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Office of Space Renovation
Audit Report No. 221
December 28, 1994
The Securities and Exchange Commission (SEC) was given independent leasing authority by the SEC Authorization Act of 1990 and established its Office of Space Renovation (OSR) in 1991. Since receiving this authority, SEC has renewed leases, acquired leases previously entered into by the General Services Administration (GSA), or leased new space for its 11 regional and district offices, 2 headquarters offices, and various storage facilities. Annual lease costs total $29.7 million. Renovation costs on 15 separate projects total $13.4 million.
The Office of Inspector General (OIG) contracted with Cotton & Company to evaluate the management controls in place to determine if they provide reasonable assurance that contract and lease administration practices comply with appropriate laws, rules, and regulations and are efficient and effective.
RESULTS IN BRIEF
Since receiving independent leasing authority, OSR has obtained desirable space for all regions and headquarters offices at competitive rates, including modern voice and data telecommunications systems. Being a relatively new function, comprehensive policies and procedures have not been developed; as a result, a number of problems have been encountered.
PRINCIPAL MANAGEMENT CONTROL ISSUES
In carrying out its largest project to date, 7 World Trade Center in New York, in anticipation of new legislation, built more office space than needed for current staffing; carried out the project without signed contracts; used landlord funds to purchase furniture and equipment; supplemented landlord funds with unspent year-end appropriated funds; and maintained incomplete and unorganized project records.
Our principal recommendation, with which OSR concurred, is that OSR enhance its controls by developing a comprehensive set of regulations to assist it in resolving issues efficiently and effectively.
MANAGEMENT COMMENTS AND OIG'S RESPONSE
We met with SEC officials for an exit briefing on October 18, 1994, and later obtained informal written comments transmitted to us on November 1, 1994.
While these officials concurred in the need for a comprehensive set of regulations and guidelines for leasing and renovation, they did not agree with our findings. Their response to the draft report and our comments are incorporated in the body of this report.
REPORT ON MANAGEMENT CONTROLS OF OFFICE OF SPACE RENOVATION
SEC conducts its business operations in 11 regional and district offices and 2 headquarters offices. Each office, plus designated warehouse space, is leased. The SEC Authorization Act of 1990 provided independent leasing authority:
Not withstanding any other provision of law, the Commission is authorized to enter directly into leases....and shall be exempt from any General Services Administration [GSA] space management regulations or directives.
OSR began in 1991 to carry out leasing operations pursuant to the SEC Authorization Act of 1990.
Since receiving its independent leasing authority, all SEC offices have renewed leases, acquired leases previously entered into by GSA, or leased different space involving varying levels of renovation or preparation before occupancy. SEC was considering a new headquarters lease during our review. Total current annual lease costs are nearly $29.7 million.
When entering into new leases for office space, construction funding, called Tenant Improvement Allowances (TIA), is provided by the landlords to pay for renovations and configuration changes required to accommodate SEC. Since assuming independent leasing authority, TIA funds for 15 separate projects totaled $13.4 million. These improvements represent sizeable investments and, therefore, require adequate internal, fund, and management controls. These controls, as defined by the Federal Managers' Financial Integrity Act (FMFIA) of 1982, should be designed to provide reasonable assurance that funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation.
OBJECTIVES, SCOPE, AND METHODOLOGY
The SEC Office of Inspector General (OIG) contracted with Cotton & Company to evaluate OSR's management controls to determine if they
provide reasonable assurance that contract and lease administration practices comply with appropriate laws, rules, and regulations and are efficient and effective.
Based on survey work, which we conducted to gain an understanding of SEC's leasing policies and practices, we developed and carried out the following procedures and methodologies:
1.Interviewed SEC personnel in OSR, Internal Audit, Office of Comptroller, and SEC's New York Regional Office.
2.Interviewed GSA leasing specialists, General Accounting Office (GAO) personnel in the GAO New York Regional Office, and the following representatives of the 7 World Trade Center project:
- Silverstein Properties, Inc. (Landlord)
- Ambassador Construction Co., Inc. (General Contractor)
- Project Control Group, Inc. (Subcontracted Project Director)
- SEC's Private Attorney
3. Reviewed SEC regulations and enabling legislation, Federal Acquisition Regulation (FAR) provisions, Office of Management and Budget (OMB) Circulars A-11, A-34, A-123, and A-127, OMB Bulletin No. 93-09, Congressional Record, Comptroller General Decisions, and GSA guidelines and procedures.
4. Reviewed SEC's lease files.
5. Reviewed 7 World Trade Center plans, drawings, Tenant Work Agreement, Lease Agreement, correspondence, and document file
6. Compared offices and occupancy characteristics depicted in the 7 World Trade Center plans and drawings with the New York Regional Office on-board staff and hiring ceilings.
Our effort focused primarily on the 7 World Trade Center project, because its size and complexity was deemed to be most comparable to the impending SEC headquarters project and, as such, was expected to provide valuable lessons.
We performed our review from May 2 through August 19, 1994, in accordance with generally accepted Government auditing standards.
PRINCIPAL MANAGEMENT CONTROL FINDINGS
Since being established, OSR has obtained desirable space (Class A, the highest class) for the regions and headquarters (the Operations Center), at competitive rates. The space built-out includes modern void and data telecommunications systems. OSR's accomplishments are noteworthy given the tight time frames under which it worked and the newness of the SEC's leasing program.
Our principal recommendation is that OSR enhance its controls by developing a comprehensive set of regulations. Because OSR has been in operation a relatively short time, written guidance has not yet been developed.
Comprehensive regulations will assist it in resolving issues efficiently and effectively. We provide examples below of the kinds of issues that the guidance should cover, based upon OSR's experiences to date.
Management control over the space planning process is basic to the efficient acquisition of minimum essential space requirements. These space requirements should be based on staffing permitted by current appropriations or authorizations and should not include future programs until such future programs have been approved by OMB.
7 World Trade Center Exceeded Initial Space Requirements
SEC initially considered building 200 offices and support areas on the 11th and 12th floors of 7 World Trade Center. Of the 200 offices, 40 were shared by junior examiners, in recognition that examiners would be in the offices only part time. Double occupancy by journeyman-level staff and below is common in Government and certain private-sector businesses, particularly accounting and auditing firms whose staff spend most of their time away from their offices, as do SEC's examiners.
The 200 offices initially planned could have met SEC's near-term office needs, for the 239 professional staff, including expansion, with about 53,000 of the nearly 66,000 square feet of usable floor space on the 11th and 12th floors, leaving about 13,000 square feet of available space for other needs.
Instead, SEC made a decision in 1991 to build 250 offices on the 11th and 12th floors in anticipation of new legislation that, if enacted, would have required a substantial increase in staffing. As of mid-1994, those new requirements had not materialized. In addition, it leased 8,180 square feet of additional space on the 13th floor to house a hearing room, 10 testimony rooms, and a public reference room. Expanding to the 13th floor was designed to provide better security from public access to SEC offices. Subsequently, SEC leased additional space on the 13th floor for records and files storage, a space requirement previously overlooked in space planning for the New York Regional Office.
SEC officials said that Commission policy is to plan for double occupancy. OSR disagreed that space requirements should be based only on staffing permitted by current appropriations, because this ignored the cost-effective business decision made in 1991 to incorporate the then-likely prospect that the Investment Advisors Act would be passed. OSR's view was that reasonable decisions to build additional space when it is most cost effective should not be discouraged.
While we do not necessarily agree that SEC's decision was cost effective, this situation exemplifies the difficulty of balancing increases in legislated demands on the SEC and efficient space utilization.
We believe this example illustrates the value of developing and applying sound management controls to ensure economy and efficiency in space planning.
Space planning regulations should incorporate criteria and guidance for estimating minimum essential space needs. These should include:
- Establishing and applying explicit space standards.
- Establishing expansion planning criteria that recognizes reasonable expectations, given existing budget realities.
SEC is exempted from GSA regulations. GSA's many years of experience in space planning, leasing, and tenant improvement projects have, however, produced a plethora of detailed policies, procedures, and guidelines. SEC should make maximum use of GSA's prior work in developing its own policies and guidelines.
SOLICITATION AND CONTRACTING
The 7 World Trade Center renovation project was completed without signed contracts. Although a prime contract and subcontracts were prepared, none was formalized by signatures of the parties involved. In addition, none of the 46 contract change orders was written or signed by a contracting officer, as required by the FAR 43.102, Policy.
In the event of a contract dispute, the Government's position could have been weakened without fully executed contracting documents.
The leasing specialist who acted as the contracting officer's technical representative exercised authorities reserved for contracting officers. For example, the specialist entered into contractual relationships, committed the SEC to significant sums of money, and verbally approved contract change orders.
In the event of a contract dispute, actions taken by the specialist might have been legally challenged. In addition, the specialist did not receive the benefits of advice from the SEC's contracting office on contracting matters.
OSR should develop regulations regarding legal contracting issues. The regulations should:
- Describe the respective roles and responsibilities of all relevant parties to SEC leasing and renovation actions (such as the contracting officer, the contracting officer's technical representative, and legal counsel).
- Provide for a legal review of significant contracting actions.
- Establish management controls to ensure compliance with the FAR and other contracting guidance.
TIA FUNDS CONTROL AND RENT-FREE PERIODS
Management controls over establishing TIAs and stipulating free-rent periods in solicitations are needed to guard against vulnerability to misuse and abuse.
These elements of leasing represent material dollar amounts and are vulnerable to misuse.
Significant Dollars Are Involved
TIAs and rent-free periods, when present, represent substantial dollar amounts. For example, the original Solicitation for Offers for 7 World Trade Center--SEC's highest dollar project to date--stipulated $5 million for the TIA and 24 months of free rent worth about $6.4 million.
Offerors, in turn, must take these two factors into account in determining their bid prices. Once a lease is entered into, SEC is obligated to pay higher lease costs over the remaining life of the lease (unless the lease contains a buy-out provision that is exercised).
SEC needs management, budget, and accounting controls to prevent overspending TIA amounts. In the 7 World Trade Center project, for example, the eventual cost of the project was $6,433,588, compared with the negotiated TIA funding amount of $5,561,231. According to the OSR Director, SEC could cover the extra costs, such as the $872,357 at 7 World Trade Center, by:
- Reducing the rent-free period.
- Increasing the rental rate (limited to $1 million over the life of the lease).
- Reprogramming appropriated funds.
These remedial actions, however, should be avoided to the extent possible through improved project management.
At the end of our fieldwork, $546,551 of the above extra costs had been paid through reprogrammed appropriations; $58,190 was offset by a utility company rebate for energy-efficient systems; $13,882 was absorbed by the landlord; and the remaining $253,734 had not been resolved.
Two other projects that experienced higher-than-planned TIA costs--Los Angeles by $551,385, and San Francisco by $83,075--were paid from appropriated funds.
TIA Funds Control Regulations Should Prohibit Imprudent or Improper Fund Use
We identified fund uses that we consider to be imprudent or improper purchasing furniture and equipment with TIA funds; and supplementing TIA funding with unobligated year-end appropriations.
Purchase Furniture and Equipment.
SEC used over $1 million of TIA funding to purchase furniture and equipment for the 7 World Trade Center offices. SEC's practice of using landlord funding to purchase furniture and equipment does not appear to have a legal precedent for a Federal agency or Government corporation. GSA leasing specialists stated that GSA does not include furniture and equipment in TIA projects, because GSA's client agencies budget separately for furniture and equipment. Moreover, this practice is not prudent, because it creates confusion about key management and control factors, such as who has ownership of the assets, is responsible for maintenance, has authority to replace the assets, and has property accountability.
The OSR Director stated that TIA funding is obtained for renovation and refurbishment and does not include telephones, computers, and furniture. He said all projects were completed efficiently, on time, and within TIA funding, and that surplus TIA funding in New York, Los Angeles, and San Francisco was used along with appropriated funds to acquire telephone systems, computers, and furniture.
We are unable to reconcile the Director's statement--which inferred that only residual TIA funding was used to purchase furniture and equipment--with project documents showing that purchases of furniture and equipment by the landlord were planned near the outset of the project.
The Comptroller stated that his office was unaware of any Comptroller General decision or Federal policy that prohibited OSR from using TIA funds for any of the expenses it deemed necessary. We believe, however, that available legal guidance might suggest otherwise. For example, SEC's independent leasing authority speaks only of leasing "space," with no inference to furniture and equipment. OMB budget guidance requires agencies to differentiate by object classification between rent expense and furniture and equipment. GAO's Principles of Federal Appropriation Law, among other relevant discussion, states that:
As a general proposition, an agency may not augment its appropriations from outside sources without specific statutory authority.
Supplement TIA Funds.
SEC obligated $65,000 in a Fiscal Year 1992 year-end transaction to supplement TIA funds.
On September 25, 1992, the OSR Director requested SEC's Comptroller to make an electronic transfer of $65,000 from reprogrammed appropriations to the 7 World Trade Center landlord's Bank of New York account. OSR instructed the landlord to apply the $65,000 as a "lump-sum construction progress payment." The contract, however, contained no provision for progress payments, as would have been required by the FAR. Moreover, at that point in the project, project costs were below budget, and no need existed for a "construction progress payment." Instead, the landlord kept these funds separate from TIA funds, and OSR later instructed the landlord to use the funds to purchase furniture.
TIA funds-control regulations should:
- Establish policy with regard to estimating, administering, and providing accountability for TIA funds.
- Prescribe a system for positive administrative control of TIA funds and rent-free periods (such as a funds tracking system) designed to track expenditures, maintain running balances, restrict expenditures to the amount of TIA funds available, and, when exceeding TIA funding cannot be avoided, establish strict guidelines, priorities, and approval processes for funding overruns.
- Provide procedures for reporting project results, including full accounting for TIA funds expended and explicit financial impact of negotiated rent-free periods on life-of-lease costs.
COMPLETE AND ACCURATE DOCUMENTATION
Management controls need to assure that records and files of all contractual actions are maintained to provide:
- A complete history of the leasing and renovation contract and subcontract transactions.
- Continuity in the event key personnel leave the agency.
Project files of the leasing specialist in charge of the 7 World Trade Center project were incomplete and unorganized. Consequently, reconstructing the project's complete chronological history from these files was not possible. Change orders were approved verbally and were not followed up with written or properly executed orders. Instead, approval was evidenced by the leasing specialist after the work was completed by signing the invoices submitted by the contractor for payment. In some cases, after having given verbal approval for project changes and after the projects were completed, the leasing specialist determined that the landlord, general contractor, architect, and engineer had made errors and omissions, and that SEC would not pay for some or all of these change orders. These latter change orders became the principal basis for disputed costs.
To complicate matters, the leasing specialist resigned from SEC prior to final settlement of the disputed project costs. Having maintained incomplete and unorganized project records, this individual's departure placed SEC at a decided disadvantage in settlement negotiations.
OSR should develop regulations covering contract documentation. The regulations should require files to be complete and organized in accordance with the FAR and other applicable guidance.
Further, regulations should provide adequate controls over files. For example, management could make spot checks of file documentation and review files before staff leave SEC. If necessary, leasing staff should be provided training in file maintenance. Their performance elements should include this issue.