Building Innovation

n the fall of 1997, the huge project to renovate the Pentagon was in disarray. Construction was behind schedule, project staff struggled to communicate with each other, and cost overruns prompted Congress to slap a lid on spending. Five years later the project-the first major renovation of the 5.5-million-square-foot Pentagon since it opened in 1943-is on budget and on time, even after losing three years of construction work on Sept. 11.

The Pentagon Renovation Program's mandate is simple enough: Bring the nation's military headquarters into the 21st century. When the Pentagon was built during World War II, two out of three employees did not need telephones. The building has hundreds of overlapping information technology systems and an electrical system that has not met code since 1953. Maintenance employees are expert at patching these systems together, but failures still occur. During the Gulf War, an overloaded electrical cord sparked a fire in the operational headquarters of the Joint Chiefs of Staff. The room's sprinkler system put out the fire, but not before the office was flooded.

In 1993, Defense began a $3 billion, 20-year project to upgrade its crumbling headquarters under the management of the Army Corps of Engineers. The Corps planned to gut and then rebuild each of the Pentagon's five 1-million-square-foot "wedges" one at a time to minimize the number of employees that would have to be relocated. Defense soon linked additional construction projects to the renovation, including a remote facility for truck deliveries, a state-of-the-art fitness center, and a transit center that would move the entrance to the Pentagon subway stop away from the building. The Corps handled day-to-day management of these projects itself, supervising hundreds of contractors through a stovepiped management structure common in construction projects.

The results weren't pretty. Renovation teams missed most of their deadlines and Congress placed tight spending caps on the project in 1995 and 1996 because of cost overruns. In 1997, the Corps was poised to award a low-bid contract to renovate Wedge 1 when Defense officials brought in a new project manager, former NASA and Air Force contracting chief Lee Evey. He promptly suspended the award and restructured the contract so it was based on performance, not just cost. It was the start of a management strategy that would right the sinking project and turn heads in federal contracting and construction circles.

"Evey has literally changed the way the federal government should be looking at major construction projects," says Stephen Busch, who served as a judge for this year's Business Solutions in the Public Interest Awards and is a senior executive program analyst with Kepler Research Inc. of McLean, Va. "I think that is pretty impressive in a market segment that is steeped in tradition like construction."

Construction has been largely overlooked in the push for performance-based contracting, a technique where the government spells out the results it needs and leaves it up to industry to find the best way to achieve them. In 2001, the Office of Management and Budget exempted architecture and engineering and construction contracts from a governmentwide performance-based contracting target before it eventually put the entire requirement on hold.

More generally, construction firms are reluctant to try new contracting arrangements that could jeopardize profits. And the government is hesitant to specify performance standards for new buildings-the essence of performance-based contracting. Agencies are more comfortable providing builders with step-by-step instructions that prescribe the exact details of the building they want. The construction requirements for Wedge 1, for example, ran more than 3,500 pages and delved into minutiae such as where each electrical outlet should be located. Evey and his deputy, Michael Sullivan, trimmed the requirements for Wedges 2 through 5 to 16 pages.

Evey and Sullivan also pursued a series of other innovations simultaneously. In 1998, Sullivan directed a staff member to compile a "Top 10" list of innovative construction management techniques from some of the top government and private sector construction projects across the country. The Pentagon renovation team already was pursuing eight of these techniques, while no other project was trying more than two. One of the methods is the design-build acquisition approach.

In design-build projects, a single a contract is awarded both for the design and construction of a building. Popular in the private sector, design-build removes a step from the traditional contracting approach, which is known as "design-bid-build." Under the latter method, which is more common in government, an agency picks an architect to design a building, holds a competition to find a builder, and then starts construction.

Using design-bid-build on Wedge 1, the Army Corps' architect took eight months to draw up the plans, which had to be finished before the project could put out a solicitation. For Wedges 2 through 5, Evey and Sullivan switched to design-build and were able to start construction within two months of awarding a contract for all four wedges. "Design-build allows the construction to start earlier than if you decided to design it first," says Sullivan.

The design-build approach helps create a strong partnership between the contractor and the government, according to Sullivan. Since one firm is in charge of both design and construction, the builder has little reason to make costly changes to the design once construction has begun. To add another incentive, Evey structured the contract for Wedges 2 through 5 so that it covered only costs and materials, but allowed the contractor to earn an "award fee" of up to 10 percent of the contract value by meeting quarterly performance goals.

Because Evey was essentially asking firms to forgo profit if their performance slipped, some top contractors were reluctant to compete for the project. They were concerned about agreeing to subjective performance reviews and thought that the award fee would be cut if the project ever faced a funding shortfall. Sullivan repeatedly met with potential contractors over the course of six months to ease their fears. "We have gone the extra mile to gain their trust that they are going to get a fair evaluation," he says.

The $758 million contract for Wedges 2 through 5 eventually went to Hensel-Phelps, a Colorado-based construction firm that included no profit in their bid beyond what they could earn through the award fee. The company previously had won the contracts for the remote delivery facility and subway entrance projects with similar no-profit proposals.

The award fee gave Hensel-Phelps plenty of motivation. When the company found a $250,000 flaw in its design for the remote delivery facility, it paid for the repair itself to improve its performance rating.

Evey and Sullivan also used a tactic imported from the world of weapons systems acquisition: the use of integrated project teams to manage each phase in the renovation. The teams bring together all the design, construction and contracting expertise involved in the project, allowing many major problems to be resolved on site. Some of the teams are led by contractors. "We firmly believe the person who is most qualified for the job should have the job," says Sullivan. He adds that Pentagon acquisition officials have studied the process and determined that contractors are not performing "inherently governmental" work, which by law must be performed by federal employees. "They said we are what a federal organization will look like 10 years from now," says Sullivan.

Evey's management structure was put to the test on the morning of Sept. 11, when American Airlines Flight 77 slammed into the newly renovated Wedge 1 and portions of Wedge 2. After assisting with the recovery effort, Pentagon officials decided to rebuild Wedge 1 while proceeding with renovation of Wedges 2 through 5 and finishing the subway entrance project. Thanks to six-day workweeks and an incredibly motivated crew, Evey's team pulled it off, rebuilding the exterior of Wedge 1 in just nine months. While Sept. 11 gave the project a sense of mission, Busch says Evey's management approach made the achievements possible.

"You have patriotism, but I don't think that's the reason they're having the success that they've having," he says. "Evey has shown the government is willing to share best practices and listen to industry to find better ways to do things."

But Busch and others question whether the innovations of the Pentagon renovation effort can be transferred to other federal construction projects. The high-profile nature of the project made it easier to push the envelope on contracting methods. "Their business practices were limited to one set of circumstances," says Busch. While agencies such as the General Services Administration and Bureau of Federal Prisons have successfully used the design-build method, experts can point to no other construction project that also uses award fees and integrated project teams.

Sullivan believes these techniques can be harnessed by other agencies. "When I go out and speak, a lot of federal organizations say, 'Why can't we do that?' and my response is, 'You can,' " he says. But they will have to be willing to take a nontraditional approach. After describing the Pentagon renovation to a forum at Penn State University, Sullivan was approached by an official with Turner Corp., one of the nation's largest construction firms.

"He said the way you describe what you're doing it doesn't sound like you are in the federal government," remembers Sullivan. "It doesn't even sound like you are in the construction industry."