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                     U.S. DEPARTMENT OF ENERGY
                    OFFICE OF INSPECTOR GENERAL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                 CONSULTANT SUBCONTRACTING AT THE
 
               IDAHO NATIONAL ENGINEERING LABORATORY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Report Number:  WR-B-95-07          Western Regional Audit Office
Date of Issue:  June 20, 1995       Albuquerque, New Mexico 87185
 
 
                 CONSULTANT SUBCONTRACTING 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 ...................   3
 
PART II  - FINDINGS AND RECOMMENDATIONS ...................   5
 
           1.   Awarding of Consultant Subcontracts .......   5
 
           2.   Consultant Subcontracts for Department
                Headquarters ..............................  13
 
PART III - MANAGEMENT AND AUDITOR COMMENTS ................  17
 
 
 
 
                     U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                         OFFICE OF AUDITS
 
 
            AUDIT OF CONSULTANT SUBCONTRACTING AT THE
              IDAHO NATIONAL ENGINEERING LABORATORY
 
 
Audit Report Number:  WR-B-95-07                  June 20, 1995
 
                             SUMMARY
 
     The Department of Energy (Department), Idaho Operations
Office (ID) is responsible for ensuring that its management and
operating (M&O) contractors subcontract consultant services in a
manner most advantageous to the Department.  The objectives of
the audit were to determine whether consultant subcontracts were
competitively and objectively awarded and whether these
subcontracts supported the Idaho National Engineering
Laboratory's (INEL) mission.
 
     The audit showed that M&O contractors generally did not
award consultant subcontracts competitively and objectively.
Also, many of the subcontracts were awarded to former INEL
employees, increasing the potential for conflicts of interest.
These problems occurred because M&O contractors' internal
controls did not ensure that sole source procurements were
adequately justified and that potential conflicts of interest
were avoided.  By not competing consultant subcontracts the
Department may not have obtained the most economical consultant
services.  Further, the fundamental fairness upon which such
subcontracts were awarded to former employees was questionable.
 
     Additionally, one INEL M&O contractor was subcontracting
consultant support services directly for Department Headquarters.
This occurred because Headquarters elements and the M&O
contractor did not follow Department guidance prohibiting
subcontractual support from an M&O contractor directly to
Headquarters.  As a result, the M&O contractor acted as a
procurement agent for Headquarters enabling Headquarters to avoid
the more stringent requirements of the Department's procurement
process.
 
     ID concurred with the findings and agreed to carry out the
corrective actions recommended in the report.
 
 
 
                                   Office of Inspector General
                                 #=2
                              PART I
 
                       APPROACH AND OVERVIEW
 
 
INTRODUCTION
 
     Department policy is to have its M&O contractors procure
consultant services in a manner most advantageous to the
Department.  ID is responsible for ensuring that its M&O
contractors follow this policy.  The purpose of this audit was to
evaluate the economy and effectiveness of the award and
administration of consultant subcontracts at INEL.  Specifically,
the audit objectives were to determine whether consultant
subcontracts were competitively and objectively awarded, and
whether these subcontracts supported INEL's mission.
 
SCOPE AND METHODOLOGY
 
     The audit was conducted at INEL from April 1994 through
January 1995.  Audit work was performed at the ID contracting
office; EG&G Idaho, Inc. (EG&G) procurement office; MK-Ferguson
of Idaho Company (MK-FIC) procurement office; and, Department
Headquarters procurement office.
 
     To accomplish the audit objectives, we interviewed key
personnel at all management levels and reviewed:
 
     o  Federal and Departmental regulations, Department
memoranda, as well as M&O contractor policies and
procedures for subcontracting;
 
     o  prior reviews and reports performed by ID concerning
subcontracting; and,
 
     o  consultant subcontract files regarding the scope of work,
period of performance, dollar amount, extent of
competition, period of performance, justifications for
sole sourcing, and modifications to the original
subcontracts.
 
     The audit was conducted in accordance with 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 the objective of
the audit.  Accordingly, we assessed the significant internal
controls with respect to the subcontracting process including
identification and review of internal controls in the selection
and administration of consultant subcontracts.  We performed
limited tests on computer generated information and relied on
this information to provide the universe of consultant
subcontracts.  Because our review was limited, it would not
necessarily have disclosed all internal control deficiencies that
may have existed at the time of our audit.
 
BACKGROUND
 
     Prior to Fiscal Year 1995, the INEL was managed by five M&O
contractors.  At the beginning of Fiscal Year 1995, these five
M&O contracts were consolidated into one M&O contract which was
awarded to Lockheed Martin Idaho Technologies (LMIT).  When LMIT
took over management of the INEL, it assumed the procurement
procedures of the former M&O contractors.  At the time of the
audit, LMIT was in the process of implementing its own guidance
on consultant subcontracts.
 
     Consultants are subcontractors who provide views or opinions
on problems or questions but neither perform nor supervise the
performance of operating functions.  Ordinarily, consultants are
experts in their field.  Their expertise may be based on broad
administrative, professional, or technical experience which
enables the consultant to furnish advice which is considered
valuable.
 
     Of the five former M&O contractors, only three had
subcontracting authority.  During Fiscal Year 1993 and the first
half of Fiscal Year 1994, these three M&O contractors awarded 263
consultant subcontracts costing more than $6.3 million.  Two
(MK-FIC and EG&G) of these three M&O contractors were included in
our audit.  We reviewed a sample of 50 consultant subcontracts
with a total cost of approximately $1.9 million.  Of this amount,
$254,000 was for six MK-FIC subcontracts, while the remaining
$1.65 million was for 44 EG&G subcontracts.
 
OBSERVATIONS AND CONCLUSIONS
 
     During the audit, we noted that ID had taken several
positive actions with respect to consultant subcontracting,
including the use of Contractor Purchasing Systems Reviews
to candidly review the M&O contractors' procurement systems.  In
addition, the contracting officer at ID took action to reduce the
number of subcontracts awarded to support Headquarters elements.
This effort resulted in the termination of INEL support for
Headquarters Technical Safety Appraisal Teams.
 
     Our audit showed, however, that the M&O contractor and ID
needed to take additional steps to improve consultant
subcontracting practices and oversight.  We found that M&O
contractors usually awarded consultant subcontracts
noncompetitively and nonobjectively.  Specifically, 36 of the
subcontracts reviewed were sole sourced.  In addition, 15 were
awarded to former INEL employees.  Awarding these subcontracts to
former employees increases the potential for conflicts of
interest.  This occurred because the internal control systems of
the M&O contractors did not ensure that sole source procurements
were adequately justified and that potential conflicts of
interest were avoided or mitigated.  By not competing its
subcontracts the Department may not have obtained the most
economical consultant services.  In addition, the number of
consultant subcontracts awarded to former employees questions the
fundamental fairness upon which the subcontracts were awarded.
 
     We recommended that ID and the M&O contractor ensure that
consultant subcontracts are awarded more competitively and
additional scrutiny is given to subcontracts awarded to former
employees.  While our audit was in progress, LMIT implemented
procedures to require a higher level of approval for consultant
subcontracts awarded to former employees.  Specifically, LMIT now
requires approval at the Vice-President level before a consultant
subcontract award can be made to a former employee.
 
     The audit also showed that a former M&O contractor
subcontracted for consultant services that directly supported
Headquarters.  This occurred because various Headquarters
elements ignored Department guidance prohibiting subcontractual
support from an M&O contractor and the contractor was willing to
process the consultant service requests.  In effect, the M&O
contractor became a procurement agent for Headquarters.  Thus,
Headquarters avoided the more stringent requirements of the
Department's procurement process.  The 14 instances where this
occurred cost the Department at least $90,000 more to procure the
services because of charges that the M&O contractor applied.  We
recommended that ID monitor LMIT's subcontracting to ensure that
consultant subcontracts are not awarded to support Headquarters
elements.  As mentioned earlier, ID has taken action to reduce
the number of consultants its M&O contractors procure to support
Headquarters.
 
     In our opinion, the findings in this report disclosed
material internal control weaknesses that the Department should
consider when preparing its year-end assurance memorandum.
 
                              PART II
 
                   FINDINGS AND RECOMMENDATIONS
 
1.   Awarding of Consultant Subcontracts
 
FINDING
 
     Department regulations require subcontracts to be awarded in
the manner most advantageous to the Government to ensure fair and
effective competition, and to avoid even the appearance of
conflicts of interest.  However, we found that M&O contractors
sole sourced 72 percent of consultant subcontracts costing more
than $1.5 million.  Further, 30 percent of the subcontracts,
costing more than $535,000, were to former INEL employees which
may appear to have potential conflicts of interest.  This
occurred because the M&O contractor and ID did not establish
adequate internal controls to ensure that sole source
procurements were justified and that the appearance of conflicts
of interest was avoided.  Specifically, M&O contractors'
procedures did not require subcontract administrators to
adequately stimulate competition and did not ensure that sole
source justifications were adequate.  In addition, although the
potential for conflicts of interest is greater in subcontracts
issued to former INEL employees, the M&O contractor and ID did
not review the conflict of interest certifications with any
additional scrutiny.  As a result, the Department may not have
obtained the most economical services possible, and the
fundamental fairness upon which consultant subcontracts were
awarded was questionable.
 
RECOMMENDATIONS
 
     We recommend that the Manager, Idaho Operations Office:
 
     1.  Direct LMIT to:
 
          a.  Provide training to technical representatives to
familiarize them with the requirements for and
benefits of competition.
 
          b.  Establish and implement procedures to ensure that
consultant subcontracts are either awarded
competitively or provide sufficient justification
to demonstrate that all available alternatives to
develop competition have been exhausted.
 
          c.  Require that if subcontract administrators receive
inadequate sole source justifications, they should
deny the requests or pursue further development of
competition.
 
          d.  Follow newly established procedures which require a
higher management approval for consultant
subcontracts awarded to former ID and M&O
contractor employees.  In addition, when conflict
of interest certifications for former employees are
sent to ID, identify them as such so ID can provide
additional scrutiny if necessary.
 
     2.  Require that the contracting officer ensure that
consultant subcontracts are adequately competed and that
awards to former ID and M&O contractor employees are
free from potential conflicts of interest.
 
MANAGEMENT REACTION
 
     Management concurred with the finding and agreed to
implement the recommendations.  Detailed management and auditor
comments are provided in Part III of this report.
 
 
                        DETAILS OF FINDING
 
     Department Acquisition Regulation 970.71 requires that M&O
contractors award subcontracts in the manner most advantageous to
the Government by ensuring adequate competition.  The Department
prefers competitive awarding of subcontracts because this is the
best way to ensure the lowest possible cost.  However, the
Department allows sole sourcing if all opportunities to compete a
subcontract have been exhausted and if the sole source is fully
justified.  In addition, Department policy discourages
subcontract statements of work with overly restrictive
specifications that may create a continuous and dependent
arrangement with the same subcontractor.
 
     In addition, the Department's policy requires M&O
contractors to ensure that consultants are not selected on the
basis of personal association or other nonobjective factors.
Further, the ID contracting officer is responsible for ensuring
that potential conflicts of interest are avoided before approving
conflict of interest certifications for consultant subcontracts.
Conflicts of interest must be avoided in order to prevent the
appearance of impropriety in procuring subcontracts.
 
NONCOMPETITIVE AND NONOBJECTIVE AWARDS
 
     We found that M&O contractors did not competitively and
objectively award consultant subcontracts.  Specifically, M&O
contractors did not award the subcontracts competitively and
modifications restricted competition.  In addition, the
objectivity of consultant subcontracts' awards was in question
since so many subcontracts were awarded to former INEL employees.
Consultant subcontracts awarded to former employees have the
potential for conflicts of interest.
 
Lack of Competition
 
     The M&O contractor's subcontract administrators did not
ensure competition for most consultant subcontract awards.  We
found that 36 of 50 (72 percent) consultant subcontracts
reviewed, costing more than $1.5 million, were sole sourced.  Our
review also showed that sole sourcing such subcontracts is not
new.  In fact, similar problems were disclosed in the 1990 and
1993 Contractor Purchasing Systems Reviews (CPSR).  The 1990 CPSR
found that nearly all of the consultant subcontract awards were
sole sourced.  The 1993 CPSR reported a similar finding and
stated that the selection of consultants noncompetitively
appeared to be a foregone conclusion.  The Department's best
interest may not have been served in those procurements without
competition because all potential bidders were not given the
opportunity to compete.  Thus, other sources, having similar or
better qualifications, may have been available to perform the job
for less cost than the consultant to whom the subcontract was
sole sourced.  Not only were the original awards sole sourced,
but extensive modifications of the subcontracts also restricted
competition.
 
Modifications
 
     Consultant subcontracts that we reviewed were modified in
the aggregate by almost 50 percent of the subcontract's value,
with no attempt to compete the additional work.  Specifically,
our review of one M&O contractor disclosed that 22 of 44
consultant subcontracts, with an original award value of $1.1
million, were modified for more than $500,000.  Of these 22
subcontracts, 86 percent had been sole sourced.  This large
amount of modifications compounded the problem of sole sourcing
subcontracts since modifications are, by definition, sole source.
For example:
 
     o  The initial award of a consultant subcontract for
monitoring legislative issues on waste management was
sole sourced for $28,894.  It was modified three times
for an additional $119,000 -- this was a 411 percent
increase with no attempt to compete the additional work.
 
     o  Another consultant subcontract, initially awarded for
$18,150, was modified four times for an additional
$29,196 -- a 160 percent increase.  This subcontract,
sole sourced to a former M&O contractor employee, was to
provide an evaluation on nuclear facility safety issues
even though nuclear facility safety reviews are routinely
competed.
 
Award to Former Employees
 
     The objectivity of consultant subcontract awards was also
questionable since so many of them were awarded to former INEL
employees.  A potential conflict of interest occurs when a
subcontract is awarded on the basis of personal association or
other nonobjective factors, as may be the case when awards are
made to former employees.  We found that 30 percent (15 of 50) of
subcontracts that were included in our review were awarded to
former INEL employees.  Four of these subcontracts were awarded
to former ID employees, while 11 were awarded to former M&O
contractor employees.  These procurements could result in
potential conflicts of interest as demonstrated in the following
example:
 
     An M&O contractor procurement director was sole sourced a
$150,000 consultant subcontract to begin immediately after
retirement.  According to the sole source justification, the
procurement director wanted to avoid being affected by
changes taking place in the M&O contractor's retirement
benefits.  When he returned to work as a consultant, his
duties were the same as the duties he had before retirement.
 
     This procurement appeared to have violated Department policy
which prohibited selecting consultants on the basis of personal
association or any other nonobjective factors, and also
prohibited consultants from performing work of a decision making,
managerial, or supervisory nature.  However, ID approved the
conflict of interest certification for this subcontract.  The
cognizant contracting officer stated that he approved it because
he believed it was more economical to retain the procurement
director than to hire another who would only work 15 months --
until the M&O's prime contract expired.  However, the
contracting officer kept no documentation of this decision.
 
     The situation described above was not consistent with what
ID decided on another similar consultant subcontract.  The facts
of the situation were the same.  A subcontract was awarded to a
former employee of the same M&O contractor's procurement office
shortly after he retired.  The procurement director wanted to
bring him back as a consultant in order to help with the backlog
of work.  However, the contracting officer recognized a conflict
of interest and refused to sign the conflict of interest
certification which forced the M&O contractor to cancel the
subcontract.
 
     The fact that 30 percent of consultant subcontracts were
awarded to former INEL employees leads us to believe that the
requestor of the services and their consultants had personal
associations which may have influenced the award of many other
subcontracts.  All but two of these were issued without
competition.  Some of the consultants had worked closely with the
technical representatives prior to retirement.  In one example, a
consultant worked in the same group as the technical
representative before retirement.
 
     Full and open competition is necessary to assure cost
effectiveness and reduce the potential for favoritism and
potential conflicts of interest.
 
INTERNAL CONTROL WEAKNESSES
 
     These problems occurred because the internal controls of the
M&O contractor and ID to ensure that consultant subcontracts were
competitively and objectively awarded were inadequate.
 
Internal Controls of M&O Contractor
 
     The M&O contractor has not implemented internal controls to
ensure adequate competition of consultant subcontracts and to
decrease potential conflicts of interest.  Specifically, the
requesting program's technical representatives, rather than
procurement, were responsible for developing competition even
though the technical representatives had no training in this
area; and, justifications for sole source subcontracts were
inadequate.  In addition, although the potential for conflicts of
interest is greater in subcontracts issued to former INEL
employees, no additional scrutiny was performed by the M&O
contractor.
 
     Responsibility For Developing Competition
 
     Even though M&O contractor technical representatives are not
specifically trained to develop competition, they have primary
responsibility for doing so.  The former M&O contractors'
procurement regulations and the guidance of the new M&O
contractor (LMIT) did not require subcontract administrators to
develop competition.  Their only responsibility in the sole
source justification process was to ensure that the requestor
(technical representative) provided an approved and signed sole
source justification before the subcontract was awarded.  In
fact, one subcontract administrator stated that the decision to
sole source was made before the subcontract reached her desk.
Instead, the technical representatives were responsible for
identifying potential sources to perform the scope of work.  In
addition, they were required to complete a section in the sole
source justification on efforts to develop competition.  The
technical representative's manager then decided whether the
justifications were adequate.  However, the technical
representatives were not specifically trained in how to develop
competition.  Making technical representatives better aware of
the procurement process would help them realize the need for
competition and planning which would decrease the number of sole
source subcontracts and those issued to former employees.
 
     Inadequate Sole Source Justifications
 
     Justifications for sole source consultant subcontracts were
inadequate.  We found that 20 of 36 subcontracts worth $827,000
had inadequate sole source justifications because they did not
adequately address or entirely ignored the "efforts to develop
competition" section of the justification.  For example:
 
     o  Two sole source justifications for construction
consultants stated the consultants were the only
individuals the requesting technical representative knew
-- both former M&O employees -- who were qualified to
perform the scope of work.  However, several other firms
routinely provided similar services to the INEL and could
have been solicited.
 
     o  One sole source subcontract for monitoring legislative
issues on waste management had a statement of work that
was so narrowly defined that it excluded competition by
intentionally describing a particular consultant's work
experience.  Department policy discourages statements of
work with overly restrictive specifications that create a
continuous and dependent arrangement with the contractor.
However, this statement of work not only hindered
competition when the subcontract was originally awarded,
but it also created a continuous and dependent
arrangement with the consultant, who has consulted for
the M&O for nine years under three subcontracts.
 
     o  One sole source justification stated that the requirement
to develop competition was not applicable to a consulting
subcontract for warehouse property management.  This
subcontract was awarded to a former ID employee.
 
     Furthermore, the justifications for not competing the
modifications were inadequate.  Most justifications for
modifications simply stated that the modification work was
related to the original scope of work.  They did not justify why
the additional work specified in the modification could not be
competed.
 
     Former INEL Employees
 
     Because technical representatives were not trained in
developing competition, they usually suggested people that they
were already familiar with, including former INEL employees.
Originally, the M&O contractor procedures did not require any
additional scrutiny, such as obtaining a higher level of
management approval, when a consultant subcontract was awarded to
a former INEL employee.  However, while our audit was in
progress, LMIT implemented procedures  requiring higher level
approval of subcontracts awarded to former employees.
Specifically, LMIT now requires approval at the Vice-President
level before a consultant subcontract can be awarded to a former
employee.
 
Internal Controls of ID
 
     ID has not implemented internal controls to ensure adequate
competition of consultant subcontracts and to decrease potential
conflicts of interest.  Even though the last two CPSRs found that
consultant subcontracts were not being adequately competed, ID
did not ensure that the M&O corrected the situation by
implementing an effective internal control system.  Specifically,
the 1990 and 1993 CPSRs found that justifications for consultant
subcontracts were inadequate.  The 1990 CPSR stated that many
subcontracts had questionable sole source justifications.  The
1993 CPSR stated that subcontracts were usually issued without
adequate documented analysis.  However, ID did not ensure that
this situation was corrected.
 
     In addition, ID generally did not perform close scrutiny of
potential conflicts of interest on consultant subcontracts
awarded to former INEL employees.  This occurred because the
cognizant contracting officer was not routinely informed when a
subcontract was to be awarded to a former INEL employee.  In
fact, we found only four instances where the contracting officer
provided additional scrutiny to a proposed award.  In three cases
it happened because the contracting officer apparently knew,
through other means, that awards were proposed for former INEL
employees.  None of the remaining subcontracts awarded to former
employees were challenged by ID because the contracting officer
did not know of the potential conflicts of interest.
 
SERVICES MAY BE UNECONOMICAL AND UNFAIR
 
     As a result, the M&O contractors' consultant subcontracts
were not procured in the manner most advantageous to the
Government.  The Department did not receive the benefits
available from competition when the M&O contractors awarded sole
source subcontracts without giving all potential bidders an
opportunity to compete.  Other subcontractors may have been
available to perform required tasks more efficiently or
effectively than the sole source subcontractor selected.
Although we cannot estimate the extent of potential overpricing
that may be associated with the lack of competition, we believe
that the amount may have been material.
 
     In addition, when subcontracts are sole sourced to former
employees without adequate scrutiny for potential conflicts of
interest, the fundamental fairness upon which subcontracts are
awarded is in question.
 
2.   Consultant Subcontracts for Department Headquarters
 
FINDING
 
     Department guidance prohibits Headquarters elements from
directing M&O contractors to subcontract support services
directly for Headquarters in order to avoid Department
competition requirements.  However, 14 of 44 (32 percent)
consultant subcontracts worth $688,000 awarded by one former INEL
M&O contractor provided support services directly to Department
Headquarters.  This occurred because Headquarters organizations
disregarded Department policy, and ID, as well as the former M&O
contractor, continued to process these requests.  As a result,
Headquarters elements used M&O contractors as a mere procurement
agent and bypassed normal Department procurement controls and
safeguards.  Furthermore, for the 14 subcontracts included in our
sample, the M&O contractor added approximately $90,000 to process
the subcontracts for Headquarters.
 
RECOMMENDATIONS
 
     We recommend that the Manager, Idaho Operations Office
monitor LMIT's procurement process to ensure that consultant
subcontracts are not awarded for Headquarters elements by:
 
     1.   performing a "for cause" review under the guidelines
established by the Business Management Pilot Oversight
program; and,
 
     2.   including this issue in the annual review of LMIT's
procurement under the Business Management Pilot
Oversight program.
 
MANAGEMENT REACTION
 
     Management concurred with the finding and agreed to
implement the recommendations.  Detailed management and auditor
comments are provided in Part III of this report.
 
                        DETAILS OF FINDING
 
     In June 1993, the Office of Assistant Secretary for Human
Resources and Administration issued a memorandum reminding all
Department elements that subcontractual support from an M&O
contractor to Headquarters is prohibited.  According to the
memorandum, this type of arrangement places an M&O into the role
of a mere procurement office and avoids the safeguards provided
by the normal Department procurement process.  The memorandum
pointed out that M&O contractors may only award subcontracts to
meet their own support needs, not the needs of Headquarters.
Additionally, Operations Offices with responsibility for an M&O
contractor should not process any such request from a
Headquarters organization.  Furthermore, Department Order
5000.1B, Institutional Planning by Multi-Program Laboratories,
states that M&O contractors should not perform work assignments
if these assignments are not part of their approved mission and
they represent Headquarters attempts to obtain subcontractual
support.  In addition, Department Order 4200.1C, Competition in
Contracting, states that under no circumstances may Departmental
personnel direct work to or accept work from M&O contractors for
the purpose of avoiding the requirements of competition.
 
HEADQUARTERS DIRECTED PROCUREMENTS
 
     Contrary to Department guidance, Headquarters elements
obtained consultant subcontract services from an INEL M&O
contractor.  In our sample of consultant subcontracts awarded by
one former M&O subcontractor, we found 14 of 44 (32 percent)
subcontracts, worth $688,000, that were support services directly
to Headquarters elements.  Even though the M&O contractor should
only process and acquire subcontracts that support its mission
requirements, none of the 14 subcontracts were for local mission
requirements.  For example:
 
     o  One consultant was paid $80,000 to prepare classified
reports for Department Headquarters on the nuclear
readiness of China and the former Soviet Union.  This
work was performed in Washington, D.C., and was clearly
not part of the INEL's mission.
 
     o  Two consultants were paid $49,000 to help Headquarters
write the Defense Programs Operations Manual.  The
consultants worked in Washington, D.C., and the work
was not part of the M&O contractor's mission.
 
     o  One consultant was paid $116,000 to assist Headquarters
develop a systems approach to training Department
employees.  One goal of this program was to improve the
Department's oversight of M&O contractors.  This was
clearly not part of the M&O contractor's mission.
 
     o  Three consultants were paid $60,000 to participate in
Headquarters administered appraisals at various
Department sites.  One was a Defense Programs assessment
of the Pantex facility.  The second was an appraisal of
nuclear criticality safety at Lawrence Livermore National
Laboratory.  The third was an appraisal of organization
and administration at Savannah River.  The primary
function the M&O contractor performed was to procure the
consultants for Headquarters.  The work was not in
support of the M&O contractor's mission.
 
     Discussions with Department management revealed that the
three appraisal subcontracts were a small part of a widespread
problem with support provided for Headquarters appraisals and
inspections.  In fact, through discussions with Headquarters
management, we were told that all Technical Safety Appraisal
teams and Tiger Team reviews, where outside experts were brought
in to participate, were procured through M&O subcontracts to
support Headquarters.
 
DEPARTMENT GUIDANCE WAS CIRCUMVENTED
 
     Subcontracts were awarded to directly support Headquarters
because these organizations disregarded Department guidance which
prohibited this, and the M&O contractor circumvented the guidance
in order to continue procuring consultant subcontractors for
Headquarters.
 
Headquarters Disregarded Department Guidance
 
     Department Headquarters obtained support from the M&O
contractor for the sake of expediency.  Three of the six
Headquarters program managers interviewed said they obtained
subcontractual support from M&O contractors because it was easier
to obtain.  Further, they said that obtaining consultants through
Headquarters procurement was too time consuming.  The other three
program managers said that they continue to obtain consultant
services from M&O contractors because they have always done so.
 
     In addition, budgetary reductions in support service
contracts have also caused Headquarters elements to increase
their reliance on M&O contractor consultants.  The Department
recently announced that the Department has cut commercial support
service contracts by $300 million.  However, one Headquarters
program manager said his group simply increased its reliance on
M&O subcontractors even though it costs more to do so.  This is
possible because consultant subcontracts obtained through the M&O
are not included in the commercial support service contracts
budget.
 
M&O Contractors Circumvented Guidance
 
     The M&O contractor circumvented Department guidance by
interpreting the guidance in such a manner that it could continue
to process consultant subcontract requests for Headquarters.
This interpretation prohibited support for Headquarters if the
consultants receive day-to-day directions from Headquarters.  If,
instead, the M&O contractor directed the work of the consultant
then the subcontract was not considered direct support for
Headquarters.  The M&O contractor simply acted as an intermediary
between the Headquarters elements and the consultant so that the
consultant reports to the M&O rather than Headquarters.  However,
this interpretation did not change the fact that the work was
still performed for Headquarters in Washington, D.C.  When we
asked Headquarters procurement about the validity of this
practice, they acknowledged that it was inappropriate.
 
     The interpretation also allowed the M&O contractor to
acquire more work.  For example, Headquarters elements offered
funding to the M&O who could provide the consultant services.  If
one M&O or its operations office was not willing to find a way to
award the consultant subcontracts then Headquarters would find
other M&O contractors who would.  In fact, one Headquarters
program manager said that he established a way to acquire
subcontracts with three different M&O contractors at different
sites so that if one would not procure the subcontracts then he
would ask another M&O contractor to do it.
 
     ID's involvement was generally limited to acting as an
intermediary between Headquarters and the M&O contractor for such
activities as transferring funds and resolution of problems.
However, ID has taken action to reduce the number of subcontracts
which are awarded to support Headquarters elements.  This effort
resulted in the termination of INEL support for Headquarters
Technical Safety Appraisals Teams, one of the examples presented
earlier in this report.
 
FEDERAL SAFEGUARDS BYPASSED AND INCREASED COSTS
 
     As a result, Headquarters elements were able to avoid the
more stringent requirements provided by the normal Departmental
procurement process including requirements for competition.  By
acquiring consultant subcontracts from an M&O contractor,
Headquarters elements placed the M&O contractor into the role of
a competing procurement office.
 
     Furthermore, the cost of acquiring services through the M&O
was higher than it would have been if Headquarters procurement
was used.  We estimated that it cost the Department at least
$90,000 more for the 14 consultant subcontracts in our sample
because of additional charges for overhead and administrative
support.  Further, we projected that there were more than 30
additional consultant subcontracts to support Headquarters that
did not appear in our sample.
 
 
                             PART III
 
                  MANAGEMENT AND AUDITOR COMMENTS
 
     In responding to the Initial Draft Report, Management
concurred with the findings and agreed to implement the
recommendations.  Management and auditor comments on specific
recommendations follow.
 
FINDING 1.  Awarding of Consultant Subcontracts
 
Recommendation 1(a)
 
     Management Comments.  Management concurred, stating that
LMIT will conduct an ongoing program of communication and
training with the technical program organizations.  This
initiative includes the discussion of competition and company
procedures associated therewith.  The topic of competition will
continue to be a central theme in that training effort.
 
     Management further stated that consultant services are
utilized to satisfy unique requirements which the M&O contractor
does not have in-house capability to perform.  The very nature of
these unusual requirements produces a situation where unique
capabilities and qualifications are essential for the needs to be
satisfied.  Frequently, a specific consultant is the singular
resource of expertise to meet the unusual service needs.
 
     Auditor's Comments.  Management comments and actions are
responsive to the recommendation.  However, we want to emphasize
that even though sometimes it may be necessary to sole-source
consultant subcontracts, sole sourcing should not occur 72
percent of the time, as we found in our audit.  This high rate of
non-competitive consultant subcontracts was not entirely because
of "unique capabilities" or "singular resource of expertise" as
ID's comments would suggest.  On the contrary, in many cases it
was because the requesting program knew someone who could perform
the work but did not know of or fully consider requirements for
competition.
 
Recommendation 1(b)
 
     Management Comments.  Management concurred, stating that the
requirements for non-competitive justification documentation are
established in the LMIT's standard practices according to dollar
thresholds, i.e., the higher the dollar value, the more extensive
the justification requirements.  The procurement standard
practices require reviews at several organization levels,
depending on the anticipated acquisition amount.  Also, the
procurement standard practices provide for the involvement of
several parties in the review of sole source justifications
depending on the dollar value of the action.  The review may
involve the Competition Advocate, Department Manager, Procurement
Director, ID Procurement Support Division (PSD), PSD Contracting
Officer, as well as the subcontract administrator.  Denial of
inadequate sole source acquisitions and the pursuit of
competition are integral to the current LMIT procurement
procedures.  LMIT will follow its procurement standard practices
for consulting subcontract services awarded on a non-competitive
basis.  In accordance with these standard practices, competition
will be appropriately maximized.  Also, the standard practices
provide adequate direction regarding development of competition.
 
     Auditor's Comments.  Management comments and actions are
responsive to the recommendation.  It is true that the
Contractor's policies and procedures require all of the items
mentioned above.  However, former M&O contractors did not apply
their procedures in a consistent manner.
 
     Recommendation 1(c)
 
     Management Comments.  Management concurred, stating that
this subject will be included in the annual Business Management
Oversight Program (BMOP) scheduled to be performed in February
1996.  However, in support of its past practices, management
stated that the adequacy of the non-competitive justification is
a matter of judgement and includes elements such as (a)
appreciation of the specific program need, (b) awareness of
potential resources in-house and in the marketplace, and (c) an
assessment of the unique and exclusive capabilities of the
recommended non-competitive source.  This judgement is made on
the basis of the best information available at the time, and the
reviewer's best judgement, given the facts available.
 
     Auditor's Comments.  Management comments and actions are
responsive to the recommendation.
 
     Recommendation 1(d)
 
     Management Comments.  Management concurred, stating that on
occasion there is a need to acquire the services of a former INEL
employee.  The standard requirements for documentation have been
constant in the procurement organization (e.g., non-competitive
justification, work statements, cost estimates, requisitions,
etc.)  However, management approval requirements have been
revised at times.  The prior M&O contractor (EG&G) was not always
consistent in approval requirements by higher management.  While
management approvals were dynamic, standard review requirements
by Procurement remained constant.  These requirements for review
and approval gave no preference to personal associations and
provided that the approval to proceed on a non-competitive basis
be made on the merits of the exclusive ability of the consultant
to perform the work.  Moreover, since award of LMIT's contract in
October 1994, approval of consultant services that exceed $30,000
must be approved by the Human Resources Vice-President, LMIT
General Counsel, Lockheed Martin Corporation, and the ID
Contracting Officer.  As discussed above, a process is in place
which provides for higher level management review and approval
(including LMIT and ID) for subcontracts with former INEL
employees.  LMIT will direct attention toward a policy for former
ID employees, as well as highlight organizational conflicts of
interest certifications of former INEL employees when the
certifications are transmitted to ID for approval.
 
     Auditor's Comments.  Management comments and actions are
responsive to the recommendation.
 
Recommendation 2
 
     Management Comments.  Management concurred, stating that it
is not considered a matter of unfairness to suppliers in the
marketplace that the services of a former INEL employee are
procured for certain assistance.  While this may be a competitive
advantage, it is not an unfair competitive advantage.  ID, in
order to ascertain that LMIT's procurement of consultant
subcontracts are adequately competed and that potential conflicts
of interest are mitigated, will include this issue in the annual
BMOP review.  The BMOP review is scheduled to be performed in
February 1996.
 
     Auditor's Comments.  Management comments and actions are
responsive to the recommendation.
 
FINDING 2.  Consultant Subcontracts for Department Headquarters
 
Recommendation 1
 
     Management Comments.  Management concurred, stating
that ID will perform a "for cause" review of LMIT's procurement
of consultant subcontracts to ascertain the extent of any
consultant subcontracting irregularities.  The "for cause" review
will be completed by December 1995.
 
     Auditor's Comments.  Management's comments and actions are
responsive to the recommendation.
 
Recommendation 2
 
     Management Comments.  Management concurred, stating
that the issue of awarding consultant subcontracts for
Headquarters will be included in the annual review of LMIT's
procurement process under the BMOP.  The BMOP is scheduled for
February 1996.
 
     Auditor's Comments.  Management's comments and actions are
responsive to the recommendation.
 
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