Report Contents
What OIG Audited
The Bureau of Overseas Buildings Operations (OBO) directs the worldwide overseas building program for the Department of State (Department). Requests for equitable adjustment (REA) are contractor requests seeking an adjustment to a contract’s time or price. The Department reported that contracting officials coordinated REAs totaling $418 million from October 1, 2020, through June 30, 2023, on overseas construction projects. The Office of Inspector General (OIG) conducted this audit to determine whether the process used by the Department to reach equitable adjustments with selected construction contractors responsible for large construction contracts complied with the Federal Acquisition Regulation (FAR) and Department guidance. From a universe of 440 REAs processed from October 1, 2020, through June 30, 2023, OIG selected 30 REAs from 5 overseas construction projects for review.
What OIG Found
The Department’s process to reach equitable adjustments with selected construction contractors did not fully comply with the FAR and Department guidance. Specifically, of the 30 REAs reviewed for this audit, OIG found 14 constructive changes made by Project Directors (PD) or other OBO officials. Constructive changes occurred when the government expressly or impliedly ordered work outside the scope of the contract. Moreover, these constructive changes led to REAs and ultimately resulted in unauthorized commitments that were not properly ratified. In addition, OIG found that PDs and Contracting Officers (CO) did not evaluate and resolve selected REAs in accordance with the FAR and Department guidance. Specifically, OIG found that PDs did not always comply with requirements to determine the merit of REAs, prepare sufficient independent government cost estimates, prepare negotiation memoranda or receive CO authorization before beginning to negotiate, and perform required cost analyses. Additionally, OIG found that the Department allowed contractors to improperly use two different bases for indirect cost allocation and did not resolve REAs in a timely manner. These deficiencies occurred primarily because PDs and COs did not follow established policies and procedures for evaluating and resolving REAs. Additionally, OBO and the Bureau of Administration, Office of the Procurement Executive, Office of Acquisitions Management (AQM), had not developed and implemented a sufficient process to determine whether PDs and COs adhered to requirements. In addition, AQM did not have specific procedures for evaluating and resolving REAs, and the Department did not have sufficient guidance related to allocating overhead costs to construction projects. Until the Department fully complies with REA requirements, it cannot be assured that REAs are settled in a fair and reasonable manner. As a result, OIG is questioning $837,172 in unsupported costs and $3,251,891 in unallowable costs associated with 17 of the 30 REAs reviewed for this audit.
What OIG Recommends
OIG made 20 recommendations to address the issues identified in this report, including 6 recommendations to recover questioned costs. On the basis of management’s response to a draft of this report, OIG considers 7 recommendations resolved, pending further action, and 13 recommendations unresolved. A synopsis of management’s comments and OIG’s reply follow each recommendation in the Audit Results section of this report. OBO’s and the Bureau of Administration’s responses to a draft of this report are reprinted in their entirety in Appendices C and D. A summary of OBO’s technical comments and OIG’s replies are presented in Appendix E.
Report Terms
Report Recommendations
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations, update the Foreign Affairs Handbook (14 FAH-2 H-535) to include guidance on how to avoid improper technical direction that could initiate a constructive change for construction contracts. At a minimum, the update should include guidance on reviewing requests for information and other methods of communication to contractors.
OIG recommends that the Bureau of Overseas Buildings Operations develop and communicate a Construction Alert reminding Project Directors and Construction Executives to review and follow the guidelines detailed in the Foreign Affairs Handbook (14 FAH-2 H-535) regarding preventing constructive changes to contracts.
OIG recommends that the Bureau of Overseas Buildings Operations (OBO), in coordination with the Bureau of Administration, develop and implement a process for management to review and monitor documents referenced in contractor requests for equitable adjustment, such as requests for information and requests for design clarification, to identify improper technical direction initiated by Project Directors or other OBO personnel.
OIG recommends that the Bureau of Administration develop and implement a communications strategy to direct Contracting Officers to review requests for equitable adjustment for unauthorized commitments and to resolve unauthorized commitments in accordance with the ratification process.
OIG recommends that the Bureau of Overseas Buildings Operations (OBO) develop and communicate a Construction Alert to remind Project Directors and Construction Executives to review and follow the guidelines and steps developed in OBO’s Construction Management Guidebook pertaining to requests for equitable adjustment, including documenting contract references and providing backup documentation to link changes to the contract.
OIG recommends that the Bureau of Overseas Buildings Operations, in coordination with the Bureau of Administration, develop and implement a process to periodically assess activities related to evaluating, resolving, and monitoring requests for equitable adjustment to ensure Project Directors and Contracting Officers adhere to federal and Department of State requirements.
OIG recommends that the Bureau of Administration develop, implement, and communicate policies and procedures directing Contracting Officers to obtain from the responsible Project Director all required documentation related to requests for equitable adjustment for construction contracts and to document their review of all findings of fact, written request for equitable adjustment analyses, and prenegotiation memoranda provided by Project Directors to assist Contracting Officers in making merit determinations.
OIG recommends that the Bureau of Administration develop, implement, and communicate policies and procedures for resolving requests for equitable adjustment.
OIG recommends that the Bureau of Overseas Buildings Operations, in coordination with the Bureau of Administration, develop, implement, and communicate a process for Project Directors and Contracting Officers to evaluate all cost elements submitted by contractors to determine necessity, reasonableness, and allowability. Additionally, the process should require that cost element evaluations be included in the independent government cost estimate and prenegotiation memoranda.
OIG recommends that the Bureau of Overseas Buildings Operations, in coordination with the Bureau of Administration, develop, implement, and communicate policies and procedures for Project Directors and Contracting Officers to comply with the cost principle requirements for construction contracts in Federal Acquisition Regulation 31.203.
Once Recommendation 10 has been implemented, OIG recommends that the Bureau of Overseas Buildings Operations (OBO), in coordination with the Bureau of Administration, develop and implement training for OBO staff and Contracting Officers on the policies and procedures related to cost principles.
OIG recommends that the Bureau of Overseas Buildings Operations (OBO) develop and implement a process to identify delays in responding to contractors’ requests for equitable adjustment. At a minimum, the process should include controls that would trigger OBO management action after a specified period of time without resolution.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations, take the following actions: (1) determine whether the questioned costs of $80,113, which were considered unsupported, for three requests for equitable adjustment for the New Embassy Compound Asuncion, Paraguay, construction contract (SAQMMA17C0082) were supported and (2) recover any costs determined to be unsupported, as shown in Table B.1.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations (OBO), take the following actions: (1) determine whether the questioned costs of $5,887, which were considered unsupported, for seven requests for equitable adjustment for the New Embassy Compound Beirut, Lebanon, construction contract (SAQMMA17C0079) were supported and (2) recover any costs determined to be unsupported, as shown in Table B.2.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations (OBO), take the following actions: (1) determine whether the questioned costs of $25,663, which were considered unsupported, for six requests for equitable adjustment for the New Embassy Compound Tegucigalpa, Honduras, construction contract (19AQMM19C0223) were supported and (2) recover any costs determined to be unsupported, as shown in Table B.3.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations, take the following actions: (1) determine whether the questioned costs of $3,078,171, which were considered unallowable, for two requests for equitable adjustment for the New Embassy Compound Beirut, Lebanon, construction contract (SAQMMA17C0079) were allowable and (2) recover any costs determined to be unallowable, as shown in Table B.4.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations, take the following actions: (1) determine whether the questioned costs of $173,720, which were considered unallowable, for six requests for equitable adjustment for the New Embassy Compound Tegucigalpa, Honduras, construction contract (19AQMM19C0223) were allowable and (2) recover any costs determined to be unallowable, as shown in Table B.5.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations, (1) review all contract modifications for the New Embassy Compound Tegucigalpa, Honduras, construction contract (19AQMM19C0223) to identify all costs associated with violations of the cost principle requirements in Federal Acquisition Regulation 31.203, which govern the selection of a distribution base for allocating indirect costs, and (2) recover any costs determined to be unallowable.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations, (1) review all contract modifications for the New Embassy Compound Beirut, Lebanon, construction contract (SAQMMA17C0079) to identify all costs associated with violations of the cost principle requirements in Federal Acquisition Regulation 31.203, which govern the selection of a distribution base for allocating indirect costs, and (2) recover any costs determined to be unallowable.
OIG recommends that the Bureau of Administration, in coordination with the Bureau of Overseas Buildings Operations (OBO), take the following actions: (1) determine whether the questioned costs of $725,509, which were considered to be unsupported, for request for equitable adjustment 003 for the New Consulate Compound Hyderabad, India, construction contract (SAQMMA16C0274), were supported and (2) recover any costs determined to be unsupported, as shown in Table B.6.