National Nuclear Security Administration:

Laboratories' Indirect Cost Management Has Improved, but Additional Opportunities Exist

GAO-13-534: Published: Jun 28, 2013. Publicly Released: Jun 28, 2013.

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What GAO Found

The National Nuclear Security Administration’s (NNSA) management and operating (M&O) contractors differ in how they classify and allocate indirect costs at NNSA laboratories. Although different approaches are allowed by Cost Accounting Standards, these differences limit the ability to compare program costs across the laboratories. Recognizing the limitations of its current cost data, the Department of Energy (DOE) and NNSA are implementing the Institutional Cost Reporting initiative intended to create a standardized report of certain costs, including many indirect costs. However, DOE is uncertain how it will use the data gathered by this initiative, and these efforts may provide only limited improvements because the data will continue to only be reported at an aggregate level.

NNSA examines M&O contractors’ models for allocating indirect costs for compliance with Cost Accounting Standards’ requirements at least annually, which helps ensure accuracy. NNSA has identified instances when these models did not comply with these requirements, but NNSA has worked with M&O contractors to address these issues. NNSA generally relies on the M&O contractors’ internal audits, however, to assess whether M&O contractors’ day-to-day cost allocation practices conform to disclosed cost allocation models. NNSA reviews some summary data to independently assess day-to-day compliance with Cost Accounting Standards but does not conduct independent audits. DOE’s Office of Inspector General (OIG) has audit authority at NNSA laboratories. OIG officials stated that the frequency and scope for conducting audits to assess contractors’ compliance with Cost Accounting Standards should be based on the level of risk. However, NNSA and OIG officials and M&O contractors hold varying opinions regarding the level of risk that inaccurate indirect cost allocation practices at the laboratories pose. In the absence of formal, periodic risk assessments, NNSA may not have a well-documented basis for its decisions regarding the type, timing, and extent of future monitoring or oversight.

NNSA reviews M&O contractors’ cost data and other information to assess the reasonableness of their costs, including indirect costs. NNSA also uses other means to help ensure the reasonableness of these costs. For example, NNSA’s contracts require M&O contractors to regularly benchmark their costs to other contractors and industry. These requirements, however, do not specify the areas that should be examined, how frequently benchmarking should occur, and what process should be used for implementing any needed corrective actions. As a result, M&O contractor efforts to benchmark costs varied across laboratories.

Why GAO Did This Study

NNSA, a semiautonomous agency within DOE, oversees the nation’s nuclear security programs. M&O contractors manage NNSA’s facilities, including its national security laboratories––Lawrence Livermore, Los Alamos, and Sandia. Each year, M&O contractors spend billions of dollars to manage and operate these laboratories. Costs include both direct costs—which can be identified with a specific objective or program—and indirect costs, such as management, administrative, and facility costs. Federal Cost Accounting Standards give M&O contractors flexibility in how costs are classified as direct or indirect and allocated to programs.

GAO was asked to review M&O contractor indirect cost management. GAO examined (1) whether laboratory M&O contractors' practices differ for allocating indirect costs and, if so, how; (2) the extent to which NNSA ensures that laboratory M&O contractors’ allocated indirect costs are accurate; and (3) the extent to which NNSA ensures that laboratory M&O contractors’ indirect costs are reasonable. GAO reviewed NNSA and laboratory M&O contractor data and documents and spoke with DOE and NNSA officials and M&O contractors.

What GAO Recommends

GAO recommends DOE clarify the uses of the data gathered through the Institutional Cost Reporting initiative, conduct periodic risk assessments, and incorporate more specific requirements for benchmarking in its laboratory M&O contracts. DOE generally agreed with GAO’s recommendations.

For more information, contact David C. Trimble at (202) 512-3841 or trimbled@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: According to an official from DOE's Office of the Chief Financial Officer, which maintains the Institutional Cost Reporting (ICR) Initiative, DOE uses the ICR data for three purposes. First, these data are used to respond to inquiries from external parties like GAO, the Commission to Review the Effectiveness of the National Energy Laboratories (CRENEL), and Congressional committees. Second, DOE provides the ICR data collected from all management and operating contractors back to DOE Field Offices and management and operating contractors for their use in analyzing trends in their own data and that of their peers. Finally, DOE has also used ICR data as a starting point for additional DOE analyses into certain subsets of costs, such as pensions and travel costs.

    Recommendation: To help improve its ability to oversee M&O contractor costs, including indirect costs, for its laboratories and make more effective use of DOE and contractor resources, the Secretary of Energy should take--or, as appropriate, direct the Administrator of NNSA to clarify how data collected by the Institutional Cost Reporting initiative will be used.

    Agency Affected: Department of Energy

  2. Status: Closed - Implemented

    Comments: NNSA reported that its Office of Field Financial Management (OFFM) prepared a formal risk assessment for FY 2014, which considered M&O contractor internal audit results, external audit results, including OIG results/plans, and other information obtained through ongoing monitoring and oversight. OFFM has since instituted these risk assessments as a periodic and ongoing practice that will be completed each fiscal year, and monitored throughout the year. The formal risk assessment process was implemented in December 2013.

    Recommendation: To help improve its ability to oversee M&O contractor costs, including indirect costs, for its laboratories and make more effective use of DOE and contractor resources, the Secretary of Energy should take--or, as appropriate, direct the Administrator of NNSA to direct the Office of Field Financial Management (OFFM) to conduct formal, periodic risk assessments of M&O contractors' compliance with Cost Accounting Standards by using (1) laboratory M&O contractor internal audit results, (2) OIG audit results, and (3) other relevant information obtained through ongoing monitoring and oversight to provide a well-documented basis for its future monitoring and oversight, including determining the appropriate level of OIG audit assistance needed.

    Agency Affected: Department of Energy

  3. Status: Open

    Comments: In April 2017, the Director of NNSA Office of Policy issued guidance to NNSA Laboratory Field Office Managers to update contracts to include a new clause requiring laboratory contractors to submit a strategic plan every year in accordance with guidance. Part of the annual plan requires contractors to discuss the costs of doing business and cost-increase factors at the sites, including overhead dollars. The annual strategic plan is due to the NNSA Office of Policy by August 15 each year. This plan is expected to allow NNSA to conduct the benchmarking activities recommended by our report, which can then be considered in current and future laboratory contracts.

    Recommendation: To help improve its ability to oversee M&O contractor costs, including indirect costs, for its laboratories and make more effective use of DOE and contractor resources, the Secretary of Energy should take--or, as appropriate, direct the Administrator of NNSA to incorporate more specific benchmarking requirements into future laboratory contracts--similar to the benchmarking requirements used by DOE to assess and manage pension and post-retirement benefit costs--including which costs should be benchmarked, how frequently benchmarking should occur, and what process should be used to ensure corrective actions are taken, as needed.

    Agency Affected: Department of Energy

 

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