U. S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
 
 
 
 
         AUDIT OF ARCHITECT AND ENGINEERING COSTS AT THE
              IDAHO NATIONAL ENGINEERING LABORATORY
 
 
The Office of Inspector General wants to make the distribution of
its reports as customer friendly and cost effective as possible.
Therefore, this report will be available electronically through
the Internet five to seven days after publication at the
following alternative addresses:
 
            Department of Energy Headquarters Gopher
                        gopher.hr.doe.gov
                                
         Department of Energy Headquarters Anonymous FTP
                       vm1.hqadmin.doe.gov
                                
Department of Energy Human Resources and Administration Home Page
               http://www.hr.doe.gov/refshelf.html
                                
Your comments would be appreciated and can be provided on the
Customer Response Form attached to the report.
 
              This report can be obtained from the
                    U.S. Department of Energy
         Office of Scientific and Technical Information
                           P.O. Box 62
                   Oak Ridge, Tennessee  37831
 
 
 
 
 
 
Report Number:  DOE/IG-0387         Western Regional Audit Office
Date of Issue:  March 1996          Albuquerque, NM 87185-5400
March 22. 1006
 
IG-1
 
INFORMATION:  Report on "Audit of Architect and Engineering
              Costs at the Idaho National Engineering
              Laboratory"
 
TO:  The Secretary
 
BACKGROUND:
 
In September 1990, the Office of Inspector General issued
the Departmentwide Audit of Architect and Engineering Design
Costs (DOE/IG-0289) which concluded that the Departmentms
architect and engineering (A/E) costs averaged more than twice
that of private industry.  The primary cause of the higher costs
was the lack of Departmental A/E cost standards that would
provide measurement criteria for controlling costs.  Consistent
with our prior Departmentwide audit, the purpose of this audit
was to determine whether A/E services performed at the Idaho
National Engineering Laboratory were economical.  Specifically,
we determined whether the costs for A/E services at the
Laboratory were comparable to the cost standards for A/E services
in industry and the State of Idaho.
 
DISCUSSION:
 
The Idaho Operations Office has begun to develop performance
expectations and performance measures in order to make the
management and operating contract more performance based.  The
audit disclosed, however, that additional opportunities exist to
improve management control over the costs of A/E services.  We
found that A/E costs for 65 conventional construction projects
were $5.8 million higher than comparable industry standards.
Therefore, we recommended that the Manager, Idaho Operations
Office take aggressive action to control the excessive cost of
A/E services that were previously identified in the 1990
Departmentwide audit report and has continued at least through
February 2, 1996.  Specifically, actions to control the excessive
cost of A/E services should include the establishment of
expectations and performance measurements for Lockheed to ensure
that:
 
     *   Laboratory costs for A/E services are more in line
         with industry cost standards;
     
     *   A/E services are awarded competitively based on
         technical competence and price; and,
     *
         A/E services are similar in quality and detail to
         industry standards.
 
The Idaho Operations Office agreed with our recommendation.
 
 
 
                                 (Signed)
 
 
                              John C. Layton
                              Inspector General
 
Attachment
 
cc:  Deputy Secretary
     Acting Under Secretary
                                
         
         AUDIT OF ARCHITECT AND ENGINEERING COSTS AT THE
              IDAHO NATIONAL ENGINEERING LABORATORY
 
         
                        TABLE OF CONTENTS
         
                                                           Page
 
SUMMARY ..................................................   1
 
PART I   - APPROACH AND OVERVIEW .........................   2
 
           Introduction ..................................   2
 
           Scope and Methodology ..........................  2
 
           Background ....................................   3
 
           Observations and Conclusions ..................   4
 
PART II  - FINDING AND RECOMMENDATION  ...................   6
 
           A/E Costs at the Laboratory ...................   6
 
PART III - MANAGEMENT AND AUDITOR COMMENTS ...............  13
 
PART IV  - APPENDIX ......................................  18
                    
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                    OFFICE OF AUDIT SERVICES
 
         AUDIT OF ARCHITECT AND ENGINEERING COSTS AT THE
              IDAHO NATIONAL ENGINEERING LABORATORY
 
Audit Report Number:  DOE/IG-0387
 
                             SUMMARY
 
     The National Performance Review (NPR) report, Making
Government Work Better and Cost Less, (September 1993) recommends
performance measurement as a tool to help improve Government
operations.  One performance measurement that the NPR encourages
is benchmarking an agencyms performance against standards used by
private industry and other Government agencies.  The objective of
this audit was to determine whether architect and engineering
(A/E) services performed at the Idaho National Engineering
Laboratory (Laboratory) were economical when compared to cost
standards for A/E services in industry and the State of Idaho
(State).
 
     Our analysis of the Laboratoryms costs for A/E services
found that A/E costs for 65 conventional construction projects
were, in the aggregate, $5.8 million higher than comparable
industry standards.  This occurred because of inadequate internal
controls over A/E design costs.  Specifically, the Laboratory did
not have a way to measure the performance of its design programs;
the Idaho Operations Officems (Operations Office) policy for the
selection of A/E services precluded price competition; and,
design services for conventional construction at the Laboratory
were in more detail than necessary.
 
     We recommended that the Manager, Idaho Operations Office,
establish expectations and performance measurements for Lockheed
Idaho Technologies Company (Lockheed) to ensure that Laboratory
costs for A/E services are more in line with industry cost
standards; individual A/E services are awarded competitively
based on technical competence and price; and, A/E services are
similar in quality and detail to industry standards.  We estimate
that the Operations Office could save as much as $2.5 million for
A/E services on 19 future planned conventional construction
projects by implementing our recommendation.
 
     Management generally concurred with the finding and
recommendation presented in the report and has already initiated
corrective actions in response to the recommendation.
 
 
 
 
                                    _______(Signed)____________
                                    OFFICE OF INSPECTOR GENERAL
                             
                             PART I
                                
                      APPROACH AND OVERVIEW
 
INTRODUCTION
 
     In September 1990 the Office of Inspector General (OIG)
issued the Departmentwide Audit of Architect and Engineering
Design Costs (DOE/IG-0289) which concluded that the Departmentms
A/E costs averaged more than twice that of private industry.  The
primary cause of the higher costs was the lack of Departmental
A/E cost standards that would provide measurement criteria for
controlling costs.  Consistent with our prior Departmentwide
audit, the purpose of this audit was to determine whether A/E
services performed at the Laboratory were economical.
Specifically, we determined whether the costs for A/E services at
the Laboratory were comparable to the cost standards for A/E
services in industry and the State; and, whether A/E costs were
reasonable.
 
SCOPE AND METHODOLOGY
 
     The audit was conducted at the Operations Office and the
Laboratory from June 15, 1995 through October 20, 1995.  To
accomplish the audit objectives, we interviewed key personnel and
reviewed:
 
     *    Federal and Departmental regulations as well as Lockheed
          policies and procedures for A/E services;
       
     *    prior A/E audit reports issued by the OIG;
     
     *    accounting records and other documentation of A/E costs and
          construction costs for conventional construction projects on the
          books in Fiscal Year 1995;
     
     *    publications of A/E cost estimates that are widely used in
          industry;
       
     *    State of Idaho construction projects; and,
       
     *    Operations Office plans for construction of conventional
          buildings in the future.
 
     The scope of the audit was limited to A/E services acquired
for conventional construction projects on Lockheedms accounting
records during Fiscal Year 1995.  These projects included those
that were recently completed, are currently underway, or are soon
to begin.  Conventional construction projects, according to the
Department of Energyms (Department) cost guidance, include
warehouses, laboratories, office buildings, non-process related
utilities, sewage, and water treatment facilities.  Conventional
construction does not mean the projects were necessarily simple,
non-sophisticated, or standard, but that from a design point of
view, prior industry experience exists (DOE COST GUIDE, Volume 6,  
November 1994, Chapter 25, "Guidelines for Engineering, Design, &
Inspection Costs").  During Fiscal Year 1995, there were 65 conventional 
construction projects on Lockheed's accounting records that cost about 
$88.1 million to construct and $13 million for A/E services.  We 
reviewed all of these projects in our audit.
 
     We compared A/E costs for the 65 Laboratory projects to an
industry benchmark taken from two publications that are used
extensively in the construction industry for estimating costs
(see Appendix).  These publications are:
 
     *    Mean's Building Construction Cost Data, 1995 annual edition,
          published by RS Means & Company; and,
     
     *    Marshall Valuation Service, January 1995 edition, published
          by Marshall and Swift Company.
 
     In addition, we compared A/E costs for 20 of the 65
Laboratory projects to a benchmark for the State that was taken
from cost data of 7 recently completed State of Idaho
construction projects (see Appendix).
 
     The audit was performed according to generally accepted
Government auditing standards for performance audits and included
tests of internal controls and compliance with laws and
regulations to the extent necessary to satisfy audit objectives.
Accordingly, the audit included an assessment of significant
internal controls with respect to A/E services including the
Operations Officems policies for the selection and authorization
of A/E services.  We relied on Lockheedms internal project
listing and accounting system to provide the universe of
conventional construction projects and performed limited tests of
the accounting system to ensure the reliability of computer
processed data.  Because our audit was limited, it would not
necessarily have disclosed all internal control deficiencies that
may have existed at the time of our audit.  An exit conference
was held on January 25, 1996.
 
BACKGROUND
 
     Prior to Fiscal Year 1995, the Laboratory was managed by
five contractors.  At the beginning of Fiscal Year 1995, the five
contracts were consolidated into one contract which was awarded
to Lockheed.  Two of the former contractors, Westinghouse Idaho
Nuclear Company and EG&G Idaho, Inc., (EG&G) had subcontracts
with several external A/E firms for design services.  However,
the majority of design work was performed in-house by EG&Gms
resident A/E organization.  When Lockheed took over management of
the Laboratory it assumed the subcontracts with the external A/E
firms and the internal resident A/E organization.  In addition,
the Operations Office had a prime contract with another firm
which was referred to as the Operations Officems miscellaneous
A/E firm.  This A/E firm generally performed the complicated, non-
conventional design work, but sometimes was used to provide
conventional design services as well.
 
     Lockheed manages approximately 580 Department owned
buildings at the Laboratory.  The ages of these buildings range
from less than one year to more than 40 years.  The Operations
Office has embarked on an extensive construction program to
replace, upgrade or modify buildings that are old, deteriorated
or obsolete to satisfy current construction codes or new mission
needs.  Before construction begins, however, A/E services must be
procured to produce the designs for the buildings.  A/E services,
as defined by the Federal Acquisition Regulations, are
professional services associated with the design of real
property.  A/E services include surveying, consultation, plans
and specifications, value engineering, design review, and other
related services.
 
OBSERVATIONS AND CONCLUSIONS
 
     Department Order 430.1, Life Cycle Asset Management,
(August 24, 1995) requires all operations offices to develop site-
specific performance expectations and performance measures for
design services.  The Idaho Operations Office is currently
preparing these expectations and performance measurements and
expects to complete these around May 1996.  We commend Idaho for
recognizing that performance measurement systems improve
performance and reduce costs.
 
     In addition, other positive practices were noted during our
audit.  For instance, Lockheed has a cost control system in place
that is intended to make internally developed A/E plans and
specifications much like a fixed price contract.  Specifically,
the construction project manager and the leader of the A/E design
team agree to a fixed price "task baseline agreement" that
includes a scope of work, deliverables, and schedule for a design
package.  This appears to be an innovative practice that may have
the potential to keep design costs down.  In fact, for 22 percent
of the conventional construction projects included in our review,
the Laboratoryms design costs were less than industry estimates.
 
     However, opportunities exist to improve management control
over the costs of A/E services.  We found that the Laboratoryms
costs for obtaining A/E services for 65 conventional construction
projects were approximately $5.8 million higher than comparable
industry standards and about $1.6 million more than the State
benchmark for 20 (of the 65) comparable construction design
projects.  Laboratory costs were higher because of inadequate
internal controls over A/E design costs.  Specifically, the
Laboratory did not have a way to measure the performance of its
design programs; Idahoms policy for the selection of A/E services
precluded price competition; and, design services for
conventional construction at the Laboratory were in more detail
than necessary.  We estimate that the Laboratory could save as
much as $2.5 million on 19 future planned conventional
construction projects by implementing our recommendation.
 
     In our opinion, the finding in this report disclosed
material internal control weaknesses that the Department should
consider when preparing its yearend assurance memorandum on
internal controls.
                             
                             PART II
                                
                   FINDING AND RECOMMENDATION
 
                   A/E Costs at the Laboratory
 
FINDING
 
     The NPR report recommends benchmarking performance to
industry standards as a tool to help improve Government
operations.  Our analysis of the Laboratoryms costs for A/E
services showed that A/E costs for 65 conventional construction
projects were $5.8 million higher than comparable industry
standards.  Laboratory costs were higher because of inadequate
internal controls over A/E design costs.  Specifically, the
Laboratory did not have a way to measure the performance of its
design programs; Idahoms policy for the selection of A/E services
precluded price competition; and design services for conventional
construction at the Laboratory were in more detail than
necessary.  As a result, the Laboratory could save approximately
$2.5 million for design services on 19 future conventional
construction projects by implementing our recommendation.
 
RECOMMENDATION
 
     We recommend that the Manager, Idaho Operations Office,
together with Lockheed, take aggressive action to control the
excessive cost of A/E services that were previously identified in
a 1990 Departmentwide audit report and have continued at least
through February 2, 1996.  Specifically, actions to control the
excessive cost of A/E services should include the establishment
of expectations and performance measurements for Lockheed to
ensure that:
 
     *    Laboratory costs for A/E services are more in line with
          industry cost standards;
     
     *    A/E services are awarded competitively based on technical
          competence and price; and,
     
     *    A/E services are similar in quality and detail to industry
          standards.
 
MANAGEMENT REACTION
 
     Management generally concurred with the finding and
recommendation and initiated corrective action.  Detailed
management and auditor comments are provided in Part III of this
report.
                       
                       DETAILS OF FINDING
 
     The NPR report recommends performance measurement as a tool
to help improve Government operations.  In fact, the report
stated that "...if it doesnmt get measured it doesnmt get
improved."  One performance measurement that the NPR encourages
is benchmarking an agencyms performance against standards used by
private industry and other Government agencies.  When
benchmarking, the NPR pointed out that it is imperative that the
agency create a level playing field by fully accounting for all
costs so that the services can be compared in as fair a manner as
possible.  For these reasons we compared the Laboratoryms A/E
costs against industry standards and State benchmarks rather than
the more stringent Federal 6-percent rule observed by other
Federal agencies.
 
     Department Order 430.1, Life Cycle Asset Management,
requires that the planning, design, construction, and management
of physical assets incorporate industry standards and performance
objectives.  This Order shall be implemented on a site-by-site
basis through the establishment of site-specific performance
expectations and performance measurements.  The Operations Office
is preparing these expectations and performance measurements and
expects to complete them during the March through May 1996
timeframe.
 
     In our audit we used two benchmarks for performance
measurement of A/E costs:  an industry benchmark, and one for the
State.  The industry benchmark for 65 conventional construction
projects at the Laboratory averaged 8.17 percent of construction
costs, according to the industry publications.  The State
benchmark for design costs averaged 8.15 percent of construction
costs.
 
     The Brooks Architect-Engineers Act of 1949 states that all
contracts for A/E services should be competed based on technical
competence alone.  The Brooks Act has been cited by the
Operations Office to back up the position that price should not
be a selection criteria for A/E services.  However, on
June 27, 1988, the language in the Department of Energy
Acquisition Regulation (DEAR) was changed to include that while
adhering to the principle of selection based upon qualifications
for A/E contracts let directly by the Government, "...this does
not prelude the consideration of other factors, including cost or
price..." for A/E contracts awarded by management and operating
contractors (M&O).
 
COMPARISON OF DESIGN COSTS TO INDUSTRY AND STATE STANDARDS
 
     Design costs for conventional construction projects at the
Laboratory were significantly higher than comparable industry
standards and State benchmarks.  We compared actual A/E costs for
65 conventional construction projects worth about $88.1 million
to A/E cost estimates found in industry publications.  In
addition, we also compared A/E costs for 20 of these buildings
worth about $32 million to similar projects constructed by the
State.
 
Comparison to Industry
 
     Design costs for 65 conventional construction projects worth
about $88.1 million were, in the aggregate, about $5.8 million
higher than comparable industry standards.  The actual cost of
A/E services for these projects was about $13 million on projects
that the industry standards estimate should have cost about
$7.2 million.  However, although the majority of projects had A/E
costs that were higher than industry standards, some Laboratory
A/E costs were lower than industry standards as illustrated in
the following chart.
 
         COMPARISON OF LABORATORY A/E COSTS TO INDUSTRY
                          ($ millions)
Laboratory A/E
Costs Relative to     No. of     Constr.  Laboratory  Industry  Total
Ind. Standards        Projects   Cost     A/E         A/E       Differences
     
Less than Industry      14       $19.1    $1.1        $1.5      $(.4)
1 to 2 Times More       30        47.5     5.3         3.9       1.4
2 to 3 Times More        9         8.6     1.9          .7       1.2
3 to 4 Times More        8         8.8     2.9          .8       2.1
More Than 4 Times        4         4.1     1.8          .3       1.5
   
Totals                  65       $88.1   $13.0        $7.2      $5.8
   
Percent of Construction                   14.7%       8.17%
 
     As shown above, 12 of 65 (or 18 percent) of these projects
have more than three times the design costs when compared against
industry standards.  However, many of the 30 projects that were
only one to two times industry standards have significant dollar
differences over industry standards.  For example:
 
     *  A new medical facility cost $390,000 to design which was
        $75,000 more than the industry estimate of $315,000.
       
     *  A new emergency response facility cost $445,000 to design
        which was $167,000 more than the industry estimate of $278,000.
       
     *  A new transportation complex cost $798,000 to design which
        was $323,000 more than the industry estimate of $475,000.
 
     The industry benchmark has been criticized by Operations
Office personnel for not taking into consideration the local
economic peculiarities of eastern Idaho, where A/E firms may be
more difficult to find than in a larger metropolis.  In addition,
management argued that Government is fundamentally different than
private industry and, therefore, cannot be fairly compared to one
another.  To satisfy these concerns, we also compared the A/E
costs of the Laboratory to construction projects that were
locally designed and constructed by the State of Idaho.
 
Comparison to the State of Idaho
 
     The Laboratory spent approximately $1.6 million more than
the State benchmark for 20 conventional construction design
services on comparable projects included in our audit.  The
Statems design costs were, on an average, 8.15 percent of
construction costs compared to the Laboratoryms average of
13.2 percent for office buildings, laboratory facilities,
communications centers, and other common use spaces.  The
Laboratoryms A/E costs were about $4.2 million, which was
$1.6 million more than the State benchmark of $2.6 million for
comparable construction projects.
 
INTERNAL CONTROLS OVER DESIGN COSTS
 
     Design costs at the Laboratory were higher than industry and
State standards because the Operations Office did not have
adequate internal controls over A/E design costs.  Specifically,
the Operations Office did not measure the performance of its
design programs; the Operations Office policy for the selection
of A/E services precluded price competition; and designs for
conventional construction projects were more detailed than
necessary.
 
Performance Measurement of A/E Costs
 
     The Laboratory did not compare its A/E costs against
industry cost standards to measure its performance.  This kind of
performance measurement could have provided management with
information to identify and correct problems that resulted in
higher design costs.  As the NPR report indicated, measurement is
a requirement for improvement.
 
     In addition, even though Headquarters initiated a cost
reduction plan that attempted to measure and track design costs,
the Operations Office did not fully implement the Headquarters
initiated Improvement Plan for Reducing Architect-Engineer Costs,
dated August 1993.  This plan was developed in response to an
Office of Inspector General audit report on A/E costs in 1990.
The improvement plan was designed to:  1) improve A/E cost
estimates and project cost management; 2) identify incompetent
contractors and inefficient practices; and, 3) provide early
recognition and resolution of sitewide problems and adverse
trends.  To implement this plan, the Manager, Idaho Operations
Office was to designate an individual with approval authority for
A/E services and create a database to compile, analyze, and
report on A/E costs at the Laboratory.  The role of the approval
authority included reviewing A/E cost proposals to ensure that
A/E costs were kept to the lowest amount possible and providing
quarterly reports on A/E costs to Headquarters.  However, the
Operations Office did not designate an approval authority for A/E
costs; create a database to report on A/E costs at the
Laboratory; or provide quarterly reports on A/E costs to
Headquarters.  In fact, management informed us that implementing
the improvement plan was largely forgotten due to reorganizations
and changing priorities.
 
Competition for A/E Services
 
     The Operations Officems policy for the selection of A/E
services precluded competition by giving Lockheedms resident A/E
organization a virtual monopoly over design services.  Rather
than routinely competing A/E design work, Lockheed scheduled
design work to keep its resident A/E organization fully employed.
Only design work above the maximum capacity of the resident A/E
organization was awarded to external A/E firms.  This policy gave
the resident A/E organization the ability to control its level of
"sales" of A/E services to the Laboratory.  As a result, the
resident A/E was not subject to market forces including
demonstrating that it was the most economical by price
competition, or by demonstrating that it was the best qualified.
In the framework of the NPR report, this may be considered a
service monopoly.  The NPR report section entitled "Making
Service Organizations Compete" suggests that agencies should not
provide services in-house unless the services can compete with
private companies.  Thus, the Operations Officems policy for A/E
services is not in the spirit of the NPR nor does it provide for
obtaining A/E services at the lowest cost.
 
     One example of how the Operations Officems policy for
selection of A/E services precluded competition, when it was
readily available, was with a new Laboratory transportation
complex.  During discussions as to who would design the
transportation complex, the project file documentation indicated
that the external A/E contractor could do the design more
efficiently than Lockheedms resident A/E.  The documentation
demonstrated that the external A/E had recently designed three
major transportation complexes, and would be able to assign
personnel who designed these projects to the Laboratory project.
However, the resident A/E was given the design project because of
the Operations Officems policy for selecting A/E services even
though the resident A/E had not designed a transportation complex
in more than 30 years.
 
     In addition, when A/E work was forwarded to an external firm
there was little incentive for the external A/E firm to accept
lower prices for its A/E services because there was no price
competition for individual design services.  All of the external
A/E contracts were task order contracts.  A task order contract
is awarded to an A/E firm for three to five years.  Prices are
negotiated for each task placed for A/E services.  However, the
Laboratoryms ability to negotiate a favorable arrangement is
reduced by the fact that the A/E firm knows that it has already
won the contract.  Thus, the A/E has no incentive to make lower
offers.  On the contrary, the A/E has incentive to get as much as
the Department is willing to pay.  Clearly, an environment where
each task is subject to price competition between several
qualified firms would be in the Governmentms best interest.
 
Amount of Detail of Design
 
     Designs for conventional construction projects were in more
detail than necessary.  Specifically, Lockheed personnel stated
that A/E designs for conventional construction projects were in
such detail that many were almost to the level of design required
for a nuclear related project.  We were not professionally
qualified to verify whether this was accurate.  However, we
concluded that providing more detail in A/E designs than
necessary for conventional construction would partially explain
the higher A/E design costs at the Laboratory.
 
     The inclination for more detailed designs was exemplified by
the fact that there were two "design reviews" performed at the
Laboratory.  The first design review was performed internally by
the A/E before the plans, drawings, and specifications were
released.  This review was performed by individuals independent
of the design team to ensure the quality and accuracy of the
design plans.  Afterward, when project management received the
plans, another design review team was assembled to examine the
plans, drawings, and specifications again.  Double checking
design plans may be appropriate for nuclear related construction
projects due to the inherently more complicated design issues.
However, double-checking the designs of conventional construction
projects typically is not performed in industry.  In fact, an
industry customer generally relies on the A/Ems quality
assurance.  If design problems are discovered by the general
contractor during construction, then the A/E fixes the problem.
 
     According to the Operations Office, more detailed design
eliminates many ambiguities in the drawings that might result in
change orders by the general contractor.  Management's position
is that spending more on design makes the total project less
expensive by reducing the number of change orders during
construction.  The Operations Office did not have quantitative
support for this position and we were unable to verify it.
However, we concluded that the State and industry have at least
as much incentive to reduce total construction costs as the
Department.
 
POTENTIAL SAVINGS ON DESIGN SERVICES
 
     We concluded that the Laboratory has an opportunity to save
approximately $2.5 million on design services in the future.  The
Laboratory has 19 conventional construction projects worth an
estimated $50.6 million planned for Fiscal Years 1996 through
1999.  We estimate that in the future, if the Laboratory
continues the same practices that led to the higher A/E costs
than industry standards, it could spend $3.3 million more than
industry estimates on these 19 future projects.  However, due to
uncertainties in our estimate and the Laboratoryms inability to
reduce its A/E costs to industry standards immediately, we
project that 75 percent of this, or approximately $2.5 million,
can be saved if the Operations Office implements changes to
reduce the Governmentms design costs.
 
     The Operations Office expressed concern that our estimate of
savings may never be realized because budget constraints may
reduce or change the scope, cost, schedule, funding year, or even
the final determination of need for the proposed construction
projects.  However, given that neither the Operations Office nor
the OIG can predict how budget limitations will affect the
construction program, we believe that it is reasonable to base
our estimate on those projects that are currently planned.
 
     While our estimate of potential cost savings is limited to
conventional construction projects (because these were readily
comparable to industry standards), it should also be noted that
nonconventional projects may also benefit from similar cost
standards and controls.  In fact, nonconventional projects
probably have an even greater potential for cost reduction since
the A/E costs on these projects are higher.  In addition to the
potential cost savings, we believe that the use of cost standards
and increased awareness of design costs could significantly
decrease the risk for waste.  Specifically, the lack of cost
standards could lead to abuse when design costs are allowed to
run, as in some projects, as much as five times the going rate.
 
                            PART III
                                
                 MANAGEMENT AND AUDITOR COMMENTS
 
     The Manager, Idaho Operations Office generally concurred
with the finding and recommendation.  Some of managementms
comments are included in Part II.  Managementms response to the
recommendation, a summary of additional management comments, and
auditor responses are provided below.
 
     Recommendation.  We recommend that the Manager, Idaho
Operations Office, together with Lockheed, take aggressive action
to control excessive A/E costs that were previously identified in
a 1990 Departmentwide audit report and have continued at least
through February 2, 1996.  Specifically, this should include the
establishment of expectations and performance measurements for
Lockheed to ensure that:
 
     *  Laboratory costs for A/E services are more in line with
        industry cost standards;
     
     *  A/E services are awarded competitively based on technical
        competence and price; and,
     
     *  A/E services are similar in quality and detail to industry
        standards.
 
     Management Comments.  Management agreed with implementing
expectations and performance measures.  Management stated that
this recommendation is in the process of being accomplished as
part of implementing the new Department Life Cycle Asset
Management (LCAM) Order.  Presently, the LCAM is in draft and is
scheduled to be implemented within the March to May 1996
timeframe.
 
     Auditor Comments.  Managementms comments and actions are
responsive to the recommendation.
 
     Summary of Additional Management Comments.  Even though
management agreed to implement the recommendation, and generally
concurred with the finding, they had some concerns about the
comparison.  Each of management's concerns are discussed below as
well as the auditor responses.
 
     Management Comments.  Management stated that Federal
requirements such as (a) the Federal budget process, (b) Federal
and Departmental Acquisition Regulations, and (c) Energy
Conservation Reports and independent energy reviews drive the
Laboratoryms A/E costs higher than the State or private industry.
 
     Auditor Comments.  Although Federal requirements add some
cost to the procurement of A/E services that industry may not
incur, this only partially explains why costs were so much
higher.  The three main reasons for higher A/E costs at the
Laboratory were:  a lack of a performance measurement system;
little or no price competition on each A/E task; and, more
detailed design than is generally performed in industry.  By
implementing our recommendation, the Operations Office would be
taking action to lower A/E costs.
 
     Management Comments.  Management stated that the primary
difficulty of comparing industry and the State of Idaho costs to
the Laboratoryms is developing a valid "apples to apples"
comparison.  Management believed that there were a number of
factors that cannot be readily separated which makes it difficult
to normalize and compare the data.  Some of these factors
include:
 
     a) The Laboratoryms accounting system may not include the
        same cost data as the State of Idaho or industry, even
        when the description of the data is similar.  For
        example, design review cost data is not captured the
        same way by private industryms and the Laboratoryms
        accounting systems.
     
     b) Studies by Independent Project Assessment (IPA) for the
        Departmentms Office of Environmental Management have
        shown a major difference between industry and the
        Department in the amount of up-front planning costs that
        are not accounted for as design costs.
     
     c) Many conventional projects were constructed within
        nuclear areas which adds additional design
        considerations.  Also, the industry standard adjustment
        for modifications to an existing facility may not be
        appropriate for these facilities.  In addition, design
        costs are accrued for connecting buildings to external
        and underground utilities at the Laboratory because the
        Department owns the utilities, whereas in private
        industry the public utility may do the design and
        construction of external utilities and recover costs
        through rate charges or connection fees.
     
    Auditor Comments.  Government Auditing Standards
require that we exercise due professional care in
establishing the scope, selecting the methodology, and
choosing tests and procedures for an audit.  To comply
with this requirement and to eliminate the perception of
an "apples-to-oranges comparison," all material
adjustments that the auditor and management could think
of were made to make the comparison as accurate as
practicable.  Where uncertainties existed as to the
appropriateness of including data or costs in the
comparison, we chose to eliminate or mitigate such data
or costs.  The comparison is described in more detail in
the Appendix.
 
          In addition, we agree that conventional construction in
nuclear areas require more design effort than in non-nuclear
areas.  However, construction and modifications to buildings in
nuclear areas also require more construction costs.  Thus, the
percentage of design over construction would not be materially
affected.  The same is true for the design costs to connect site
facilities to electrical, water and sewage utilities.  That is,
the Laboratory also pays for the construction of these
connections, therefore, after agreement by Lockheed personnel, we
concluded that the A/E costs as a percentage of construction
would not be materially affected.
 
     Management Comments.  Management stated that the unique
nature of fire and life safety improvements make it difficult to
properly compare to industry standards.  However, this data was
still used to support the conclusions of high design costs.  Of
the projects analyzed, 14 (22 percent) had A/E costs below
industry standards.  Of the 51 projects that exceeded industry
standards, 14 involved fire and life safety project designs.  If
this class of projects were excluded from the audit due to the
difficulty in quantifying, there would have been smaller
differences between industry and Laboratory costs.
 
     Auditor Comments.  Fire and life safety improvements are
modifications to existing facilities to upgrade fire alarms,
announcement/intercom systems, ceiling sprinklers and water
supply, exits, and barriers.  These improvements were accounted
for differently than other modifications because rather than
accumulating design and construction costs on a building by
building basis, costs were accumulated for a number of buildings
in a geographic area.  Because design and construction costs for
fire and life safety improvements were accumulated differently
than design costs for other modifications, we proposed
eliminating them from our comparison.  However, at the request of
Lockheed management we included the fire and life safety
improvement projects in the comparison.  Notwithstanding the
difference in accounting for fire and life safety improvements,
the Laboratoryms A/E costs were still significantly higher than
industry standards.  Specifically, if the 14 fire and life safety
improvement projects were completely removed from the comparison,
A/E costs for the remaining 51 projects would still be
$2.5 million higher than industry standards -- or approximately
$50,000 more per building.
 
     Management Comments.  Managementms interpretation of the
Brooks Act for Federal A/E selections is that selection must be
based on capability to perform and does not permit competition
based on price.  In addition, management felt the M&O contract
may also preclude some competition options.  Management also
stated that several court cases found the Government acted
improperly when cost proposals were requested even where firms
had first been found to be equally qualified.  However,
management understands that the Savannah River Operations Office
has recently implemented a process, through its M&O contractor,
which reportedly satisfies the Brooks Act and permits price
competition following technical prequalification.  The Operations
Office stated that it will pursue this issue and its application
at the Laboratory under the terms of the Lockheed M&O contract.
 
     Auditor Comments.  Managementms interpretation that Federal
A/E selections cannot be based on price is correct.  However, the
DEAR specifically allows the selection of A/E contractors by an
M&O contractor to include price as part of the selection
criteria.  The court cases mentioned were all Federal A/E
selections, not selections made by an M&O contractor.  Only 1 of
65 A/E designs was performed by the Departmentms A/E contractor.
The other 64 were performed by or contracted out by Lockheed, and
thus, were specifically allowed to be competed using price as
part of the selection criteria.  Since virtually all conventional
A/E jobs performed for the Laboratory were allowed to be competed
based on technical qualifications and price, we recommended that
the Laboratory begin to compete individual A/E tasks.
 
     Management Comments.  The 1993 A/E cost improvement plan was
formalized in the DOE Cost Estimating Guide, Volume 6.  The
requirements for an approval authority and quarterly reports are
no longer required by this document but are the responsibility of
the Departmentms Project Manager.  Copies of this guide and a
formal explanation were provided to the OIG during this audit.
In addition, this applied to conventional line item projects of
which we have few each year.
 
     Auditor Comments.  Headquarters developed an action plan to
address the problem of high A/E costs throughout the Department.
Specifically, Headquarters asked that "...all the action items in
the Improvement Plan be implemented as expeditiously as
possible."  The Operations Office did not give the plan
sufficient management attention to timely implement the action
items required in the plan.  Although there was a 15 month
interval between the time the Improvement Plan was issued and the
Cost Estimating Guide was completed, the Operations Office had
not implemented the required items.  As for managementms
statement that the improvement plan was formalized into the DOE
Cost Estimating Guide, Volume 6, (issued November 1994), which
rendered the Improvement Plan obsolete, we could not verify that
this was true.  On the contrary, the Headquarters official who
coordinated implementation of the Improvement Plan indicated that
all of the recommendations in it were still in effect.
 
     Management Comments.  From managementms point of view it
appeared that the Laboratory has improved since 1990.  They
pointed out that the 1990 audit found that the Departmentms A/E
costs were more than twice (200 percent) that of industry.  The
results of this audit are that the Laboratoryms A/E costs are
approximately 181 percent higher.  Management felt this was
significantly lower than the finding identified in 1990.
 
     Auditor Comments.  In spite of this positive trend, more
improvement is still needed.
 
                             PART IV
                                
                            APPENDIX
                                
                    Details of Comparison of
       Laboratory A/E Costs to Private Industry and Idaho
 
     When we compared Laboratory A/E costs for conventional
construction projects to industry standards and the State
benchmarks we were conservative in our use of comparison data.
For example, we excluded Title III costs (construction-in-
progress inspection services performed by the A/E firm) from the
Laboratory data but left them in the industry standard which
reduced the difference between the costs.  In addition, of the
three industry publications obtained, we eliminated the one with
the lowest estimates of A/E costs and settled for the two more
conservative publications (Means and Marshall & Swift).  Also, if
we were unsure as to what industry building class a Laboratory
project should be compared against, we always selected the more
conservative choice.
 
     In addition, we continually coordinated with Lockheed on how
to make the comparison as fair as possible.  For example,
Lockheed indicated that its costs included a "common support"
burden that pays for security, fire protection, bus service to
the site and other costs that were not considered normal business
expenses for industry and the State.  Therefore, we removed these
expenses from the Laboratory data to make the comparison to
industry and the State more comparable.  In addition, Lockheed
pointed out that non-design charges (such as project management,
cost estimating, and design review) are input into the Title I
and II design charge numbers which may make the true cost of
design services appear higher than it is.  We looked into this
and found that project management and cost estimating costs were
of such an immaterial amount that it required no adjustment.  The
design review costs, we determined, were simply a quality control
procedure that we consider a bona fide part of producing the
designs, plans, and specifications.  Also, Lockheed indicated
that building construction costs (the denominator) were
understated and A/E design costs (numerator) were overstated
because A/E design costs included design costs accrued for major
equipment to be installed in buildings.  We found that this was
true and with Lockheedms input decided that it would be more
reasonable to add equipment costs in with construction costs.
 
     The industry benchmark was taken from manuals that publish
architectural and engineering costs as a percentage of
construction cost for most types of construction projects,
including warehouses, office buildings, laboratories, medical
facilities, research facilities, factories, municipal buildings,
and special use facilities.  Management was concerned that the
comparison included a number of relatively small projects.  This
may result in higher numbers when calculating A/E percentages due
to economies of scale.  Management is correct in stating that
there are economies of scale associated with the procurement of
A/E services.  That is, the larger the construction project, the
smaller the A/E cost estimate as a percentage of construction.
Fortunately, our industry data took this into account.
Specifically, cost information was also broken down by project
size.  For example, the A/E cost estimate for an office building
that cost $100,000 was 11.7 percent; a $500,000 building had an
8.5 percent cost estimate; and a $1 million building had an 7.3
percent cost estimate.  This allowed us to compare the industry
A/E "should be" costs for specific types of facilities and for
the specific sizes of construction projects.  In addition, many
of the Laboratory construction projects that we reviewed were
modifications to existing facilities which require more design
effort than "ground up" construction.  We adjusted the industry
figures on a project by project basis to account for the
additional design costs associated with modifications in
accordance with the guidance contained in the industry manuals.
We used these publications to determine an industry estimate of
design costs for each conventional construction project in our
audit.  We then took an average of the industry estimates to come
up with an aggregate industry estimate for design costs.
 
     To formulate a benchmark for the State, we obtained
construction and A/E cost data for seven recently completed State
construction projects that were comparable to conventional
projects at the Laboratory.  These seven projects included three
office buildings; three laboratory-classroom buildings; and one
media center that appeared to be comparable to facilities at the
Laboratory.  The 20 related construction projects were similar in
size and makeup to the State facilities and included five office
buildings; six laboratory and laboratory related projects; and
nine other projects that had comparable design issues.
 
                                       Report No. DOE/IG-0387
 
 
                     CUSTOMER RESPONSE FORM
                                
The Office of Inspector General has a continuing interest in
improving the usefulness of its products.  We wish to make our
reports as responsive as possible to our customers'
requirements, and therefore ask that you consider sharing your
thoughts with us.  On the back of this form, you may suggest
improvements to enhance the effectiveness of future reports.
Please include answers to the following questions if they are
applicable to you:
 
1.  What additional background information about the
   selection, scheduling, scope, or procedures of the
   audit or inspection would have been helpful to the
   reader in understanding this report?
 
2.  What additional information related to findings and
   recommendations could have been included in this report
to assist management in implementing corrective actions?
 
3.  What format, stylistic, or organizational changes might
have made this report's overall message more clear to
   the reader?
 
4.  What additional actions could the Office of Inspector
   General have taken on the issues discussed in this  report
which would have been helpful?
 
Please include your name and telephone number so that we may
contact you should we have any questions about your comments.
 
Name ____________________________ Date______________________
 
Telephone _______________________ Organization______________
 
When you have completed this form, you may telefax it to the
Office of Inspector General at (202) 586-0948, or you may mail it
to:
 
     Office of Inspector General (IG-1)
     Department of Energy
     Washington, D.C. 20585
     ATTN:  Customer Relations
 
If you wish to discuss this report or your comments with a staff
member of the Office of Inspector General, please contact Wilma
Slaughter at (202) 586-1924.
 
_______________________________
11/  DOE Cost Guide, Volume 6, November 1994, Chapter 25
Guidelines for Engineering, Design, & Inspection Costs.