Department of Energy:

Subcontracting Practices

RCED-98-30R: Published: Nov 24, 1997. Publicly Released: Nov 24, 1997.

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Pursuant to a congressional request, GAO reviewed whether the Department of Energy (DOE) has policies or contract requirements that: (1) limit subcontracting between corporate affiliates or limit the amount a subcontractor can charge for profit when it contracts with a corporate affiliate; and (2) ensure that contractors and subcontractors make payments they owe to suppliers or other companies supporting their work. GAO noted that concerns were raised because of a subcontract Lockheed Martin Advanced Environmental Systems had with a corporate affiliate, Lockheed Martin Idaho Technologies Companies, for cleaning up a radioactive waste dump, Pit 9 at DOE's Idaho Falls site.

GAO noted that: (1) in certain instances federal and DOE procurement regulations place limits on subcontracting between a DOE contractor and its corporate affiliates; (2) the nature of DOE's controls over these transactions between corporate affiliates depends on the type of contract that exists between DOE and the prime contractor; (3) if DOE has a cost-reimbursement contract with the prime contractor under which the contractor generally is paid for all costs incurred, the regulations generally: (a) require that DOE have approval authority over transactions between corporate affiliates; and (b) prohibit amounts for profit that can be charged on such transactions if the contractor and subcontractor have the same corporate affiliation; (4) however, if DOE has a fixed-price contract with the prime contractor, the regulations do not call for imposing such controls on subcontracts because, unlike under cost-reimbursement arrangements, the overall costs to the government are not affected; (5) in the case of the Pit 9 project, even though the prime contract was a cost-reimbursement contract, DOE allowed the subcontractor to include an amount for profit; (6) DOE did so because at the time the Pit 9 subcontractor was initially selected, the management and operating contract for the Idaho Falls site was held by EG&G Idaho; (7) while DOE expects its contractors to conduct business in a responsible manner, it generally lacks the authority to require contractors or their subcontractors to make payments to suppliers or other companies supporting the work; (8) an exception exists for certain federal construction project contracts, for which federal law requires that the contractor post a payment bond to better ensure that the suppliers receive payments owed to them; (9) in the case of the Pit 9 project, DOE determined that the project was not a federal construction project because a private company would own and operate the facilities, therefore a payment bond was not required; (10) a supplier subsequently complained about not being paid by Lockheed Martin Advanced Environmental Systems for proposed design work on an analytical laboratory; and (11) DOE examined the complaint, in keeping with its general practice of looking into allegations that contractors are not performing responsibly, and determined that the complaint was not valid because no contractual arrangement existed between the two companies.

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