____________________________________________________________________________
___
Title: Department of Energy Contract Management
Subtitle:
Report No.: GAO/HR-93-9 Date: December 1992
____________________________________________________________________________
___
Author: United States General Accounting Office
Addressee: High-Risk Series
This file contains the text of a GAO report. Delineations within the text
indicating chapter titles, headings, and bullets are preserved. No attempt h
as
been made to display graphic images or pagination of the typeset report.
Footnotes appear in brackets at the reference point in the text. Underlined
text is indicated by underscore characters (_Introduction_). Superscript
characters are preceeded by a backslash (\a). Figures may be omitted or
replaced with tables. Tables may not resemble those in the printed version.
A printed copy of this report may be obtained from the GAO Documents
Distribution Facility by calling (202) 512-6000 or faxing your request
to (301) 258-4066 or writing to P.O. Box 6015, Gaithersburg, MD 20877.
____________________________________________________________________________
___
Overview
- The Problem
- The Causes
- GAO's Suggestions for Improvement
DOE Contracting
DOE's Oversight of Contractors Is Weak
- Controls Over Contractors' Operations and Activities Are Weak
- DOE Has Not Provided Needed Contract Administration
- DOE Lacks Essential Information to Make Decisions
- Improving Contract Management Is Critical for Future Environmental
Cleanup
Contract Provisions Weaken DOE's Control
- Nonstandard Contract Clauses Increase Costs
- DOE's Administration of Award and Management Fees Is Problematic
DOE's Contracting Changes Will Take Time and Commitment
- Change in DOE's Culture Acknowledges Fundamental Problems
- Initiatives Are Designed to Increase Contractor Oversight and
Accountability
- Initiatives Raise New Challenges
Conclusions and Action Needed
Related GAO Products
High-Risk Series
- Lending and Insuring Issues
- Contracting Issues
- Accountability Issues
Office of the Comptroller General
Washington, DC 20548
December 1992
The President of the Senate
The Speaker of the House of Representatives
In January 1990, in the aftermath of scandals at the Departments of Defense
nd Housing and Urban Development, the General Accounting Office began a
special effort to review and report on federal government program areas that
we considered "high risk."
After consulting with congressional leaders, GAO sought, first, to identify
areas that are especially vulnerable to waste, fraud, abuse, and
mismanagement. We then began work to see whether we could find the fundament
al
causes of problems in these high-risk areas and recommend solutions to the
Congress and executive branch administrators.
We identified 17 federal program areas as the focus of our project. These
program areas were selected because they had weaknesses in internal controls
(procedures necessary to guard against fraud and abuse) or in financial
management systems (which are essential to promoting good management,
preventing waste, and ensuring accountability). Correcting these problems is
essential to safeguarding scarce resources and ensuring their efficient and
effective use on behalf of the American taxpayer.
This report is one of the high-risk series reports, which summarize our
findings and recommendations. It describes our concerns over systemic contra
ct
management weaknesses in the Department of Energy. It focuses on the
Department's failure to adequately oversee the contractors that it relies on
to manage and operate the nuclear weapons complex and national laboratory
network. The report delineates the consequences of an approach to contract
management based on noninterference in contractors' activities. It also
discusses GAO's suggestions to the Secretary of Energy for improving contrac
t
management and reducing risk.
Copies of this report are being sent to the President-elect, the Democratic
and Republican leadership of the Congress, congressional committee and
subcommittee chairs and ranking minority members, the Director-designate of
the Office of Management and Budget, and the Secretary-designate of Energy.
Fundamental contract management weaknesses in the Department of Energy (DOE)
have led to widespread mismanagement of federal property and funds. In
response to calls from us and others for increased oversight, DOE has taken
positive steps toward reforming its contract management. In particular, the
Department's leadership has begun to instill a new organizational culture th
at
acknowledges management shortcomings.
DOE's approach to contract management dates back to the Manhattan Project of
World War II, when the federal government sought to obtain private industry'
s
participation in dangerous and uncertain activities by giving contractors wi
de
latitude in operating the government's weapons research and production
facilities. Under the veil of national security, contractors operated largel
y
without oversight or financial risk.
DOE recognizes that this lenient approach to contract management has placed
at
risk the government's multibillion-dollar annual investment in contractors'
services. The Department's recent reforms are designed to give contractors
more incentive to act responsibly and at the same time to increase DOE's
oversight of contractors' activities. Changing an approach to contract
management that has led to so many problems will, however, take time and
leadership.
============================================================================
===
THE PROBLEM
DOE is the largest civilian contracting agency in the federal government,
providing employment to about 140,000 contractor personnel. About $15.6
billion of DOE's $19 billion procurement budget for fiscal year 1991 went to
35 contractors working under 52 contracts for management and operations. The
se
contractors design, test, develop, and produce the nation's nuclear weapons;
manage DOE's national laboratories; and conduct research in energy and
science.
DOE's contracting approach has led to contracts that have virtually tied DOE
's
hands, requiring DOE to reimburse contractors for money and materials that t
he
contractors' own employees have stolen and for fines that the contractors ha
ve
incurred by violating environmental laws. We have identified substantial
evidence of the systemic nature of DOE's contract management problems,
finding, for example, that 10,000 secret documents were missing from a nucle
ar
weapons facility and that subcontracting costs for nuclear waste containers
had tripled. Similarly, DOE's Inspector General (IG) found that requirements
for congressional approval had been circumvented to obtain funding for an
unauthorized construction project. In addition to these costs, the long-term
effects of DOE's contract mismanagement and emphasis on production--the
environmental, safety, and health problems at DOE's nuclear weapons
complex--are now estimated to cost at least $160 billion to restore and
correct. Since DOE will have to rely heavily on contractors for the cleanup
effort, the need for wholesale improvements in DOE's contract management
remains urgent.
============================================================================
===
THE CAUSES
Because DOE's management and operating contracts provide few incentives for
contractors to operate cost-effectively, DOE needs to control costs carefull
y.
However, weak oversight remains one of the Department's fundamental
contracting problems. DOE has not provided the staff and other resources
needed to monitor contractors' operations, and it does not have the manageme
nt
and financial information necessary for effective oversight. For decades, th
e
secrecy surrounding contracted activities has discouraged oversight.
Furthermore, until recently, the international competition for weapons
supremacy led DOE to emphasize production over environmental, safety, and
health considerations.
Compounding DOE's contract management problems are contracts that limit the
Department's control over contractors' operations. Nearly 70 percent of DOE'
s
management and operating contracts do not contain standard clauses that othe
r
federal agencies commonly use to protect the government's interests. DOE's
contracts give contractors excessive latitude, increase the government's
financial risk, and restrict the Department's ability to control costs. In
addition, DOE does not provide objective criteria for the award or managemen
t
fees that it pays contractors, leaving open the possibility of abuse in fee
determinations.
============================================================================
===
GAO'S SUGGESTIONS FOR IMPROVEMENT
DOE has made significant changes to strengthen contract management. New
contract provisions will require contractors to perform work only when
specifically authorized and will make contractors liable for improper
performance and accountable for improper behavior. DOE is also using award
fees to motivate improvements in contractors' environmental, safety, and
health performance.
Although DOE's progress is noteworthy, new reforms will require DOE to
substantially upgrade its oversight capabilities. Existing staff must be giv
en
the right skills to administer new provisions, and information systems must
be
developed and implemented to provide the kinds of data needed for the more
intensive oversight brought about by reforms. Changing a contract management
approach that has developed over half a century is certainly not easy.
Implementing reforms such as those DOE has begun will take years and will
require commitment from DOE's managers, employees, and contractors.
DOE CONTRACTING
----------------------------------------------------------------------------
---
During World War II, the Manhattan Engineer District of the U.S. Army Corps
of
Engineers--a predecessor to DOE--was responsible for developing and producin
g
the first atomic bomb. More commonly known as the Manhattan Project, the
enterprise was based on contractual arrangements among the War Department,
industry, and academic organizations and created an unprecedented approach t
o
contract management in response to the exigencies of war.
After the war, the newly created Atomic Energy Commission decided that speci
al
incentives were needed to retain the participation of its management and
operating contractors. Under a "philosophy of least interference," the
Commission gave its contractors virtual independence in managing and operati
ng
the sprawling 12-state network of weapons facilities. External oversight of
the contractors' activities was limited by national security concerns. The
Commission's lack of involvement in the operations of its own facilities was
reflected in contract clauses that relieved the contractors of virtually all
financial risk and exempted them from most federal and state environmental
laws. DOE carried over this contract management approach intact.
Today, DOE is the only cabinet-level office to contract out its major
missions. Providing employment to about 140,000 contractor and 20,000 federa
l
personnel, DOE is also the largest civilian contracting agency in the federa
l
government. In fiscal year 1991, about $15.6 billion of DOE's $19 billion
procurement budget went to management and operating contractors who not only
design, test, develop, and produce the nation's nuclear arsenal but also
manage the country's national laboratories and conduct basic research in
science and energy.
To manage and operate its facilities, DOE has entered into 52 fully
cost-reimbursable contracts with 35 contractors. These include multinational
firms and academic organizations, such as Westinghouse, General Electric,
AT&T, and the University of California. The University of California and AT&
T
have operated some of DOE's facilities continuously since 1943 and 1949,
respectively.
DOE's contracts are generally cost reimbursable because of the difficulties
in
estimating production and research work loads and costs in advance. DOE uses
primarily two types of contracts--
cost-plus-award-fee and cost-plus-management-fee. The majority of DOE's
contracts--28 out of 52--are held by profit-making firms and are
cost-plus-award-fee contracts. Fiscal year 1991 award fees ranged from
$673,000 to
$18 million. A cost-plus-award-fee contract compensates a firm for costs
incurred and provides an additional fee on the basis of DOE's evaluation of
the company's performance. Most of the remaining 24 contracts are with
nonprofit organizations and are cost-plus-management-fee contracts that, in
addition to reimbursing all costs, provide a supplemental fee agreed upon
during contract negotiations.
DOE'S OVERSIGHT OF CONTRACTORS IS WEAK
----------------------------------------------------------------------------
---
Fundamental weaknesses in DOE's contract management include insufficient
oversight of contractors and their subcontractors and lack of essential
management and financial information. Although cost-reimbursable contracts
require extensive monitoring and DOE relies heavily on them, DOE has not
provided the necessary oversight to hold contractors accountable and protect
taxpayers' funds. Furthermore, because DOE does not have essential managemen
t
and financial information, it does not have the complete picture of its
contractors' activities required for adequate oversight. Over time, these
weaknesses have contributed in no small measure to the deterioration of the
weapons complex as well as to the more insidious environmental, safety, and
health problems brought on by working for half a century with the radioactiv
e
elements used to produce nuclear weapons.
============================================================================
===
CONTROLS OVER CONTRACTORS' OPERATIONS AND ACTIVITIES ARE WEAK
Much of DOE's vulnerability to waste, fraud, abuse, and mismanagement stems
from long-standing inadequacies in the Department's oversight of contractors
'
operations and activities. Although DOE's "least interference" management
approach may have been appropriate at the end of World War II, it has led ov
er
time to negligible DOE control and limited contractor accountability. The
following examples demonstrate the systemic nature of the problem.
Although DOE's contracting approach was established partly in the interests
of
national security, DOE's limited oversight has not produced that security. F
or
example, the management and operating contractor at Lawrence Livermore
National Laboratory could not account for 10,000 of 600,000 secret documents
concerning nuclear weapons and laser technology. DOE's reviews of the
contractor's controls were inadequate to identify this breach of security.
DOE's weak oversight has also led to inefficient nuclear production decision
s.
According to an August 1991 DOE IG report, [ Footnote 1: _Departmentwide
Audit of the Visibility Over the Status of Nuclear Materials_ (DOE/IG-0296,
Aug. 30, 1991). ] reports of on-hand quantities of nuclear materials from
DOE's nuclear weapons laboratories contained inaccuracies ranging from 52
percent to 88 percent. The management and operating contractor for Sandia
National Laboratory, for instance, had requested about $500,000 worth of
uranium for its research needs when, in fact, the uranium was already in
inventory and had been declared excess. However, DOE's field offices had
delegated the preparation of inventory assessments to the management and
operating contractors with little or no guidance, involvement, or oversight
and had generally accepted the reports without question.
The subcontracting area provides further evidence of the systemic nature of
DOE's contract management problem. DOE has inadequately overseen its prime
contractors' subcontracting activities, which represented an expenditure of
about $5.7 billion in fiscal year 1991. DOE's failure to oversee a
subcontractor's quality control procedures and fabrication methods cost
taxpayers millions of dollars. Instead of monitoring the subcontractor's
operations from the start, DOE remained uninvolved while the subcontractor
designed, tested, and produced containers for transporting nuclear waste.
Consequently, DOE did not detect problems that led the Nuclear Regulatory
Commission to reject 24 of the containers after the prime contractor had pai
d
the subcontractor more than $8 million to develop and produce them.
Ultimately, DOE paid the prime contractor about $14 million for 15 container
s
that met the Commission's design criteria--or about the same amount that the
prime contractor had originally agreed to pay the subcontractor for 52
containers. This tripling of per-unit costs could have been avoided if DOE h
ad
monitored the subcontractor's activities from the start.
Furthermore, DOE's internal program for examining prime contractors'
subcontracting practices has identified numerous weaknesses, including
insufficient competition for subcontracts and circumvention of DOE's approva
l
of subcontracts. More than half of the reviews have identified questionable
sole-source procurement problems. Yet lack of competition in obtaining
subcontracts can limit the government's ability to obtain the best terms. Fo
r
example, at one management and operating contractor, about 19 percent of the
purchases that DOE reviewed did not contain adequate justification for
sole-source procurement. These subcontracts totaled about $445,000. Similarl
y,
at DOE's Waste Isolation Pilot Plant, all but one support service subcontrac
t
that DOE examined were sole source. Each subcontract started as an agreement
to purchase goods or services at a relatively small dollar value for a limit
ed
period and then grew into a long-term subcontract with a high dollar value.
Thus, none of these contracts was put out to bid to obtain the best price fo
r
the government.
============================================================================
===
DOE HAS NOT PROVIDED NEEDED CONTRACT ADMINISTRATION
Because DOE's contracts are primarily cost reimbursable, extensive governmen
t
oversight is required to preclude unnecessary contract costs. However, DOE
historically has not provided the needed oversight under its "philosophy of
least interference" in contractors' activities.
DOE now acknowledges the limited oversight it has provided in the past and t
he
effects of its inattention. The Secretary of Energy's 1991 Federal Managers'
Financial Integrity Act report cites inadequate staffing resources as a
material weakness, demonstrating DOE's belief that its mission is being
significantly affected by the shortages. At the DOE Albuquerque field office
,
only four staff members are responsible for financial management oversight o
f
seven management and operating contractors that received about $4.1 billion
in
fiscal year 1991 obligations. These same staff members are also responsible
for providing limited oversight of several other contractors. DOE has
recognized the inadequacy and has begun hiring additional staff to improve i
ts
contract oversight.
Furthermore, as the DOE IG reported in 1990, [ Footnote 2: _General
Management Inspection of the San Francisco Operations Office_ (DOE/IG-0290,
Sept. 20, 1990). ] staffing problems--including vacant positions, turnover
,
and recruiting difficulties--have limited the ability of DOE's San Francisco
field office to oversee key management and operating contracts for national
laboratory operations. However, the IG itself cannot ensure that contractors
'
costs are accurate, allowable, and reasonable. Staffing and resource
limitations have prevented the IG from completing the audits required under
the 5-year cyclical audit plan that the IG considers necessary to evaluate
contractors' costs.
============================================================================
===
DOE LACKS ESSENTIAL INFORMATION TO MAKE DECISIONS
Another fundamental weakness in DOE's contracting is lack of management
information. DOE spends about $1.6 billion annually to provide its executive
s,
managers, and staff with information to help them accomplish DOE's mission.
Yet DOE's managers still do not have management and financial information
essential for contract management. The following cases illustrate this
weakness.
Our ongoing work has found problems in DOE's financial reporting systems. At
the time that DOE's financial systems were designed, program managers were
focusing primarily on producing weapons rather than on overseeing contractor
s.
Now that DOE is attempting to strengthen oversight, these systems cannot
reliably produce the information needed in such areas as functional and
overhead costs. Thus, DOE lacks the information systems to gauge either the
status or the costs of its contractors' activities.
DOE's failure to systematically monitor contractors' financial reporting
practices has created an atmosphere conducive to financial irregularities. F
or
example, as the DOE IG reported in March 1991, [ Footnote 3: _DOE IG Report
on "Construction Carrying Account at the Savannah River Site"_ (ER-B-91-14,
Mar. 15, 1991). ] the operating contractors at DOE's Savannah River
production facility improperly charged a construction account (1) $13 millio
n
to fund a warehouse complex, directly circumventing congressional funding
authorization, (2) $33 million to purchase unauthorized capital equipment, a
nd
(3) $13 million to cover a shortfall in operating funds. According to the IG
,
these practices enabled the facility to avoid reporting potential funding
problems. At the time of the IG's audit, a Savannah River plant contractor w
as
conducting a wall-to-wall inventory of the capital equipment acquired throug
h
these improper procedures. Contractor officials estimated that as much as 25
percent of this equipment might be missing.
DOE also lacks adequate systems to budget for certain types of financial
commitments to contractors, called "uncosted obligations." These are
obligations that DOE has made to contractors for goods and services that hav
e
not yet been provided and for which no costs have been incurred. Although DO
E
ended fiscal year 1991 with approximately $9.7 billion in uncosted
obligations, it had not established a system for ensuring the analysis of
these obligations during its budget preparation. Without adequate informatio
n
on uncosted obligations and systematic reviews of its financial commitments,
DOE cannot guarantee that its budget requests represent the minimum amount
needed for annual operations.
============================================================================
===
IMPROVING CONTRACT MANAGEMENT IS CRITICAL FOR FUTURE ENVIRONMENTAL CLEANUP
DOE's fundamental contracting weaknesses have contributed to significant
environmental, safety, and health problems at DOE's nuclear weapons plants.
Because contractors will have a significant role in correcting these problem
s,
improvements in DOE's contract management will be critical. As DOE itself ha
s
admitted, its contractors have released radioactive contaminants at many, if
not all, of its weapons production sites. In addition, years of neglect have
made the complex obsolete and unsafe. We identified the effects of such
behavior years ago and began projecting a more than $100 billion price tag f
or
the cleanup.
Resolving safety issues at DOE facilities continues to be a significant
problem for DOE. Safety concerns led to DOE's closing much of the complex an
d
are an important reason why many key facilities remain closed. On the
environmental side, DOE's efforts to clean up the legacy of weapons producti
on
have been hampered by technological, compliance, and management problems tha
t
have led, in turn, to missed milestones and escalating budgets. In the quest
for weapons supremacy, DOE and its contractors placed an overriding emphasis
on weapons production and relegated environmental, safety, and health issues
to a minor role.
Over the years, contractors' concerns with meeting production quotas and DOE
's
inattention to oversight compounded DOE's environmental problems. Today, it
is
estimated that it will cost as much as
$160 billion to clean up the nuclear weapons complex and restore it to a saf
e
condition. Given that contractors will be receiving much of this money,
correcting DOE's contract management problems remains urgent.
CONTRACT PROVISIONS WEAKEN DOE'S CONTROL
----------------------------------------------------------------------------
---
The systemic weakness in DOE's contract management is also exhibited in the
contracts themselves. About 70 percent of DOE's management and operating
contracts do not employ standard contract clauses typically used by other
federal agencies. Thus, from the outset, DOE is contractually precluded from
exercising any authority it may have had to control contractors' activities.
In addition, DOE does not provide adequate criteria or justification for the
award and management fees that it pays contractors. Deviations in contract
clauses expose the government to greater financial risk, and inadequate
criteria or support for fees paid does not ensure that contractors are
objectively compensated.
DOE's extensive use of nonstandard contract clauses has restricted the
agency's ability to control costs. This fundamental weakness dates back to t
he
use by DOE's predecessor agencies of special incentives that they believed
were necessary to attract and retain contractors. Since then, DOE's
contractors have been reluctant to negotiate contracts with more stringent
clauses. Consequently, DOE's contracts with the University of California for
operating three national laboratories did not include the standard procureme
nt
clause that would require the contractor to obtain DOE's approval of vehicle
leases. Thus, the Lawrence Livermore Laboratory was able to lease 58 vehicle
s
from the university at commercial rates without obtaining DOE's approval.
Under the university's rates, DOE paid about $600,000 more for the vehicles
than it would have paid under government rates. When DOE directed the
laboratory to terminate some commercial leases to reduce its fleet size, the
laboratory did not comply, citing a contract clause requiring that DOE and t
he
university mutually agree on property management issues. Thus, the contract
that DOE had negotiated with the university prevented DOE from correcting th
is
waste of funds.
Nonstandard indemnification clauses in some of DOE's contracts have grown ou
t
of DOE's historical practice of indemnifying, or reimbursing, almost all
contractors' costs to compensate for the unique risks inherent in producing
weapons. These clauses could require DOE to reimburse contractors for all
costs, even those that it considered unreasonable, unless DOE could
demonstrate that the costs had been incurred through the willful misconduct
or
bad faith of corporate management. Consequently, as we reported in October
1989, a contract clause required DOE to reimburse a contractor for $420,000
in
money and materials that a contractor's employee had stolen. Such payments
reflect an irresponsible use of government funds.
============================================================================
===
DOE'S ADMINISTRATION OF AWARD AND MANAGEMENT FEES IS PROBLEMATIC
Another weakness in DOE's overall contract management is that DOE cannot
always support the millions of dollars in award or management fees that it
pays to contractors. Thus, contractors are sometimes rewarded for questionab
le
performance. This is because DOE's performance evaluations of contractors ar
e
poor and, in some cases, DOE has no criteria for determining its fees. In
1989, we pointed out problems in DOE's award fee process and recommended tha
t
DOE restructure the process to reduce the level of discretion exercised in
making a final award determination. The same problems we identified still
exist.
We found that the DOE Albuquerque field office did not tell its contractors
specifically what was expected of them or what significance would be attache
d
to specific accomplishments or failures. Without specific criteria, DOE had
no
sound basis for assessing performance and determining the contractors' award
fees.
We also found that a fee of nearly $2 million was awarded to the Rocky Flats
management and operating contractor even though a DOE review board's initial
rating of the contractor's performance had recommended no award at all on th
e
basis of established evaluation criteria. The review board raised 30
significant deficiencies, chief of which was the contractor's poor
environmental, safety, and health performance. However, a subsequent
management review discounted the review board's recommendation and
significantly increased the rating score to award a fee of $1.7 million. In
addition, the final determination did not explain what weight had been
assigned to environmental criteria, on which at least 51 percent of the awar
d
fee should have been based. These examples demonstrate that DOE still
exercises considerable discretion in making final award fee determinations
even when specific criteria exist.
Management fees paid to nonprofit organizations reflect similar problems. As
the DOE IG reported in September 1990, [ Footnote 4: _General Management
Inspection of the San Francisco Operations Office_ (DOE/IG-0290, Sept. 20,
1990). ] DOE lacks written criteria for establishing management fees.
According to the report, DOE and the University of California negotiated a
management fee of $12 million for the university to operate three weapons
laboratories. This fee was to be increased automatically each year by $250,0
00
for fiscal years 1987 through 1992. Although DOE did not provide detailed
justifications for these increases, DOE's contracts indicated that $8 millio
n
of the management fee was in lieu of reimbursing the university for indirect
costs. The university was required to spend "a significant portion" of the
remaining fee (which was about $4.75 million in fiscal year 1991) on
"complementary and beneficial activities." DOE was unable to identify these
activities," yet it paid the $4.75 million fee. Because DOE has no guideline
s
for these fees, it is virtually impossible to evaluate their reasonableness.
DOE's CONTRACTING CHANGES WILL TAKE TIME AND COMMITMENT
----------------------------------------------------------------------------
---
DOE acknowledges its contract management problems and has undertaken wholesa
le
changes in its relationship with its contractors. These changes include a ne
w
management approach toward contractors and efforts to negotiate contract ter
ms
and conditions that are more consistent with the government's interests. We
believe that DOE's actions are a step in the right direction but that it wil
l
take years to effect a cultural change in a 50-year-old business philosophy.
============================================================================
===
CHANGE IN DOE'S CULTURE ACKNOWLEDGES FUNDAMENTAL PROBLEMS
One of the major changes is the Secretary of Energy's overall objective to
instill a new culture within DOE. This cultural change acknowledges the
systemic nature of DOE's contract management problems and institutes reforms
in oversight and contractor liability.
According to the Secretary, the new culture embraces the development of (1)
compatibility between DOE's mission to produce materials for nuclear weapons
and to protect the environment--intended to replace almost 50 years of
production at environmental expense, (2) a workplace culture that demands
excellence and personal accountability--intended to replace DOE's ambiguous
lines of authority, and
(3) an atmosphere that welcomes openness and constructive criticism--intende
d
to replace DOE's practice of making decisions under extreme secrecy.
Furthermore, DOE identified contract management as a material weakness in it
s
three most recent Federal Managers' Financial Integrity Act reports to the
President and the Congress on internal control weaknesses. Thus, DOE has
acknowledged that its contract management significantly impairs the
fulfillment of its mission. In fiscal year 1992, DOE increased its staff,
including staff for contract oversight. DOE believes that these changes will
help address weaknesses in its contract oversight.
============================================================================
===
INITIATIVES ARE DESIGNED TO INCREASE CONTRACTOR OVERSIGHT AND ACCOUNTABILITY
To direct contractors' activities more effectively and gain more control ove
r
costs, DOE is attempting to change contract terms and conditions and create
new types of contracts. First, DOE is incorporating a new accountability rul
e
into its contracts with profit-making organizations. Under this rule, DOE wi
ll
(1) hold contractors liable for costs that could have been avoided by proper
contract performance and (2) increase contractors' potential award fees to
offset the increase in their financial risk. Second, DOE is attempting to
delete as many nonstandard contract clauses as possible, such as the mutuali
ty
clause with the University of California. Finally, DOE is introducing "task
order contracting," a practice that will require specific DOE authorization
for each task before money can be obligated or work can begin.
To increase contractors' compliance with environmental, safety, and health
standards, DOE now requires that at least 51 percent of the award fee be bas
ed
on these important measures of performance. Furthermore, DOE will deny the
entire award fee if performance in any of these areas is unacceptable. DOE h
as
also proposed a new contracting approach for cleaning up contamination at th
e
nation's nuclear weapons sites. This new approach would transfer cleanup
responsibilities at each DOE facility from an existing management and
operating contractor to an environmental restoration management contractor.
Goals include improving contractors' performance, lowering costs, achieving
more timely restoration, and increasing accountability. DOE intends to pilot
test this approach for at least 5 years at DOE's Fernald, Ohio, and Hanford,
Washington, sites beginning in late 1992 and early 1993.
============================================================================
===
INITIATIVES RAISE NEW CHALLENGES
We believe that DOE's efforts to address these contract management problems
are significant positive actions. However, the systemic nature of these
weaknesses--
insufficient oversight, lack of essential information, nonstandard contracts
,
and questionable fees--requires wholesale changes within DOE, including
commitment not only from DOE but also from its contractors, and will take
years to implement. Meanwhile, several problems whose solutions are crucial
to
achieving improved accountability and performance are not being fully
addressed.
DOE's new rule to make contractors more accountable, for example, requires
that DOE (1) incorporate accountability provisions into all existing
cost-plus-award-fee contracts, (2) develop operational procedures to identif
y
all avoidable costs, and (3) train staff to implement the rule in a timely
manner. Until DOE completes all of these actions, however, the management an
d
operating contractors may receive increased award fees without incurring any
additional liability.
Although DOE now requires that 51 percent of a contractor's award fee be bas
ed
on environmental, safety, and health performance, the fee determination
process is still largely subjective--as we found at Rocky Flats. DOE needs t
o
show and document clearly the relationship between a contractor's performanc
e
and the amount of the award fee. The more DOE reduces the level of discretio
n
in the award fee ratings, the more DOE will ensure that contractors are
compensated objectively.
To improve oversight, task order contracting requires increased resources fo
r
administering contracts and estimating costs. Although DOE is increasing its
staff, it is still unknown whether DOE will allocate sufficient resources to
this area. In addition, neither DOE nor its contractors have developed
adequate cost-estimating systems. Furthermore, DOE has not yet developed its
own cost estimates for task orders and will therefore need to rely on
estimates developed by contractors to negotiate cost, schedule, and
performance milestones.
The environmental restoration management contractor approach carries over ma
ny
problems from existing management and operating contracts. For example, the
new contractor proposals state that site labor costs will not change. That i
s
primarily because the new contractors will be required to hire as many of th
e
existing management and operating contractors' staff as they can effectively
employ, at their present salary and benefit levels. Moreover, proposals do n
ot
specify how responsibility will be divided between DOE and the new contracto
rs
or how it will be shared with the existing management and operating
contractors. Overseeing new contractors will also require more and better
trained staff. Thus far, DOE has largely ignored training because it has
focused on selecting the new contractors.
Given these concerns and the systemic nature of DOE's contract management
problems, we plan to continue monitoring DOE's contracting through a variety
of assignments over the next several years. We will (1) assess the adequacy
of
DOE's corrective actions in addressing specific problems as well as DOE's
overall contract management approach and (2) identify additional actions tha
t
may be needed to correct these and other deficiencies in DOE's contracting
practices.
CONCLUSIONS AND ACTION NEEDED
----------------------------------------------------------------------------
---
DOE's contract management philosophy has put at risk billions of dollars in
yearly contractors' services. Spurred by strong congressional oversight and
recommendations from GAO, the DOE IG, and others, DOE has begun to make
wholesale contract management reforms. Increased audit oversight, new award
fee criteria, task order contracting, and strengthened contract clauses are
steps in the right direction.
These reforms are directed at giving contractors more incentive to act
responsibly while at the same time increasing DOE's oversight of contractors
'
activities. Changing a contract management approach that has become so
ingrained, however, will not be easy. It will take a significant leadership
effort, as well as years to implement.
As we change leadership, the new administration has an opportunity to build
on
the positive directions of the previous administration. Specifically, the ne
w
administration needs to continue the increased accountability required of
contractors. Also, improved information management systems and technical sta
ff
will be necessary to ensure such accountability. Finally, the new
administration should recognize that changes of this magnitude will take
long-term commitment and, therefore, sustained leadership to realize. These
changes will also require the concerted efforts of DOE's managers, employees
,
and contractors, as well as continued congressional oversight.
_Energy Management: DOE Has an Opportunity to Improve Its University of
California Contracts_ (GAO/RCED-92-75, Dec. 26, 1991).
_Energy Management: Tightening Fee Process and Contractor Accountability Wil
l
Challenge DOE_ (GAO/RCED-92-9, Oct. 30, 1991).
_Energy Management: Contract Audit Problems Create the Potential for Fraud,
Waste, and Abuse_ (GAO/RCED-92-41, Oct. 11, 1991).
_Energy Management: DOE Actions to Improve Oversight of Contractors'
Subcontracting Practices_ (GAO/RCED-92-28, Oct. 7, 1991).
_DOE Management: Improvements Needed in Oversight of Procurement and Propert
y
Management Practices at the Lawrence Livermore National Laboratory_
(GAO/T-RCED-91-88, Aug. 20, 1991).
_DOE Management: DOE Needs to Improve Oversight of Subcontracting Practices
of
Management and Operating Contractors_ (GAO/T-RCED-91-79, Aug. 1, 1991).
_DOE Management: Management Problems at the Three DOE Laboratories Operated
by
the University of California_ (GAO/T-RCED-91-86,
July 31, 1991).
_Nuclear Security: Property Control Problems at DOE's Livermore Laboratory
Continue_ (GAO/RCED-91-141, May 16, 1991).
_Nuclear Nonproliferation: DOE Needs Better Controls to Identify Contractors
Having Foreign Interests_ (GAO/RCED-91-83, Mar. 25, 1991).
_Nuclear Security: Accountability for Livermore's Secret Classified Document
s
Is Inadequate_ (GAO/RCED-91-65, Feb. 8, 1991).
_Nuclear Security: DOE Oversight of Livermore's Property Management System I
s
Inadequate_ (GAO/RCED-90-122, Apr. 18, 1990).
_Hazardous Waste: Contractors Should Be Accountable for Environmental
Performance_ (GAO/RCED-90-23, Oct. 30, 1989).
