submit a prospectus to Congress for all major medical facility leases. Project Delays and Cost Increases for Outpatient Leases Mostly Occurred Prior to Entering into the Lease Agreement

		Project Delays

VA has experienced substantial delays in executing new outpatient clinic  lease projects, nearly all of them occurred prior to entering into a lease  agreement with the developer. We found that 39 of the 41  congressionally authorized outpatient clinic projects we reviewed  experienced schedule delays, ranging from 6 months to 13.3 years, with  an average delay of 3.3 years, while 2 projects experienced schedule  time decreases. Outdated Guidance. VA provided cost data for its outpatient clinic lease projects  in January 2014. Although first year rents increased for the 31 projects—increasing overall  total costs—VA’s total build-out costs were lower than reported in the  projects’ prospectuses. Based on the findings of the council and our work, VA is  planning the following improvements to the major medical facilities  leasing program:  requiring detailed design requirements earlier in the design process to  help avoid the delays, scope changes, and cost increases, and providing Congress with more complete information on the cost of  proposed future lease projects. However, we also found that while VA has updated and refined some  guidance for specific aspects of lease projects—including design  guidance for the construction of outpatient clinics—to better support VA’s  leasing staff and prevent project delays; it has not updated its overall  guidance for staff involved in leasing projects. Creating a Review Council

In April 2012, the Secretary of Veterans Affairs established a Construction  Review Council (CRC) to serve as the single point of oversight and  performance accountability for the planning, budgeting, execution, and  delivery of the VA’s real property capital-asset program, including the  leasing program. The CRC report, along with GAO’s past work  on VA leasing,below. During  our review in January 2014, VA issued a guidance memorandum  directing that beginning with fiscal year 2016, VA would develop more  detailed space requirements before a prospectus is submitted to  Congress for major construction and major leased projects.to VA officials, the more detailed requirements should be prepared as part  of a business case for each major construction and lease project during  the SCIP planning process that occurs before a prospectus is prepared. Developing a Process for Handling Scope Changes

VA has also taken steps to better manage scope changes to project  leases. According to  VA officials, this process will help ensure review and approval of any  proposed scope changes by the appropriate department officials and will  require a systematic review of projects at pre-defined stage-gates, as well  as reviews of the effects of any changes to scope, schedule, and cost. VA’s 2014 budget submission includes an  estimate of total costs for proposed future lease projects for the next 10  years; however, this estimate only provides the first year’s annual rent  and build-out costs, and not the complete lifecycle costs for these leases. We reviewed  VHA’s 2004 Handbook on Planning and Activating Community Based  Outpatient Clinics, which is VHA’s overall guidance for leasing outpatient  clinics. The Handbook is intended to establish consistent planning criteria  and standardized expectations. As of November 2013, VHA’s leasing program has a long-term liability of  $5.5 billion and growing, but its guidance on outpatient clinics is a decade  old and no longer relevant. Standards for Internal Control in the Federal  Government calls for federal agencies to develop and maintain internal  control activities, which include policies and procedures, to enforce  management’s directives and help ensure that actions are taken to  address risks. Thus, the  success of those efforts will depend on how quickly and effectively VA  implements them. In its  written comments, VA concurred with our recommendation and discussed  actions under way to implement it. GAO staff who made key contributions to  this report are listed in appendix V.

Appendix I: Scope and Methodology

To determine the extent to which costs and schedules changed for  selected Department of Veterans Affairs’ (VA) outpatient clinic lease  projects, we obtained and analyzed data that VA provided on VA’s 41  authorized major outpatient-clinic projects as of January 2014.included a short project description, project location, the original and  current total estimated cost of the project, and the original and current  completion date. To identify any actions VA has taken to improve its leasing management,  and any opportunities that exist for VA to further improve its management  of leased projects, we reviewed VA’s management practices of leased  projects at the 11 locations we selected.
Why GAO Did This Study

VA operates one of the nation's largest health-care delivery systems. To help meet the changing medical needs of the veteran population, VA has increasingly leased medical facilities to provide health care to veterans. As of November 2013, VHA's leasing program has long-term costs of $5.5 billion and growing. Given previous problems that GAO has identified with VA's hospital construction program, GAO was asked to review VA's leasing program.
This report examined (1) the extent to which schedule and costs changed for selected VA outpatient clinics' leased projects since they were first submitted to Congress and factors contributing to the changes and (2) actions, if any, VA has taken to improve its leasing practices for outpatient clinics and any opportunities for VA to improve its project management. GAO analyzed agency documents as well as VA data for 41 ongoing major outpatient-clinic lease projects, for which a prospectus was submitted to Congress with an average annual rent of more than $1 million as of January 2014. We also interviewed VA officials and representatives from private companies, involved in VA leasing projects.

What GAO Found

Schedules were delayed and costs increased for the majority of the Department of Veterans Affairs' (VA) leased outpatient projects reviewed. As of January 2014, GAO found that 39 of the 41 projects reviewed—with a contract value of about $2.5 billion—experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years. The large majority of delays occurred prior to entering into a lease agreement, in part due to VA's Veterans Health Administration (VHA): 1) providing project requirements late or changing them or 2) using outdated guidance. Costs also increased for all 31 lease projects for which VA had complete cost data, primarily due to delays and changes to the scope of a project. First-year rents increased a total of $34.5 million—an annual cost which will extend for 20 years (the life of these leases).
VA has begun taking some actions to address problems managing clinic-leased projects. First, it established the Construction Review Council in April 2012 to oversee the department's real property programs, including the leasing program. Second, consistent with the council's findings and previous GAO work (December 2009, January 2011, and April 2013), VA is planning the following improvements:
Requiring detailed design requirements earlier in the facility-leasing process . VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress.
Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost.
VA's 2014 budget submission did not clarify that its estimates for future lease projects included only one year's rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA's 2015 budget submission.
However, these improvements are in the early stages, and their success will depend on how quickly and effectively VA implements them.
Finally, VA is also taking steps to refine and update guidance on some aspects of the leasing process, for example the VA's design guides, but VHA has not updated the overall guidance for clinic leasing (used by staff involved with projects) since 2004. Specifically, VHA's Handbook on Planning and Activating Community Based Outpatient Clinics , which established planning criteria and standardized expectations for outpatient clinics, was based on past planning methodologies that no longer exist. Standards for Internal Control in the Federal Government calls for federal agencies to develop and maintain internal control activities, which include policies and procedures, to enforce management's directives and help ensure that actions are taken to address risks.

What GAO Recommends

GAO recommends that VA update VHA's guidance for the leasing of outpatient clinics. VA concurred with GAO's recommendation and discussed actions under way to implement the recommendation. VA also provided technical comments, which GAO incorporated as appropriate.