ms. Garber, why don't we start with you? There is a button on the base of the mic. Be sure to press it and pull the mic close enough to you. STATEMENT OF JUDITH GARBER, DEPUTY ASSISTANT SECRETARY OF STATE, BUREAU OF EUROPEAN AND EURASIAN AFFAIRS, U.S. DEPARTMENT OF STATE Ms. Garber. I'm pleased to be here today and I'll be ready to answer any questions. I do not have an oral statement. Chairman Waxman. You don't have a statement? Ms. Garber. No. Chairman Waxman. OK. General Rogers. STATEMENT OF MAJOR GENERAL MARC E. ROGERS, USAF, VICE COMMANDER, U.S. AIR FORCES IN EUROPE General Rogers. Thank you, Mr. Chairman. Members of the committee, the U.S. Air Forces in Europe appreciates the opportunity to appear today and update you on the KMCC. This facility is important to ensure that future retail goods, services, morale and recreation activities and mission-related lodging facilities are available to our military members and their families who live in the Kaiserslautern military community. These services are all currently available to our forces, but the quality of service is hampered by early cold war era facilities. They are old, dispersed, have high maintenance costs, frustrating parking deficiencies and space limitations. I first became engaged on the KMCC in December 2006 when I chaired the KMCC Oversight Council for the first time as the new Vice Commander of the USAFE. By that time, the project was months late, quality defects had been identified and arguments were ongoing between the USAFE Project Office and LBB, the construction agent, because USAFE was not paying invoices and contractors were continuing to walk off the site due to nonpayment. Additionally, I was briefed on a draft audit by the Air Force Audit Agency that USAFE personnel had improperly paid invoices and that the Air Force Office of Special Investigations was investigating two personnel for possible wrongdoing. The Commander of USAFE at that time directed me to take charge of an effort to do three things: Investigate the reason for the delays and failures in KMCC; find out who is accountable for any failures, mismanagement or wrongdoing and; three, lead an effort with our German partners to find a strategic solution to completing the KMCC. I found that USAFE personnel had indeed improperly paid invoices. According to the GAO, those funds have been recovered. Investigations continue; and once complete, responsible individuals will be held accountable. I also found that Air Force internal controls found the initial wrongdoing, properly identified quality defects, and preserved our taxpayer money. And I found many previous decisions by USAFE leaders were fortuitous and positioned us to keep costs under control and enforce quality performance. We stood up a task force and have been conducting root cause analysis on about 35 different potential causes for delays and failures. This analysis is complex and continues; however, many conclusions have already proven useful in working with our German partners for solutions. Some work has continued over the past years--past year, and I brought a few photos to show there are bright spots in the progress. So if you'll put up the first photo. Just so we all know, Mr. Chairman, what we're talking about, is there is an image of the KMCC. The tall portion, of course, is the hotel portion and all of the green area you see is the green roof over the mall portion. It is a very complex and, as you said, huge facility, reputed to be DOD's largest single facility project in the world. Next slide, please. There is an image of the front entry to the mall. Next. That is an image of the hotel portion as it stands today. Next, please. That is an image inside the hotel lobby. Next. That is one of the rooms in the hotel that has been outfitted with furniture. All of the rooms are essentially complete. There are 27 rooms that have finishes to be done and we've outfitted one with furniture for visitors who want to see what this is going to look like. Next. That is the Ramstein tickets and tours office, one of the morale welfare and recreation offices in the building. Next. This is the mall concourse showing the entryways to some of the vendor shops. Next. And that photo is 90 degrees out, but it is office space in the building. Next. I think that is the last slide. So there has been some progress over the past year, although minimal because contractors were essentially trying to not be in default of a contract. German leadership has worked hard to pick up the management and administrative train wreck of the KMCC and get construction on track and, due to their personal leadership, both Federal and state level, is now picking up more steam with more workers onsite and contractors have signed up to a new schedule. We want to thank our German counterparts for demonstrating commitment to our great partnership by standing up to responsibilities under the international agreement, stepping out with strong leadership, and I'm convinced the German Government wants to get this facility finished as much as we do. There has been numerous rumors surrounding the cost and quality, extended delays on this project in the past year. And since the committee's hearing, we have strengthened the management, corrected all the discrepancies and the GAO has not found any new ones. We are frustrated and disappointed, but we're doing everything we can, sir, to get this done. That concludes my opening statement. And as you mentioned, I have a written statement for the record. We appreciate your interest, sir. Thank you. [The prepared statement of General Rogers follows:] [GRAPHIC] [TIFF OMITTED] T4635.178 [GRAPHIC] [TIFF OMITTED] T4635.179 [GRAPHIC] [TIFF OMITTED] T4635.180 [GRAPHIC] [TIFF OMITTED] T4635.181 [GRAPHIC] [TIFF OMITTED] T4635.182 [GRAPHIC] [TIFF OMITTED] T4635.183 [GRAPHIC] [TIFF OMITTED] T4635.184 Chairman Waxman. Thank you very much, General Rogers. Mr. Kutz, why don't we hear from you next and your colleagues? Just a minute. Mr. Kutz. Mr. Dorn can start and I'll finish. STATEMENTS OF TERRELL G. DORN, DIRECTOR, PHYSICAL INFRASTRUCTURE, GOVERNMENT ACCOUNTABILITY OFFICE; GREGORY D. KUTZ MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; AND BRUCE A. CAUSSEAUX, SENIOR LEVEL CONTRACT AND PROCUREMENT FRAUD SPECIALIST, FORENSIC, GOVERNMENT ACCOUNTABILITY OFFICE STATEMENT OF TERRELL G. DORN Mr. Dorn. Thank you, Mr. Chairman, Mr. Davis, members of the committee. Construction projects can be broken down into three fundamental areas: Cost, schedule and quality. Optimization of those three areas is the goal of good project management. But in the case of KMCC, none of the three went Air Force's way. There have been serious quality issues, escalating and still uncertain project costs, and a schedule that is likely to deliver the project at least 3 years late. This morning I will cover the construction quality and schedule issues, and then Mr. Kutz will discuss the cost issues. A year ago, the serious KMCC quality issues we discussed included a defective roof and kitchen exhaust duct work that did not comply with U.S. Fire Code standards. Both needed to be ripped out and replaced. Schedule-wise, no one knew when the project would be finished, and in fact the contractors had all but abandoned the site. Project management and internal controls were inadequate and there were allegations of fraud. Since then, there has been a lot of progress in some areas and almost none in others. First the good news. Since the committee's last oversight hearing, the Air Force has made great progress in addressing internal controls and has quadrupled the size of its KMCC Project Management Office with particular focus on staff training and acquisition management, construction management and financial management. In addition, General Rogers, assisted by State Department, met with high-level German officials to cooperatively work out the details necessary to improve oversight of the project by LBB, who is the German Government's construction agent in Rheinland-Pfalz. They also laid the groundwork for the German Government to pay its contractors and to get them back to work. Now the not-so-good news. The new internal controls and the new processes and the new Project Management Office have hardly been tested because insignificant progress has been made in construction over the last 12 months. Our review of the latest construction schedule furnished to Air Force by LBB was not encouraging. The schedules for the mall portion and the hotel portion of the project were not integrated to show how they might affect each other. It was also not clear from the schedule what contractor resources, such as crew sizes, were necessary to keep the project on time. The project's critical path, which is supposed to show what tasks need to be completed by certain dates to keep the project on schedule, was not clear. However, it was clear from the schedule that some tasks were already late. Given those issues, finishing all construction and fire alarm testing in the mall and hotel by the end of the January 2009 is very unlikely. And given that AAFES may need as many as 4 months to take the building from the Air Force's definition of complete to the day the first customer buys a pair of shoes, it is foreseeable that we may be waiting at least 1 year from today before the buildings are fully occupied. Here are a few slides to better illustrate the lack of construction progress over the last year. This first slide is a side-by-side comparison of the food court area just inside the mall's entrance. On the left 2007 and on the right 2008. This next slide shows a similar lack of progress in the mall's name-brand restaurant. If progress can be defined as ripping out defective work, then some progress has been made on the kitchen exhaust duct work and the roof. Demolishing and replacing the KMCC's roof began this spring, but the work is extensive, must be done in sections, and will not be completed for some time. In addition, we have identified that the KMCC project was not an isolated failure. Several other projects constructed more or less concurrently for the Air Force by LBB Kaiserslautern also experienced significant cost, schedule and quality issues. On this slide, you will see a logistics distribution facility designed to be an open bay and to not have interior columns. It now has 43 temporary columns running down the center of the building to keep the roof from collapsing. A forklift operator running into one of those columns and collapsing a portion of the roof was the nightmare scenario of one official we interviewed. This last photo is from our return visit to Ramstein in March of this year. It shows large pond that formed next to a runway extension that was built by LBB as part of the Rheinland transition program. The pond not only attracted waterfowl, which is something you don't want around an airfield, but also repeatedly shorted out the runway lights, causing the possible diversion of aircraft to other bases. Clearly LBB's recent track record of construction for the Air Force indicates that increased oversight to protect U.S. tax dollars is required now and in the foreseeable future. And now Mr. Kutz will highlight the KMCC's cost issues. STATEMENT OF GREGORY D. KUTZ Mr. Kutz. Given the problems Mr. Dorn just described, you might be wondering what the total cost of this project will be. Unfortunately, because certain costs have not been tracked by the Air Force, nobody will ever fully know. If you could put the pie chart up for us. This pie chart on the monitor shows the elements of total cost, including that red slice that is referred to as unknown costs. The amounts shown are estimates by the Air Force and the German construction agency of the total U.S. dollar cost at completion. The biggest piece of the pie or the black piece there is construction costs. This $163 million represents primarily charges for trade contractor work. Other costs shown relate to foreign currency, rework design and other contracted services and furniture and equipment. When added up, the total estimate for this amount or these amounts here is $214 million. The unknown or the red piece there represents millions of dollars of contingencies and other costs that are not tracked as part of the KMCC. For example, the cost of Air Force staff overseeing the project are not captured. Other unknown include hindrance claims and estimates of cost to repair the new cracks in the floor. In addition to the $214 million estimate and the unknowns there are other real costs resulting from the problems and delays. For example, for every month of delay, it is estimated that $500,000 of profits are lost from operation of the shopping mall and the restaurants. In total, if the project opens 3 years late, which is the best case scenario, these lost profits and additional costs will approach $20 million. As the chairman mentioned, last year the Air Force testified that KMCC was under budget. Many of the members of the committee expressed concern and wondered how that could possibly be true. Last week, Air Force officials briefed your staffs and told you the same thing. Let me clarify some of the facts related to this representation. For this project, what you have is a 35 percent increase in the euro-dollar exchange rate, at least 3 years of delay, over $10 million of rework and millions of dollars of improper payments. Further, funding partner records reveals substantial cost overruns. For example, the largest funding source for KMCC is the Army and Air Force Exchange Service. According to their records, their piece of the construction pie you see alone is $24 million, or 45 percent over budget. Their worst case estimate is a $59 million, or 110 percent cost overrun. Clearly, KMCC will cost substantially more than the Air Force and its funding partners envisioned at the beginning of this project. Their budget number they are speaking about, it represents the congressionally authorized spending limits for the construction piece of the pie. Last year I testified that KMCC was from the beginning a high risk overseas project with minimal Air Force oversight. As Mr. Dorn mentioned, Air Force has since your hearing last year substantially increased its oversight. Improvements include more and better trained staff, standardized procedures and enhanced disbursement controls. We believe these improved controls reduce the risk of fraudulent and improper payments. In conclusion, the people most impacted by the problems at KMCC are military members and their families. The tens of millions of dollars of cost overruns and lost profits have reduced the money that is available for morale, welfare and recreation programs worldwide. We are encouraged that the Air Force has beefed up its oversight of this project. Given the problems with other large projects at Ramstein, we believe they should provide this enhanced oversight for all future projects. Mr. Chairman, this ends our statement. We look forward to your questions. Chairman Waxman. Thank you very much. Mr. Causseaux you are here to answer questions? Mr. Causseaux. They took care of it. [The prepared statement of Messrs. 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Without objection, we'll proceed for 10 minutes on each side, 10 minutes controlled by the majority and then 10 minutes controlled by the minority, and I will start off the questions. Mr. Kutz, when you testified before us last year, you identified several severe construction deficiencies at this K- Town Mall. One of these was the roof. And as you said last year, this roof had major defects and leaked continually. As a result, the water was damaging other aspects of the construction; is that right? Mr. Kutz. Correct. Chairman Waxman. Now, last year you couldn't tell us how much it was going to cost to fix this roof, but in your report today you have a number. You say it is going to cost $10.8 million; is that right? Mr. Kutz. That is an Air Force estimate, yes. Chairman Waxman. That is a major setback. The original cost estimate for the whole project was $131 million and now it is going to cost more than 8 percent of that just to repair the roof. Is it possible that this number could go up? Mr. Kutz. Yes, it is. Because as I mentioned, the exchange rate we are talking with for the euro--you know they're being built in euros. Since your hearing last year, it has gone up 16 percent and certainly materials have gone up and other costs have gone up. So it is possible that it will come in higher. That is yet to be determined. They are in the first and second phases of a multi-phase roof replacement. Chairman Waxman. Last year, you gave us your testimony and this year you found even more problems. Your report describes major cracks in the concrete. And I think we have a picture of an example of that. Can you tell us more about these cracks? Where else did you find them? Mr. Dorn. These cracks were in the floor. And what you are looking at is probably defective concrete. The Germans working with the Air Force have a consultant, who--a proof engineer they call them in Germany who is investigating to see why that concrete is that way. It was probably a bad mix or too much water or not enough water. At this point, I would say it is not structural because it is on the floor. It is like a topping slab over the existing slab. But it could affect whatever floor finishes go in over top of that. Chairman Waxman. Does this raise new concerns about construction quality? Mr. Dorn. Absolutely, Mr. Chairman. I would recommend that the--in this relative lull in construction, that the Air Force and their consultants go over that facility with a fine toothed comb looking for other quality control issues. Chairman Waxman. Some of these defects we heard about last year, some of these are new. Are you worried that there might be other defects that aren't readily visible? In other words, defects that you wouldn't see just by walking around? Mr. Dorn. That's correct. I do expect that they will find latent defects. Chairman Waxman. General, how much is it going to cost to repair the concrete? General Rogers. Sir, I don't know. That is in the German courts and Germany is fixing the cracks. Chairman Waxman. I understand that contractors make mistakes, but these are serious flaws. The Air Force should have people inspecting the architectural plans before the designs are approved and they should have people overseeing construction, before things are installed incorrectly, but that didn't happen here. I would like to ask a few questions about when the K-Town mall project will be completed. General, as I understand it, the Air Force broke ground on this project in the summer of 2004. At that time, the plan was for the hotel to open in December 2005 and the mall to open July 2006; isn't that right? General Rogers. That sounds right, sir. Chairman Waxman. But this deadline was missed, so the next deadline the Air Force set was April 2007; isn't that right? General Rogers. Sir, the Air Force did not set those deadlines. 2005 in December was the mission due date. But when the German construction agent told us that couldn't be met, they established April. We accepted that because we don't control their schedule really. Later slippages were the same way. They basically do this work since we have no contracts with the construction workers company. So every time they give us a slippage, it is a slippage. We can complain, but it is up to them to respond and fix schedules. Chairman Waxman. Mr. Kutz, according to your report, the current plan is for the project to be turned over in January 2009. Is that your estimate? Mr. Kutz. No. We really don't have an estimate. We haven't seen a legitimate estimate. As Mr. Dorn mentioned in his opening statement, middle to late 2009 is probably the best case scenario where you'll actually see people shopping and staying at the hotel. But there is no estimate right now that we're comfortable has legitimate support behind it. Chairman Waxman. Is that an estimate of the completion of the project? Mr. Kutz. The General is going to have to answer that. We don't really know if there is a legitimate estimate. I don't think there is a legitimate--that may be the last date that they've thrown out there, is January 2009. But that isn't even really when they are going to have people in. That was when the keys kind of get turned over. You would have to add several months to that to do the final finishing and to get the restaurants ready and the hotels ready. So that would be plus 3 or 4 months and that would be certainly the best case scenario. Chairman Waxman. Well, General, let me understand this. The project was supposed to take 2 years, 2004 to 2006. Now the best case scenario is that it will take at least 5 years, 2004 to 2009. Is that the situation, best case? General Rogers. That's about right, sir. Chairman Waxman. Mr. Kutz, in your written testimony you raise concerns that the project may not be finished even by this newest projected completion date. And you just indicated some of these a minute ago. We just don't know for sure then when this project is going to be completed. Mr. Kutz. That's correct, Mr. Chairman. Chairman Waxman. Is that correct, General? General Rogers. Yes, sir. I would say that the January 2009 completion date given to us by the construction agent probably has more fidelity than any we have seen in over 2 years. But whether or not the construction agent is able to actually pull that off, I don't know. I do have more faith in it than in the past, but probably wouldn't bet on it being complete by then. Maybe in a few months delay. Chairman Waxman. We also want to explore the total cost of this project. We seem to have a disagreement among the panelists about how much the K-Town Mall will actually cost. General Rogers, you state in your testimony that your budget estimate is $162.9 million, which is below the amount authorized by Congress. But, Mr. Kutz, in your report you conclude that tens of millions of dollars of other project costs are not included in the Air Force cost estimates. So let us just walk through these. General, construction costs paid out so far are $121.7 million and you estimated it will take about $41.2 million more to complete construction. That is how you got to your number of $162.9; isn't that right? General Rogers. Yes, sir. Chairman Waxman. Mr. Kutz, you say this excludes other costs. For example, it doesn't count $16.3 million for furniture and equipment; is that right? Mr. Kutz. That's correct. Chairman Waxman. And, General, why don't you count the cost of the furniture? Are you going to get that furniture for free? General Rogers. Oh, no, sir. That was planned all along, but it was never reported in the same channels. And questions in the past have not been about such things as furniture. They have been about construction. But the Air Force has tracked these costs all along for secondary services, furniture and equipment, any other kinds of costs that are normal in standing up a facility. And we don't report those numbers routinely in any construction project, although we have them budgeted and we know what they'll cost. In September 2005, we submitted a new 1391, which is the form that comes over to Congress to get approval for a total cost of a facility. That was approved by Congress in January 2006. And we said at that time that total costs for construction and furniture equipment, secondary services, design, the entire bit would be a $210 million ceiling. Chairman Waxman. Mr. Kutz, does that explain what appears to be the discrepancies in your testimony? Mr. Kutz. Yeah. I think last year it was confusing, too, because the Air Force representative simply focused on a construction piece. But that is not the project. The project does include, as you mentioned, furniture and equipment. There are additional foreign currency translation charges that have gone against certain other appropriations and there is other things like rework, design--those are really costs of the project. So you have to look at this in a more holistic approach. And when you look at the whole thing, you're talking about over $200 million. Chairman Waxman. And when you look at the whole thing, that includes fixing the kitchen ducts for $1.2 million at the cost of currency fluctuation because of these delays for another $8.6 million. And when you add all these up, you get an estimate of $213.9 million. That is 63 percent more than the original cost estimate of $131.1 million; isn't that right? Mr. Kutz. About, yes, that's about correct. Chairman Waxman. You've also estimated how much the Air Force pays to house officials in other hotels while this facility is still being built. On page 16 of your testimony you say this amount will be $2.9 million by January 2009, the best case estimate for completion date. You also estimate the amount of revenue lost from retail sales to be another $14 million. So if you include these amounts, by my calculations, you're up to more than $230. And that doesn't even include other costs like all of the additional Air Force staff assigned to this contract or the cost to fix the cracks in the concrete foundation; is that correct? Mr. Kutz. Yeah, those are related costs. Certainly they are a little bit different in their nature. But, yes, they are resulting from the problems and delays we are talking about. And they do--much of that impacts soldier morale, welfare, recreation programs, as we both mentioned in the opening there. Chairman Waxman. General Rogers, I don't understand how you can continue to tell this committee that the project is under budget. It seems that you're deliberately excluding millions of dollars worth of costs just so that we get this somewhat misleading statement. And I think the taxpayers deserve more of a clear explanation if--could you respond to that? General Rogers. Yes, sir. There is no deliberate shading here, sir. Those kind of costs to send these people off base, for example, exist today. They existed in the past. What is lost here is an opportunity cost to save that money because it is not open. The cost today to send people off base is not nearly what it was, say, a couple of years ago. For the first 4 months of this year, for example, the cost to send people off base to lodging was about $1,200 a month. It surged in May and--yeah, April/May because of an exercise we had, but it is back to normal now. Chairman Waxman. Well, when you take all of those costs into consideration--you said we would incur them anyway--do you agree with the estimate of all of them combined, $230 million? General Rogers. Yes, sir. But it is not the same as--it is not the issue we're talking about here. We're talking about the controllable parts of construction and other management controls we can have. A lot of these costs are things that you would include in the cost of doing business of opening any facility. We don't include the cost of the roof rework, the hindrance claims, concrete repair, etc., because we are under no liability to pay those. Currency fluctuation is a major portion of this problem. Since this project began, we've experienced a total of $47 million of expenses due to currency fluctuation alone. And as you know, we can't control that. If the project was delivered on time top quality in 2006, we would have paid out $32 million in foreign currency fluctuation. The delays so far have been worth $15 million of additional foreign currency fluctuation costs. Those parts--this is the equivalent of buy low, sell high. We set these contracts when the dollar was at its strongest in Europe and at the same time construction contracts could be had for a minimum. Today in Germany, there is what I would call a Katrina effect. Contracts are very high, materials are up and it is difficult to bring anything in very cheaply today. It is one reason the construction manager has had such a difficulty in getting contractors back to work because there are much more lucrative contracts out there to be had and they are tied to this one settled back in 2004. Chairman Waxman. Thank you very much. We're going to have other questions. I'm sure other Members will ask questions. Mr. Davis. Mr. Davis of Virginia. General Rogers, let me just understand. Basically the fact that the euro has risen so much against the dollar accounts for an important part of the cost rise? General Rogers. Very important part, sir. Mr. Davis of Virginia. You have no control over that. Now, how about in hiring the construction contractors? That wasn't the Air Force, was it? General Rogers. No, sir. We do business with the German Government under the international agreement known as ABG-75. Mr. Davis of Virginia. Let me ask Ms. Garber. It looks like a huge part of this problem was that the construction--the contractors in this case were German contractors hired by the German Government and our only job was to approve the work and pay. Is that a fair understanding or am I missing something? Ms. Garber. ABG-75 provides a framework for these military construction activities to take place. Mr. Davis of Virginia. Can you speak into the microphone? Ms. Garber. ABG-75 provides a framework for these military construction contracts to take place. Mr. Davis of Virginia. I understand that. And it is my understanding that framework, correct, that basically the hiring of the contractors, the German Government does that, we basically approve the work and pay the government, who then pays the contractors. Isn't that the way it works? Ms. Garber. Article 49 of the U.S.---- Mr. Davis of Virginia. Just yes or no. I don't need to get into all of the article. Is that a correct understanding? Ms. Garber. The supplemental provides that the military construction for the benefit of foreign forces stationed in Germany should be carried out by German authorities. That is correct. Mr. Davis of Virginia. So a lot of this problem just goes back to the German Government, who they hired and--is that fair to say? Let me ask GAO. Mr. Causseaux. That's---- Mr. Davis of Virginia. I understand that there was some work at one point--this is before General Rogers got into it. There was some work that was approved and accepted that probably shouldn't have been accepted. Mr. Causseaux. That's true, sir. As far as the U.S. influence or control over the process, the United States can request a contracting approach. In this case, the United States did not opt for or did not go for a general contractor approach. So the Germans went with what they call trade lots. It is essentially 40 small business or trade-lot contractors, individuals and then they attempted the--LBB attempted to manage that. That was a significant problem for them. They were effectively overwhelmed. Mr. Davis of Virginia. And some of these contractors walked off the job, didn't they? Mr. Causseaux. They walked off the job because they weren't getting paid. Mr. Davis of Virginia. They weren't getting paid because they weren't doing good work. Mr. Causseaux. It wasn't--I don't believe that was necessarily the case. It was that the invoices that they were-- ultimately when they were providing their invoices and they were coming through--because the change orders had not been approved--this is when the Air Force stepped in and said we're not going to pay any invoices for unapproved change orders. When that occurred, the funding stopped, the contractors walked off the job. That is certainly a control that the United States had. The question---- Mr. Davis of Virginia. And if they had paid these contractors and with unapproved change orders, they would probably be up before this committee trying to answer why you paid unapproved change orders. Mr. Causseaux. Absolutely. And there were improper payments that had been made at a--up until a certain point and then it was finally discovered. But the question is whether or not the United States had the ability or the authority to inject greater oversight and control in the process from the beginning. And the answer to that under the ABG-75 is clearly yes. Mr. Davis of Virginia. But that horse is long since out of the barn. I mean, that's--we are where we are today. Mr. Causseaux. That's correct. Mr. Davis of Virginia. So, you know, we are where we are. I don't know--I mean, it should be a lesson learned for the Air Force and State and everybody else in terms of future projects, in terms of what can go wrong. I guess the question is today, as we look at this today, and we see where we are in trying to get this completed as rapidly as possible, given all of the other factors, the fact that construction costs are high, that you still have a rising euro against the dollar, that we don't have direct control under the contractual arrangement that we have, what is the fastest way to get this thing wrapped up as quickly as we can at the best costs? And is the Air Force doing a satisfactory job on that? That is the question. Mr. Causseaux. I think certainly the Air Force has instituted effective controls at this point. As Mr. Dorn indicated---- Mr. Davis of Virginia. So they are doing a satisfactory job at this point? Mr. Causseaux. That's correct. But the question is those controls have not really been tested yet because there hasn't been sufficient progress. But have they--do they have adequate infrastructure and oversight in place---- Mr. Davis of Virginia. From your perspective of looking forward, are they doing everything they can do? Mr. Causseaux. It appears so, yes. And I think the Air Force in terms of--is to be commended for the actions in terms of engaging the German Government and getting them to put forth funds to stem the process and get it going. Mr. Davis of Virginia. Yeah. I mean, the German Government can't feel too good about this project. I'm not going to ask you to comment in terms of what they feel. But just looking at this, I'm sure it is a source of embarrassment to them, which is probably why they kicked in some money at this point to get it going. What is the status of those dollars that the German Government put in? Do they expect to get that back at this point? Do they just kind of add it to the cost? Can anybody on the record--Ms. Garber, I'll start with you as far as the State Department. Any idea what this--the money they kicked in, what is the status of that? What do we expect to get back? Would that be an added reimbursement for us? If it is an added reimbursement, do we have to do it under the euro as it rises? Can you give me a feel for that? Ms. Garber. The State Department was not involved in that particular piece. I think the Air Force is the best place to answer that question. Mr. Davis of Virginia. So you don't have the answer to that, OK. General Rogers. General Rogers. Sir, when we went to the Germans and laid out failures of their agents, we asked them for solutions to this problem. They agreed with us that the real problem is lack of flow of money. If you don't keep the money flowing, construction doesn't proceed. Mr. Davis of Virginia. Contractors don't work for free, in other words? General Rogers. Yes, sir. Mr. Davis of Virginia. They aren't liquid enough to carry any costs and---- General Rogers. Yes, sir. This money that has been injected by the Germans is prefinancing, was their solution to that problem to sustain liquidity in the project. Mr. Davis of Virginia. Now, did we sign a note for that, that they advance this and we sign a note and we pay them later? General Rogers. No, sir. We never signed any paperwork. We didn't get any of the money. We have no control over the money. Mr. Davis of Virginia. So they went ahead and paid their own contractors ahead of time with no understanding from us that we'd reimburse them as far as you know? General Rogers. Yes, sir. And they--you know, we really don't know exactly what they're doing with the money. There are contractors involved. There are previous costs involved. And we are staying out of it because under advisement by our legal staff, if we stick our finger in it, we could create liability. So we've stayed out of that completely. Mr. Davis of Virginia. What do you see the--how do you see this moving forward at this point? There are still--as we saw from the pictures that were put up there, there has been no progress in some areas over the last year. General Rogers. True. Mr. Davis of Virginia. We have a plan now that--GAO has testified that you have controls in place that they are satisfied with at least to date. They haven't been tested and we all understand that, but at least you have them in place. They've given you good marks for moving ahead. How do you see this progressing on a timeline or getting contractors back in there working? Can you walk us through what we can expect from---- General Rogers. Yes, sir. The real test on whether we are making good progress is to have the worker count adequate to meet the construction schedule they have created. Mr. Davis of Virginia. Have enough workers to get the job done? General Rogers. Yes, sir. We have not seen that yet. The German authority---- Mr. Davis of Virginia. You don't control that either, do you? General Rogers. No, sir. The German authorities are doing what they can with the contractors. But as I mentioned about the constructing environment in Germany, they have some challenges in dealing with these contractors. To put it bluntly, they are holding the cards with the government. The measures the government is taking are to be commended, but not all the problems are solved yet. We have seen work progress on the roof. We have seen kitchen ducting removed. But we understand there are additional details they are having difficulty working out with the contractors. Mr. Davis of Virginia. So the big variable, the big delta here in terms of being able to get this thing done on time and cutting our losses is getting the workers there to perform to standards in a timely manner? General Rogers. And yes, sir. Mr. Davis of Virginia. And that is something we don't control. Does everybody agree with that? Mr. Dorn. I would agree with that. Mr. Davis of Virginia. And is there anything else we can do to make this happen? Obviously don't go this route in the future when you're constructing this type of building because this is one case of, you know, if it can go wrong, it will go wrong. But is there anything else we could be doing at this point, except for maybe a phone call from the President to Ms. Merkel or something like that? I mean, what else can you do at this point to get the contractors? Mr. Causseaux. Short of writing a blank check to bring more workers in and pay them more than they are contracted to do, no, I don't think so. Mr. Davis of Virginia. OK. So we still have the unresolved issue of trying to get the contractors in in a timely manner to get this thing done, and that is the variable that nobody controls here. You think we are doing everything we can. It goes back, then, to the initial agreement that is before anybody was here on this panel, was here in terms of the contractual vehicle that would handle this where we allowed the German Government to basically hire the contractors to make this go and things started going bad from there. We made a mistake along the way at one point evidently in accepting some work that wasn't acceptable, but that is not the major part of the problem. Is that fair to say? Mr. Causseaux. I think that is fair to say, but I think the agreement itself also has provisions that the United States did not take full advantage of in terms of its risk mitigation. There are opportunities that the United States has to inject itself into the process for oversight control, checking and checks and balances and that type of thing. Mr. Davis of Virginia. But we're doing that now? Mr. Causseaux. Yes, sir. Mr. Davis of Virginia. OK. Thank you very much. Chairman Waxman. Thank you, Mr. Davis. Mr. Sarbanes. Mr. Sarbanes. Thank you, Mr. Chairman. Can I pick up right where you just left off? What--because that is the--the suggestion is that we are now at a place where we are sort of being held hostage by these German contractors and so forth. But like you said, it didn't have to come to that. And I'm curious as to--well, first of all, how typical or atypical is it for this kind of situation to arise where work stops and then a third party enters the scene apparently without objection and starts funding the project that we are supposed to have control or oversight on and then creating expectations of some kind of disposition of that outlay of funds down the line, which apparently is not totally resolved yet. This strikes me as out of the ordinary. Am I correct in that? Mr. Causseaux. That is our understanding, yes. It is I believe the first time the Germans have engaged in this type of a prefinancing loan, however you want to--whatever semantic term you want to---- Mr. Sarbanes. Well, even just going beyond the Germans, on a project of this kind you wouldn't expect to see that kind of situation arise, right? Mr. Causseaux. No, I don't believe so. Mr. Sarbanes. OK. And you suggested that it is because we didn't take advantage of earlier warning signs, things we could have done presumably before it got to a stage where the contractors felt they had to walk off--well, before it got to a stage where we had to do a stop work---- Mr. Causseaux. Correct. Mr. Sarbanes [continuing]. Order and then force these contractors in effect to walk off the job because they weren't getting paid and then invite the third party, German Government, to come into the situation. What are some of the things--what are some of the earlier stages that we could have taken advantage of to avoid that? Mr. Causseaux. Well, at the very outset of the arrangement or the agreement, the United States has the ability to inject itself in terms of reviewing the construction, onsite quality control, oversight of the process, the invoices, all the change orders. The fact that there were such a huge backlog of change orders and that the invoices were being paid associated with those before the change orders had been approved suggests that, you know, the government--the United States was not, you know, adequately monitoring the process at that time. That all caught up when the surge of change orders hit and it was finally realized, you know, holy cow, we're paying for stuff that we haven't approved of yet. So then it was we are not going to process any further payments. That obviously created the dilemma. So injecting the adequate amount of oversight resources up front would have mitigated that risk. Mr. Sarbanes. How fast based on your--when you do reviews of these kinds of projects and other instances as well and have a general sense of how a contract proceeds over time and when-- where the trigger mechanisms are. So--I mean, how fast if you have an efficient oversight and monitoring role in place, how fast should you be able to detect things that you need to weigh in on? I mean, this project started when--what was the start time when this project---- General Rogers. Fall of 2004. Mr. Sarbanes. So on a project of this size and complexity, you know, granted--if you have a good oversight function in place, how quickly could you expect to know? I mean, 2 months out, 3 months out, 6 months out? I mean, here we are 4 years out. We looked at this last year. So say 3 years out. But, I mean, a good oversight operation should be able to judge whether things are going in the right direction or not how quickly? Mr. Dorn. A couple of months, Mr. Sarbanes. Mr. Sarbanes. A couple of months. A couple of months you're going to know if you've got---- Mr. Dorn. That's correct. Construction is normally 30 days in arrears. So--but if you're out there every day, you're going to see what is going on. One of the things that they didn't do early, and I'll be brief, is they didn't have a schedule that they could trust. The Germans are giving them Excel spreadsheets instead of network schedule that showed what resources were needed. So they didn't have the tools necessary to even know how many people were going to be on the site. And they don't have that tool today. They still couldn't tell you how many people need to be on the site today to make sure you're on schedule. Mr. Sarbanes. So tracing back to--I mean, if I were interested in knowing exactly how the oversight role broke down, where does that path lead? Was it that there should have been 10 people overseeing this and there was only one, that there should have been somebody with more experience and background doing this sort of thing, and there wasn't anyone? What was the breakdown in terms of the failure to do the early oversight? Specific. Mr. Dorn. It's--again, it gets to back to what Mr. Causseaux said. In the beginning we had the option to insist on one general contractor, for example, and instead we had over 20 general contractors effectively; and trying to manage that many contractors is---- Mr. Sarbanes. I'm out of time, but it sounds like, right out of the gate, the structure of this was such that it was going to lead to confusion, missed oversight, and all the rest of it; and here we are. Mr. Dorn. Made it a high-risk job, as Mr. Causseaux said. Chairman Waxman. Thank you, Mr. Sarbanes. Mr. Tierney. Mr. Tierney. Thank you, Mr. Chairman. Thank you, folks, for coming in to testify. Mr. Kutz, particularly, I want to thank GAO for helping us understand what went wrong with this particular project. But in your report you also warned that there may be some construction problems that were also discovered in other places when you were looking at the installation in Germany. First, you showed us a picture of a runway at Ramstein Air Base. I think there's a photo on the screen there. Your report says this runway was built to help support an increase in U.S. mission to Iraq and Afghanistan. You said that the runway's lights don't work when it gets wet. And you said a construction defect allows groundwater to damage lights and cause power outages. As a result, the base actually has to divert aircraft to other bases in Europe. Am I understanding that correctly? Mr Kutz. Yes, that is correct. Mr. Tierney. And now they're forced to use portable lights, and they have to pump water from the manholes on an ongoing basis? Mr. Kutz. Yes. Mr. Tierney. I don't understand how this could have happened. Should there not have been some oversight that identified the contractor who installed these lights and some required repairs by them? Mr. Kutz. Yes. It was the same LBB agency, I believe, that is overseeing the KMCC, which is why we looked at them. We looked to see if there were other similar types of issues in that immediate area that LBB Kaiserslautern was involved with. And so we see the same kinds of things we saw with KMCC on a little bit smaller projects, but still important projects. Mr. Tierney. So no one inspected the work before it was accepted by the U.S. Government? Mr. Kutz. We don't know that. Mr. Tierney. Does anybody on the panel know that? General Rogers. Say again the question, sir. Mr. Tierney. Did not somebody inspect the work before it was accepted by the government? General Rogers. Yes, sir. Some of these projects were managed by another government agency. LBB as the German construction agent, a German government organization, accepts from contractors on behalf of the forces. So when LBB accepted it, there was the first breakdown. Mr. Tierney. Back to Mr. Kutz's report, it says, When it rains, ponds that are as big as acres across develop between the runways because of poor drainage. So I think you're saying that again we accepted that particular situation of the construction without its ever being properly graded. Mr. Kutz. Yes. And that is the picture you see. That was in March of this year. Mr. Tierney. What's going on with the runway now? Mr. Kutz. These guys were there last month, Mr. Dorn and Bruce. Mr. Tierney. Mr. Dorn, what's happening now? Mr. Dorn. As of last month, they've started grading operations to fill in those low spots, but they're still having trouble; and we watched them pump water out of the manholes. Mr. Tierney. So was that same company that was responsible brought back to do the repairs, or is some additional or new company in there doing the work? Mr. Dorn. I'm not aware of that. The Air Force probably is. General Rogers. Those are items that we identified to the Germans as unacceptable. The construction agent and the German Government is working with the contractors to repair these deficiencies. In the meantime, it's true that they impact certain capabilities out there. We've got measures in place to ensure safety and mission are not impacted more than necessary, but we're holding their feet to fire to make sure we get good results on this one. Mr. Tierney. So we're not paying additional to have that done; they're coming back under the original contract and completing that. Is there any penalty involved? General Rogers. So far, we haven't paid anything. They haven't told us we're going to pay anything. Because we have identified most--in fact, all of the known ones that were shown here we identified prior to when it was accepted. Because you can accept the runway for usage while other pieces can be repaired later, a punch list. Mr. Tierney. So it was accepted for use, but not accepted in terms of all responsibility; and they own the problem of fixing it and the cost of doing that? General Rogers. Yes, sir. Mr. Tierney. Ms. Garber, is that generally the recourse that the U.S. Government has from the German Government or the German contractors when a situation like this arises? Ms. Garber. I think the Air Force is the best place to answer that question. The State Department generally does not get involved in the technical construction issues and questions. Mr. Tierney. And it never gets to a diplomatic level of concern? Ms. Garber. In this particular case, because there were problems with the LBB agent, the embassy did play a facilitative role in trying to arrange meetings to facilitate and support, to help bring the parties to agreement at the Federal level. So in that sense, yes, but generally it was handled by the Air Force directly. Mr. Tierney. Mr. Kutz, could you tell us what you found when you went to the warehouse in terms of the structure there and deficiencies in the steel frame? Mr. Kutz. Well, there were the beams that were inserted. I guess that is the picture there. And there was originally issues where this had to be evacuated because there was concern that the roof would cave in. So, again, Mr. Dorn and Mr. Causseaux saw that last month; and I believe that is a recent picture. Mr. Tierney. So the building can't be used to capacity. In some areas, I think you said, a forklift couldn't get into it anymore, correct? Mr. Causseaux. That's correct. Mr. Tierney. So what's happening with that? Mr. Causseaux. They have work-arounds. Mr. Tierney. And now we are just going to have a building that is not up to the capacity originally designed? Mr. Causseaux. It's essentially a huge basketball court with pillars in it, and it's a little difficult to play basketball in that scenario. But they have forklifts moving equipment and other things around, and in some cases they can't get to certain locations easily so they have to use either hand facilities or work-arounds. But as Mr. Dorn alluded, one of the officers that we spoke with there said one of the things that he worries about significantly is a forklift backing into one of those pillars and the pillar falling or affecting the structure of the roof. Mr. Dorn. They are using that facility. There are operations, but they are degraded by the interior columns. Mr. Tierney. So have we accepted that? Are we paying for it? Are we going to pay in full? Is somebody going to assist on that? What's going on? General Rogers. That facility was accepted about 3 years ago by another government agency, and the Germans notified us of the defects in the building because they weren't visible to us. It has to do with the defective metal that was used in multiple government facilities throughout Germany, some German Government projects, some U.S. Army projects; and in conjunction with that, they found some defective welds in this one. It is now in the hands of German courts, and we're standing by for the German officials to tell us what their solution is. Mr. Tierney. They'll tell us what our recourse is? General Rogers. Yes, sir. And this is, of course, dragged out with the court process over there. Mr. Tierney. I see my time is up, Mr. Chairman. Thank you. Ms. Watson. I just want to followup the questioning of my colleague, Mr. Tierney. The committee staff received a briefing on June 30th from the Air Force Office of Special Investigations. And at this briefing, Air Force investigators gave us some additional information, and they said we could share it with certain limitations. They told us that they believed that two Air Force officers and two Air Force civilians and a fifth individual, who was a contract employee, falsely certified almost $8 million in payments to German contractors. So this is a question for General Rogers. Are you familiar with this investigation and these allegations? General Rogers. Yes, ma'am, I am. Ms. Watson. And let me ask you this. Have you reprimanded or removed any of the Air Force personnel that were involved in the payments? General Rogers. I would put it this way, ma'am. One of them self-removed. The others, the investigations are not complete yet, but when they are complete and if it's warranted, we will take appropriate action and hold them accountable. To date, it appears that it's more process foul and lack of training versus intentional---- Ms. Watson. Criminal activity? General Rogers. Yes, ma'am. Not absolving them of responsibility to know, but the individual who self-eliminated also happened to run that office, who had an interest in them not necessarily knowing exactly how to do this job. Ms. Watson. Because the case is being investigated now. I think they're in court. If there are criminal activities, it will be adjudicated there? Is that what you're saying? General Rogers. Yes, ma'am. A civilian employee, it would go through the civilian process, the Department of Justice. Military ones do the Universal Code of Military Justice. Ms. Watson. It seems like there has been very poor conduct by U.S. officials, so this question is to Mr. Kutz. Program managers have an obligation to protect the taxpayers' funds, don't they? Mr. Kutz. That's correct, yes. Ms. Watson. And do you think a government supervisor needs to prove beyond a reasonable doubt that someone engaged in criminal activity before taking any administrative action? Mr. Kutz. We don't believe that because we come across it. We refer hundreds of thousands of cases to agencies for criminal investigation and administrative action because, as you're probably well aware, criminal virtually never happens, but administrative should happen when someone does things. So that's our view. And if it's proven, if someone is still being investigated, then that is one thing. But if you know that they did a poor job in their work, they should be reprimanded. Their ratings should reflect that, their performance ratings and things like that. And you're talking here about individuals who were rubber- stamping, if you will, the bills that came in versus other individuals who are under investigation for fraud. There are other cases of fraud. Ms. Watson. Well, when we see the pictures that were up on the screen and the shoddy kind of construction, and we look away or we wait for somebody to maybe give us a clue that things are not right, it just is very troubling. We're the oversight committee, and we're here to protect the general public, the taxpayers' dollars, protect Americans; and when we have these kinds of projects that seem to be not worthy of who we are, it's very troubling. And we have all of you out there, and I appreciate your coming here today and being willing to testify. We need to get to the truth, and we need to remove those people who are demonstrating very poor judgment and poor, shall I say, conduct--maybe because they expect a fiduciary reward in the end. That is always our concern. So I yield back my time, Mr. Chairman, and thank you very much, witnesses. Thank you, Mr. Chairman. Chairman Waxman. Thank you, Ms. Watson. I want to ask a few questions. Mr. Kutz, last year, you testified before us on this project and you told us that the Air Force's program office had lost control of project finances and was paying invoices for work they weren't sure was done. At last year's hearing, the witness for the Air Force was Brigadier General Danny Gardner, who was in charge of the project at that time. He acknowledged some problems with the project, but he basically said the Air Force had addressed these problems. Mr. Kutz, if I recall correctly, you didn't agree with those assertions; is that correct? Mr. Kutz. That's correct. Chairman Waxman. It doesn't seem the Air Force believed them either, because after our hearing the Commander of Air Forces in Europe, General Hobbins, formed a high-level task force to troubleshoot the project; and by the following month, July 2007, it presented its findings to top Air Force officials supporting GAO's findings. Here is what the Air Force's own internal review stated, ``Air Force did not properly monitor or approve contractor payments. Air Force did not have adequate policies and controls in place. And Air Force did not have sufficient staffing to oversee complex project.'' General Rogers, you're here in the Air Force seat today. Do you agree that the Air Force did not adequately oversee this project, and do you agree with GAO's findings in that regard? General Rogers. Sir, as I mentioned earlier, I have been investigating this thing for 18 months, and I probably know more about it than anybody. What I found is--of course, I participated in this piece of it. The task force was directed by General Hobbins even prior to the hearing. We just had logistic difficulties getting stood up quick enough. The internal findings that you speak of by the Air Force, the source for that was members from here in the Air Staff in the Pentagon. Those members were there for 2 weeks and had a short look. Their opinion, I do not agree with. Initially I did, but now I know better. As it turns out, the main crux of the problem was transparency from our construction agent. As an example, to know about change orders, the construction agent has to tell you they're there, because we're not in their offices. In terms of controls, we have to know something is not quite right to ramp it up. Initially, the Air Force knew that this project was going to be more complex. And because we had tried to get a general contractor--actually written an official letter to the Germans and couldn't get it supported by the Minister of Defense of Germany, who also wrote letters saying, you have to put a general contractor on this--we lost that fight, and LBB did not put a general contractor on it. So based on that, the Air Force doubled its normal oversight team size to eight in the beginning. Chairman Waxman. But you disagree with the Air Force's own findings? General Rogers. Sir, those--you can't classify those as the Air Force's own findings. Those were members of the team who generated their briefing when they came back here, and they had far less information. So I don't. There are pieces of it that have some credibility, but you can't count those as the findings. Chairman Waxman. This was at the request of General Hobbins, they put together this inquiry? General Rogers. He directed me to lead it, sir. Chairman Waxman. On the chart, the type of findings, it says, these are the findings pursuant to an internal Air Force review. General Rogers. Yes, sir. We're talking two different things here. This is not the task force; this is the Air Force Audit Agency findings. Chairman Waxman. I see. And there are findings and you agree with those findings? General Rogers. We agreed with those when the audit agency came up with them. What I now know is that when an audit agency looks at a project in Europe, they can only look at the U.S. side. That is like looking at the tip of an iceberg and judging the whole iceberg. Chairman Waxman. GAO created some findings as well. Do you disagree with their findings? General Rogers. Depends which ones you're talking about sir. Chairman Waxman. With regard to the work of the Air Force and their having sufficient staffing to oversee the complex, to properly monitor and approve the contractor payments, and adequate policies and controls in place, address those as well. General Rogers. Here is what happened. If the question on any given day through the process of building this facility, what do you know at the time? In this project LBB hired another firm to act as a surrogate general contractor because they were directed not to have a general contractor. That general contractor served and failed miserably and did not inform LBB of all the situation on the site. The LBB subsequently did not inform the Air Force. So the story---- Chairman Waxman. Does the Air Force have any responsibility or is it all the contractor's fault? General Rogers. Sir, I will tell you that the Air Force has responsibility. We execute the responsibility based on what we know at the time. As I look back at those times, the question becomes, what was reasonable at the time based on what you knew. I have reams of facts that show that the efforts made by Air Force people at the time seemed reasonable. Now that I have more information from the surrogate GC, the general contractor, and from LBB, what their internal memo said at the time, I realize the situation the Air Force people were trying to manage was completely different from reality. Chairman Waxman. Let me ask Mr. Kutz. It seems to me that we don't have an acknowledgement from General Rogers to what the findings were from the internal audit of the Air Force, that there were some mistakes by the Air Force. Do you agree that those findings were incorrect and General Rogers is correct? Mr. Kutz. We would agree with the Air Force Audit Agency's findings. And last year you asked, I think, General Gardner, when they first became aware that there were real problems. He told you December 2005, a couple of months before the project was supposed to be done. How could you say you didn't have Air Force oversight problems when you became aware of the problems a couple of months before the ribbon-cutting ceremony? It doesn't make any sense, Mr. Chairman. Chairman Waxman. Well, General Rogers, what has passed is past. But it seems to me it's important to have some acknowledgement of the problems that existed and how they came to be the responsibility of the Air Force. It sounds like the Air Force is in denial mode, and that is not very comforting. If you deny what happened in the past, I fear you might be likely--not you yourself, but the Air Force-- might be likely to make some of the mistakes again. General Rogers. Sir, I'm not in a denial mode. I acknowledge what happened in the past. My job is to figure out why it happened. I do now understand why the Air Force Audit Agency and GAO could come up with these findings, that we also would agree with--there were inadequate controls, etc. The issue is, why did it happen. For example, Mr. Kutz says, why did we learn in December 2005 that this facility is going to be late when it's only a couple of months from delivery. The delivery date being promised in December 2005 by the construction agent and showed to the KMCC council with all of the stakeholders, German Government officials, AFE services, everybody at the table, was April or May 2006. At that time, there was 16 weeks of construction work remaining, and if you look at the clock, you would say, Well, there is the building, it is standing, looks right, 16 weeks from now--they're telling us 16 weeks, it's going to open in 16 weeks. You don't have a reason to question that, and when you go out and look at the site, you can correspond work to invoices you are getting. So as you can see, the issue here was one of transparency. My finding is that once this construction project broke ground, there was a difference in the rate of information that flowed from the surrogate general contractor to LBB, and from LBB to the Air Force. And as you went through time, that lag in situation awareness continually grew to the point that even in November or December 2005, I now have internal memos from LBB showing that project was not going to be delivered until--the hotel portion until July or August. Yet the entire council, which is where they're reporting out the status to the oversight, to all the stakeholders, that council was briefed, this will be here in May. Chairman Waxman. Let me ask Mr. Kutz the last question I have. If we hold a hearing next year at this time, are we going to find that we've learned some lessons and they're going to correct the situation, or do you think that there is a denial going on, and it's as troubling to you as it appears to be to me. Mr. Kutz. It's too late for KMCC. It is what it is at this point. It's a mess. There is a lot of issues and a lot out of our control at this point. The real question is for new projects going forward, at the very beginning, before we start spending the money, will we have the people in place, will we make sure that a general contractor whatever makes sense here, we'll make sure we're not schedule driven, driven based upon milestones, etc. That is the real test here. I think KMCC, it's really too late. Hopefully, there are lessons learned going forward, and at the very beginning of the project they will learn from what has happened here and, hopefully, not repeat the same situation. Mr. Davis of Virginia. Do you want to ask any questions Mr. Duncan? Mr. Duncan. Well, very briefly. Thank you, Mr. Chairman. I was sitting here reading this memo that the staff provided us, and it says, ``Unfortunately, this recent report from GAO is not good. Little work has been completed in the year that has passed since the first hearing, and while the U.S. Air Force and the German Government have recently reached an agreement on a plan to complete the project by January 2009, neither the Air Force nor GAO has confidence that completion date will be met. The project is now more than 2 years overdue and the building will suffer from significant structural problems, including a defective roof that is in the process of being replaced.'' If neither the Air Force nor the GAO has confidence that the completion date of January 2009 will be met, General Rogers, when is the completion date? When is this going to be completed? General Rogers. Sir, we count on our German construction agent to give us the schedule, in terms of--you know, they figure out how long it's going to take and level of effort. And they have offered January--not offered; they have told us that January 2009 is when they expect to turn it over. We see indications that do not--while they're performing better than in the past, it's not like we should count on January 2009. But as I mentioned earlier, I at least have a little more confidence in this schedule in only slipping a few months versus years because contractors have at least signed up to this schedule. And it's the first hard schedule, after years of begging, that LBB has given us since November 2004. Mr. Duncan. And in this memo also says that ``Total cost to complete the project is unclear. The Air Force contends it will spend $162 million, but the GAO estimates the cost to complete the project will be over $200 million.'' What do you say about that? Where is the disagreement between the Air Force and the GAO? General Rogers. The Air Force and the GAO are really saying the same thing here, sir. The $163 alludes to pure construction costs. That one should be about $7 to $7.5 million, under the agency approved amount for construction. The other costs that take over $200 million include furniture and equipment, secondary services, design fees that are not included in construction that are normal in any construction project; and just about all of those would have been spent even if we completed it on time. Last year, the discussion seemed to be all about the construction costs being out of control, so those other costs weren't really brought up. The Air Force tracks them carefully, which is why we're able to provide them to the GAO when they ask. But we're basically saying the same thing. Mr. Duncan. But do you have somebody now who is in charge of this, who has major construction experience? General Rogers. Yes, sir. We had to delay a little bit last year to stand up and consolidate the management office, because our colonel was deployed to Iraq. We got him back, and as soon as he came back, he plowed into this and he is doing a great job. Mr. Duncan. Thank you very much. I yield back. Mr. Shays. I'm not going to take the full 5 minutes because I wasn't here. But could we have it clarified for the record why there was no general contractor, a U.S. general contractor, overseeing this? General Rogers. Yes, sir, I can. During investigation of this project, I found letters from previous vice commanders of USAFE, and meeting minutes, where USAFE officially and repeatedly asked for a general contractor. Additionally, the Minister of Defense in Germany wrote letters to German Government agencies saying, you're going to need a general contractor or this thing is going to go afoul. However, there were other German bureaus and political interests who insisted on trade lot contracts because they, like us, have rules and laws that ensure that small business has opportunities, etc. And in those initial days, when told we wouldn't get a general contractor, the people overseeing the project accepted it in the sense that there were only about four trade lots envisioned at the time. But nobody had a clue that it was going to grow to over 42. Mr. Shays. Just a question: We had a project manager on this project? Someone? General Rogers. Yes, sir. Mr. Shays. Thank you, Mr. Chairman. Mr. Davis of Virginia. Let me sum up. We just don't want to be here next year going through the same thing. And I guess the real variable here is Germans and the contractors and how they act. And we have the controls in at the Air Force, I understand. So the real question is, are the German contractors going to show up? Are they going to be able to do the job? Are they going to show in the numbers that we need to get this thing done? Am I missing some something, or is that the essence of where we are right now? Mr. Kutz. Yes. And I think the other thing that has been discussed here, too, is whether that German amount is a loan or a grant or whatever the case may be, because that will have to be sorted out later as to who will pay for what. But with respect to physical progress, getting it done, we agree with that. Mr. Davis of Virginia. Just tell me, we're not going to use this procedure again. General? General Rogers. Sir, under ABG 75, we're obligated to use a German construction agent which in that region is LBB. What we intend to do is---- Mr. Davis of Virginia. Is this is State Department agreement or a military agreement? I'll ask Ms. Garber. Ms. Garber. It's an agreement between the forces and the Germans. Mr. Davis of Virginia. Does that agreement have a 10-year timeframe? Is that just part of the agreement for our bases being there? General Rogers. Yes, sir. The Germans conclude agreements like this with all forces, all nations. It will be changed if the forces at some point decide to renegotiate. Mr. Davis of Virginia. But we did note we did have other options with this? Mr. Causseaux. There are clearly provisions in the ABG 75 for the United States to--in some cases to demand, insist and request; and the option for using a general contractor, I think the United States could have insisted on the use of a general contractor. Mr. Davis of Virginia. My question is, we have learned from this so that next time we will handle it differently, within the confines of that agreement. General Rogers. Yes, sir. As a matter of fact, the Germans agree because this didn't work for them either, and it's now costing. Believe me, the impact on them is more than us. Mr. Davis of Virginia. Good. Thank you very much. Chairman Waxman. Well, I thank you all for advising us where we stand with this project, and I appreciate your being here today. That concludes our business, and the committee stands adjourned. [Whereupon, at 11:34 a.m., the committee was adjourned.] [The prepared statement of Hon. Diane E. Watson follows:] [GRAPHIC] [TIFF OMITTED] T4635.214 [GRAPHIC] [TIFF OMITTED] T4635.215 [GRAPHIC] [TIFF OMITTED] T4635.216 [GRAPHIC] [TIFF OMITTED] T4635.217 <all>