Key Issues > High Risk > Department of Energy's Contract Management for the National Nuclear Security Administration and Office of Environmental Management
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Department of Energy's Contract Management for the National Nuclear Security Administration and Office of Environmental Management

This information appears as published in the 2015 High Risk Report.

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The Department of Energy (DOE), the largest civilian contracting agency in the federal government, relies primarily on contractors to carry out its diverse missions and operate its laboratories and other facilities. Approximately 90 percent of DOE’s budget is spent on contracts and large capital asset projects. We designated DOE’s contract management—which includes both contract administration and project management—as a high-risk area in 1990 because DOE’s record of inadequate management and oversight of contractors has left the department vulnerable to fraud, waste, abuse, and mismanagement. In January 2009, to recognize progress made by DOE’s Office of Science, we narrowed the focus of its high-risk designation to two DOE program elements—the Office of Environmental Management (EM) and the National Nuclear Security Administration (NNSA). Together, these two programs accounted for almost 63 percent of DOE’s fiscal year 2015 discretionary funding of more than $26 billion. In February 2013, we further narrowed the focus of the high-risk designation to EM and NNSA’s major contracts and projects, those with an estimated cost of $750 million or more, to acknowledge progress made in managing projects with an estimated cost of less than $750 million. Our 2013 assessment found that DOE satisfied 3 of the 5 criteria needed for removal from the High Risk List. This year, we did not observe similar progress in DOE’s management of major projects. EM and NNSA struggled to stay within cost and schedule estimates for most of their major projects.

DOE's Contract Management for the National Nuclear Security Administration and Office of Environmental Management

Since our high-risk update in February 2013, DOE met one of our five criteria for removal from the High Risk List based on its performance in managing its major contracts and projects. DOE met the criteria for demonstrating a strong commitment and top leadership support to improve contract and project management in EM and NNSA. DOE’s top leadership continued to be engaged and take action to address this high-risk area. DOE did not meet the criteria for having the capacity (people and resources) to resolve contract and project management problems. DOE, including EM and NNSA, took some actions to address capacity issues, but these actions did not ensure that the department has the capacity to fully address its contract and project management challenges. DOE partially met the criteria for having a corrective action plan that identifies effective solutions. In 2008, DOE developed a corrective action plan. However, we are concerned that DOE did not adequately identify root causes of its contract and project management challenges, because it has continued to identify additional corrective actions since it declared in 2011 that it had mitigated the root causes of its most significant contract and project management challenges. DOE did not meet the criteria for monitoring and independently validating the effectiveness and sustainability of corrective measures as DOE continued to propose new measures to address ongoing performance problems. In our 2013 high-risk update, we reported that DOE had met the criteria for demonstrating progress toward implementing corrective measures. This was largely a result of the progress DOE had made in managing projects with an estimated cost of less than $750 million (nonmajor projects). However, because of continuing cost and schedule problems with EM and NNSA major projects, DOE did not meet this criterion for this 2015 update.

DOE met one of our five criteria, partially met one, and did not meet three. The department met the criteria for demonstrating a strong commitment and top leadership support for improving contract and project management in EM and NNSA. DOE demonstrated top leadership attention to contract and project management challenges by initiating reorganizational efforts to better focus the department’s resources on these challenges. In 2013, DOE revised its organizational structure by establishing the Office of Management and Performance and by creating a new position of deputy under secretary to head this office. The deputy under secretary functions as the chief operating officer of the department and has responsibility for mission support organizations, including project management, procurement, and human capital. The office is responsible for overseeing EM, including its contract and project management activities. The Secretary of Energy demonstrated top leadership support by establishing, in 2013, the Contract and Project Management Working Group to analyze project management issues.

In December 2014, DOE shared with us a draft copy of a working group report that included 21 recommendations. According to the report, the key recommendations include, among others, (1) taking steps to ensure that DOE’s project management requirements are followed and making the provisions in all DOE project management guides mandatory, (2) having program offices analyze alternatives independent of the contractor organization responsible for constructing the facility, and (3) fully funding projects with an estimated cost of less than $50 million. Accompanying this report was a memorandum from the Secretary of Energy to all department elements. According to the memorandum, four of the report recommendations will be implemented immediately: the 3 key recommendations mentioned above as well as a recommendation to establish a project leadership institute to create and sustain a culture of project delivery excellence. The memorandum explains that the Secretary will also strengthen the Energy Systems Acquisition Advisory Board, which is responsible for providing recommendations to the Deputy Secretary of Energy involving capital asset projects with an estimated cost of $750 million or greater. Further, the memorandum explains that the Secretary is establishing a project management risk committee to provide enterprise-wide project management risk assessment and expert advice to the Secretary and others in the department. The risk committee is to review the report recommendations and report back, within 60 days, to the Secretary and senior leadership with a specific suggested action for the remaining recommendations.

DOE did not meet the criteria for having the capacity to resolve contract and project management problems. In its 2008 corrective action plan, DOE recognized that having sufficient people and other resources to resolve these problems was one of the top 10 issues facing the department. The plan said that the department lacked an adequate number of federal contracting and project personnel with the appropriate skills (such as cost estimating, risk management, and technical expertise) to plan, direct, and oversee project execution. In July 2013, DOE completed a review of its acquisition workforce. The review noted that DOE’s acquisition workforce, which includes contract specialists and officers for both contracts and financial assistance agreements, comprised less than 5 percent of DOE’s federal workforce, but was responsible for administering contract and other obligations representing over 90 percent of the agency’s annual budget. The review concluded that DOE has an extremely low number of contract specialists, and that this finding is most apparent when benchmarked against other agencies. This review helped to identify the extent to which the department has adequate people and resources to effectively manage its acquisition process. However, this review did not include the other key staff members normally included in the description of the acquisition workforce, such as program and project managers and contracting officer representatives.

In addition to this workforce review, DOE and NNSA have activities under way to improve the skills of the contracting and project management workforce. For example, in March 2014, the Secretary of Energy approved the implementation of the DOE Acquisition Fellows program, which is designed to recruit, acquire, develop, and retain contract specialists. NNSA officials explained that they have signed an agreement with the U.S. Army Corp of Engineers to provide support for, among other things, acquisition and project management. Similarly, NNSA awarded two contracts to industry experts to enhance federal oversight of its capital asset projects. NNSA officials explained that these contracts with experts are intended to fill the skills gap until NNSA can reach its goal of a developing a workforce by 2019 that is capable of planning and delivering capital asset projects within the performance baseline established for these projects.

The department partially met the criteria for having a corrective action plan that identifies effective solutions. However, we are concerned that DOE did not adequately identify the root causes of its contract and project management problems. In 2009, we found that DOE met the criteria because it had issued a corrective action plan in 2008 that identified what it considered to be the 10 most significant issues DOE faced in managing its contracts and projects. The department officially closed out most of these issues in 2011, stating in a report that the corrective actions it implemented from its 2008 plan had effectively mitigated most of the root causes of their most significant contract and project management challenges. However, the department has continued to identify additional corrective actions and recommendations to address its persistent contract and project management challenges. In 2010, DOE identified six additional barriers to improving contract and project management and developed corrective actions to address these barriers. In 2012, DOE issued a report stating that it has completed or partially completed the corrective actions necessary to address these barriers. In December 2014, as noted above, DOE officials shared with us a draft report that includes 21 recommendations to address continuing project management challenges. DOE intends to immediately implement four of the recommendations and has tasked the new risk committee with reporting back within 60 days with suggested actions for the remaining recommendations. However, it is unclear whether and when DOE will implement these remaining 17 recommendations. While these recommendations seem well intended, they are also part of an ongoing cycle of announcing new corrective actions, declaring them successful, and then identifying more actions. We are concerned that this cycle may indicate that the department has not adequately identified the root causes of its challenges. Further, it is unclear whether this latest round of recommendations will be any more successful than those that have preceded them.

The recent performance of EM and NNSA major projects did not meet the criteria for monitoring and independently validating the effectiveness and sustainability of corrective measures. Nor did it meet the criteria for demonstrating progress toward implementing corrective measures. As of December 2014, EM is managing seven major projects with estimated costs totaling as much as $49.4 billion. Four of these projects are in construction—the Salt Waste Processing Facility, the Waste Treatment and Immobilization Plant, the River Corridor Closure Project, and the K-25 Decontamination and Decommissioning Project—and the other three are in various stages of design. NNSA is managing three major projects with estimated costs totaling nearly $17 billion—one of these projects, the Mixed Oxide Fuel Fabrication Facility, is under construction, and the other two, the Uranium Processing Facility and the Chemistry and Metallurgy Research Replacement Nuclear Facility, are in the design phase. NNSA is also managing a multibillion dollar project to upgrade the B61 nuclear weapon. Since our 2013 high-risk update, EM and NNSA have continued to struggle with many of these projects, as the following examples illustrate:

  • In August 2014, DOE increased the estimated cost for completing EM’s Salt Waste Processing Facility by approximately $983 million and added an additional 6 years to the scheduled completion. The project is under construction at DOE’s Savannah River site in South Carolina. This increase raises the total project cost to approximately $2.3 billion and extends the estimated completion date to January 2021. Since the project began in 2001, its estimated cost has increased by approximately $1.9 billion and completion has been delayed by about 12 years.
  • In 2012 we reported on the status of the construction of EM’s Waste Treatment and Immobilization Plant (WTP) at DOE’s Hanford site in the state of Washington. Since then, EM has had difficulty in developing a reliable cost and schedule estimate for completing this project. In December 2012, we found that the estimated cost to construct WTP had tripled to $13.4 billion since its inception in 2000, and the scheduled completion date had slipped by nearly a decade to 2019. We recommended, among other things, that DOE (1) not resume construction on WTP until the design of certain facilities has been completed to the level established by nuclear industry guidelines; (2) ensure the department’s contractor performance evaluation process does not prematurely reward contractors for resolving technical issues later found to be unresolved; and (3) take appropriate steps to determine whether any incentive payments were made erroneously and, if so, take actions to recover them. DOE agreed with these recommendations. As of November 2014, DOE had partially implemented one of these recommendations by reviewing the incentive payments made to the WTP contractor. We have ongoing work examining the WTP, including DOE’s recent proposal to design and construct two new nuclear facilities as part of the WTP project. We expect to issue a report early in 2015. In addition, we reported in November 2014 that the underground nuclear waste storage tanks were in worse condition than previously understood. We recommended that, in light of the continued delays in the WTP project and the deteriorating condition of waste storage tanks, DOE should, among other things, update the schedule for retrieving waste from the tanks and assess alternatives for creating additional tank storage space, including building new tanks. DOE accepted the report’s recommendations and stated that the recommendations are well-aligned with DOE’s ongoing initiatives for the management of its waste storage tanks.
  • In 2011, we reported that the Department of Defense and NNSA had experienced difficulty in scoping the planned refurbishment of the B61 nuclear weapon. Since then, the estimated cost of the effort has increased. NNSA refers to this refurbishment as the B61 Life Extension Program (B61 LEP). In November 2014, we found that two program reviews of the B61 LEP effort both concluded that the cost estimate was inaccurate, with one review noting that the program will cost approximately $3.6 billion more than NNSA’s 2011 estimate of $6.5 billion. We also found that, in the absence of a DOE or NNSA requirement for programs to follow cost estimating best practices, managers for programs we reviewed, including the B61 LEP, used different processes in developing cost estimates. In regards to the B61 LEP, we found that NNSA managers developed an approach for developing cost estimates for the program using various sources, including DOE’s project management order and cost guide and our cost-estimating guide. This effort resulted in the management team producing a document that defines the strategy and provides guidance for completing the cost estimate for the B61 LEP. We reviewed this document and found that it did not stipulate that NNSA program managers or its contractors must follow any DOE or NNSA requirements or guidance for the development of a program cost estimate when developing the estimate for the B61 LEP.
  • In February 2014 we reported that DOE had forecasted a cost increase of approximately $2.9 billion and a schedule delay of about 3 years for NNSA’s Mixed Oxide (MOX) Fuel Fabrication Facility that is currently under construction at DOE’s Savannah River Site. This increase would raise the total estimated cost of the facility to approximately $7.7 billion and extend the completion date to 2019. Since the project began in 1997, the estimated cost of the project has increased by more than $6.3 billion and the schedule has been delayed by about 15 years. We found that, among other things, NNSA had not analyzed the root causes of the construction cost increases to help identify lessons learned and to help address the agency’s difficulty in completing projects within cost and schedule. We also found that NNSA’s most recent cost estimates for the overall plutonium disposition program, of which the MOX facility is a part, did not fully reflect all the characteristics of reliable cost and schedule estimates, placing the program at risk of further cost increases. We recommended that, among other things, DOE conduct a root cause analysis of the program’s cost increases and ensure that future estimates of the program’s life-cycle cost and cost and schedule for the program’s construction projects meet all best practices for reliable estimates. DOE generally agreed with our recommendations.
  • We reported several times in 2013 and 2014 on NNSA’s continuing difficulties in designing a new Uranium Processing Facility at DOE’s Y-12 National Security Complex in Oak Ridge, Tennessee. We found in July 2013 that key assumptions contained in multiple cost estimates proved to be inaccurate and were the primary factors that contributed to project cost increases. We found that the upper bound of the project’s cost range had increased from its initial 2004 estimate of $1.1 billion to $6.5 billion in June 2012. We found that the June 2012 estimate deferred significant portions of the original scope of the project. We also found that DOE estimated an additional $540 million in costs stemming from the need to modify the design of the facility by raising the facility roof by an additional 13 feet to accommodate the equipment needed in the facility. In December 2014, we found that DOE proposed a new project alternative consisting of building three, new smaller facilities within the $6.5 billion upper bound of the estimated cost range.
  • We reported in 2012 on significant cost increases associated with NNSA’s Chemistry and Metallurgy Research Replacement Facility at DOE’s Los Alamos National Laboratory in New Mexico. Since then, NNSA took action to reconfigure this project. This project was initially planned to include three subprojects—a laboratory (completed in 2010), installation of equipment for the laboratory (completed in 2013), and a nuclear facility. In March 2012, we found that the estimated cost of the overall project had increased from an initial estimate in 2005 of between $745 million and $975 million to a revised estimate in 2010 of between $3.7 billion and $5.8 billion. We also found that NNSA had decided to defer construction of the nuclear facility subproject by at least an additional 5 years. In August 2014, DOE cancelled the nuclear facility and approved a new strategy that includes renovating three existing facilities, including the laboratory that was completed in 2010. According to NNSA, with this new strategy the total cost of the project—including the completed cost for the laboratory and installation and equipment—will be between $2.4 billion and $2.9 billion, which is lower than the 2010 estimate. According to NNSA, this revised cost range includes the completed cost for the laboratory, the laboratory equipment installation, and the design costs expended to date for the nuclear facility.

In addition to examining these ongoing major projects, we conducted more broadly-focused reviews to identify potential corrective actions that may address some of DOE’s contract and project management challenges. We reported in 2013 and 2014 on DOE contract and project management issues involving (1) cost estimating for projects and programs, (2) the process DOE uses to select a preferred project alternative at the beginning of acquiring a capital asset—a process referred to as analysis of alternatives (AOA), (3) issues related to DOE’s use of management and operating contractors, and (4) financial management issues involving indirect costs and improper payments.

Cost estimating. In November 2014, we reported that DOE has a history of struggling to complete many of its major construction projects within initial cost and schedule estimates. Our report examined the extent to which DOE’s cost estimating requirements and guidance reflected best practices. We found that DOE and NNSA cost estimating requirements and guidance for projects and programs generally do not reflect best practices for developing cost estimates. We also found that, because DOE and NNSA do not require reviews of program cost estimates, the extent of weaknesses in program cost estimates is largely unknown. To address these issues, we recommended that DOE, among other things, revise its requirements and guidance for projects and programs to ensure DOE and NNSA and its contractors develop cost estimates in accordance with cost estimating best practices, and that independent reviews of programs are conducted periodically. DOE agreed with these recommendations. However, we noted in the report that DOE’s unspecified, open-ended date for responding to many of these recommendations may have indicated a lack of urgency or concern about the need to implement these recommendations.

Conducting AOAs. We found in December 2014 that several of DOE’s major construction projects had incurred significant cost increases and schedule delays, and that DOE was in the process of reassessing the originally selected project alternative for these projects. Our report assessed the extent to which DOE’s process for selecting project alternatives reflects best practices. We found that neither DOE’s AOA requirements nor its guidance conform to best practices, and therefore DOE cannot have confidence that applying its requirements and guidance would lead to reliable AOAs. To address these issues, we recommended that DOE incorporate all best practices into its AOA requirements. DOE agreed with this recommendation. However, we noted in the report that DOE’s unspecified, open-ended date for responding to this recommendation may have indicated a lack of urgency or concern about the need to implement these recommendations.

Management and operating contracts. As we reported in our February 2013 high-risk update, one of the six barriers DOE identified in its 2010 Contract and Project Management Summit was that the department needed to improve its ability to hold both federal employees and contractors accountable for project and contract performance and to award fees to contractors consistent with project performance, operational targets, or both. DOE reported that the department needs to improve its process for documenting contractor performance. In addition, as we reported in July 2012, NNSA did not thoroughly review contractor-provided budget estimates before it incorporates them into its proposed annual budget. We made several recommendations to address this situation. As of September 2014, NNSA has only partially responded to these recommendations. We have ongoing work that assesses the extent to which the department’s contractors have systems in place to accurately report performance and we expect to issue a report in early 2015.

Financial management issues. In June 2013, to address concerns about the proportion of NNSA weapons laboratories’ funds used for indirect costs, such as general and administrative costs that indirectly support a program, we reported that NNSA’s contractors differ in how they classify and allocate indirect costs. We found that different approaches are allowed by Cost Accounting Standards, but these differences limit the ability of DOE and the Congress to compare costs across laboratories. Recognizing the limitations of its current cost data, we noted that DOE was implementing an initiative to create a standardized report of costs, including indirect costs. We recommended that DOE clarify the uses of the data collected through the initiative, conduct periodic risk assessments, and establish requirements for benchmarking in its laboratory contracts, among other things. DOE generally agreed with these recommendations, and has since taken steps to (1) clarify the uses and limitations of the data collected through the initiative, and (2) conduct a baseline risk assessment of its oversight of contractor financial management activities and draft a process description for annual risk assessments.

In October 2013, we reported that in fiscal years 2008 through 2012, DOE performed about $2 billion annually of work for others (WFO) projects. Through these projects, DOE allows the capabilities of its national laboratories to be made available to perform work for other federal agencies and nonfederal entities. We found that DOE had not ensured that the WFO program requirements were consistently met and that DOE had not measured the extent to which WFO program performance is measured against program objectives and had not established performance measures to do so. We recommended, among other things, that DOE take steps to ensure compliance with project approval requirements and require laboratories to establish written procedures for charging costs to projects. DOE generally agreed with the report and its recommendations. In December 2014, DOE issued an updated WFO policy but this policy did not directly address any of the report’s recommendations.

In December 2013, we found that the estimates contained in NNSA’s fiscal year 2014 budget materials excluded most of the budget estimates for two of NNSA’s major construction projects—the Uranium Processing Facility and the Chemistry and Metallurgy Research Replacement Facility. To improve the utility of future budget estimates and address the misalignment between modernization plans and budget estimates, we recommended that the Administrator of NNSA include in future modernization plans at least a range of potential budget estimates for known construction projects. NNSA generally concurred with the recommendation and has taken action to implement it. For example, NNSA’s fiscal year 2015 budget materials included preliminary estimates for all three phases of the Uranium Processing Facility and the Chemistry and Metallurgy Research Replacement Facility or its alternative.

In December 2014, we reported that DOE developed a process to assess its programs’ risk of improper payments in fiscal year 2011 that included both a qualitative risk assessment and quantitative information on improper payments. Based on our evaluation of the department’s fiscal year 2011 risk assessment process, we found that (1) DOE did not prepare risk assessments for all of its programs and the quantitative information reported was not reliable; (2) DOE’s risk assessments did not always include a clear basis for the risk determination; and (3) DOE’s risk assessments did not fully evaluate other relevant risk factors. In addition, we found that in fiscal years 2012 and 2013, although not required, DOE directed its sites to prepare an overall risk assessment rating and information on the amount of actual improper payments identified through the normal course of business. However, we found that the information reported in fiscal years 2012 and 2013 constituted less information on improper payments risk than what was provided in fiscal year 2011 and provided limited insight into DOE’s risk of improper payments. We made recommendations to help DOE improve its ability to assess the risk of improper payments, make more effective use of DOE and contractor resources, and provide better transparency regarding DOE’s total known improper payments. DOE agreed with these recommendations.

DOE’s removal from the High Risk List requires meeting all five of our long-established criteria. DOE must sustain the leadership commitment it has already demonstrated to address its contract and project management challenges. In addition, DOE needs to commit sufficient people and resources to resolve its contract and project management problems. DOE must also ensure its corrective action plan and the initiatives needed to address underlying causes of contract and project management problems are up to date and address root causes. DOE will need to demonstrate progress in implementing corrective measures, especially measures intended to improve the performance of major projects. The department will also need to monitor and independently validate the effectiveness and sustainability of its corrective measures, particularly for major projects. Specifically, DOE must ensure that the corrective measures it is taking result in sustained improvements to the achievement of cost, schedule, and scope targets and that federal managers are receiving and validating accurate and reliable information from contractors that can be used to make decisions and to hold them and the department accountable for performance.

Looking for our recommendations? Click on any report to find each associated recommendation and its current implementation status.
Improper Payments: DOE's Risk Assessments Should Be Strengthened
http://gao.gov/products/GAO-15-36

GAO-15-36: Published: Dec 23, 2014. Publicly Released: Dec 23, 2014.
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