State has 31 additional ongoing  construction contracts for new facilities and plans to build approximately  90 more facilities from 2009 to 2023. In this context, a U.S. person is  defined, in part, as a company that  is incorporated or legally organized under the laws of the United States;    has its principal place of business in the United States;   has performed within the United States or at a U.S. diplomatic or consular  establishment abroad administrative and technical, professional, or  construction services similar in complexity, type, and value to the project  being bid;    has total business volume equal to or greater than the value of the project  being bid in 3 years of the 5-year period before the specified date;    employs U.S. citizens (1) in at least 80 percent of its principal management  positions in the United States and (2) in more than half of its permanent,  full-time positions in the United States;     will employ U.S. citizens in at least 80 percent of the supervisory positions  on the project site; and    has the existing technical and financial resources in the United States to  perform the contract. State Has Generally Met the Adequate Competition Requirement for Awarding NEC Contracts, but the Level of Contractor Participation Has Declined

Although State has generally received at least two bids for NEC projects  since 1999, which meets the adequate competition clause, the number of  contractors participating in the State’s program has declined. We also found that the number of firms per project prequalified to  bid also declined during that period. Officials from these companies  cited insufficient profits and disagreements with State’s management of  the program as factors contributing to decisions to withdraw. State officials  did report that from 1999-2008, the department received at least two  bids—the legislatively defined minimum number for adequate  competition—for all but one NEC project solicited as an open  competition. State’s revised proposal would, in effect, open  competition for NEC awards to smaller U.S. firms. Relations with Foreign Governments

Contractors also cited problems dealing with foreign governments as a  challenge. Absent such support, it is unclear how  State’s proposed amendment would affect the NEC program. In our analysis, we found that contractor participation declined in recent  years for two reasons. First, increasing construction costs have made it  more difficult for some firms to qualify for awards. Second, contractors  reported that State management and construction processes undermine  their ability to turn a profit, which is their primary incentive for  participating in the program. While these changes may increase  contractor participation, their full effects on the NEC construction process  may not be apparent for a number of years, and State will need to monitor  their effectiveness. Recommendations for Executive Action

We recommend that the Secretary of State conduct a systematic review of  the embassy construction contractor base that (1) demonstrates whether  the U.S. contractor base that is both capable of meeting current  requirements and willing to participate in the NEC program is adequate;  (2) estimates the expected benefits and identifies the potential risks  associated with the legislative proposal; and (3) details how the risks  would be mitigated. Absent such support, it is unclear how the  proposed changes would affect State’s program. Appendix I: Scope and Methodology

To address the first objective—how the contractor participation in the  NEC program changed in recent years—we assessed the number of firms  that prequalified and the number of contract proposals (bids) submitted  for each new embassy compound (NEC), new consular compound (NCC),  and new office building (NOB) awarded from 2002 to 2008. We determined that these data on the numbers of  prequalifying firms and bids received were sufficiently reliable for our  purposes. To address the second objective—the degree to which State has assessed  the need for or potential outcomes of its proposed amendment to the  Omnibus Diplomatic Security and Antiterrorism Act of 1986—we reviewed  State documents on legal requirements to qualify for NEC awards, State’s  proposed amendments to these legal requirements, and State’s contract  solicitation and award processes. To address the fourth objective—actions State has taken to address the  reported decline in contractors willing to participate in the NEC  program—we reviewed documentation and conducted interviews with  knowledgeable State officials on (1) rules and regulations outlining the  embassy construction process, including public laws, Federal Acquisition  Regulations, the Foreign Affairs Manual, and State reports and decision  memos; (2) delivery methods and partnering policies employed by other  federal agencies and supported by leading industry groups; (3) State’s  efforts to improve communications with the contractor community,  including meetings with industry groups and individual contractors;   (4) State’s reorganization of planning offices, including the development of  a new project management group and project manager positions; and   (5) State efforts to improve construction processes, including lengthening  project schedules, streamlining the contract solicitation process, and  clarifying contract documents. State questioned why we chose to highlight the declines in the number  of firms prequalifying to bid on NECs from 2006 to 2008 when that  decline was not statistically significant.
Why GAO Did This Study

To provide safe and secure workplaces for overseas posts, the Department of State (State) has built 64 new embassy compounds (NEC) and other facilities since 1999, has 31 ongoing projects, and plans to build at least 90 more. In 2007, State reported the U.S. contractor pool for building NECs had reached its limit and proposed legislation to amend the criteria to qualify for NEC awards. GAO was asked to examine (1) how contractor participation in the NEC program changed in recent years, (2) the degree to which State assessed the need for and potential outcomes of its proposed amendment, (3) factors contractors consider when deciding to participate in the program, and (4) actions State has taken to address reported declines in contractor participation. GAO examined two indicators of contractor participation; reviewed State documents and proposed legislation; and interviewed State officials and U.S. firms that won NEC awards from 2001-2007.

What GAO Found

State received at least two bids--the legislatively specified minimum for adequate competition--for 60 of the 61 NEC projects it awarded from 1999-2008, and received three or more bids for at least 49 of the 61. Nonetheless, there was a statistically significant decline in the number of bids per NEC project from 2002 to 2008. GAO also found that the number of firms prequalified to bid on NEC projects also declined during this period. While many factors could affect contractor participation, GAO found the declines in the number of prequalifying firms and bids received were due, in part, to rising construction costs, which made it more difficult for some firms to meet qualification criteria. In addition, officials from five firms cited insufficient profits and State management practices as reasons for their recent withdrawals from the program. State has not systematically assessed the need for, or the possible outcomes of, its legislative proposal that would open competition for NEC awards to construction firms that cannot meet current qualification criteria. Although State identified several factors it believed reduced contractor participation, it has not assessed whether a sufficient number of contractors capable of meeting current requirements exists or how its legislative proposal would affect the NEC program. Specifically, State has not assessed the potential benefits or identified the potential risks of its legislative proposal, and has not stated how the risks would be mitigated. Absent these analyses, it is unclear whether the proposed amendment, including its December 2008 revision, would benefit State's embassy construction program. Contractors interviewed by GAO cited various incentives and challenges that affected their decision to participate in the NEC program. Although making profits was cited as the primary incentive for participating, contractors reported losing money on 42 percent of the contracts they performed. Contractors also cited several significant challenges that affected their decisions to submit contract proposals, including meeting State's shortened construction schedules, supplying labor and material to remote locations, finding and retaining cleared American workers, managing financial constraints, and dealing with foreign governments. Firms also expressed concerns with State's processes, including unclear solicitation documents and contract requirements, laborious design reviews, and State's 2001 decision to end formal partnering relationships with contractors. State has made several recent efforts to encourage contractors' participation in the NEC program. State has begun new outreach efforts to improve relations with contractors, and undertaken several changes to its management practices and organizational structures, including lengthening project schedules, improving clarity of contract requirements, and establishing a project management group to provide coordination and oversight throughout each phase of a project. While these changes address some contractor complaints, their full effects may not be apparent for a number of years.