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GAO-13-686R: 

GAO: 
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

July 12, 2013: 

Congressional Committees: 

Nuclear Weapons: Factors Leading to Cost Increases with the Uranium 
Processing Facility: 

The Y-12 National Security Complex in Oak Ridge, Tennessee, is the 
National Nuclear Security Administration's (NNSA) site for conducting 
enriched uranium activities, producing uranium-related components for 
nuclear warheads and bombs, and processing nuclear fuel for the U.S. 
Navy.[Footnote 1] According to NNSA, the Y-12 plant's current enriched 
uranium operations (1) have an inefficient workflow due to the 
patchwork of facilities and equipment, (2) experience continually 
rising operations and maintenance costs and frequent outages and work 
interruptions due to facility age and deterioration, and (3) involve 
processes that could expose workers to radiological contamination, 
among other things. To address these issues, in 2004, NNSA decided to 
construct the Uranium Processing Facility (UPF).[Footnote 2] According 
to NNSA, the UPF will: 

* consist of a single, consolidated uranium processing and component 
production facility less than half the size of the existing Y-12 plant 
facilities; 

* reduce the costs of enriched uranium processing by using modern 
processing equipment and consolidated operations; and: 

* use new technologies and other features that provide better worker 
protection and environmental health and safety. 

The UPF is to be built adjacent to the Highly Enriched Uranium 
Materials Facility (HEUMF)--the nation's central repository for such 
material--and the facilities are to be joined.[Footnote 3] We reported 
in November 2010 that UPF had experienced significant cost increases. 
[Footnote 4] More recently, the upper bound of the UPF's cost range 
has increased from approximately $1.1 billion in 2004 to $6.5 billion 
in 2012. 

At the request of the Senate Appropriations Committee, Subcommittee on 
Energy and Water Development, and in accordance with the requirements 
contained in the National Defense Authorization Act for Fiscal Year 
2013, GAO is to report quarterly on the UPF.[Footnote 5] Our objective 
for this first quarterly report was to identify factors that 
contributed to UPF's cost increase.[Footnote 6] During April 2013, we 
provided your staff with our preliminary observations on the reasons 
leading to UPF's cost increases. The attached briefing slides include 
the information provided (see enclosure I), and this report formally 
transmits this information to you. To conduct our work, we reviewed 
pertinent cost estimate documents prepared by NNSA; the UPF 
contractor; and the U.S. Army Corps of Engineers (Corps). We visited 
the Y-12 plant to receive briefings, tour the current enriched uranium 
facilities, and interview NNSA and contractor officials; we also 
interviewed NNSA headquarters officials and officials from the Corps. 
The Corps conducted an independent cost estimate of the UPF in 2011. 

We conducted this performance audit from January 2013 to July 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

In summary, we found the following: 

* Overly optimistic NNSA assumptions about the UPF contained in 
multiple cost estimates prepared from 2004 to 2011 are the primary 
factors that contributed to its cost increase.[Footnote 7] Initial UPF 
cost estimates in 2004 and 2007 were largely based on the estimated 
cost to construct HEUMF because the facilities were assumed to be 
similar in form and design. However, NNSA designed the HEUMF as a 
storage facility for highly enriched uranium, in contrast to the more 
complex assembly/disassembly, processing, and machining operations 
that are to be housed in UPF. In addition, revised UPF cost estimates 
in 2010 and 2011 assumed that annual appropriations would not be 
subject to budget constraints. None of these assumptions proved to be 
accurate. 

* In June 2012, the Deputy Secretary of Energy approved an updated 
cost range for the UPF ($4.2 to $6.5 billion) and deferred significant 
portions of the original scope. According to NNSA documentation, this 
deferral was due, in part, to the UPF's increased cost estimate and to 
accelerate the completion of portions of the scope that were of 
highest priority. 

* In August 2012, the UPF contractor concluded that the UPF's roof 
would have to be raised 13 feet and that the start of construction 
would be further delayed. These factors resulted in approximately $540 
million in additional costs to the UPF and occurred because the 
contractor did not adequately manage and integrate the design work 
subcontracted to the four other contractors. Given these additional 
costs, the confidence in the cost estimate range approved in June 2012 
has been reduced, and it is not clear if the cost estimate range 
remains valid. 

For additional information on the results of our work, please see the 
briefing slides provided in enclosure I. While we are currently not 
making any recommendations for congressional consideration or agency 
action, we will continue to review UPF as required by the National 
Defense Authorization Act for Fiscal Year 2013. In addition, we have 
ongoing audits on NNSA major projects and cost-estimating practices 
and will make recommendations, if appropriate, based on these future 
reviews. 

We provided a draft of this report to NNSA for review and comment. In 
written comments (see enclosure II), NNSA's Associate Administrator 
for Management and Budget stated that, while our presentation was 
generally accurate with respect to the history of the UPF cost 
estimates, the agency believes the presentation does not reflect the 
efforts taken to improve UPF cost estimating and project execution. In 
its comments, NNSA provided several examples of completed and ongoing 
corrective actions, such as making significant organizational changes; 
applying dedicated resources to improve the evaluation of the UPF's 
cost estimate; and articulating expectations to its contractor 
partners and using the contract to hold the UPF contractor team 
accountable for deficient work, which the agency believes will improve 
UPF project management. Furthermore, in its comments, the Associate 
Administrator for Management and Budget stated that NNSA had corrected 
the contractor's cost estimating optimism bias and improved its risk 
management processes and are updating assessments of cost and impact 
as the UPF project design continues to mature. NNSA's comments stated 
that with these corrective actions in place, the agency believes that 
the cost baseline established at the next key project milestone will 
represent a credible basis for completing the project within the 
established cost. 

Evaluating the effectiveness of UPF-related corrective actions was 
beyond the scope of this work. We are encouraged by NNSA's stated 
efforts to improve its cost estimating and project management 
capabilities. It is possible that some of NNSA's stated actions, such 
as correcting the contractor's cost estimating optimism bias, could 
result in a more accurate cost estimate. However, there remains some 
uncertainty regarding UPF's cost estimate. As noted in our briefing 
slides, NNSA did not update the June 2012 range estimate to fully 
reflect the $540 million in additional costs associated with the need 
to raise UPF's roof 13 feet to ensure the processing equipment would 
fit into the facility (i.e., the space/fit issue). NNSA plans to 
complete its review and approval of a new official cost estimate 
during the next key project milestone in June 2014--approximately 2 
years after NNSA learned of the space/fit issue. As our briefing 
slides also discuss, several identified project risks remain and will 
require mitigation if they occur. Until the estimate is updated in 
June 2014, it is unclear how the agency's stated corrective actions, 
the $540 million in additional costs, and the remaining project risks 
will impact the new cost estimate. 

We are sending copies of this report to the Secretary of Energy, 
Administrator of NNSA, and the appropriate congressional committees. 
This report is also available at no charge on the GAO website at 
[hyperlink, http://www.gao.gov]. 

If you or your staff members have any questions concerning this 
report, please contact me at (202) 512-3841 or trimbled@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. GAO staff who 
made key contributions to this report were Jonathan Gill (Assistant 
Director), Patrick Bernard, Will Horton, Jason Lee, Timothy Persons, 
Cheryl Peterson, and Karen Richey. 

Signed by: 

David C. Trimble: 
Director, Natural Resources and Environment: 

Enclosures--2: 

List of Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable James M. Inhofe: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Dianne Feinstein: 
Chairman: 
The Honorable Lamar Alexander: 
Ranking Member: 
Subcommittee on Energy and Water Development: 
Committee on Appropriations: 
United States Senate: 

The Honorable Howard P. "Buck" McKeon: 
Chairman: 
The Honorable Adam Smith: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable Rodney P. Frelinghuysen: 
Chairman: 
The Honorable Marcy Kaptur: 
Ranking Member: 
Subcommittee on Energy and Water Development: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Enclosure I: 

Briefing on the Uranium Processing Facility: 
Factors Leading to Cost Increases: 

For Congressional Committees: 
April 2013: 

Introduction: 

The Y-12 National Security Complex in Oak Ridge, Tennessee, is the 
National Nuclear Security Administration's (NNSA) site for conducting 
enriched uranium activities, producing uranium-related components for 
nuclear warheads and bombs, and processing nuclear fuel for the Navy. 
NNSA is a separately organized agency within the Department of Energy 
(DOE). 

The site has received periodic upgrades, but NNSA officials said that 
support utilities, equipment, and buildings need to be modernized for 
the Y-12 plant to continue to meet its mission. 

According to NNSA, the Y-12 plant's current enriched uranium 
operations: 

* have an inefficient workflow due to the patchwork of facilities and 
equipment; 

* require materials to be transported between multiple buildings during
processing; 

* experience continually rising operations and maintenance costs and 
frequent outages and work interruptions due to facility age and 
deterioration; 

* do not meet a number of current regulatory and design standards, 
including those for protection against fire and natural occurrences, 
such as earthquakes or tornadoes; 

* involve processes that could expose workers to radiological 
contamination or other dangers; and; 

* require a significant number of security personnel to patrol a 154-
acre protected area. 

In 2004, NNSA decided to construct the Uranium Processing Facility 
(UPF).[Footnote 1] 

According to NNSA, the UPF will: 

* consist of a single consolidated uranium processing and component
production facility less than half the size of the existing Y-12 plant
facilities; 

* reduce the costs of enriched uranium processing by using modern
processing equipment and consolidated operations; and; 

* use new technologies and other features that provide better worker
protection and environmental health and safety. 

The UPF is to be built adjacent to the Highly Enriched Uranium Materials
Facility (HEUMF)--the nation's central repository for such materials--
and the facilities will be joined. Constructed from 2004 to 2009, 
HEUMF is responsible for the receipt, shipment, and interim and long-
term storage of current and projected inventories of highly enriched 
uranium. 

The upper bound of the UPF's cost range has increased from approximately
$1.1 billion in 2004 to $6.5 billion in 2012. 

Objectives, Scope and Methodology: 

At the request of the Senate Appropriations Committee, Subcommittee on 
Energy and Water Development, and in accordance with the requirements 
contained in the National Defense Authorization Act for Fiscal Year 
2013, GAO is to report quarterly on the UPF. 

Our objective for this first briefing was to identify factors that 
contributed to UPF's cost increase. Subsequent briefings will focus on 
technology readiness and risk management, among other things. 

To do this work we: 

* reviewed pertinent cost estimate documents prepared by NNSA, the UPF 
contractor, and the U.S. Army Corps of Engineers (Corps); 

* visited the Y-12 plant to receive briefings and tour the current 
enriched uranium facilities; 

* interviewed: 

- NNSA headquarters officials; 

- NNSA and contractor officials at the Y-12 plant; and; 

- officials from the Corps, which conducted an independent cost 
estimate (ICE) of the UPF in 2011. 

NNSA reviewed a draft version of this presentation for factual 
accuracy. NNSA provided technical clarifications, which we 
incorporated as appropriate. 

Scope and Methodology: 

We conducted this performance audit from January 2013 to April 2013 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Results in Brief: 

Overly optimistic assumptions contained in multiple cost estimates 
prepared between 2004 and 2011 are the primary factors that 
contributed to UPF's cost increase. Specifically: 

* initial UPF cost estimates were largely based on inaccurate cost 
estimates for HEUMF, and; 

* revised UPF cost estimates assumed that annual appropriations would 
not be subject to budget constraints. 

In June 2012, the Deputy Secretary of Energy approved an updated cost 
range and deferred significant portions of the original scope. 
According to NNSA documentation, this deferral was due, in part, to 
the project's increased cost estimate and to accelerate the completion 
of the highest priority scope. 

In August 2012, the contractor concluded that UPF's roof would have to 
be raised 13 feet, and the start of construction would be delayed, 
among other things. These factors resulted in approximately $540 
million in additional costs and occurred because the contractor did not
adequately manage and integrate the design work subcontracted to four 
other contractors. Given these additional costs, it is unclear if the 
cost estimate range approved in June 2012 remains valid. 

Background: 

In 1990, GAO designated DOE program management as a high-risk area
vulnerable to fraud, waste, abuse, and mismanagement. GAO's most 
recent high-risk list narrowed this focus to NNSA and DOE's Office of 
Environmental Management major projects (i.e., projects over $750 
million). 

DOE has taken steps to address GAO's concerns, including developing an 
order that defines DOE's project management principles and process: 
Order 413.38, Program and Project Management for the Acquisition of 
Capital Assets. NNSA is required to manage the UPF project in 
accordance with this order. 

DOE's order defines a project management process consisting of a 
series of management reviews and approvals, called "critical 
decisions" (CD), that are required to move a project forward from 
project planning and design to implementation. 

* CD 0: Approve mission need and a rough order of magnitude cost range. 

* CD 1: Approve an approach and preliminary cost range. 

* CD 2: Approve the performance baseline-defined as a project's cost,
schedule, and scope--and develop a definitive cost estimate. 

* CD 3: Approve the start of construction. 

* CD 4: Approve the start of operations. 

According to our cost-estimating guide, high-quality cost estimates 
are: (1) well-documented, (2) comprehensive, (3) credible, and (4) 
accurate.[Footnote 2] 

At CD 0 and CD 1, a cost estimate may be presented as a range. The 
estimate range (lower and upper bounds) is established by considering 
a risk analysis conducted by the project team. The upper bound of the 
cost range represents a scenario where there is a high likelihood of 
occurrence of the identified risks. 

At CD 2, a cost estimate is usually provided as a single point that is 
risk adjusted and captures the total cost to acquire the capital asset. 

In general, a cost estimate (range or point) includes: 

* the price and amount of resources (e.g., labor, commodities, etc.) 
needed to accomplish a scope of work, stated in constant dollars; 

* contractor controlled management reserve (i.e., "known unknowns"); 

* escalation costs that account for the effects of inflation between 
the time the estimate is prepared and when a given scope of work is to 
be performed; 

* contingency funds held at or above the government program office for 
items that are outside of the contractor's control (i.e., "unknown 
unknowns"); 

* confidence levels that determine the likelihood that a project can 
be completed at a specific cost. The greater the confidence level, the 
greater the amount of contingency is needed because the tendency is 
for costs to overrun rather than underrun. 

In January 2010, we reported on DOE's project cost-estimating 
function.[Footnote 3] We found that DOE did not have a cost-estimating 
policy and that the cost-estimating guide it developed in the 1990s 
was out of date and did not include important components. For example, 
the guide assigned responsibilities to offices that no longer existed 
and was based on policies that had been canceled. We have ongoing work 
on cost estimating at DOE. 

In November 2010, DOE took steps to enhance project oversight by 
requiring an ICE for projects with values over $100 million. 

As shown in table 1, the UPF's estimated cost has increased, its 
completion date has been delayed, and substantial portions of its 
original scope have been deferred. 

Table: UPF's Cost, Schedule, Scope, and Key Assumptions Over Time: 

Date/critical decisions: 2004/CD 0; 
Cost range: $600 million to $1.1 billion (2004 constant dollars); 
Proposed start of construction: 2008; 
Proposed start of operations: 2012; 
Scope: Consolidates all uranium operations; 
Key cost assumptions: Proposed costs to construct HEUMF could be used 
as basis for UPF estimate. 

Date/critical decisions: 2007/CD 1; 
Cost range: $14 to $3.5 billion (escalated dollars)[A]; 
Proposed start of construction: 2011; 
Proposed start of operations: 2018; 
Scope: Consolidates all uranium operations; 
Key cost assumptions: Proposed costs to construct HEUMF could be used 
as basis for UPF estimate. 

Date/critical decisions: 2010/NNSA directed the contractor to update 
the CD 1 cost estimate; 
Cost range: $4.2 to $6.5 billion (escalated dollars)[A]; 
Proposed start of construction: 2011; 
Proposed start of operations: 2022; 
Scope: Consolidates all uranium operations; 
Key cost assumptions: Annual appropriations would not be subject to 
budgetary constraints. 

Date/critical decisions: 2011/Army Corps of Engineers independent cost 
estimate; 
Cost range: $6.5 to $7.5 billion (escalated dollars)[A]; 
Proposed start of construction: 2011; 
Proposed start of operations: 2023; 
Scope: Consolidates all uranium operations; 
Key cost assumptions: Annual appropriations would not be subject to 
budgetary constraints. 

Date/critical decisions: 2012/CD 1 reaffirmation, which is required by 
Order 413.3B if original CD 1 cost range increases by more than 50 
percent; 
Cost range: $4.2 to $6.5 billion (escalated dollars)[A]; 
Proposed start of construction: 2012; 
Proposed start of operations: 2023; 
Scope: Does not consolidate all uranium operations[B]; 
Key cost assumptions: Scope reduced to building exterior, all support 
systems, and Building 9212 capabilities, which include uranium 
purification and casting. All other capabilities deferred. 

[A] Escalated dollars account for the effects of inflation between the 
time the estimate is prepared and when a given scope of work is to be 
performed. 

[B] Scope does not include capabilities of Building 9204-2E (assembly 
and dismantlement, among other things), Building 9215 (machining), and 
Building 9998 (product certification). 

Sources: GAO analysis of NNSA and Corps data. 

[End of table] 

NNSA owns the buildings, equipment, and the components produced
at the Y-12 plant, but the site is operated under contract to NNSA by
Babcock & Wilcox Technical Services Y-12, LLC (B&W), a partnership
of the Babcock & Wilcox Company and Bechtel Corporation. 

B&W is also the contractor managing the UPF design. 

B&W has subcontracted portions of the design work to four other
contractors. 

The UPF Federal Project Director is the federal official with primary
responsibility for management of the project and oversight of B&W. 

Figure: Proposed UPF design in 2004: 

[Refer to PDF for image: drawing] 

Shows the planned UPF (labeled by its name at the time: EUMF, or the 
Enriched Uranium Materials Facility) and the HEUMF in 2004. An 
underground tunnel would connect the two facilities. 

Source: NNSA. 

[End of figure] 

Figure: Proposed UPF design in 2010: 

[Refer to PDF for image: drawing] 

Shows the planned UPF in 2010, which would be linked to HEUMF by an 
above-ground connector. 

Source: NNSA. 

[End of figure] 

Factors That Contributed to UPF's Cost Increase: 2004 and 2007 Cost 
Estimates Were Largely Based on Inaccurate Cost Estimates for HEUMF: 

According to federal officials, prior to developing the 2004 UPF cost 
estimate, NNSA directed B&W to use the estimated cost to construct 
HEUMF as the basis for the UPF estimate because the facilities were to 
be similar in form and design. However, HEUMF provided an inaccurate 
cost basis because: 

* HEUMF's estimated cost increased substantially. According to NNSA
officials, the reasons for the increase included changes to security 
policy and the need to meet rigorous nuclear facility construction 
quality requirements. 

* HEUMF is less complex than UPF. HEUMF was designed as a storage
facility for highly enriched uranium, in contrast to the more complex
assembly/disassembly, processing, and machining operations that are to
be housed in UPF. 

The 2004 UPF cost estimate when the project was at CD 0 ($600 million to
$1.1 billion in 2004 constant year dollars) used the 2004 HEUMF cost
estimate to obtain a cost per square foot, and then increased that by 25
percent to account for UPF's larger number of floors and mezzanines. 
[Footnote 4] 

However, this assumption was overly optimistic because HEUMF's 2004 cost
estimate was $321 million, but the facility's actual final cost was 
$527 million, a 64 percent increase. 

According to a senior NNSA project official, the agency did not fully 
account for UPF's complexity (as compared to HEUMF) in its 2004 cost 
estimate. For example, this official said that the utilities needed to 
support UPF's production mission are more numerous and provide a much 
larger amount of electricity than the utilities needed to support 
HEUMF's storage mission. 

The 2007 UPF cost estimate when the project was at CD 1 ($1.4 to $3.5
billion): 

* updated the 2004 estimate to reflect increased labor prices, among 
other things; 

* included $1.1 billion in contingency funds to address risks that 
were not under the control of the project, such as material and 
commodity cost growth, and the key NNSA document supporting this 
decision cited project execution difficulties experienced by the HEUMF; 

* did not fully meet all four characteristics of a high-quality cost 
estimate. We reported in 2010 that the estimate was partially well-
documented, partially comprehensive, somewhat credible, and somewhat 
accurate.[Footnote 5] 

Factors That Contributed to UPF's Cost Increase: UPF's 2010 and 2011 
Cost Estimates Assumed Annual Appropriations Would Not Be Subject to 
Budget Constraints: 

In 2010, B&W updated the 2007 CD 1 cost estimate. NNSA directed the 
update to develop a resource-loaded project schedule, among other 
things. The 2010 cost estimate ($4.2 to $6.5 billion): 

Assumed a funding profile, where annual appropriations: 

* were not subject to budgetary constraints; 

* could change significantly year-to-year as the UPF moved between 
phases (e.g., design work, site preparation, construction, facility 
start-up testing). 

NNSA officials told us that, historically, DOE construction projects 
have not been funded in this manner. 

Showed increased methodological rigor over the 2004 and 2007 cost 
estimates as B&W followed an engineering build-up or "bottoms-up" 
estimate. 

* This method builds the overall cost estimate by summing detailed 
estimates done at lower work levels while employing industrial 
engineering principles. 

* For example, B&W representatives told us that they developed the 
overall cost estimate by combining detailed estimates for the over 200 
engineering systems (e.g., heating, ventilation, and air conditioning 
as well as equipment instrumentation and controls) needed in the UPF. 

From July 2010 to August 2011, the Corps conducted an ICE to assist the
UPF federal management team determine the reasonableness of B&W's 2010
cost estimate. The ICE assumed, like the B&W estimate, that annual
appropriations would not be subject to budgetary constraints. 

While the Corps was conducting its work, NNSA issued guidance in 
February 2011 that limited UPF funding to between $200 million and 
$500 million annually. 

In documentation explaining the funding limits, NNSA stated that the 
planned construction of UPF and the Chemistry and Metallurgy Research
Replacement (CMRR) project at Los Alamos would be done so as "to not
redirect funding from the core mission of managing the stockpile and
sustaining the science, technology, and engineering capabilities of 
the nuclear security enterprise." 

In 2011, the Corps provided cost estimates and the start of operations 
dates for both funding scenarios: 

* Annual appropriations not subject to budget constraints: 

- $6.5 to $7.5 billion and facility begins operations in FY 2023. 
- Over $900 million required annually for 4 consecutive fiscal years. 

* Annual appropriations subject to budget constraints contained in 
NNSA's February 2011 guidance: 

- $10.3 to $11.6 billion and facility begins operations in FY 2035. 
- Appropriations limited to between $200 and $500 million annually. 

Officials told us that the longer schedule significantly increased the 
costs for level-of-effort activities (e.g., program management and 
systems engineering), which are needed throughout the project's 
duration. 

UPF's 2010 and 2011 Cost Estimates Assumed Annual Appropriations Would 
Not Be Subject to Budget Constraints, but NNSA Later Limited Funding: 

Figure: UPF cost and schedule under different funding profiles: 

[Refer to PDF for image: multiple line graph] 

Total cost range with funding profile not subject to budget 
constraints: $6.5-$7.5 billion. 

Total cost range with limited funding profile: $10.3-$11.6 billion. 

Fiscal year: 2013; 
2011 Corps ICE optimal funding profile: $720.2 million; 
Corps analysis of limited funding profile: $190 million. 

Fiscal year: 2014; 
2011 Corps ICE optimal funding profile: $826.6 million; 
Corps analysis of limited funding profile: $350 million. 

Fiscal year: 2015; 
2011 Corps ICE optimal funding profile: $972.6 million; 
Corps analysis of limited funding profile: $350 million. 

Fiscal year: 2016; 
2011 Corps ICE optimal funding profile: $1.053 billion; 
Corps analysis of limited funding profile: $350 million. 

Fiscal year: 2017; 
2011 Corps ICE optimal funding profile: $1.070 billion; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2018; 
2011 Corps ICE optimal funding profile: $927.7 million; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2019; 
2011 Corps ICE optimal funding profile: $242.4 million; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2020; 
2011 Corps ICE optimal funding profile: $113.1 million; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2021; 
2011 Corps ICE optimal funding profile: $55.3 million; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2022; 
2011 Corps ICE optimal funding profile: $23.1 million; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2023; 
2011 Corps ICE optimal funding profile: $60 million; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2024; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2025; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2026; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2027; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2028; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2029; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2030; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2031; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2032; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2033; 
Corps analysis of limited funding profile: $500 million. 

Fiscal year: 2034; 
Corps analysis of limited funding profile: $75 million. 

Fiscal year: 2035; 
Corps analysis of limited funding profile: $100 million. 

Source: GAO analysis of Corps data. 

[End of figure] 

UPF's Current Cost Estimate Does Not Include Significant Portions of 
Original Scope: 

In February 2012, NNSA deferred portions of the UPF's scope that was 
included in all prior cost estimates and slightly increased the 
project's funding profile.[Footnote 6] In explaining this decision, NNSA
documentation stated that: 

* the cost range contained in the Corps ICE challenged NNSA's ability 
to complete the entire original scope for less than $6.5 billion 
(i.e., the upper limits of the cost range presented by B&W in 2010), 
and; 

* scope is being deferred in order to accelerate the transition of 
Building 9212 capabilities into UPF. Building 9212 was constructed in 
the1940s and is the highest priority scope. According to the UPF 
Federal Project Director, Building 9212 capabilities will compose 
approximately 70 percent of UPF's processing equipment. 

In June 2012 and during the CD 1 reaffirmation process, which is 
required by DOE Order 413.3B when a cost estimate increases by more 
than 50 percent, the Deputy Secretary of Energy approved this reduced-
scope UPF at a cost range of $4.2 to $6.5 billion. 

* The UPF had a point estimate of $5.2 billion as well as $1.2 billion 
in NNSA contingency. 

* According to NNSA officials, these amounts were developed to meet 
the NNSA policy requirement that cost estimates be developed at the 85 
percent confidence level. 

NNSA Determined That the UPF Would Need to Be Enlarged, Resulting in 
Additional Costs: 

In August 2012, B&W concluded that UPF's roof would have to be raised 
13 feet to ensure, among other things, the processing equipment would 
fit into the facility. 

NNSA officials told us that this problem arose because B&W did not 
adequately manage and integrate the design work subcontracted to four 
other contractors. 

Based on this issue, NNSA rated B&W's FY 2012 UPF performance as 
"unsatisfactory." Agency officials told us that B&W did not earn any 
award fee for its UPF work in FY 2012. 

NNSA documents state that addressing this space/fit issue will require 
substantial design rework, cost an additional $540 million, delay the 
start of construction, and delay the start of facility operations by 
13 months. 

Earlier analyses identified this issue as a potential project risk, 
but it was not considered to be one of the project's most significant 
risks, according to NNSA officials, as its impact to the UPF's cost 
was estimated to be approximately $80 million. 

In October 2012, NNSA updated the June 2012 point estimate from
approximately $5.2 billion to $5.8 billion to reflect the additional 
costs associated with the space/fit issue. These costs were paid out of
NNSA contingency. 

NNSA officials said that they did not update the June 2012 range
estimate ($4.2 to $6.5 billion) because, among other reasons, the
project's estimate will undergo a complete review to establish the cost
baseline at CD 2. 

B&W representatives said that they are planning to submit CD 2 
materials to NNSA in September 2013 and expect to receive approval
by June 2014. 

It is unclear if the project's current cost range of $4.2 to $6.5 
billion remains valid because: 

* NNSA's current point estimate is $6.0 billion as design costs for 
certain processing equipment has increased; 

* the space/fit issue required approximately 45 percent of NNSA's 
contingency to address; NNSA's contingency planning did not account 
for such a large sum of money being needed to address this risk; and; 

* several identified project risks, including all risks related to 
construction activities, remain and would require mitigation if they 
were to occur. 

It is possible that additional funds will be needed to ensure there is 
sufficient contingency to complete the UPF within a cost range that 
meets NNSA's 85 percent confidence level. As part of the CD 2 process, 
NNSA plans to establish a firm cost baseline by June 2014. 

Next Steps: UPF Cost Estimate: 

As stated earlier, 8&W representatives said that they are planning to 
submit required CD 2 materials to NNSA in September 2013 and expect to 
receive approval by June 2014. 

DOE Order 413.38 requires an ICE at CD 2. 

GAO could assess, under this mandate or in a separate request, the 
extent to which UPF's CD 2 cost estimate meets the best practices 
established in our cost guide. 

Briefing slides footnotes: 

[1] Per Section 3123 of the National Defense Authorization Act for FY 
2013, the UPF project is now known as the Uranium Capabilities 
Replacement Project. NNSA uses the new nomenclature in its FY 2014 
budget request. 

[2] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs, [hyperlink, 
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009). 

[3] GAO, Department of Energy: Actions Needed to Develop High-Quality 
Cost Estimates for Construction and Environmental Cleanup Projects
[hyperlink, http://www.gao.gov/products/GAO-10-199] (Washington, D.C., 
Jan. 14, 2010). 

[4] If the estimate is presented in escalated dollars, B&W officials 
said that the upper bound of the cost estimate would be $1.3 billion. 

[5] [hyperlink, http://www.gao.gov/products/GAO-10-199]. 

[6] NNSA has continued to increase the project's planned funding 
profile. According to NNSA's FY 2014 budget request for UPF, the 
agency plans to request an average of approximately$531 million for FY 
2014 through FY 2018 with the maximum request being $640 million in FY 
2018. 

[End of Enclosure I] 

Enclosure II: 

Comment from the National Nuclear Security Administration: 

Department of Energy: 
National Nuclear Security Administration: 
Washington, DC 20585: 

June 27, 2013: 

Mr. David Trimble: 
Director: 
Natural Resources and Environment: 
Government Accountability Office: 
Washington, DC 20458: 

Dear Mr. Trimble: 

Thank you for the opportunity to review the Government Accountability 
Office's (GAO) congressional briefing slides titled "Briefing on the 
Uranium Processing Facility (UPF) — Factors Leading to Cost Increases" 
(GAO-13-686R). I understand the GAO is required to report quarterly on 
the UPF in response to a request made by the Senate Appropriations 
Committee, Subcommittee on Energy and Water Development, and in 
accordance with the requirements contained in the National Defense 
Authorization Act for Fiscal Year 2013. The briefing slides reflect 
the briefing as provided to the committees in April 2013. 

While the GAO briefing is generally accurate with respect to the 
history of the UPF cost estimates, the National Nuclear Security 
Administration (NNSA) believes the briefing does not reflect the 
efforts taken to improve estimating and project execution on the UPF 
project. NNSA has made the commitment to ensure that the UPF cost 
baseline to be approved at Critical Decision (CD-2) reflects a 
credible, accurate and defensible basis to allow for accountability 
during the execution of the project's final design and construction 
activities. NNSA has made significant organizational changes and has 
applied dedicated resources to improve the evaluation of the project 
estimate prior to establishing the UPF baseline. The enclosure to this 
document highlights specific actions NNSA has taken to strengthen 
project management at UPF and for all of its projects. With these 
corrective actions in place, we are confident that the UPF baseline to 
be established at CD-2 will represent a credible basis for successful 
completion of the project within the established cost and schedule. 

If you have any questions regarding this response, please contact Dean 
Childs, Director, Office of Audit Coordination and Internal Affairs, 
at (301) 903-1341. 

Sincerely, 

Signed by: 

Cynthia A. Lersten: 
Associate Administrator for Management and Budget: 

Enclosure: 

Response to GAO Briefing Slides (GAO-13-686-R): 

"Briefing on the Uranium Processing Facility — Factors Leading to Cost 
Increases" 

General Comments: 

While the Government Accountability Office (GAO) briefing on factors 
leading to the cost increases on the Uranium Processing Facility (UPF) 
is generally accurate with respect to the history of the UPF cost 
estimates, NNSA believes the briefing does not reflect the efforts 
taken to improve estimating and project execution on the UPF project. 
NNSA has made the commitment to ensure that the UPF cost baseline to 
be approved at Critical Decision (CD-2) reflects a credible, accurate 
and defensible basis to allow for accountability during the execution 
of the project final design and construction activities. NNSA has made 
significant organizational changes and has applied dedicated resources 
to improve the evaluation of the project estimate prior to 
establishing the UPF baseline. 

In February 2013, GAO changed their High Risk List for the NNSA to 
include only our major systems projects which have a total project 
cost of $750 Million or greater. This shift is a direct result of our 
improved performance on delivering the smaller projects in our 
portfolio. Building on improvements in front end planning, estimating, 
and oversight, 100% of NNSA's projects completed in calendar years 
2010 through 2012 that were base-lined after 2006 met the Department's 
success metric of completing within 10% of the original budget, and 
87% were completed at or under the original budget. 

As a part of NNSA's organizational realignment, our Federal Project 
Director (FPD) assigned to UPF directly reports to the Associate 
Administrator for Acquisition and Project Management. Additionally, 
NNSA has committed to providing the necessary staffing to support the 
FPD, and in those cases where personnel with requisite experience and 
certifications levels are not available, NNSA is augmenting the FPD's 
staff with personnel from the US Army Corps of Engineers and from the 
Enterprise Construction Management Services support contractor. We 
have also adopted the peer review process used so successfully by the 
Office of Science, in providing critical independent assessments of 
our work throughout the project life cycle. 

Our FPDs assigned to UPF and other capital projects are also certified 
Contracting Officer Representatives which ensures they have a sound 
understanding of the Federal Acquisition Regulations and have a broad 
knowledge base with which to communicate contract performance 
expectations. Our FPDs work together with our contracting officers to 
ensure our contractors deliver on the expectations identified in our 
contracts and work authorizations. NNSA's contractor partners are the 
largest and most successful design and construction companies in the 
world. We have selected them to work on our projects because of their 
reputations in delivering complex state of the art facilities on time 
and on budget. By more clearly defining our expectations, 
strengthening our contract deliverables and incentives, and 
appropriately sharing risk and accountability, we are seeing more 
focused leadership attention from the parent companies of our 
Management and Operating Contractors, who currently perform most of 
our construction work. They are utilizing corporate resources and have 
brought in more experienced talent to replace or supplement their 
staff on projects that are not performing to expectations. 

Most importantly, we have clearly articulated our expectations to our 
contractor partners and are using the contract to hold them 
accountable for deficient work. For instance, in fiscal year (FY) 
2012, the UPF contractor team did not meet the commitment to deliver 
the 90% design on schedule, primarily due to the process systems 
requiring more floor space and building height than anticipated and 
necessitating a significant redesign effort. NNSA did not approve 
incentive fee payments for these design deliverables in FY 2012. 

NNSA has also worked hard to address previous cost estimating issues 
on UPF. We corrected the contractor's estimate optimism bias by 
incorporating lessons learned across the complex in cost estimating 
and risk management. The UPF contractor is now using actual commodity 
installation rates, more realistic escalation rates, quality control 
and project management costs, and reasonable risk models based on 
recent experience within the Complex unless there is a credible, 
substantive reason to use more optimistic estimates. This change in 
approach enabled us to understand the cost range established in 2007 
was no longer achievable. Working with the National Laboratories, 
Office of Defense Programs, and our Management and Operating 
Contractor, we reviewed the original project requirements and 
developed a new scope and cost range that focused on incorporating our 
most mission-critical processes into UPF, with the balance as deferred 
scope. The project was reaffirmed by the Deputy Secretary in June 2012 
with the minimum scope to meet mission needs at a cost range of $4.2 - 
$6.5 Billion, an increase of $3.0 Billion from the previous estimates 
at the top end. 

We have improved our risk management processes to more definitively 
document our potential risks and risk mitigation strategies, and are 
updating our assessments of cost and impact as the project design 
continues to mature. The engineering, procurement, and construction 
community has underestimated the cost of several nuclear facilities 
over the past decade. The risks realized by the entire community are 
being considered in the development of the UPF project estimate. The 
Acting Administrator has maintained the Agency's commitment to 
ensuring that the necessary front end planning is accomplished and 
design of the nuclear facility is 90% complete before establishing the 
UPF project baseline. UPF will achieve 90% design completion prior to 
the approval of the formal baseline for the UPF project. Maturing the 
design to a 90% completion threshold allows for a more accurate 
estimate of project costs, and ensures that the impact of risks 
inherent to NNSA and nuclear industry facilities are understood as the 
project moves toward the start of nuclear facility construction. 

We have instituted a weekly call among the key project team members 
and stakeholders to elevate issues that require leadership decisions, 
have instituted a monthly senior leadership integrated project team 
meeting where representation from key NNSA stakeholders are briefed by 
the UPF FPD, and issues requiring resolution by their staffs are 
highlighted and managed to closure. We have worked with the federal 
and contractor workforces to reemphasize the principles of a safety 
based work culture, encouraging issues to be raised early so they can 
be resolved as quickly and economically as possible. 

With these corrective actions in place, we are confident that the UPF 
baseline to be established at CD-2 will represent a credible basis for 
successful completion of the project within the established cost and 
schedule. 

[End of section] 

Footnotes: 

[1] NNSA is a separately organized agency within the Department of 
Energy. NNSA owns the buildings, equipment, and the components 
produced at the Y-12 plant, but the site is operated under contract to 
NNSA by Babcock & Wilcox Technical Services Y-12, LLC (B&W), a 
partnership of the Babcock & Wilcox Company and Bechtel Corporation. 

[2] B&W is the contractor managing the UPF design and has 
subcontracted portions of the design work to four other contractors. 

[3] Constructed from 2004 to 2009, HEUMF is responsible for the 
receipt, shipment, and interim and long-term storage of current and 
projected inventories of highly enriched uranium. 

[4] GAO, Nuclear Weapons: National Nuclear Security Administration's 
Plans for Its Uranium Processing Facility Should Better Reflect 
Funding Estimates and Technology Readiness, [hyperlink, 
http://www.gao.gov/products/GAO-11-103] (Washington, D.C.: Nov. 19, 
2010). 

[5] The National Defense Authorization Act for Fiscal Year 2013 
renamed the UPF as the Uranium Capabilities Replacement Project. NNSA 
uses the new nomenclature in its fiscal year 2014 budget request. 

[6] Subsequent quarterly reports will focus on technology readiness 
and risk management, among other things. 

[7] In January 2010, we found that DOE and NNSA needed to improve 
their cost-estimating practices. See, GAO, Department of Energy: 
Actions Needed to Develop High Quality Cost Estimates for Construction 
and Environmental Cleanup Projects. [hyperlink, 
http://www.gao.gov/products/GAO-10-199] (Washington, D.C.: Jan. 14, 
2010). 

[End of section] 

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