Department of Energy:

Additional Opportunities Exist for Reducing Laboratory Contractors' Support Costs

GAO-05-897: Published: Sep 9, 2005. Publicly Released: Oct 11, 2005.

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Mark E. Gaffigan
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In fiscal year 2004, about two-thirds of the Department of Energy's (DOE) $26.9 billion in spending went to 28 major facilities--laboratories, production and test facilities, and nuclear waste cleanup and storage facilities. DOE spent about $2.9 billion in fiscal year 2004 to support the mission of its five largest laboratories. GAO was asked to examine (1) recent trends in indirect and functional support cost rates for these five laboratories, noting key differences in how contractors classify costs, and (2) the efforts of DOE and its contractors to reduce indirect and other support costs and identify additional opportunities for savings.

For fiscal years 2000 through 2004, laboratory-reported rates for indirect costs--those not charged directly to a specific program--increased at two laboratories and decreased at three. However, indirect cost rates cannot be compared across laboratories because contractors classify different portions of support costs as indirect. To facilitate analysis, DOE requires the laboratories to report what it called "functional support costs," or costs that support missions, regardless of whether they are classified as direct or indirect costs. Using this measure, three laboratories' rates--that is, functional support costs divided by total costs--increased and two laboratories' rates decreased over the 5-year period. While functional support cost rates improved comparability, several DOE and contractor officials said that the definitions for some categories of support costs, such as "facilities management," are unclear, leading to confusion and inconsistent reporting. DOE and its contractors have initiated several steps to reduce indirect and other support costs but can take additional actions to improve their implementation. First, DOE's laboratory contracts have increasingly included incentives to encourage cost reductions. In fiscal year 2004, for example, the National Nuclear Security Administration began an "award-term" pilot program that allows a contractor to earn extra contract years based on performance and cost-saving achievements. However, DOE is expanding use of this incentive without evaluating it. Second, DOE requires its contractors to benchmark employee benefits and to reduce benefits if they exceed the benchmark, but DOE did not promptly enforce these requirements at one laboratory and exempted two others. Third, DOE has begun to address a $1.9 billion backlog of deferred maintenance to reduce long-term costs. However, without a more rigorous approach, the backlog will persist well into future decades. Lastly, while some laboratories have used process improvement programs to streamline business processes and reduce costs, others do not have such programs, nor are they required to have them.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOE has improved the quality and comparability of its facilities support cost data by revising functional support cost definitions in its Support Cost by Functional Activity Report Guidance for fiscal year 2006.

    Recommendation: To improve the quality and comparability of DOE facilities' support cost data, the Secretary of Energy should direct the Chief Financial Officer to work with the Financial Management Systems Improvement Council to clarify definitions of functional support cost categories.

    Agency Affected: Department of Energy

  2. Status: Closed - Implemented

    Comments: To ensure that the National Nuclear Security Administration (NNSA) receives benefits commensurate with awarding 1 or more extra years to the term of a management and operating contract, NNSA officials told us that an additional year can be awarded only (1) by NNSA's Administrator and (2) if the contractor has received an award-fee performance score of at least 85 percent and then has met or exceeded performance standards for additional award-term criteria.

    Recommendation: To determine whether the department receives benefits commensurate with awarding 1 or more extra years to the contract term, the Secretary of Energy should direct the National Nuclear Security Administration to evaluate the effectiveness of its pilot award-term program at Sandia National Laboratories, particularly the nature and extent of work quality improvements, prior to extending the program to other laboratories.

    Agency Affected: Department of Energy

  3. Status: Closed - Implemented

    Comments: Beginning in May 2006, DOE has inserted language consistent with GAO's recommendation into new or extended contracts with seven facilities, including two of the three laboratories--Los Alamos and Lawrence Livermore National Laboratories--that we identified as having pension, medical, and other benefits exceeding allowable ranges. DOE plans to continue inserting such language in subsequent contract solicitations.

    Recommendation: To provide competitive but economical employee benefits, the Secretary of Energy should complete the revision of DOE Order 350.1 and ensure that the order (1) extends the requirement to benchmark the value of employee benefits to all contractors; (2) requires prompt corrective action if the value of benefits exceeds the allowable range; and (3) extends the benchmarking requirements to include the costs, as well as the values, of the benefits.

    Agency Affected: Department of Energy

  4. Status: Closed - Implemented

    Comments: In late 2006, DOE developed a multi-faceted approach for reducing its maintenance backlog that included (1) budget guidance that required facilities to include day-to-day and deferred maintenance in their budget planning, (2) models to project deferred maintenance growth or reduction based on multi-year finding scenarios, (3) more accurate and consistent deferred maintenance tracking and reporting by facilities, and (4) establishment of targets by facilities for deferred maintenance reduction. In March 2007, DOE formed a Mission Dependency Team, chaired by the Office of Engineering and Construction Management, to improve mission dependency definitions and guidance for the consistent designation of assets within DOE's Facilities Information Management System.

    Recommendation: To reduce long-term maintenance costs at contractor-operated facilities, the Secretary of Energy should develop a long-term sustainable approach that meets day-to-day maintenance requirements, reduces the maintenance backlog, and minimizes its reaccumulation.

    Agency Affected: Department of Energy

  5. Status: Closed - Implemented

    Comments: As DOE moves forward with plans to implement performance-based contracting, all contractors will be required to implement disciplined methodologies to identify process improvements based on statistical analysis. DOE will require contractors, effective with FY 2006 reporting, to include a description of their formal statistically correct cost improvement process in their annual Support Cost by Functional Activity reports as well as a description of all the significant studies conducted that year and the results. In November 2007, DOE's National Nuclear Security Administration validated that Los Alamos National Laboratory's contractor had reduced annual operating costs by $102.5 million during fiscal year 2007 by using its process improvement programs to identify efficiencies.

    Recommendation: To facilitate the further reduction of support costs, the Secretary of Energy should require that each DOE management and operating contractor implement a process improvement program that routinely assesses the efficiency and effectiveness of business practices and other operations.

    Agency Affected: Department of Energy


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