IN 1972 GSA AWARDED A CONTRACT FOR CONSTRUCTION OF A U.S. COURTHOUSE AND FEDERAL OFFICE BUILDING TO A SAN FRANCISCO CONTRACTOR. SHORTLY AFTER CONSTRUCTION BEGAN, PROBLEMS OCCURRED BECAUSE OF LARGE QUANTITIES OF WATER FLOWING THROUGH THE SITE. FOLLOWING BITTER DISPUTES WITH GSA, THE CONTRACTOR FILED CLAIMS FOR ADDED DELAYS AND COSTS ARISING FROM THE WATER PROBLEMS AND REQUESTED AN EXTENSION OF THE COMPLETION DATE. ADDITIONAL CLAIMS WERE FILED LATER, AND GSA FINALLY AGREED TO SETTLE IN 1976. THE SETTLEMENT AMOUNT, TOGETHER WITH LITIGATION EXPENSES AND OTHER CONSTRUCTION COSTS, ADDED OVER $9 MILLION TO THE PROJECT COSTS AND DELAYED COMPLETION BY ABOUT 19 MONTHS. THE COMPTROLLER'S OFFICE EXAMINED THE SETTLEMENT AGREEMENT, CONTRACTS, DEPOSITIONS, TRIAL TRANSCRIPTS, AND REPORTS RELATING TO THE CONTRACTOR'S CLAIMS. THIS DATA WAS SUPPLEMENTED BY INTERVIEWS WITH GSA PERSONNEL WHO HAD BEEN INVOLVED WITH THE PROJECT'S ADMINISTRATION AND THE LITIGATION. THE GAO REVIEW CONCLUDED THAT THE DECISION TO SETTLE RESULTED IN PART FROM GSA'S ACTIONS AND OMISSIONS DURING THE PROJECT'S DESIGN AND CONSTRUCTION. IN THE DESIGN PHASE, GSA IGNORED RECOMMENDATIONS THAT ADDITIONAL SOIL TESTS BE CONDUCTED. AFTER CLAIMS WERE FILED, GSA MADE SEVERAL CONCESSIONS TO THE CONTRACTOR THAT DAMAGED ITS CLAIMS DEFENSE, INCLUDING GRANTING A DELAY AND HIRING AN INDEPENDENT EXPERT WHOSE REPORT CRITICIZED GSA ACTIONS. THE TIME DEVOTED TO ATTEMPTING TO SETTLE THE CONTRACTOR'S INITIAL CLAIMS AND PREVENT THE REPORT'S RELEASE DELAYED PREPARATION OF AN ADEQUATE DEFENSE. BY THE TIME OF THE TRIAL, GSA COULD NOT ORGANIZE SUFFICIENT LEGAL, FINANCIAL, AND TECHNICAL SUPPORT FOR A STRONG DEFENSE AND OPTED TO SETTLE. THE APPENDIXES CONTAIN A LETTER TO GAO FROM THE HOUSE COMMITTEE ON GOVERNMENT OPERATIONS, A DESCRIPTION OF THE CONTRACTOR'S CLAIMS, GSA'S ESTIMATE OF THE GOVERNMENT'S LIABILITY IF CLAIMS HAD BEEN LITIGATED, SCHEDULE OF CHANGE ORDERS DURING THE CONSTRUCTION OVER $20,000, AND PRINCIPAL GSA OFFICIALS RESPONSIBLE FOR ACTIVITIES DISCUSSED IN THE REPORT. (MJM)