GAO was asked to examine the policies used by the Tennessee Valley Authority (TVA) in determining whether to contract for construction or to perform the construction in-house. GAO was asked to determine: (1) whether TVA has a policy whereby the costs of using its own employees versus the costs of using private contractors for construction projects are compared; (2) if TVA has such a policy, whether it is used on all projects, what criteria are used to determine the least costly approach, and if they are reasonable; (3) how TVA calculates overhead, if administrative costs are included in comparisons, and how this cost allocation compares with private industry or other Government construction projects; and (4) what factors TVA should consider in developing a method for comparing costs.

GAO found that, while TVA has historically used in-house staff for most of its design and construction work, it does not have a procedure for comparing the cost of building a project using its employees to the cost of using a private contractor. TVA does not have a policy requiring comparisons to be routinely made and does not believe it is subject to regulations requiring such comparisons. TVA officials stated that unwritten factors are routinely considered in the decisionmaking process and that overhead costs are not included in most partial project or subproject estimates. GAO added overhead costs to the comparisons and found that they were insignificant; however, these omissions indicated that standard estimating procedures are needed. Evaluation of some of the cost comparisons performed by TVA did not show that construction by contract is more economical in general than in-house construction.