National Nuclear Security Administration: Additional Steps Needed to Improve Cost Estimates for Fixed Price Subcontracts

What GAO Found

Based on GAO’s analysis, none of the policies established by the management and operating (M&O) contractors operating National Nuclear Security Administration (NNSA) sites met or substantially met all 12 steps for developing a reliable cost estimate for fixed-price construction subcontracts. GAO's cost estimating guide established these 12 steps, which reflect commercial best practices to help agencies develop comprehensive, well documented, accurate, and credible cost estimates. Specifically, of the seven M&O contractors who operated NNSA sites during the period of our review, the policies of four M&O contractors met or substantially met most of the steps, but the policies of the remaining three contractors only met or substantially met a few steps.

M&O contractors generally underestimated the costs associated with fixed-price construction subcontracts. Specifically, based on GAO’s analysis of 252 fixed-price construction subcontracts completed during fiscal year (FY) 2023, their combined final (or actual) costs exceeded the contractors’ initial cost estimates by more than $37 million, or 14 percent (see fig.). Most of these cost increases occurred after the M&O contractors had already awarded these subcontracts. Fixed-price subcontracts provide for a price that is firm or adjustable (based on specific contract terms), and other adjustments are at the expense of the subcontractor. According to contractor representatives, cost increases can occur for multiple reasons after the award of a fixed-price subcontract, including for expansions of the project’s scope or unanticipated expenses. In such cases, increased costs may be borne by both NNSA and subcontractor.

Estimated and Actual Costs of Fixed-Price Construction Subcontracts Completed in Fiscal Year 2023

NNSA oversees the cost estimating policies of its M&O contractors for fixed-price construction subcontracts to a limited extent. For example, according to Department of Energy (DOE) acquisition regulations, contractor purchasing systems—which include policies for conducting cost estimates of fixed-price subcontracts—should identify and apply commercial best practices. In addition, according to DOE guidance, NNSA is to review contractor purchasing systems at least every 6 years. NNSA has approved all its M&O contractors’ purchasing systems but has not ensured that its M&O contractors’ policies are substantially meeting all 12 steps for developing a reliable cost estimate. By ensuring M&O contractors’ cost estimation policies incorporate commercial best practices consistent with GAO’s cost estimating guide, NNSA would have greater assurance that contractors’ cost estimates are more reliable for realistic program planning, budgeting, and management.

Why GAO Did This Study

NNSA spends millions of dollars on hundreds of construction projects each year to maintain and modernize the research and production infrastructure at its eight nuclear security enterprise sites. NNSA relies on M&O contractors at its sites to manage the day-to-day activities associated with these construction projects. For less costly projects, M&O contractors may use fixed-price subcontracts to procure the services of subcontractors.

The report accompanying the Senate bill for the National Defense Authorization Act for FY 2024 includes a provision for GAO to review NNSA’s use of fixed-price construction subcontracts. This report examines (1) the extent to which M&O contractor policies for estimating the costs of fixed-price subcontracts followed best practices, (2) the performance of M&O contractors in estimating costs, and (3) the extent to which NNSA oversees the cost estimating policies of its M&O contractors.

To do this work, GAO reviewed relevant regulations and DOE and NNSA directives and guidance on estimating costs for fixed-price construction subcontracts. GAO also analyzed contractor documentation and cost estimation data, and interviewed NNSA officials and M&O contractor representatives.