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United States Government Accountability Office:
GAO:
Report to the Subcommittee on Energy and Water Development, Committee
on Appropriations, House of Representatives:
September 2011:
Modernizing the Nuclear Security Enterprise:
The National Nuclear Security Administration's Proposed Acquisition
Strategy Needs Further Clarification and Assessment:
GAO-11-848:
GAO Highlights:
Highlights of GAO-11-848, a report to the Subcommittee on Energy and
Water Development, Committee on Appropriations, House of
Representatives.
Why GAO Did This Study:
The National Nuclear Security Administration (NNSA)—-a semiautonomous
agency within the Department of Energy (DOE)—-proposed in March 2010 a
new acquisition strategy that includes consolidating the management
and operating (M&O) contracts for two of its eight sites—-the Y-12
National Security Complex (Y-12) in Tennessee and the Pantex Plant in
Texas-—and consolidating all construction projects for all of its
sites under a single, enterprise-wide contract. NNSA anticipates that
this strategy will reduce costs, enhance mission performance, and
improve construction management. NNSA’s sites are overseen by
colocated federal site offices. GAO was asked to assess NNSA’s
preliminary proposals for (1) a consolidated M&O contract for Y-12 and
Pantex and (2) an enterprise-wide construction contract. GAO reviewed
analyses supporting NNSA’s acquisition strategy; examined agency
directives and guidance; and interviewed DOE, NNSA, and contractor
officials.
What GAO Found:
Based on the analysis supporting its proposed acquisition strategy,
NNSA expects that the proposed consolidation of the M&O work at its Y-
12 and Pantex Plants will increase efficiencies and save $895 million
in nominal dollars, primarily through efficiency gains and other
improvements in support services (i.e., integrated budget and finance
systems, more uniform training and human resources practices), that
could result in the potential elimination of about 1,000 support
service jobs over the next 10 years. NNSA selected these sites because
both have M&O contracts with terms that expire in 2012, as well as
similar nuclear production operations. Anticipated savings from this
proposed consolidation, however, are uncertain because of the
assumptions NNSA used when calculating these savings, the limited
details available about the actual work that will be consolidated, and
the adequacy of historical data used in the analysis. NNSA officials
said that savings will be more accurately determined as industry
provides feedback on the recently released draft request for proposal.
In addition to cost savings, a number of NNSA and contractor officials
have raised other issues with a consolidated M&O contract proposal,
including uncertainty about the number of actual staff reductions that
can be achieved and the need for a federal oversight plan for the new
consolidated contract. In addition, NNSA’s analysis suggests that
efficiencies may also be achieved under its existing contracts through
improved management practices. However, NNSA has not developed a plan
for implementing these improved management practices at all of its
sites.
NNSA also anticipates several potential benefits, including cost
savings, associated with awarding a single, enterprise-wide
construction contract. It is uncertain, however, whether these
benefits will be realized because of a number of issues. For example,
NNSA’s projected savings from a consolidated construction contract—-
approximately $120 million in nominal dollars over a 5-year period—-
are uncertain because NNSA lacks an accurate total cost baseline of
its ongoing and planned construction projects and because it is likely
that the construction contract will exclude major projects, such as
the Uranium Processing Facility and Chemistry and Metallurgy Research
Replacement facility, out of concern that this consolidated contract
would disrupt ongoing design and construction efforts. Collectively,
these two facilities represent about 85 percent of NNSA’s total
planned construction projects through fiscal year 2016. In addition,
NNSA has not conducted, consistent with federal standards of internal
control and cost-estimating best practices, an assessment of risks
associated with awarding an enterprise-wide construction contract,
such as costs and benefits expected enterprise-wide and at each site
for both proposed consolidated contracts. NNSA officials and
contractors said that NNSA may need increased federal oversight to
integrate the work of existing M&O and consolidated construction
contractors.
What GAO Recommends:
GAO recommends, among other things, that NNSA develop a plan for
implementing the improved management practices identified by its
analysis and assess the costs, risks, and benefits of the consolidated
construction contract to better define and inform its acquisition
strategy and to take appropriate future actions. NNSA generally agreed
with GAO’s findings and recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-11-848]. For more
information, contact Gene Aloise, (202) 512-3841, aloisee@gao.gov.
[End of section]
Contents:
Letter:
Background:
Benefits of NNSA's Move to a Single M&O Contract for Y-12 and Pantex
Will Remain Uncertain until NNSA Further Develops Its Proposal:
Benefits of a Single Enterprise-wide Construction Contract Will Remain
Uncertain Until NNSA Further Develops Its Proposal:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Comments from the National Nuclear Security Administration:
Appendix II: GAO Contact and Staff Acknowledgments:
Figure:
Figure 1 : NNSA's Nuclear Security Enterprise Sites:
Abbreviations:
CAS: Cost Accounting Standards:
CFO: Chief Financial Officer:
CMRR: Chemistry and Metallurgy Research Replacement facility:
DOE: Department of Energy:
FTE: full-time equivalent:
KCP: Kansas City Plant:
LANL: Los Alamos National Laboratory:
M&O: management and operating:
NNSA: National Nuclear Security Administration:
OCA: Office of Cost Analysis:
Pantex: Pantex Plant:
RFP: request for proposal:
SNL: Sandia National Laboratory:
SRS: Savannah River Site:
UPF: Uranium Processing Facility:
Y-12: Y-12 National Security Complex:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 20, 2011:
The Honorable Rodney P. Frelinghuysen:
Chairman:
The Honorable Peter J. Visclosky:
Ranking Member:
Subcommittee on Energy and Water Development:
Committee on Appropriations:
House of Representatives:
The National Nuclear Security Administration (NNSA), a separately
organized agency within the Department of Energy (DOE), is responsible
for the management and security of the nation's nuclear weapons
programs.[Footnote 1] In March 2010, NNSA proposed a new acquisition
strategy that includes consolidating the management and operating
(M&O) contracts for two or more of its production sites and
consolidating its nuclear weapons infrastructure construction under a
single contract[Footnote 2]. This strategy is an important and
explicit part of NNSA's annually updated Stockpile Stewardship and
Management Plan,[Footnote 3] which includes plans to improve project
and contract management, areas where we have noted long-standing
problems. More specifically, because of issues we identified with
contract and project management at NNSA and its predecessor
organizations, including cost overruns in the billions of dollars, we
designated NNSA's contract and project management as a high-risk area
that has left it vulnerable to fraud, waste, abuse, and mismanagement.
[Footnote 4]
To execute the activities to maintain and refurbish the nation's
existing nuclear weapons stockpile, NNSA oversees eight sites that
comprise its nuclear security enterprise--formerly known as the
nuclear weapons complex--which includes three national weapons
laboratories, four production plants, and a test site, all of which
carry out missions to support NNSA's programs. These sites execute,
among other things, the Stockpile Stewardship Program, which ensures a
credible U.S. nuclear deterrent without full-scale nuclear testing.
This program also includes nuclear warhead bomb dismantlement and
disposition, as well as long-range plans to modernize NNSA's nuclear
security enterprise. Since their inception, the sites in the nuclear
security enterprise have been managed and operated by private M&O
contractors. These contractors operate and maintain the government-
owned facilities and infrastructure deemed necessary to support the
nuclear weapons stockpile and to support the capabilities to conduct
scientific, technical, engineering, and production activities that
ensure the continued safety and reliability of the stockpile.
Colocated federal site offices oversee the day-to-day activities of
these contractors.
For the past several years, NNSA has envisioned an integrated,
interdependent nuclear security enterprise characterized by, among
other things, fewer, more uniform contracts with multisite incentives
and more uniform business practices, technical processes, information
management, and program and project management. As part of this
enterprise concept, in 2008, NNSA created an acquisition strategy team
that performed quantitative and qualitative analysis of various
contracting options. Several consulting firms, including one with
expertise in mergers and acquisitions in the commercial nuclear
industry, supported NNSA's acquisition strategy team effort. The
team's research, findings, and recommendations were compiled into a
series of reports issued in 2009 that have not been publicly released,
are considered procurement sensitive, and, hence remain for official
use only. As a result of this analysis, NNSA has proposed an
acquisition strategy.
Under this proposed acquisition strategy, NNSA plans to seek separate
proposals from companies for (1) a single M&O contract for the Y-12
National Security Complex (Y-12) in Tennessee and the Pantex Plant
(Pantex) in Texas[Footnote 5] and (2) a single nuclear security
enterprise-wide construction contract. Currently, construction
projects are carried out by the M&O contractors at each of NNSA's
eight sites. In the future, NNSA may conduct additional contract
competitions for consolidated contracts to manage and operate other
nuclear security enterprise sites. According to the procurement
announcement released by NNSA, the agency anticipates that one part of
this strategy--a single M&O contract for Y-12 and Pantex--will allow
the contractor to provide greater focus on nuclear weapons production
and also result in more efficient operations and cost savings, as both
sites have complementary operations. In addition, the current M&O
contracts for both sites expire in 2012. NNSA anticipates that the
second part of this strategy--a single, nuclear security enterprise-
wide construction contract--will attract top U.S. design, engineering,
and construction contractors and result in improved project planning
and execution. Together, NNSA officials said the agency anticipates
that implementation of its proposed strategy will lead to reduced
costs to manage, operate, and oversee nuclear security enterprise
facilities; enhance mission performance; improve construction
management; and reduce construction costs.
After announcing its intentions to adopt this acquisition strategy,
NNSA faced a number of questions from members of Congress,
contractors, concerned communities, and citizens. Among the key
questions were concerns about the impact of this strategy on workers
at the sites and how the strategy would affect two of NNSA's largest
construction projects. NNSA issued a draft request for proposal (RFP)
for the M&O of Y-12 and Pantex on July 21, 2011. It has not yet
released a draft RFP for a single, nuclear security enterprise-wide
construction proposal.
In this context, you asked us to examine NNSA's proposed acquisition
strategy. Specifically, our objectives were to assess NNSA's
preliminary proposals for (1) a consolidated M&O contract for Y-12 and
Pantex and (2) an enterprise-wide construction contract.
To address both objectives, we examined key NNSA strategy, management,
and planning documents. These documents included NNSA's Report on the
Plan for Transformation of the NNSA Nuclear Weapons Complex and the
accompanying Final Complex Transformation Supplemental Programmatic
Environmental Impact Statement and associated Records of Decisions. In
addition, we examined NNSA's Acquisition Strategy Team Report
(analysis), which included subteam reports on the impact to the NNSA
mission, cost analysis, and estimates for cost savings; federal
workforce reports and communications; and consolidated contracts
analysis, including contract competition and construction management
alternatives analysis. We also compared NNSA's acquisition strategy
team charter and mission statement and the work carried out by its
team to the practices in GAO's Cost Estimating and Assessment Guide,
[Footnote 6] which identifies characteristics of a high-quality--that
is, reliable--cost estimate, and relevant provisions from the Federal
Acquisition Regulation and the DOE Acquisition Regulation.
We also examined the reports completed by several firms covering
projected cost savings and other effects of potential consolidated
contracts at NNSA nuclear security enterprise sites. These reports
were important in helping inform NNSA's proposed acquisition strategy.
In addition, we examined DOE's Office of Cost Analysis (OCA) review,
NNSA's Contracting Request for Information reports, and NNSA's
analysis and summary report on requests for information. Our review
also included visits to a nonprobability sample of the nuclear
security enterprise sites, Y-12 and Pantex, which will likely be the
first sites affected by the proposed strategy, and included interviews
with NNSA site office officials and discussions with current
facilities contractors. Because we used a nonprobability sample of
sites to visit, the information we obtained from these visits cannot
be generalized to other sites, but the visits provided us with
information on the perspectives of various federal officials and
contactors about the sites. To gain further insights and perspectives
into NNSA's proposed contracting strategy, we interviewed a wide range
of NNSA officials; contractors; and experts, including NNSA Senior
Management, NNSA Contracting Strategy Team, and OCA officials;
potential future contractors; and nuclear security enterprise subject
matter experts. We conducted this performance audit from August 2010
to September 2011 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.
Background:
Nuclear weapons have been and continue to be an essential part of the
nation's defense strategy. The end of the cold war resulted in a
dramatic shift in how the nation maintains such weapons. Instead of
designing, testing, and producing new nuclear weapons, the strategy
has shifted to maintaining the existing nuclear weapons stockpile
indefinitely and extending the operational lives of these weapons
through refurbishment, without nuclear testing.[Footnote 7]
Established by Congress in 2000 as a separately organized agency
within DOE, NNSA has the primary mission of providing the United
States with safe, secure, and reliable nuclear weapons in the absence
of underground nuclear testing and maintaining core competencies in
nuclear weapons science, technology, and engineering. To support this
highly technical mission, NNSA relies on capabilities in several
thousand facilities located at eight nuclear security enterprise sites
that support weapons activities. These sites are owned by the
government but managed and operated by private M&O contractors. Each
site has specific responsibilities within the nuclear security
enterprise, with six of them having important production missions (see
figure 1).
Figure 1: NNSA's Nuclear Security Enterprise Sites:
[Refer to PDF for image: illustrated U.S. map]
The locations of the following Nuclear Security Enterprise Sites are
depicted on the map:
Lawrence Livermore National Laboratory (LLNL) (Livermore, CA):
* No major weapons production;
* Not included in NNSA's acquisition strategy review.
Nevada National Security Site (NNSS) (Mercury, NV):
* No weapons production mission;
* Not included in NNSA's acquisition strategy review.
Los Alamos National Laboratory (LANL) (Los Alamos, NM):
* Produces plutonium pits, feedstock production for mixed-oxide fuel
and primary high explosive detonators.
Kansas City Plant (KCP) (Kansas City, MO):
* Produces over 85% of the components (all nonnuclear) in a nuclear
weapon.
Y-12 National Security Complex (Y-12) (Oak Ridge, TN):
* Manufactures, evaluates, and tests uranium and special materials
components for nuclear weapons, cases, and other nuclear weapons
components;
* Supplies enriched uranium for use in naval reactors.
Sandia National Laboratories (SNL) (Albuquerque, NM; Livermore, CA):
* Engineers and produces nonnuclear weapon components.
Pantex Plant (Pantex) (Amarillo, TX):
* Evaluates, repairs, and dismantles nuclear weapons;
* Conducts high explosive research and development.
Savannah River Site (SRS)-Tritium Operations (Aiken, SC):
* Conducts tritium reservoir loading and surveillance testing in
support of continued stockpile certification;
* Conducts tritium research and development.
Sources: NNSA; Map Resources (map).
[End of figure]
NNSA reimburses its M&O contractors for the allowable costs incurred
in carrying out NNSA's missions. These include costs that can be
directly identified with a specific NNSA program (known as direct
costs)--for example, the costs for dismantling a retired weapon--and
costs of activities that indirectly support a program (known as
indirect costs), such as administrative activities. To ensure that
NNSA programs are appropriately charged for incurred costs, M&O
contractors' accounting systems assign the direct costs associated
with each program and collect similar types of indirect costs into
pools and allocate them among the programs. Consistent with Cost
Accounting Standards (CAS),[Footnote 8] M&O contractors must classify
their costs as either direct or indirect and, once costs are
classified, must consistently charge their costs to these
classifications. M&O contractors are required to disclose their cost
accounting practices in formal disclosure statements, which are
updated annually and approved by NNSA officials. M&O contractors' cost
accounting practices cannot be readily compared with one another
because contractors' methods for accumulating and allocating indirect
costs vary--that is, a cost classified as an indirect cost at one site
may be classified as a direct cost at another.[Footnote 9]
To obtain more consistent information about the support costs at DOE's
major contractor-operated facilities, in the mid-1990s, DOE's Chief
Financial Officer (CFO) created 22 standard categories of "functional
support costs." These categories include, for example, executive
direction, information services, procurement, maintenance, and
facilities management. Each of the 22 categories is defined to cover
all related costs, regardless of whether contractors classify them as
direct or indirect. From fiscal years 1997 through 2010, the CFO
required the department's primary contractors to annually report these
costs. To oversee the quality of these data, contractors' financial
personnel peer reviewed the data for each facility once every few
years. According to the CFO, functional cost data are derived, to the
extent possible, from contractors' existing accounting systems and
overlaying financial structure, but contractors do not budget,
accumulate, or distribute costs in their formal accounting systems in
the same manner. Because of this, and because numerous site specific
factors (missions, size, age, location of facilities) influence
support costs, the CFO refers to functional costs as sufficient for
trending costs at a given site over time but not necessarily for
comparison across sites. NNSA officials and contractors have told us
in the past that the collection of historical functional support cost
data has also been marked by different definitions and interpretation
of functional cost categories, as well as different data gathering
methods.[Footnote 10] Because of these limitations, in 2011 DOE
significantly revised its guidelines for the collection of contractor
cost data. These guidelines now de-emphasize functional support cost
reporting.
NNSA's Office of Defense Programs is responsible for NNSA's weapons
activities and oversees the sites' M&O contractors. Federal site
offices are located at each NNSA site to perform day-to-day oversight
of these contractors' activities. Federal site office managers serve
important roles, in conjunction with the Office of Defense Programs,
such as determining contract award fees and managing and accepting
safety and security risks at their sites.
The administration, through the legislatively mandated 2010 Nuclear
Posture Review,[Footnote 11] established the nation's nuclear weapons
policy and strategy. This strategy seeks to maintain a safe and
reliable but smaller nuclear deterrent than in the past. More
specifically, the United States has agreed to reduce the size of its
strategic nuclear weapon stockpile from a maximum of 2,200 to 1,550
weapons. This stockpile is composed of seven different weapons types,
including air-delivered bombs, ballistic missile warheads, and cruise
missile warheads. As the stockpile is being reduced, the
administration pledged additional funds to modernize and operate the
nuclear security enterprise, to include the refurbishment of weapons
currently in the stockpile and the construction of important new
production facilities to support these refurbishments. NNSA's fiscal
year 2012 Stockpile Stewardship and Management Plan provides details
of nuclear security enterprise modernization and operations plans over
the next two decades. During this period, NNSA estimates it will have
funding needs of about $180 billion. In 2010, the administration
pledged over $88 billion to fund the first decade of this plan.
NNSA's efforts to improve its operations and business practices
predate the 2010 Nuclear Posture Review but are now an important
component of NNSA's modernization efforts. In 2008, NNSA established
an acquisition strategy team that examined 11 different contracting
options to reduce costs and improve operations. Eight of these options
involved combining various production missions under a single M&O
contract. Another three options looked at combining functional areas,
such as safeguards and security, construction management, and
information technology, at multiple sites under a single contract. To
conduct its analysis of these options, the team did the following: (1)
compiled and analyzed available historical functional support cost
data for six of NNSA's eight sites (see fig. 1); (2) attempted to
normalize these data to account for discrepancies and anomalies in
them, compared these normalized data across sites in an attempt to
create a "common financial language," and benchmarked this information
against information from commercial nuclear industry mergers and
acquisitions;[Footnote 12] (3) developed a set of major assumptions to
frame the analysis; (4) compared the expected effects of the proposed
consolidation with a status quo or baseline scenario where no M&O
consolidation occurs;[Footnote 13] and (5) developed estimates for
potential cost savings resulting for each option. The team completed
its analysis in 2009 and, in March 2010, NNSA in large part adopted
the acquisition strategy team's primary recommendations and announced
plans to undertake a two-part acquisition strategy. According to NNSA
officials, NNSA rejected the team's proposal to include the Los Alamos
National Laboratory's (LANL) production mission as a future option in
the consolidated M&O contract on the grounds that LANL's research and
development mission were too diverse and complex to separate. The
agency also decided not to pursue for, the time being, a proposal to
consolidate the nonnuclear production carried out by the Kansas City
Plant (KCP) and the Sandia National Laboratory (SNL). KCP expects to
transition to a new facility by the end of 2012, which we reported on
in October 2009.[Footnote 14]
Benefits of NNSA's Move to a Single M&O Contract for Y-12 and Pantex
Will Remain Uncertain until NNSA Further Develops Its Proposal:
NNSA's anticipated benefits as a result of its proposal to award a
single contract for the management of Y-12 and Pantex will remain
uncertain until NNSA makes decisions about the details of the contract
and addresses several issues raised by NNSA officials, contractors,
and members of Congress. Among these benefits, NNSA anticipates that
increased efficiencies at those sites could save an estimated $895
million in nominal dollars over the next 10 years.[Footnote 15] Some
cost savings seem likely under a single contract, but NNSA's analysis
suggests that efficiencies also could be achieved under existing
contracts. In addition, NNSA's estimated cost savings are uncertain
due to issues relating to the methodology NNSA used to support its
estimate and the adequacy of the cost data used. In addition, NNSA,
contractor officials, and members of Congress have also raised a
number of concerns that a single M&O contract could disrupt work at
the sites, which if unaddressed, could ultimately affect the safety
and reliability of the nuclear weapons stockpile.
NNSA Expects Increased Efficiency and Savings of $895 Million Over 10
Years:
According to its analysis on the proposed acquisition strategy, NNSA
expects that the proposed consolidation of the M&O work at its Y-12
and Pantex sites will increase efficiencies at those sites. These
expected efficiencies are based on a combination of assumptions made
by NNSA in its analysis of the proposal, input from private
consultants with experience involving mergers and operations at
commercial nuclear facilities, and discussions with staff at the
sites. According to the analysis, these efficiencies are expected to
result primarily from (1) more streamlined and uniform operations and
(2) improved performance by the contractor.
First, NNSA's analysis indicates that consolidating the contracts will
streamline and make more uniform training; human resources practices;
and information systems, such as payroll, budget, and finance systems;
and improve the comparability of management data at both sites. For
example, there are over 100 different information technology systems
and applications at the Y-12 and Pantex sites, and NNSA concluded in
its analysis that merging some of those systems would lead to improved
effectiveness, data integrity, and security. In addition, NNSA's
analysis concluded that a consolidation could have similar benefits in
interactions with external parties, such as regulators and vendors, as
those entities would need to coordinate with only one contractor
instead of two or three.
Second, NNSA's analysis concluded that the one contractor overseeing
the consolidated M&O work at these sites would improve performance as
a single contractor would be able to implement best practices across
its sites more easily. For example, a single M&O contract would allow
the contractor to more readily share its processes and approaches to
reduce costs, and efficiencies and commercial production practices
could be more easily transferred among sites.
NNSA's analysis estimated that these efficiency gains and other
improvements could eliminate about 1,000 full-time equivalent (FTE)
[Footnote 16] support service jobs over the next 10 years at the Y-12
and Pantex sites. NNSA estimated that the elimination of these FTEs
could lead to a savings of $895 million in nominal dollars over the
same period.[Footnote 17] To calculate these estimates, NNSA's
projected baseline cost for operations over the next 10 years was $23
billion. NNSA and its private consultants then estimated the potential
staff reductions that could occur by consolidating contracts at
certain sites based on a comparison of current NNSA staffing levels
with those in the commercial nuclear industry. This comparison did not
involve identifying specific jobs at the particular NNSA site that
would be eliminated, but rather it involved estimating how certain
general job functions--such as management, security, and human
resources--might be adjusted to more closely align with commercial
nuclear industry levels. For example, an NNSA consultant estimated
that FTEs associated with the CFO and human resources would be reduced
by about 45 percent, and FTEs associated with information technology
and procurement reduced by about 30 percent if the contracts were
consolidated. NNSA's analysis concluded that more than 1,000 of the
nearly 10,000 contractor FTEs at the Y-12 and Pantex sites[Footnote
18] would no longer be needed after the consolidation and that these
positions would be eliminated over a 5-year period. NNSA estimated
that, over the next 10 years, these FTE reductions would reduce costs
at these affected sites from $23 billion to about $22 billion, or
about 4 percent of the total cost of operations at these sites, and
about 1 percent of NNSA's funding at all of its sites during that
period.
NNSA's Analysis Suggests That Efficiencies Could Be Achieved under
Existing Contracts:
According to NNSA's analysis, although efficiencies are expected as a
result of consolidating contracts, NNSA could also achieve
efficiencies through its existing M&O contracts. Specifically, the
analysis included 18 recommended improved management practices that
would make changes to the current management of all eight of its sites
that could lead to process improvements and cost savings. These
recommendations included substituting commercial best practices and
industrial standards for DOE directives, standardizing security force
equipment, improving enterprise-wide collection and analysis of costs,
and streamlining contractor pension and health benefits plans. NNSA
contractors we spoke with also said that many of the efficiencies
expected under this strategy could be realized by NNSA under its
existing contracting approach without a contract consolidation. For
example, officials representing the contractors at Pantex and Y-12
both said their companies had begun implementing some of these changes
at their respective sites and had seen efficiencies and savings
already. We view these actions on the part of contractors as positive
and a step in the right direction toward more effectively and
efficiently managing NNSA contracts. However, NNSA has not identified
in a systematic manner, how it plans to implement these 18 improved
management practices at all of its sites. Without that implementation
information, it is unclear whether NNSA is taking every opportunity to
improve its contract management practices.
NNSA's Estimated Cost Savings Are Uncertain Due to Issues Relating to
NNSA's Methodology and Poor Historical Cost Data:
In a 2010 testimony before the Senate Armed Services Committee, NNSA's
Administrator stated that, while many of the details still need to be
worked out, the consolidated M&O contracting strategy can save
taxpayers more than $895 million over the next decade.[Footnote 19]
However, the sensitivity of NNSA's key assumptions formulated in 2008
to 2009; the lack of details surrounding the scope of work of the
contract; and the recognized problems in comparative, historical DOE
and NNSA cost data, make realizing these savings uncertain.
A key assumption used in NNSA's cost savings calculation--estimating
future costs under both status quo and contract consolidation
scenarios--relied on assumptions that may no longer be valid. For
example, according to NNSA officials and documents we reviewed:
* NNSA's analysis assumed that its baseline future funding and
staffing levels at the sites would remain flat.[Footnote 20] This
assumption is in sharp contrast to the commitment made by the
administration in 2010 to request increased funding to modernize the
nuclear security enterprise and the funding needs identified in the
fiscal year 2012 Stockpile Stewardship and Management Plan.[Footnote
21]
* NNSA's analysis assumed that commercial nuclear industry data would
serve as a valid basis for comparison when forecasting staffing and
funding levels at its sites under a consolidated contract. However,
several NNSA and contractor officials questioned the use of these
commercial data as a benchmark because they may not accurately reflect
the work that occurs at NNSA sites. For example, in the case of
security costs, an NNSA official said that the security needs and
activities at Y-12 and Pantex, which handle nuclear weapons components
and nuclear weapons, respectively, differ significantly from security
needs at commercial nuclear facilities.
* NNSA's analysis assumed that the contracts at the Y-12 and Pantex
sites would not be extended upon the expiration of their terms at the
end of 2010 and would instead be either recompeted or consolidated.
However, because of delays in issuing an RFP for the consolidated M&O
contract, NNSA was forced to extend the terms of the contracts for
both of these sites for an additional 18 months in 2010, which will
likely affect estimates of both the expected future costs and
anticipated savings at those sites.[Footnote 22]
In addition, since announcing its intention in March 2010 to
consolidate M&O contracts at Y-12 and Pantex, NNSA did not announce
the preliminary scope of work (through a draft RFP) to be included in
its consolidated M&O contract until July 21, 2011--at the same time we
were concluding our work.[Footnote 23] This timing limited our ability
to review the calculation of estimated savings since it was unclear if
NNSA's draft RFP would align with the assumptions used in its
analysis. According to NNSA officials, the recently released draft RFP
for the consolidated M&O contract outlines more complete details about
NNSA's proposed contracting strategy. NNSA officials told us that the
agency anticipates that industry feedback on the draft RFP, due by
September 19, 2011, will be important in structuring the final RFP.
[Footnote 24] Final RFPs include information such as the government's
requirement, anticipated terms and conditions of the contract,
information required to be in the offeror's proposal, and factors that
will be used to evaluate the proposal and their relative importance.
[Footnote 25] Unlike a draft RFP, which is one way the government
promotes early exchanges of information with industry, a final RFP is
intended to result in a contracting action.
Furthermore, historic cost data were not readily available for NNSA to
use in its cost analysis, requiring NNSA to create its own historical
"financial common language" for its sites. More specifically, a key
step in NNSA's process to estimate savings--developing a comparative
baseline of historical site costs--was a difficult and inexact process
because DOE and NNSA contractors use different methods for tracking
costs, and DOE's functional support cost data are of limited use in
comparing sites. NNSA sought to develop a clearer picture of potential
cost savings across its sites, working with NNSA and contractor
officials at its sites trying to resolve discrepancies and anomalies
in the historical cost data. Using these "normalized" data, and other
assumptions, NNSA arrived at its cost savings estimate of $895 million
in nominal dollars, which it called "most likely." DOE's OCA, which
was established within the CFO Office in 2008[Footnote 26], also
examined historical functional support costs but excluded some of the
most questionable data and arrived at a cost savings estimate of $750
million over 10 year[Footnote 27]s. Any cost savings estimate should
be viewed as illustrative rather than precise because of the quality
of the data. This is consistent with our Cost Estimating and
Assessment Guide, which notes that specific "point" estimates are more
uncertain at the beginning of a program because less is known about
its detailed requirements and opportunity for change is great[Footnote
28]er. In discussions with GAO, NNSA officials agreed that actual
savings will be more accurately determined with the release of a draft
RFP, which will better define the scope of the work and, ultimately,
by the execution of the contract.
Proposed Consolidated M&O Strategy Raises Additional Issues:
In addition to concerns over cost savings, a number of NNSA and
contractor officials have raised issues about a consolidated M&O
contract potentially disrupting the work at sites. These issues
include: (1) uncertainty about actual staff reductions, (2) opposition
from local constituents, (3) security force issues, (4) need for a
federal oversight plan, and (5) potential for reducing the number of
contractors willing and able to participate in the competition.
A number of NNSA site officials that we spoke with said that they were
skeptical that such large staff reductions were possible in a
consolidated M&O contract. In fact, NNSA reported in its 2012
Stockpile Stewardship and Management Plan (an annual report to
Congress on the status of NNSA's efforts to manage and modernize the
nuclear weapons enterprise) that the contractor staffing levels at the
sites are currently too low and that further reductions are not
plausible. The plan characterizes current contractor workforce levels
as lacking robustness and depth and states that there is little or no
redundancy in the contractor workforce. The plan noted, for example,
that the production activities at the sites were already operating at
minimum staff levels--some having recently eliminated some staff. Any
further reductions would threaten the success of the mission of the
sites. Some site officials also said that other indirect functions,
such as security and oversight, would not experience any efficiency
under a consolidated contract because those functions would still
require the same number of staff at each specific site regardless of
the management structure. For other indirect services, such as
information technology and human resources, which make up a small
portion of the total FTEs, the opinions of site officials were mixed,
with some acknowledging the possibility of some reductions, while
others were skeptical of any reductions in FTEs.
NNSA announced in 2010 that the incoming contractor of the
consolidated M&O contract would have the flexibility to restructure
the workforce, which has led to employee concerns at both sites that
may present challenges to NNSA. According to one NNSA official,
although included in other DOE contracts, NNSA typically has not
included such a provision of workforce flexibility in past contract
restructuring; instead it has traditionally accepted the same terms as
the previous contractor with regard to human resources issues.
Restructuring the workforce now may be difficult because advocates
representing current employees, including unions, have voiced
opposition to any actions that negatively impact workers. As a result,
opposition from some constituents and their representatives could
complicate any attempts to consolidate the contracts if that
consolidation includes staff reductions. For example, in response to
these concerns, two members of Tennessee's congressional delegation
recently sent a letter to the Secretary of Energy asking him not to
consolidate the contracts at these sites citing, among other reasons,
concerns about the need to maintain a focused and skilled workforce.
Even the prospect of a consolidation may already be having negative
impacts on staffing. According to contractor officials at one site,
some currently vacant support positions that could be eliminated under
a consolidated M&O contract, such as a general counsel position, have
been difficult to fill. NNSA's analysis notes that employee concerns
such as these could affect important site operations, though,
according to site office officials, currently none have been reported.
In addition, federal site office officials noted two concerns about
how a single M&O contract will affect contractor guard forces, which
at NNSA and DOE sites are known as protective forces. These forces are
a key component of security at sites with special nuclear material,
which is a high security risk. Y-12 and Pantex have over 1,000
protective forces combined. First, as we recently reported, these
protective forces each operate under different contracts and
contractors, have different pay and benefit structures, and are
represented by different collective bargaining agreements.[Footnote
29] As such, site office officials told us combining these two
protective forces under a single contract could be difficult. Second,
the current M&O contractor at Pantex employs protective forces, and
protective forces are employed at Y-12 under a direct protective force
contract (i.e., a non-M&O contract). In addition to the Y-12 site, the
same contractor provides, under a separate contract, protective forces
for other important, nearby operations in DOE's Oak Ridge Reservation,
such as a major environmental cleanup of hazardous materials. It is
unclear how protective forces will be provided for DOE's Oak Ridge
Reservation under a consolidated M&O contract.
Furthermore, because of increased complexity under a consolidated
contract, some NNSA officials said that federal oversight of a
consolidated contract may need to be enhanced. NNSA's analysis showed
that effective federal oversight is crucial to realizing cost savings
and performance in both current and future contracts and that its
employees must be better equipped to manage the contractors under any
type of contract. The analysis also recommended that NNSA better train
its federal site officials to ensure accountability of its
contractors. Federal officials NNSA interviewed as part of conducting
its analysis also expressed the need to have federal oversight changes
in place before the new contracts go into effect. However, NNSA's
plans to improve federal oversight of these contracts are still in the
early stages of development. NNSA recently awarded a contract to study
the structure, roles, and responsibilities of federal site office
oversight that will include oversight of the proposed M&O contract
consolidation; this study is expected to be completed in December
2012. Until NNSA has the results of its federal site office study,
including information on federal workforce needs, it cannot finalize
plans and begin to prepare the federal site offices for the transition
to the new contracts. In its response to our draft report, NNSA said
that it will develop a site office structure prior to contract award.
According to NNSA's analysis, and some NNSA officials and contractors,
it is likely that the number of contractors willing and able to
participate in the competition will decrease (compared with
competition for separate contracts) due to the large scope of diverse
and complicated work being consolidated, resulting in fewer
contractors that may have the interest or capability to execute the
contract successfully.[Footnote 30] As part of this review, we found
that previous NNSA contract competitions during the last 10 years
attracted an average of three contractors or contracting teams.
According to some NNSA officials and contractors, it is quite possible
that there will only be a single offeror for a consolidated contract,
although this offeror will likely consist of a consortium of companies
with specialized technical, management, and administrative expertise
to perform the work required by the large contract scope. An NNSA
official suggested that such a consortium could preserve the benefits
of competition by involving the strongest firms. After reviewing
NNSA's proposal, DOE's OCA reported, however, that a decrease in the
number of competitors interested in competing for this contract could
cause costs to actually increase over the long-term because NNSA may
be forced to choose from only one or two contractors. Recently, the
Office of Management and Budget also warned that competitions that
yield only one offer deprive agencies of the ability to consider
alternative solutions in a reasoned and structured manner.[Footnote 31]
Benefits of a Single Enterprise-wide Construction Contract Will Remain
Uncertain Until NNSA Further Develops Its Proposal:
NNSA has identified several potential benefits associated with
awarding a single, enterprise-wide construction contract, but a number
of issues have also been raised by NNSA and others. NNSA's analysis
identified some potential benefits, including a new dedicated nuclear
security enterprise-wide focus on management of major construction
projects to meet schedules, cost savings, and the implementation of
uniform business practices in executing major projects. However,
NNSA's projected savings from a consolidated construction contract--
approximately $24 million per year or $120 million in nominal dollars
over a 5-year period--is uncertain, especially since it appears
unlikely that some of NNSA's major construction projects will be part
of the contract. In addition, NNSA's analysis did not include a formal
assessment of the risks involved in this effort, as is recommended by
federal standards for internal control. NNSA and others have also
identified two potential concerns associated with the new contracting
strategy, including (1) the need to closely integrate the work of the
existing M&O and new construction contractor could necessitate
increased federal oversight and (2) reduced industry interest in the
contract if major projects are not included.
NNSA Has Identified Potential Benefits of a Consolidated Construction
Contract:
NNSA's analysis identified several potential benefits that could
result from awarding a single construction contract. The potential
benefits include the following:
* Allowing the M&O contractor to focus its resources on its core
mission of managing and operating sites and having U.S. engineering
and construction management contractors focus on construction.
* Having a dedicated nuclear security enterprise-wide focus on
management of major construction projects to control costs and meet
schedules.
* Implementing uniform business practices in executing major projects
across the nuclear security enterprise.
* Realizing cost savings of about $120 million over a 5-year period,
primarily because the eight M&O contactors will be able to reduce
construction personnel.
The Estimated Cost Savings Resulting from a Consolidated Construction
Contract Are Uncertain:
NNSA's projected savings from a consolidated construction contract are
uncertain. NNSA estimates the projected savings resulting from
awarding such a contract at approximately $120 million in nominal
dollars over a 5-year period, which is approximately 2 to 3 percent of
the projected total construction costs. The cost savings are primarily
achieved through the assumption that future M&O contractors will have
less need to maintain a large cadre of construction personnel.
However, actual cost savings resulting from implementing a
consolidated construction contract strategy that NNSA developed are
uncertain for three primary reasons. Specifically:
* NNSA does not have an accurate total cost baseline of its ongoing
and planned construction projects. For example, we reported in
February 2011 that NNSA had identified 15 ongoing capital improvement
projects as necessary to ensure future viability of the Stockpile
Stewardship Program but did not have estimated total costs or
completion dates for all projects.[Footnote 32] As we also reported in
November 2010, NNSA has a history of inaccurately estimating the cost
of major construction projects, including recent inaccurate estimates
for facilities included in the estimate for potential cost
saving.[Footnote 33] For example, as we reported in November 2010,
NNSA's 2007 estimate for its Uranium Processing Facility (UPF) at Y-12
indicated the facility would cost from $1.4 to $3.5 billion in nominal
dollars to construct--more than double its 2004 estimate of $600
million to $1.1 billion. In 2010, NNSA again adjusted its estimate for
the UPF, estimating the facility will cost from $4.2 to $6.5 billion
in nominal dollars to construct--double its 2007 estimate. Without an
accurate total cost baseline of its ongoing and planned construction
projects, it will be difficult for NNSA to accurately estimate savings.
* The consolidated construction contract may not include some of
NNSA's major construction projects. According to one NNSA official,
NNSA's projected savings from a consolidated construction contract
assumes that all construction projects costing over $10 million
dollars, excluding the Mixed Oxide Fuel Fabrication Facility,[Footnote
34] which is well under way at SRS, will be included in the contract.
NNSA's analysis assumed that, once the consolidated construction
project is in place, about half of the M&O contractors' construction
personnel will no longer be needed. As with the draft RFP for the
consolidated M&O contract, NNSA has delayed the release of the draft
RFP for the consolidated construction contract, but, according to
agency officials, plans to release it later in 2011. These officials
told us that the agency anticipates that industry feedback on that RFP
will be important in structuring the final RFP.[Footnote 35] However,
an NNSA official associated with the contracting effort recently
stated that the contract probably will not include the most expensive
and significant construction projects planned for the next 10 years.
More specifically, senior NNSA officials told us that it is unlikely
that the construction contract will include UPF and the Chemistry and
Metallurgy Research Replacement facility (CMRR) at LANL or some other
major facilities because including them would disrupt ongoing design
and construction carried out by M&O contractors.[Footnote 36]
Collectively, these two facilities represent about 85 percent of
NNSA's total planned construction projects through fiscal year 2016.
Other NNSA construction projects are also unlikely to be included in
the consolidated contract. For example, the Pit Disassembly and
Conversion Facility planned for SRS, may not be included in the scope
of the consolidated contract, according to NNSA officials, because of
this facility's high cost and lack of a stable cost estimate.
* NNSA's cost savings' estimate was, according to an agency official,
relatively cursory, given the lack of an accurate total cost baseline
of its ongoing and planned construction projects and since the focus
of the proposal is to improve project management. We found that NNSA,
in this part of its acquisition strategy, did not employ best
practices such as conducting a sensitivity analysis, identified in our
Cost Estimating and Assessment Guide for developing reliable cost
estimates.[Footnote 37]
NNSA's Analysis Neither Fully Assessed Risks Nor Identified Risk
Mitigation Strategies:
In addition, we note that NNSA's analysis of a consolidated
construction contract was far less extensive than its analysis of the
consolidated M&O contracts, even though a consolidated construction
contract could be worth over $8 billion over the next decade and
represents a fundamental change for the nuclear security enterprise.
As part of the contract analysis process, in April 2009, NNSA
completed a review of construction management alternatives and
developed a recommendation to issue an RFP for a consolidated
construction contract to include all major construction projects,
general projects, and facility infrastructure and revitalization
projects. However, this review was largely based on expert judgment
and did not include an in-depth analysis of potential risks resulting
from awarding a single construction contract to one company for
construction across the nuclear security enterprise. More
specifically, NNSA did not conduct a formal assessment of the risks
involved in this effort, such as risk analysis regarding the different
roles and responsibilities between the M&O contractor and the
construction contractor. One of the federal standards for internal
control--risk assessment--states that management should assess the
risks faced entity-wide, and at the activity level, from both external
and internal sources, and that once risks have been identified,
management should decide what actions should be taken to mitigate
them. Risk identification methods may include, among other things,
forecasting and strategic planning, and consideration of findings from
audits and other assessments.[Footnote 38] NNSA did not develop
potential mitigation strategies, according to one NNSA official, even
though awarding a single M&O contract for its multiple sites and a
single construction contract worth billions of dollars for
construction projects across the nuclear security enterprise
represents a fundamental change in the way NNSA conducts and manages
projects. This is inconsistent with NNSA's much more detailed analysis
of its consolidated M&O contracting proposal and with best practices
identified in our Cost Estimating and Assessment Guide, which is a
compilation of cost-estimating best practices drawn from across
industry and government.[Footnote 39]
A Consolidated Construction Contract Raises Other Potential Issues:
NNSA officials and contractors have also identified two issues
associated with the new contracting strategy. First, according to NNSA
officials and contractors, a chief potential challenge with a
consolidated contract is the need to closely integrate the work of the
M&O and construction contractors. NNSA will have to develop ways to
ensure that current M&O contractors and the winning construction
contractor(s) successfully coordinate their respective missions to
prevent the disruption of important activities, such as weapons
refurbishments, and to allow construction projects, some of which will
be located near or in sensitive ongoing site operations, to be
completed on schedule and at cost.[Footnote 40] For example, LANL
plans to undertake a number of construction projects near or within
its major plutonium operations in the next decade. As a result, both
NNSA officials and contractors told us there will be a need for
increased federal oversight and coordination to manage and integrate
the M&O and construction contractors' activities associated with these
projects. To this end, NNSA is developing a course for its site
offices on how to conduct oversight under the new contracting
strategy. To facilitate coordination, NNSA management has also
committed to requesting budget increases to hire temporary employees
at the site offices to help integrate and manage the M&O and
construction contractors' activities. However, as discussed earlier,
NNSA will not complete a study of federal site office structure and
roles and responsibilities until December 2012. Until NNSA has the
results of its federal site office study, including needs under the
new contracting strategy for the federal workforce, it cannot finalize
plans and begin to prepare the federal site offices for the transition
to the new strategy.
Second, NNSA's analysis concluded that excluding major construction
projects may reduce the number and quality of competitors willing and
able to bid because the contract would be less profitable. A recent
NNSA report on the contractor perspectives of a consolidated
construction contract found that inclusion of the UPF in the
consolidated construction contract is key to drawing strong interest
from the best construction firms and that the scope of the contract
would determine the level of competition for it. This is because the
top U.S. engineering and construction companies may only be interested
in the contract if it includes the higher profit large construction
projects. This NNSA report, which captures the feedback from the
construction contractors concerning the contract strategy for UPF,
noted that the competitive landscape for a contract competition for a
construction contract that does not include UPF could be impacted with
the top engineering and constructions firms possibly not
participating. The report further notes that excluding UPF in the
consolidated construction contract would send the signal to the
contracting community of "business as usual" and would not represent a
significant commitment by NNSA of a commitment to improve the
management of large construction projects.[Footnote 41]
Conclusions:
As the U.S. nuclear stockpile is being reduced, NNSA is to receive
additional funds to modernize and operate the nuclear security
enterprise. The funds will be used, in part, to refurbish most of the
weapon types currently in the stockpile and to construct important new
production facilities to support these refurbishments. NNSA envisions
an integrated, interdependent nuclear security enterprise
characterized by, among other things, fewer, more uniform contracts
with multisite incentives and more uniform business practices. Since
contractors execute the vast majority of the agency's mission, it is
reasonable for NNSA to focus its attention on the types, structure,
and management of its contracts. Thus, to improve its operations and
business practices, NNSA proposed, in 2010, consolidating the M&O
contracts for two significant nuclear production sites--Y-12 and
Pantex--and awarding a single contract for complex-wide construction.
NNSA's analysis that supported these proposals noted that simply
changing contract types and structures will produce little effect
unless NNSA better manages its contracts. NNSA's analysis also
identified 18 improved management practices--some of which could be
accomplished now through existing contracts--such as improving
enterprise-wide collection and analysis of costs that could lead to
greater efficiencies regardless of the contracting strategy employed.
In fact, officials representing the contractors at Pantex and Y-12
both said their companies had begun implementing some of these changes
at their respective sites and had seen efficiencies and savings. In
our view, these actions on the part of contractors are positive and a
step in the right direction toward more effectively and efficiently
managing NNSA contracts. However, NNSA has not identified in a
systematic manner how it plans to implement these 18 improved
management practices at all of its sites. Without such an approach or
plan, it is unclear whether NNSA is taking every opportunity to
improve management practices.
NNSA has committed to pursuing its two-part acquisition strategy, but
until NNSA undertakes certain actions, the strategy will not be
completely defined, and its benefits will remain uncertain. These
actions include incorporating industry feedback on its recently
released draft RFP for the proposed Y-12 and Pantex M&O contract;
releasing a draft RFP for the enterprise-wide construction proposal;
updating its analysis using industry feedback, current budget
projections, and project cost estimates; and developing an integrated
federal site office structure applicable to both proposals to
effectively manage and oversee their implementation with clearly
identified roles and responsibilities. For example, until NNSA
releases a draft RFP for the enterprise-wide construction proposal,
NNSA cannot assess industry interest and will not begin to prepare the
final RFP. Furthermore, NNSA did not conduct a formal assessment of
the risks involved in the consolidation of its construction contracts
consistent with federal standards of internal control, such as
potential conflicts between the M&O contractor and the construction
contractor. It will remain difficult to accurately assess whether NNSA
will realize its goals of more efficient and effective operations
through the implementation of the proposed acquisition strategy
without more information. Consistent with cost-estimating best
practices, such information should specify the costs, risks, and
benefits expected enterprise-wide and at each site for both proposed
consolidated contracts. In addition, NNSA will not complete a study of
federal site office structure and roles and responsibilities until
December 2012. Without the results of this study, NNSA cannot finalize
plans and begin to prepare the federal site offices for the transition
to the new contracts.
Recommendations for Executive Action:
We recommend that the Secretary of Energy take the following four
actions:
In order to manage NNSA's contracts as effectively and efficiently as
possible the Secretary of Energy should direct the Administrator of
NNSA to take the following action:
* Develop a plan for implementing the 18 improved management practices
identified by its analysis, as appropriate, to improve its current
contract management practices.
If NNSA continues to pursue its two-part acquisition strategy, the
Secretary of Energy should direct the Administrator of NNSA to take
the following actions to better define and inform the agency's
strategy:
* Issue a draft RFP for the enterprise-wide construction proposal.
* Using updated information gathered through the draft RFPs and recent
budget projections and cost estimates, analyze the consolidated M&O
proposal and the enterprise-wide construction proposal. Consistent
with federal standards for internal control and cost-estimating best
practices, this analysis should assess the costs, risks, and benefits
expected enterprise wide and at each site. This analysis should be
used by NNSA as it prepares its final RFPs for each proposal.
* Using the results of the federal site office study, develop an
integrated federal site office structure applicable to both proposals
to prepare the site offices before the transition to the new contracts.
Agency Comments and Our Evaluation:
We provided NNSA with a draft of this report for its review and
comment. NNSA provided written comments to the draft report--in which
it generally agreed with our findings and recommendations--and
technical comments, which we have incorporated as appropriate. NNSA's
commented that it "does not agree that similar cost efficiencies could
be obtained without a contract consolidation" and that we should
adjust statements in the report related to these efficiencies. In
response, we removed the word "similar." However, consistent with our
recommendation in this report, NNSA agreed to develop a plan for
implementing the 18 recommendations outlined in its analysis to
improve current contract management practices. This, in our view,
indicates NNSA's agreement that the efficiencies gained in doing so
would enhance its ability to carry out the mission at NNSA's various
sites, regardless of a contract consolidation. This is also consistent
with NNSA's own analysis, which stated that actions can be taken under
the current contracts to improve the effectiveness and efficiency of
operations at the individual sites.
In its comments, NNSA also stated that it may not issue a draft RFP
for the enterprise-wide construction proposal but may, instead, issue
another form of solicitation, such as a final RFP, or sealed bid, by
the end of September 2011. However, given the delays associated with
the issuance of its draft RFP for the consolidated M&O contract and
given the benefits outlined in our report of issuing a draft RFP, we
continue to recommend, if NNSA pursues this part of its acquisition
strategy, that the agency issue a draft RFP for the enterprise-wide
construction contract. Consistent with the Federal Acquisition
Regulation, a draft RFP will help provide information on NNSA's
requirements and industry capabilities and may enhance NNSA's ability
to obtain quality supplies and services, at reasonable prices, and
increase efficiency in proposal preparation, proposal evaluation,
negotiation, and contract award. As we also recommended, information
gathered through the draft RFP, when combined with recent budget
projections and cost estimates, should be used by NNSA to assess, in
ways consistent with federal standards for internal control and cost-
estimating best practices the costs, risks, and benefits of NNSA's
proposal expected enterprise-wide and at each NNSA site.
The full text of NNSA's comments is reproduced as appendix I in this
report.
We are sending copies of this report to the appropriate congressional
committees, the Secretary of Energy, the Administrator of NNSA, the
Director of the Office of Management and Budget, and other interested
parties. The report also is available at no charge on the GAO Web site
at [hyperlink, http://www.gao.gov].
If you or your staff members have any questions about this report,
please contact me at (202) 512-3841 or aloisee@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 major
contributions to this report are listed in appendix II.
Signed by:
Gene Aloise:
Director, Natural Resources and Environment:
[End of section]
Appendix I: Comments from the National Nuclear Security Administration:
Department of Energy:
National Nuclear Security Administration:
Washington, DC 20585:
September 13, 2011:
Mr. Gene Aloise:
Director:
Natural Resources and Environment:
Government Accountability Office:
Washington, DC 20458:
Dear Mr. Aloise:
The National Nuclear Security Administration (NNSA) appreciates the
opportunity to review the Government Accountability Office's (GAO)
report on Modernizing The Nuclear Security Enterprise: The National
Nuclear Security Administration's Proposed Acquisition Strategy Needs
Further Clarification and Assessment, GA0-11-848. At the request
of the House Subcommittee on Energy and Water Development, Committee
on Appropriations, NNSA understands that GAO was asked to review the
new contracting and acquisition strategy and was asked to assess
NNSA's preliminary proposals for (I) a consolidated M&O contract for
Y-I2 National Security Complex and the Pantex Plant with an option for
Savannah River Tritium Operations; and (2) an enterprise-wide
construction contract. While specific comments regarding factual
accuracy are listed in the enclosed document, NNSA offers the
following general comments from a broader perspective.
The NNSA is working on transformation of the complex to focus the
enterprise on mission success while reducing costs. Without
transformation, an ever increasing budget would be required due to
escalating costs and greater demands of maintaining an aging
stockpile. As one part of the plan to achieve nuclear weapons complex
efficiencies and transformation, an acquisition strategy team was
assembled to plan for new contract replacements as existing contracts
expire. The NNSA's acquisition strategy to accomplish transformation
includes consolidation of the Y-12 National Security Complex and the
Pantex Plant with an option for Savannah River Tritium Operations into
one single contract, thus resulting in efficiencies and enhanced
effectiveness, including costs savings and management of the three
plant sites as one contract entity to advance NNSA's transformation.
The cost analysis reviewed by the GAO is premised, first and foremost,
on merger and acquisition savings. The methodology used to develop the
anticipated savings was similar to that used by leading commercial
companies and was conservative and reasonable in its approach.
NNSA believes that the analysis is consistent with federal standards
for internal controls and cost estimating best practices that arc
referenced in the GAO report. In preparing its analysis, NNSA utilized
a team of subject matter experts to make adjustments to account for
differences between commercial nuclear operations and NNSA nuclear
production operations. NNSA agrees that the life cycle cost and
benefit analysis should be updated to assess the costs, risks and
benefits expected for the three sites being merged as those risks
relate to a cost sensitivity analysis, therefore, the recommendation
should be revised accordingly.
NNSA does not agree that similar cost efficiencies could be obtained
without a contract consolidation. As stated above, NNSA's cost
analysis is premised on merger and acquisition savings. NNSA requests
GAO consideration in adjusting its highlights and other statements in
its report, particularly as they relate to efficiencies being obtained
under current contracts.
With regard to the discussion on the federal site office structure,
the recommendation should simply state: "Develop an integrated federal
site office structure applicable to the consolidation of sites under
one contract before the transition to the new contract." GAO should
focus on the goals to be met by NNSA. The four phase federal staffing
study will inform ongoing long term decisions regarding federal
staffing and organization structure. The NNSA will stand up a Site
Office structure prior to contract award and does not plan to delay
the initial federal standup until after 2012.
In terms of the Enterprise Construction Management solicitation, the
final structure of the solicitation is still pending with an
anticipated solicitation release date by the end of September
2011. The recommendation should be modified to provide for issuing a
solicitation versus a draft Request for Proposal (RFP) providing NNSA
flexibility to select its method of contract solicitation.
Finally, GAO recommends that NNSA develop a plan for implementing the
18 improved management practices identified by an analysis as
appropriate to improve its current contract management practices. The
NNSA agrees that it should formally complete an evaluation of the
18 practices identified for improved management practices to determine
appropriateness of implementation within NNSA and further develop a
plan for implementation of those identified as appropriate.
We appreciate GAO's professionalism and effort of this review, and
look forward to the final report and to the overall results achieved
by NNSA's acquisition strategy. As stated above, enclosed are specific
comments that we believe will help clarify and improve the report in
areas that may be confusing or misleading.
If you have any questions concerning this response, please contact
JoAnne Parker, Director, Office of Internal Controls, at 202-586-1913.
Sincerely,
Signed by:
Kenneth W. Powers:
Associate Administrator for Management and Budget:
Enclosure:
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Gene Aloise, (202) 512-3841 or aloisee@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Jonathan Gill, Assistant
Director; Jonathan Kucskar; Jeff Larson; Mehrzad Nadji; Alison
O'Neill; Tim Persons; Peter Ruedel; Ron Schwenn; Vasiliki
Theodoropoulos; and Alyssa Weir made key contributions to this report.
[End of section]
Footnotes:
[1] Congress created NNSA as a semiautonomous agency within the DOE in
1999 (Title 32 of the National Defense Authorization Act for Fiscal
Year 2000, Pub. L. No. 106-65, § 3201 et seq.).
[2] M&O contracts are agreements under which the government contracts
for the operation, maintenance, or support, on its behalf, of a
government-owned or -controlled research, development, special
production, or testing establishment wholly or principally devoted to
one or more of the major programs of the contracting federal agency.
Federal Acquisition Regulation, 48 C.F.R. § 17.601 (hereinafter FAR).
[3] In its Stockpile Stewardship and Management Plan, NNSA outlines
plans for substantial investments in important nuclear weapons
capabilities and physical infrastructure.
[4] GAO, High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-11-278] (Washington, D.C.: Feb. 16,
2011). To recognize progress made at DOE's Office of Science, in
January 2009, we narrowed the focus of its high-risk designation to
two DOE program elements--the Office of Environmental Management and
NNSA, which together account for 60 percent of DOE's budget of $27
billion.
[5] This proposed acquisition strategy includes an option to later
phase in tritium operations performed at the Savannah River Site (SRS)
in South Carolina. Tritium is a heavy isotope of hydrogen and a key
component of nuclear weapons; at SRS, NNSA recycles tritium from
existing warheads among other things.
[6] GAO, Cost Estimating and Assessment Guide, [hyperlink,
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009).
[7] In 1992, the United States began a moratorium on testing nuclear
weapons. Subsequently, the President extended this moratorium in 1993,
and Congress, in the National Defense Authorization Act of 1994,
directed DOE to establish a science-based stockpile stewardship
program to maintain the nuclear weapons stockpile, Pub. L. No. 103-
160, § 3138 (1994).
[8] CAS is a set of 19 standards promulgated by the U.S. Cost
Accounting Standards Board, an independent and statutorily established
board (41 U.S.C. § 422) that is administratively part of the Office of
Management and Budget's Office of Federal Procurement Policy. For CAS
rules and procedures, see 48 C.F.R. § 9901 et seq.
[9] GAO, Nuclear Weapons: Actions Needed to Identify Total Costs of
Weapons Complex Infrastructure and Research and Production
Capabilities, [hyperlink, http://www.gao.gov/products/GAO-10-582]
(Washington, D.C.: June 21, 2010).
[10] GAO, Department of Energy: Additional Opportunities Exist for
Reducing Laboratory Contractors' Support Costs, [hyperlink,
http://www.gao.gov/products/GAO-05-897] (Washington, D.C.: Sept. 9,
2005).
[11] Department of Defense, Nuclear Posture Review Report (Washington,
D.C.: Apr. 6, 2010).
[12] Commercial nuclear industry data was based on the consultant's
proprietary information about mergers, costs, and employment within
the industry.
[13] This baseline of costs and staffing levels was established at
each of the sites by gathering historical cost and employment data
from each of the sites, then projecting flat spending and staffing
into the future.
[14] GAO, Nuclear Weapons: National Nuclear Security Administration
Needs to Better Manage Risks Associated with the Modernization of Its
Kansas City Plant, [hyperlink, http://www.gao.gov/products/GAO-10-115]
(Washington, D.C.: Oct. 23, 2009).
[15] NNSA's estimate of saving $895 million in nominal dollars over a
10-year period includes phasing in SRS tritium operations to the
consolidated M&O contract (the current contract for these operations
expires in 2013).
[16] An FTE consists of one or more employed individuals who
collectively complete 40 hours per week (or 2,080 work hours in a
given year).
[17] This estimate of $895 million in savings includes the cost to
transition to a consolidated contract which NNSA estimates at $35
million over 10 years.
[18] This includes 1,167 contractor FTEs for SRS tritium operations.
[19] D'Agostino, Thomas, testimony on the Fiscal Year 2011 President's
Budget Request before the Senate Armed Services Committee,
Subcommittee on Strategic Forces, Apr. 14, 2010.
[20] According to NNSA's fiscal year 2012 Stockpile Stewardship and
Management Plan, in fiscal years 2005 through 2009, the Stockpile
Stewardship Program experienced relatively flat funding that, when
adjusted for inflation, resulted in decreased purchasing power.
[21] According to the fiscal year 2012 Stockpile Stewardship and
Management Plan, this increase is expected as a result of a number of
large construction projects for which NNSA expects to soon begin.
[22] An RFP is a solicitation document used in negotiated acquisitions
to communicate government requirements to prospective contractors and
to solicit proposals.
[23] Noting our preliminary audit results and potential
recommendations, NNSA released the draft RFP for the consolidated M&O
contract.
[24] Releasing a draft RFP is one method the government may use to
have early exchanges of information about a future acquisition with
industry. The purpose of these early exchanges of information is "to
improve the understanding of government requirements and industry
capabilities, thereby allowing potential offerors to judge whether or
how they can satisfy the government's requirements, and enhancing the
government's ability to obtain quality supplies and services . . . at
reasonable prices, and increase efficiency in proposal preparation,
proposal evaluation, negotiation, and contract award." FAR 15.201(b).
[25] FAR 15.203.
[26] DOE established OCA to improve the department's cost-estimating
capabilities and better ensure that its project cost estimates are
reliable by providing a new independent cost-estimating function for
the department. DOE disbanded OCA in a 2011 reorganization.
[27] OCA estimated that savings could range from $0 to $1 billion
dollars.
[28] [hyperlink, http://www.gao.gov/products/GAO-09-3SP].
[29] SRS has nearly 500 protective forces. Integrating these forces
into a consolidated M&O contract could also pose similar issues at
SRS. See GAO, Nuclear Security: DOE Needs to Address Protective
Forces' Personnel System Issues, [hyperlink,
http://www.gao.gov/products/GAO-10-275] (Washington, D.C.: Jan. 29,
2010).
[30] Federal laws and regulations governing federal contracting
generally require that contract solicitations promote and provide for
full and open competition.
[31] Office of Management and Budget, "Memorandum for Chief
Acquisition Officers, Senior Procurement Executives" (Washington,
D.C.: Oct. 27, 2009).
[32] GAO, Nuclear Weapons: NNSA Needs More Comprehensive
Infrastructure and Workforce Data to Improve Enterprise Decision-
making, [hyperlink, http://www.gao.gov/products/GAO-11-188]
(Washington, D.C.: Feb. 14, 2011).
[33] 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).
[34] Mixed oxide fuel fabricated, in part, from weapons-grade
plutonium and uranium.
[35] In its response to our written report, NNSA said that it plans to
issue some form of contract solicitation, but not necessarily a draft
RFP, by the end of September 2011.
[36] An NNSA official said that it is likely the new contract will
include a clause in the consolidated contract that will allow NNSA to
essentially reserve the right to decide which construction projects it
would like to build under the consolidated construction contract or
keep with the M&O contractor.
[37] A sensitivity analysis is used to test the sensitivity of cost
elements to changes in estimating input values and key assumptions.
[38] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. ("Green
Book") (Washington, D.C.: November 1999).
[39] [hyperlink, http://www.gao.gov/products/GAO-09-3SP].
[40] At this time, it is unknown whether NNSA will award this contract
to a single contractor or a team of prequalified contractors.
[41] DOE and NNSA have taken a number of actions, in part due to our
high-risk designation, to improve contract and project management.
[End of section]
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