IG-1
 
INFORMATION:  Report on "Inspection of Westinghouse Savannah 
              River Company Fees for Managing and Operating the
              Savannah River Site"
The Secretary
 
BACKGROUND:
 
During the first five years of its contract with the Department
of Energy, Westinghouse Savannah River Company was paid over $130
million in fees to manage and operate the Savannah River Site.
Fees paid to Westinghouse steadily increased over the five year
period.  For example, fees paid for the last six months of this
five year period were over three times as large as fees paid for
the first six months.  The purpose of this inspection was to
review the Department's annual negotiation of total available 
fees with Westinghouse, and to examine the reasons for the growth
in fees over this five year period.  The report is being sent to
inform you of our findings and recommendations.
 
DISCUSSION:
 
Our review disclosed that, after Fiscal Year 1989, the Department
used an increasing number of fee bases in calculating
Westinghouse Savannah River Company's fixed-fee-equivalents from 
the maximum fee schedules within the Department of Energy
Acquisition Regulation.  Two fee bases were used in the 1989
calculation, and eight were used in the 1994 calculation.  These
increases in the number of fee bases resulted in significantly
higher fixed-fee-equivalents being calculated from the maximum
fee schedules.
 
We found that the Department had significantly increased the
percentage of the dollar value of subcontracts being placed in
Westinghouse's fee bases for fee calculation purposes.  In Fiscal 
Year 1989, 50 percent of the value of Westinghouse's subcontracts 
was included in the fee bases; by Fiscal Year 1993, 100 percent
of the value of a portion of work performed under one subcontract
was included in the fee bases.  Since the subcontractor was also
receiving a fee for this portion of work, the Department was
paying two full fees for the same work.
 
We found that the Department had effectively increased
Westinghouse's fixed-fee-equivalents by approximately $3 million 
in both Fiscal Year 1993 and 1994 to, in large part, fund an
"unallowable" employee incentive compensation program.
 
We found that Westinghouse's total paid fees for the five year 
period increased significantly over what they would have been had
the terms resulting from the original competitive negotiations
been maintained.  Using actual performance scores, we estimated
that Westinghouse would have received approximately $70.9 million
in total fees under the terms initially negotiated, or some $59.7
million less than the $130,621,000 actually received during this
five year period.
 
We recommended that the Deputy Assistant Secretary for
Procurement and Assistance Management require that changes in
either the number or composition of fee bases used in calculating
fees from the maximum fee schedules be submitted to the
Department's Procurement Executive for approval.  We recommended
that a standard for weighting the dollar value of subcontracts in
fee bases be established, along with a requirement for
justification and approval when the standard is exceeded.  We
also recommended that negotiated fixed-fee-equivalents not
include either direct or indirect funding for "unallowable"
incentive compensation programs.  We further recommended that
initially negotiated total available fee, negotiated
fixed-fee-equivalents, and the relationship of
fixed-fee-equivalents to the maximum fee schedules, be used to
benchmark total available fees negotiated in subsequent fee
periods.
 
In commenting on our report, management concurred with the
recommendations and identified corrective actions.
 
 
 
 
 
                             John C. Layton
                             Inspector General
 
Attachment
 
cc:  Deputy Secretary
     Under Secretary
     Associate Deputy Secretary for Field Management
     Deputy Assistant Secretary for Procurement and
       Assistance Management
     Manager, Savannah River Operations Office
 
 
***************************************************************
**This document is an ASCII formatted version of a printed   **
**document.  The page numbers in this eletronic version may  **
**not be in the same order as the printed document.  The     **
**printed document may also contain charts and photographs   **
**which are not reproduced in this electronic version.  If   **
**you require the printed version of this document, contact  **
**the Office of Inspector General (IG-1), Department of      **
**Energy, 1000 Independence Avenue, SW, Washington, D.C.     **
**20585 or call Wilma Slaughter at (202) 586D1924.           **
***************************************************************
 
                     U.S. DEPARTMENT OF ENERGY
 
                    OFFICE OF INSPECTOR GENERAL
 
 
 
 
 
 
 
 
 
 
                      REPORT ON INSPECTION OF
 
             WESTINGHOUSE SAVANNAH RIVER COMPANY FEES
 
        FOR MANAGING AND OPERATING THE SAVANNAH RIVER SITE
 
 
 
 
 
 
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
                     vml.hqadmin.doe.gov
 
  U.S. 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.
 
 
Report No.:  IG-0377                       Office of Inspections
Date Issued: AUGUST 3, 1995                Washington, DC  20585
                      REPORT ON INSPECTION OF
             WESTINGHOUSE SAVANNAH RIVER COMPANY FEES
        FOR MANAGING AND OPERATING THE SAVANNAH RIVER SITE
 
 
                       TABLE OF CONTENTS
 
                                                         Page
 
  I.  PURPOSE AND OBJECTIVES ............................  1
 
 II.  SCOPE AND METHODOLOGY .............................  1
 
III.  SUMMARY RESULTS OF INSPECTION .....................  2
 
 IV.  BACKGROUND ........................................  5
 
  V.  RESULTS OF INSPECTION .............................  7
 
      A.  SUBDIVISION OF FEE BASES ......................  8
 
      B.  SUBCONTRACT FEE BASE VALUES ................... 11
 
      C.  FUNDING INCENTIVE COMPENSATION THROUGH FEES ... 13
 
      D.  BENCHMARKING FEES ............................. 16
 
      E.  DOCUMENTATION OF TOTAL AVAILABLE FEE
          NEGOTIATIONS .................................. 20
 
 VI.  RECOMMENDATIONS ................................... 21
 
VII.  MANAGEMENT COMMENTS ............................... 23
 
      APPENDIX I ........................................ 30
 
      APPENDIX II ....................................... 31
 
      APPENDIX III ...................................... 32
 
      APPENDIX IV ....................................... 33
 
      ATTACHMENT A ...................................... 57
 
      ATTACHMENT B ...................................... 59
                                #=1
                     U.S. DEPARTMENT OF ENERGY
                    OFFICE OF INSPECTOR GENERAL
                       OFFICE OF INSPECTIONS
                       WASHINGTON, DC  20585
 
 
                      REPORT ON INSPECTION OF
             WESTINGHOUSE SAVANNAH RIVER COMPANY FEES
        FOR MANAGING AND OPERATING THE SAVANNAH RIVER SITE
 
 
 
I.   PURPOSE AND OBJECTIVES
 
     The purpose of this inspection was to review the Department
of Energy's (DOE) annual negotiation of total available fees 
with the Westinghouse Savannah River Company (WSRC) under
Contract No. DE-AC09-89SR18035.  The specific objectives of
this inspection were to:  (1) determine whether the
negotiation process for total available fees had been
administered in conformance with the requirements of the
Department of Energy Acquisition Regulation (DEAR), to
include documentation, approvals, and timeliness; (2)
determine whether the negotiated total available fees
conformed with the Department's fee policies, as stated in 
the DEAR; (3) assess the adequacy of justifications for
negotiated total available fees; and (4) evaluate the
overall results and effectiveness of the process for
negotiating total available fees.
 
 
II.  SCOPE AND METHODOLOGY
 
     This inspection covered the initial negotiation of total
available fees in 1988, and all subsequent negotiations
through Fiscal Year (FY) 1994.  In conducting this
inspection, the inspectors examined how WSRC's total 
available fees were established each year, including the
amount and composition of fees.  The inspectors did not
address performance evaluation plans, nor the Government's 
process for evaluating WSRC's performance and determining 
actual fees paid to WSRC.  They did, however, analyze
historical performance scores and fees paid to WSRC.
 
In the course of the inspection, interviews were conducted
with procurement officials in the Department's Office of 
Procurement and Assistance Management, and at the Savannah
River Operations Office (SR).  Reviews were also made of
both the Department of Energy Acquisition Regulation and the
Department's contract with WSRC.
 
     The inspection was conducted in accordance with Quality
Standards for Inspections issued by the President's Council 
on Integrity and Efficiency.
 
 
III. SUMMARY RESULTS OF INSPECTION
 
     In 1988, the Department of Energy conducted negotiations
with both Martin Marietta Corporation and Westinghouse
Electric Corporation (Westinghouse) to manage and operate
the Savannah River Site.  These negotiations included the
determination of the total available fee that could be
earned for the first six months of the award fee contract.
Westinghouse Electric Corporation was ultimately selected as
the successful bidder.  Westinghouse Savannah River
Company was designated as the management and operating (M&O)
contractor, and was paid a fee of $5.188 million for the
first six month fee period.  Since those initial and very
competitive negotiations, WSRC's subsequent fee arrangements 
have increased to the point where they received a fee of
$17.262 million for the six month period ending in March
1994.  This inspection reviewed the changes in the fee
arrangements during this period.  A brief summary of the key
findings of this inspection follows:
 
     o    Our review disclosed that, after FY 1989, SR
increasingly subdivided WSRC's fee base (the total 
dollar value of the contract) into more numerous,
smaller dollar value fee bases.  WSRC increased from
two fee bases in FY 1989 to eight in FY 1994.  The
result was that the sum of the fixed-fee-equivalents
for the smaller fee bases exceeded the
fixed-fee-equivalents based on the two initial, larger
fee bases.  This occurred because the schedules in the
DEAR that are used as a basis for computing
fixed-fee-equivalents are regressive.  That is, as the
size of the fee base increases, the incremental
increase in fee percentage decreases.  For example,
Attachment A to this report indicates that the
incremental fee percentage for "production" work
between $100 million and $150 million should be limited
to 1.1 percent; for work between $200 million and $300
million, the maximum fee for this incremental work
declines to 0.5 percent.
 
     o    We found that SR had significantly increased the
percentage of the dollar value of WSRC's subcontracts 
that are added to WSRC's fee bases.  In FY 1989, SR 
included 50 percent of the value of WSRC's subcontracts 
in the fee bases.  By FY 1993, SR had significantly
increased these percentages.  For example, 100 percent
of the value of a portion of work performed under one
subcontract was included in WSRC's fee bases.  Since 
the subcontractor was also receiving a fee for this
portion of work, DOE was paying two full fees for the
same work.
 
     o    We found that SR had effectively increased WSRC's 
fixed-fee-equivalents by approximately $3 million in
both FY 1993 and 1994 to, in large part, fund WSRC's 
employee incentive compensation program.  SR had
declared this program to be an unallowable cost after
FY 1992.  We believe that funding WSRC's "unallowable" 
incentive compensation program through the mechanism of
increased fee is inconsistent with current Departmental
policy, and precludes effective DOE oversight of the
program.
 
     o    We found that WSRC's total paid fees for the period we 
reviewed increased significantly over what they would
have received if the terms resulting from the original
competitive negotiations had been maintained.  In 1988,
when Westinghouse Electric Corporation was competing
against Martin Marietta Corporation, Westinghouse
proposed a fixed-fee-equivalent (the basis for
determining the total available fee) for FY 1989 that
was 6.6 percent higher than that specified in the DEAR
maximum fee schedules, but accepted a fee 11 percent
less than that calculated from the schedules.  For FY
1990, after contract execution, WSRC proposed a
fixed-fee-equivalent seven times as large as the
annualized amount it had accepted for FY 1989; and
negotiated a fixed-fee-equivalent which was twice as
large as the amount prescribed by the DEAR maximum fee
schedules under the conditions of the initial contract
negotiations.
 
Using WSRC's actual performance scores, we estimated 
that, during the first five years of the contract, WSRC
would have received approximately $70.9 million in
total fees under the terms initially negotiated, or
some $59.7 million less than the $130,621,000 actually
received.  Our calculations were based on the amount of
fees that WSRC would have been paid if the fees had
been based upon fixed-fee-equivalents which:  (1) were
limited in amount to the maximum fee schedules (WSRC
actually accepted less than the maximum the first
negotiated fee period), and (2) were calculated in the
same manner as the first fee period, including the use
of one fee base per fee schedule.  Initially, WSRC only
had two fee bases, one for the production schedule and
one for the research and development schedule.
 
     Management officials, while concurring with the report's 
recommendations, commented on the report's findings.  
Although they did not question the facts presented in the
report, they did not feel that the report adequately
recognized the changes underway in the Department's fee 
process, nor the changes in the operating conditions of the
WSRC contract.  For example, the Office of Procurement said
that, while it may have appeared as if rules were not being
followed, the Department was attempting to analyze fees in
accordance with a new management approach.  Under this
initiative, the total dollar value of the contract was
subdivided into an increased number of separate fee bases,
thus moving more to a task order approach for identifying
fee base areas.  We believe, however, that if the Department
was moving to a task order mode, and thus subdividing fee
bases, the Department should have considered using less than
the maximum fixed-fee-equivalent allowed by the DEAR to
determine total available fee.  In our view, when the
maximum fee schedules were established, the Department did
not envision that a contractor would have eight separate fee
bases, as was the case with WSRC in FY 1994.
 
     The Office of Procurement further stated that the report did
not take into account the increased risk borne by the
contractor.  SR also commented that the fee for WSRC was in
fact in line with the "market price" for M&O contractors and
provided data relative to selected contractors to support
this position.  We found, however, that unlike WSRC, one of
the contractors cited had the "Accountability Rule"
provisions in its contract which made it liable for certain
avoidable costs and accordingly incorporated different fee
provisions.  We also found that one of the reasons the other
contractors cited had higher fees was that they placed more
of their base fee at risk in order to have a larger award
fee pool.
 
 
IV.  BACKGROUND
 
     In 1988, Westinghouse Electric Corporation competed against
Martin Marietta Corporation for a contract to manage and
operate the Department of Energy's Savannah River Site (SRS) 
near Aiken, South Carolina.  DOE selected Westinghouse as
the replacement contractor on September 8, 1988.  A five and
one-half year contract, Contract No. DE-AC09-89SR18035, was
subsequently signed by DOE and the Westinghouse Savannah
River Company, to commence on April 1, 1989.
 
     Under Clause H.24, Recognition of Performing Entity, of
WSRC's contract with DOE, Bechtel Savannah River, Inc. 
(BSRI) was specified as part of the "entity" which manages
and operates SRS.  BSRI is responsible for certain elements
of WSRC's statement of work, to include design and 
construction.  Although BSRI is legally a subcontractor to
WSRC, BSRI personnel are integrated within the overall WSRC
organization.
 
     With the exception of a relatively small "fixed fee"
associated with WSRC's management of the Naval Fuels 
Materials Facility (which was eliminated after FY 1991),
DOE's contract with WSRC is a cost-plus-award-fee (CPAF) 
contract.  WSRC's subcontract with BSRI is also a CPAF 
contract.  DOE annually negotiates a "total available fee"
with WSRC; WSRC likewise annually negotiates a total
available fee with BSRI, subject to DOE approval.
 
     DEAR Section 970.1509 discusses fees for management and
operating contracts.  Section 970.1509D1, "Fee policy,"
states that M&O contractors may be paid a fee.  The amount
of the fee payable for an M&O contract will be established
in accordance with DEAR 970.1509, and "shall not exceed 
maximum amounts derived from the appropriate fee schedule
established for this purpose."  
 
     The maximum fees for M&O contracts are to be determined from
the fee schedules which most closely relate to the services
being performed.  DEAR 970.1509D5, "Limitations," contains
fee schedules which indicate the maximum allowable fees to
be paid to M&O contractors for "Production Efforts" and
"Research and Development Efforts."  DEAR 915.971 contains
fee schedules which indicate the maximum allowable fees to
be paid to M&O contractors for "Construction" and
"Construction Management."
 
     These schedules are not necessarily intended to be used to
calculate an appropriate "fixed-fee-equivalent" for an M&O's 
contract effort.  Guidance for initially determining fees,
using a judgemental process, is provided in DEAR 970.1509D4,
"Considerations and techniques for determining fees."
Instead, the primary purpose of these fee schedules is to
establish a "maximum" fee limit which should ordinarily not
be exceeded.  Furthermore, if a DOE contracting officer
intends to authorize a fixed-fee-equivalent which exceeds
these "maximum" fees, then prior approval must be obtained
from DOE's Procurement Executive.
 
     As a practical matter, the Savannah River Operations Office
has always used the maximum fee schedules in DEAR 970.1509D5
to develop proposed fees for WSRC, and not the more
judgemental process described in DEAR 970.1509D4.
Attachment A to the report shows DEAR 970.1509-5 maximum fee
schedules which were in effect when WSRC's contract was 
being negotiated by DOE in 1988.  Attachment B shows these
same fee schedules after they were revised in June 1991 to
reflect the impact of inflation since 1983.
 
     One of the significant structural characteristics of these
fee schedules is the decline in fee percentage as the size
of the work/fee base increases.  For example, Attachment A
indicates that the incremental fee percentage for
"production" work exceeding $100 million (and less than $150
million) should be limited to 1.1 percent; for work
exceeding $200 million (and less than $300 million), the
maximum fee for this incremental work declines to 0.5
percent.  The significance of these declining percentages is
discussed in more detail later in the report.
 
     DEAR 970.1509D6, "Fee base," provides guidance on
determining an appropriate estimate of necessary allowable
costs (fee base) to be used in calculating a maximum
allowable fee from the fee schedules.  This section
discusses various adjustments which should be made to the
fee base (i.e., cost of work being performed) to better
reflect the actual management and technical effort required
of the contractor.  Most frequently, this section discusses
what should be excluded from the fee base.  Examples of
possible exclusions include any part of a subcontract which
did not reflect the contractor's effort, and government 
furnished materials.
 
     DEAR 970.1509D6 also states that there may be circumstances
where the fee schedules do not reflect adequate compensation
to the contractor, such as when the contractor uses its own
facilities and capital.  In these circumstances, fee
proposals exceeding the fee schedules should be submitted to
the DOE Procurement Executive, documenting why the
contractor is entitled to additional fees.
 
     With the exception of DEAR 970.1509-8, all sections of
DEAR 970.1509 address establishing a fixed-fee-equivalent
for M&O contracts.  DEAR 970.1509D8, "Special considerations 
D award fee," provides guidance on converting this 
fixed-fee-equivalent to an "award fee" basis.
 
     The starting point in establishing an award fee is to first
determine an appropriate fixed-fee-equivalent for the
contract, either judgementally or by using the maximum fee
schedules.  This fixed-fee-equivalent would be the fee paid
if the contract were on a cost-plus-fixed-fee (CPFF) basis,
rather than an award fee basis.  Once this
fixed-fee-equivalent is determined and agreed to, a portion
of the fixed fee-equivalent (0 to 50 percent) remains fixed
as a "base fee," and is payable to the contractor in equal,
normally monthly, installments.  The remainder of the
fixed-fee-equivalent is converted to an "award fee pool."
The DEAR sets a maximum for the award fee pool at double the
remaining fixed-fee-equivalent, after the base fee has been
deducted.  (Award fees exceeding this maximum require
approval by DOE's Procurement Executive.)  The contractor 
then earns some portion of this available award fee pool,
based upon its performance during the award fee rating
period.  The base fee and the award fee pool together make
up the total available fee under the award fee contract.
The percentages of both the base fee and the award fee pool
to the fixed-fee-equivalent are commonly referred to as the
"award fee split."  For example, if the base fee were set at
40 percent of the fixed-fee-equivalent, and the award fee
pool were set at 120 percent of the fixed-fee-equivalent,
then the award fee split would be "40/120."
 
 
V.   RESULTS OF INSPECTION
 
     As shown in Appendix II to the report, fees totaling
$130,621,000 had been paid to WSRC through March 31, 1994.
Appendix III summarizes the award fee negotiation data by
fiscal year.  Appendix IV analyzes the growth in total
available fees for WSRC to manage and operate SRS, from the
time the contract was initially negotiated in 1988 through
the first FY 1994 fee period.
 
The principal focus of the analyses in Appendix IV was a
comparison of the basic fixed-fee-equivalents negotiated
with WSRC, before being converted to an award fee basis, and
the maximum fees per the fee schedules in DEAR 970.1509D5,
as well as a discussion of the resulting variances.  These
analyses were the primary basis for the findings discussed
in this section of the report.
 
     A.   SUBDIVISION OF FEE BASES
 
     Our review disclosed that, after FY 1989, SR increasingly
subdivided WSRC's fee base (the total dollar value of the 
contract) into more numerous, smaller dollar value fee
bases.  The result was that the sum of the
fixed-fee-equivalents for the smaller fee bases exceeded the
fixed-fee-equivalents based on the two initial, larger fee
bases.
 
     The Department of Energy Acquisition Regulation provides fee
schedules for determining the maximum allowable fee to be
paid under management and operating contracts.  DEAR
970.1509D5 contains the maximum fee schedules for
"Production Efforts" and "Research & Development Efforts;"
DEAR 915.971 contains maximum fee schedules for
"Construction" and "Construction Management" contracts.
 
     A fundamental characteristic of these maximum fee schedules
is that each schedule is regressive.  As the size of the
effort increases, the fee percentage decreases.  If a larger
effort is broken down into smaller pieces, fees are
separately calculated for each of these smaller pieces using
the higher fee percentages.  As a result, the total fees for
the smaller pieces will exceed the single fee for the larger
effort.
 
In reviewing SR's calculation of WSRC maximum fees from the 
DEAR fee schedules, it is apparent that SR had increasingly
subdivided the WSRC budget into additional, smaller fee
bases prior to calculating the fee(s).  The number of fee
bases used by SR to calculate the "maximum" fees for the
WSRC contract are shown, by category, in the following
table:
 
                (Continued on next page)
                                          Separate Fee Bases
 
                                          Research &   Construction
                Fiscal Year   Production  Development   Management    Total
 
                   1989           1            1             D          2
                   1990           3            1             D          4
                   1991           3            1             D          4
                   1992           3            1             D          4
                   1993           3            2             D          5
                   1994           3            2             3          8
 
 
A result of subdividing the WSRC budget into more numerous
fee bases has been to increase the total
fixed-fee-equivalent calculated from the maximum fee
schedules.  Using FY 1990 as an example, SR initially
calculated a maximum fixed-fee-equivalent of $6.66 million
for WSRC's "Production" efforts, based upon one "Production" 
fee base.  Less than two months later, using the same data,
SR recalculated a maximum fixed-fee-equivalent of $10.61
million for WSRC's "Production" efforts, based upon three 
"Production" fee bases.  Subdividing the "Production" effort
into three fee bases increased the "Production"
fixed-fee-equivalent by $3.95 million, or 59 percent.  SR
partially justified the FY 1990 change in subdividing fee
bases by concluding "that major changes since September 1988 
in organizational alignment, both by DOE and WSRC, and in
operating requirements" dictated that a different approach 
be used.
 
     FY 1993 provides another example of the impact of subdividing
fee bases.  Allocating WSRC's budget among one "Production" 
fee base and one "Research and Development" (R&D) fee base,
as was used in the contract's initial FY 1989 fee 
calculation, we calculated a total fixed-fee-equivalent of
$14.7 million from the maximum fee schedules in the DEAR.
SR subdivided this same budget among three "Production" and
two "R&D" fee bases, and calculated a total
fixed-fee-equivalent of $26 million from these same fee
schedules.  WSRC, in their initial fee proposal, subdivided
the budget data into 61 fee bases and calculated a total
fixed-fee-equivalent of $66 million from, again, the same
fee schedules.
 
In addition to increasing the number of fee bases from 1989
through 1994, SR had frequently changed the programmatic
composition of the fee bases during this period, as the
following data indicates:
 
                (Continued on next page)
                Composition of Fee Bases
 
 
     FY 1989 Fee Bases
 
     Production Fee Base:      (1) Site Operations (Included 60% of Savannah River
                                   Laboratory (SRL) Fee Base)
     R&D Fee Base:             (1) Savannah River Laboratory (40% of SRL Fee Base)
 
     1990, 1991, & 1992 Fee Bases
 
     Production Fee Bases:     (1) Site Operations
                               (2) Reactor Restart (RR)
                               (3) New Production Reactor (NPR)
 
     R&D Fee Base:             (1) Savannah River Laboratory (100% of SRL Fee Base)
 
     Note:  For 1990 - 1992, (a) two additional "Production" fee bases were recognized
            (RR and NPR); and (b) all SRL fee base was designated as "R&D," versus
            40% in 1989.
 
     1993 Fee Bases
 
     Production Fee Bases:     (1) Site Operations
                               (2) Reactors
                                    (3) Environmental Restoration/Waste Management (ER/WM)
 
     R&D Fee Bases:            (1) Savannah River Laboratory
                               (2) Defense Waste Processing Facility (DWPF)
 
     Note:  For 1993, (a) the New Production Reactor effort was eliminated as a
            "Production" fee base due to termination of the program; (b) the ER/WM
            program was recognized as a new "Production" fee base; and (c) the DWPF
            effort was switched from "Production" to "R&D" and recognized as a
            separate "R&D" fee base.
 
     1994 Fee Bases
 
     Production Fee Bases:     (1) Site Operations
                                    (2) Environmental Restoration/Waste Management
                               (3) Savannah River Technology Center (SRTC)
                                   (29.2% of SRTC Fee Base)
 
     R&D Fee Bases:            (1) SRTC (70.8% of STRC Fee Base)
                               (2) DWPF
 
     Construction Management
       Fee Bases:              (1) Site Operations
                               (2) Savannah River Technology Center
                               (3) DWPF
 
     Note:  For 1994, (a) Reactors was eliminated as a separate fee base; (b) a portion
            of the Savannah River Technology Center fee base (formerly SRL) was
            identified as a separate "Production" fee base; and (c) a new category of
            fee bases was identified ("Construction Management") with three new and
            separate fee bases placed in this category.
 
We found evidence that SR had disclosed to DOE Headquarters
Procurement the various fee bases used in calculating WSRC's 
fixed-fee-equivalents from the maximum fee schedules.
However, we did not find evidence in SR's procurement files 
that SR had adequately disclosed to DOE Headquarters
 
the impact of increased fees which resulted from SR's 
changes in both the number and programmatic composition of
fee bases.  Furthermore, an SR official confirmed that SR
had not disclosed this type of information to DOE
Headquarters.
 
In summary, we found that SR's subdivision of WSRC's budget
into smaller fee bases, as well as SR's programmatic 
reconfiguration of these fee bases, resulted in
substantially larger fixed-fee-equivalents being calculated
from the maximum fee schedules within the DEAR.  We
concluded that, while some flexibility for restructuring fee
bases may be necessary, this process needs to be more
closely controlled.
 
B.   SUBCONTRACT FEE BASE VALUES
 
We found that SR had significantly increased the percentage
of the dollar value of WSRC's subcontracts that are added to 
WSRC's fee bases.  For example, 100 percent of the value of 
a portion of work performed under one subcontract was
included in WSRC's FYs 1993 and 1994 fee bases.  In our 
view, assigning too much weight to subcontracts in fee bases
is not consistent with the partial exclusion of
subcontracts' costs as discussed in the DEAR. 
 
DEAR 970.1509D6, Fee base, defines a fee base as "an 
estimate of necessary allowable costs to which a fee factor
has been applied to determine the maximum fee allowance."  
This section further states that the fee base shall exclude
any part of costs which are of such magnitude or nature as
to distort the technical and management effort actually
required of the contractor.  The "estimated cost or price of 
subcontracts and other major contractor procurements" is 
listed as one type of cost which may, in some part, be
excluded from the fee base.
 
When the WSRC contract was in the process of being
negotiated in 1988, SR reduced the value of subcontracts in
the fee base by 50 percent.  SR's Business Management 
Committee, in commenting on Westinghouse's initial fee 
proposal, stated:
 
     "However, in developing the fee proposal 
Westinghouse has overlooked a factor which will
tend to lower the fee even more.  All of the
construction and A-E effort will be performed by
a subcontractor, Bechtel.  Subcontract costs
don't carry the same weight as in-house costs 
(subcontract costs are usually reduced by 50% or
more) in fee calculation."
 
We did note, however, a trend by SR to include an increasing
percentage of the subcontracts' value in the fee base when 
calculating fixed-fee-equivalents from the DEAR's maximum 
fee schedules.  SR, as partial justification for its FY 1991
prenegotiation fee objective, stated varying percentages
were used for subcontracts in WSRC's fee bases to more 
accurately reflect WSRC's actual management effort.  The 
following table summarizes WSRC's subcontract fee base 
values from FY 1989 through FY 1994:
 
                                                                Percentage of
                                                                 Subcontract
            Fiscal                                              Costs Included
             Year   Subcontracts/Fee Base                        In Fee Base
 
             1989:  All                                               50
 
             1990:  Initial Calculations
                    Site Operations                                   50
                    Savannah River Laboratory                         50
                    Bechtel Direct Design & Construction              65
                    Bechtel Subcontracts                              50
 
             1990:  Revised Calculations
                    Site Operations                                   50
                    New Production Reactor                            50
                    Reactor Restart                                   75
                    Savannah River Laboratory                         50
                    Bechtel Direct Design & Construction              65
                    Bechtel Subcontracts                              50
 
             1991:  Site Operations                                   50
                    New Production Reactor                            50
                    Reactor Restart                                   75
                    Savannah River Laboratory                         50
                    Bechtel, all work/subcontracts                    65
 
             1992:  Site Operations                                   50
                    New Production Reactor                            50
                    Reactor Restart                                   75 Savannah River Laboratory                         50
                    Bechtel, all work/subcontracts                    65
 
             1993:  Site Operations                                   50
                    Reactor Restart                                   70 Environmental Restoration/Waste Management        60
                    Defense Waste Processing Facility                 70
                    Savannah River Laboratory                         70
                    Bechtel, excluding below                          65
                    Bechtel employees within WSRC organization       100
 
             1994:  Site Operations                                   50
                    Environmental Restoration/Waste Management        60
                    Defense Waste Processing Facility                 70
                    SRTC (Formerly Savannah River Lab)                70
                    Bechtel, excluding below                          80
                    Bechtel employees within WSRC organization       100
 
The above data clearly indicates an increasing trend in SR's 
"weighting," or valuation of subcontracts for fee base
purposes.  For the FY 1989 total available fee calculation,
all subcontracts were weighted at 50 percent.  In FY 1990,
weighting of Bechtel's direct design work and construction 
increased to 65 percent.  Also, Reactor Restart subcontracts
were increased to 75 percent in FY 1990.  In FY 1991,
subcontracts associated with Bechtel's work were increased 
to 65 percent.  For FY 1993, (1) the Savannah River
Laboratory subcontracts were increased to 70 percent; (2)
subcontracts in the Environmental Restoration/Waste
Management and Defense Waste Processing Facility fee bases,
which were previously included in Site Operations at 50
percent, were also increased to 60 percent and 70 percent
respectively; and (3) the budget for Bechtel employees
within the WSRC organization received a full 100 percent
valuation in the WSRC fee base.  In FY 1994, Bechtel's 
construction work was increased from 65 to 80 percent.
 
The 100 percent weighting of Bechtel's work in WSRC's FYs
1993 and 1994 fee bases resulted in:  (1) Bechtel receiving
a fee for its work from WSRC; and (2) WSRC receiving full
fee credit from DOE for the same work.  Since DOE reimburses
WSRC for allowable costs under the M&O contract, including
the fees paid to Bechtel, the Government, in effect, paid
two full fees for the same work.  The 80 percent weighting
of Bechtel's construction work in FY 1994 approaches the 
same situation:  WSRC (and DOE) paid Bechtel full fee for
its work, and WSRC received 80 percent credit for the same
work in its fee calculation.
 
Based upon the above data, we concluded that SR had included
too high a percentage of the dollar value of WSRC's 
subcontracts in its fee bases, resulting in increases in the
fixed-fee-equivalents being calculated from the DEAR maximum
fee schedules.  In view of the Department's recent 
initiative to subcontract out work previously performed by
the Department's M&O contractors, a proper weighting of 
these subcontracts in M&O fee calculations becomes even more
significant.
 
C.   FUNDING INCENTIVE COMPENSATION THROUGH FEES
 
We found that SR had effectively increased WSRC's 
fixed-fee-equivalents by approximately $3 million in both FY
1993 and 1994 to, in large part, fund WSRC's employee 
incentive compensation program.  SR had declared this
program to be an unallowable cost after FY 1992.
 
During the first three calendar years of the WSRC contract,
SR authorized, as an allowable cost, an incentive
compensation program for WSRC employees.  The details of
this incentive compensation program were discussed at length
in an Office of Inspector General report on "Inspection of 
the Department of Energy's Procedures for Administering 
Contractors' Executive Employees' Compensation," Report 
DOE/IG-0332, dated August 1993.
 
In a July 1992 letter to WSRC's Executive Vice President, 
SR's Manager stated that he had concluded it was no longer 
in the best interests of the Government to recognize
employee incentive compensation as an allowable cost under
the contract between DOE and WSRC.  At the time of this
letter, the 1992 incentive compensation performance period,
which was on a calendar year basis, was a little over
one-half completed.  In February of 1993, WSRC awarded and
paid incentive compensation to covered employees for the
Calendar Year (CY) 1992 performance period.  These costs
were not directly reimbursed by DOE as allowable costs under
the contract.
 
A review of the total available fee negotiation files for FY
1994 revealed that SR did, in fact, assist WSRC in funding
its "unallowable" incentive compensation program by
increasing WSRC's fees.  Specifically, an SR briefing chart, 
which was included in a presentation to SR's Manager in 
December 1993, indicated that $3 million in WSRC's FY 1993 
base fee represented an "allowance" for employee incentive
compensation.
 
Another SR briefing document, dated December 10, 1993,
summarized the results of a meeting at DOE Headquarters.
This meeting, attended by senior Headquarters program and
procurement officials and SR personnel, dealt with WSRC's FY 
1994 fee options.  Under the heading "OUTCOMES OF THE 
MEETING," the document stated:  "IT WAS REAFFIRMED THAT THE
FY93 $3M [million] BUYOUT OF INCENTIVE COMPENSATION WILL
CONTINUE IN FY94 AND FUTURE YEARS."
 
We believe that funding an "unallowable" incentive
compensation program through the mechanism of increased fee
effectively eliminated meaningful involvement and oversight
of the program by the Department.  The Department has no
authority to obtain answers to such basic and fundamental
questions as the following:
 
o    Does WSRC have an incentive compensation program?
 
o    What is the program's annual expenditures?
 
o    Which WSRC employees participate in the program?
 
o    Are employees in the program adequately compensated
without incentive compensation?
 
o    Does criteria for earning incentive compensation meet
DOE objectives?
 
o    Did the employees' performance merit incentive 
compensation?
 
At least one SR employee did not share our concern regarding
the lack of involvement and oversight by DOE in funding
WSRC's incentive compensation program through the mechanism 
of increased fee.  During our inspection, we reviewed an
unsigned internal document, dated October 1992 and addressed
to SR's Manager, that discussed various funding options for 
WSRC's incentive compensation program.  It stated, in part:
 
"- there are two ways WSRC can recover IC 
[incentive compensation] costs: through fee or
as an allowable cost.  I would prefer the fee
approach as this would exclude any DOE
involvement in the process."
 
            *   *   *   *   *   *   *
 
"D The above would, in my mind, provide more than 
enough in additional fixed fee to cover the
cost of the IC program [$2.7MM last year] and
an additional amount to reflect something for
Task order contracting.  The formal record
would not show that we have done either!"
 
We also noted that the Department's assistance in funding 
WSRC's "unallowable" incentive compensation program through 
increased fee appears to be inconsistent with current
Departmental policy.  In comments to our Report DOE/IG-0332,
the then Deputy Director, Office of Procurement, Assistance
and Program Management, stated as current policy that
"incentive compensation programs, which increase the cost of 
employee compensation, will not be an allowable cost in the
future, and existing incentive programs will be evaluated
for continuation or termination as current contracts
expire."  
If the policy is to stop paying for these incentive
compensation programs as "allowable" costs, as SR has done,
we believe it is inconsistent to continue "paying" for them
by increasing fees.  We further believe that the
Department's assistance to WSRC in funding its "unallowable" 
incentive compensation program through the mechanism of
increased fee precludes effective DOE oversight of the
program and should be terminated.
 
D.   BENCHMARKING FEES
 
We concluded that it would have been advantageous to the
Department to have used WSRC's initially negotiated fee 
parameters to benchmark fees paid to WSRC in subsequent fee
periods.  We noted a lack of consistency between fees
initially bid and (a) the contractor's fee expectations and 
requests in subsequent fee periods, and (b) total available
fees actually negotiated by the Department in subsequent
periods.
 
In 1988, when Westinghouse was competing against Martin
Marietta Corporation for the contract, Westinghouse
submitted a fee proposal based on a fixed-fee-equivalent of
$6 million for the initial six month fee period of FY 1989.
This amount was 6.6 percent higher than the maximum fee
schedules in the DEAR.  After negotiations, Westinghouse
accepted a fixed-fee-equivalent of $5 million, which was 11
percent less than the DEAR's maximum fee schedules.
 
After Westinghouse was selected for contract award, the
subsequent annual total available fee negotiations between
SR and WSRC appeared to become a wide open process without
regard to the fee terms originally negotiated.  The annual
negotiation process typically involved WSRC submitting a
very large initial fee proposal, and SR agreeing, after
protracted negotiations lasting well into the applicable fee
year, to a fixed-fee-equivalent much higher than that
specified in the DEAR's maximum fee schedules.
 
For example, less than six months after the start of the new
contract, WSRC submitted a FY 1990 proposal for a $70
million fixed-fee-equivalent.  This was seven times the
annualized fixed-fee-equivalent amount negotiated the
previous year, when competition was still ongoing.  WSRC's 
negotiation technique appears to have been effective since
SR finally agreed to a $20 million fixed-fee-equivalent,
which was approximately double that specified in the DEAR's 
maximum fee schedules.  The negotiations finally concluded
with Modification M020 being signed on June 4, 1990, some
eight months into the FY 1990 fee year.
 
The negotiation process in subsequent years substantially
followed this pattern, as the following data indicates:
 
                                    WSRC          SR
             Fee/     Fixed-Fee-  Proposed    Negotiated               Contract
            Fiscal    Equivalent  Fixed-Fee   Fixed-Fee                  Mod.
             Year     Per DEAR*   Equivalent  Equivalent  Percent **    Dated
 
             1990      $10.1MM     $70.0MM     $20.00MM      198       06D04D90
 
             1991       11.7MM      24.4MM      21.75MM      186       06D04D91
 
             1992       14.2MM      61.6MM      26.50MM      187       06D05D92
 
             1993       14.7MM      66.0MM      29.75MM      202       03D19D93
 
             1994       16.4MM      39.0MM      29.00MM      177       04D08D94
 
 
             * DEAR Fixed-Fee-Equivalent amount based upon one fee base per
               schedule (e.g., one "Production" fee base, one "R&D" fee
               base, etc.)
 
 
            ** SR Negotiated Fixed-Fee-Equivalent divided by
               Fixed-Fee-Equivalent Per DEAR.
 
 
A general trend of DOE paying increasingly higher fees to
WSRC is discernible from data presented in Appendix II of
our report.  Even after the major increase in fees from FY
1989 to FY 1990, fees paid have continued to increase in
subsequent years.  In some instances, these increases have
occurred in the face of declining budgets and lower
performance scores.
 
As a basis of comparison, we used FY 1991 when the WSRC
contract budget was $2.054 billion.  For the second six
month evaluation period of FY 1991, WSRC received a
numerical performance score of 88, and a total fee of
$13,045,000.
 
For FY 1992, the WSRC contract budget was $2.017 billion, or
$37 million less than for FY 1991.  For the second six month
evaluation period of FY 1992, WSRC received a numerical
performance score of 89, and a total paid fee of
$16,287,500.  Comparing this score and fee with the second
period of FY 1991, the score increased by one point while
the paid fee increased by $3,242,500.  We do not believe a
$3,242,500, or approximately 25 percent, increase in paid
fee for a six month evaluation period can be explained by a
one point increase in score, especially in view of a decline
in budgeted activity.
 
More recently, the FY 1994 WSRC contract budget was $1.822
billion, or $232 million less than the FY 1991 level.  For
the first six month evaluation period of FY 1994, WSRC
received a numerical performance score of 85, and a total
paid fee of $17,262,250.  Comparing this score and fee with
the second period of FY 1991, the score decreased by 3
points while the paid fee increased by $4,217,250.  Again,
we do not believe a 32 percent increase in fee for a six
month evaluation period is warranted with declines in both
budgeted activity and the performance score.
 
During June 1991, DOE changed its fee policy for certain
profit making M&O contractors in two ways.  First, the
Department significantly increased the fees that these M&O
contractors could earn under their contracts.  In the
highest fee category, contractors would receive 100 percent
of the fixed-fee-equivalent as their base fee, plus an
additional 200 percent of the fixed-fee-equivalent as their
award fee pool, giving them a total available fee of 300
percent of the fixed-fee-equivalent.  Second, in exchange
for these higher fees, the Department made these M&O
contractors financially responsible for certain avoidable
costs.  The contractor would now be responsible for
avoidable costs in the areas of property, fines and
penalties, litigation and claims, and other losses which
were incurred due to negligence or willful misconduct on the
part of the contractor.  These changes are collectively
referred to as the "Accountability Rule."
 
WSRC does not have the "Accountability Rule" provisions in
its contract and, therefore, is not currently financially
responsible for avoidable costs.  However, WSRC's original 
fees have increased to the point where they are almost equal
to the 100 percent base fee and 200 percent award fee pool
available to those M&O contractors under the "Accountability 
Rule."  Using WSRC's total available fees for FY 1991 as an 
example, WSRC negotiated a base fee of $10.9 million and an
award fee pool of $21.7 million.  If a fixed-fee-equivalent
were calculated for FY 1991 on the same basis as the
initially negotiated fee (i.e., one fee base per schedule),
the fixed-fee-equivalent would be $11.65 million.  The
negotiated base fee of $10.9 million was 94 percent of this
$11.65 million fixed-fee-equivalent, and the $21.7 million
award fee pool was 186 percent of this fixed-fee-equivalent.
Thus, the total available fee, $32.6 million, was
approximately 280 percent of the $11.65 million
fixed-fee-equivalent discussed above.
 
During the first five years of its contract with the
Department, WSRC was paid total fees of $130,621,000.  We
have estimated the amount of fees that WSRC would have been
paid if fees had been based upon fixed-fee-equivalents
which:  (1) were limited in amount to the maximum fee
schedules (WSRC actually accepted less during negotiations
for the first fee period); and (2) were calculated in the
same manner as the first fee period, by using only one fee
base per fee schedule.  Using WSRC's actual award fee splits 
and performance scores, we have estimated that WSRC would
have received approximately $70.9 million in total award
fees under the terms initially negotiated, or some $59.7
million less than actually received.
 
In our opinion, the fees initially bid by contractors should
be used as the basis for negotiating additional total
available fees over the life of the contract.  For example,
if the initially negotiated fixed-fee-equivalents were the
DEAR maximum plus 10 percent, then the subsequent fees paid
during the contract should be kept very close to this
benchmark.  The contractor should be made aware that the
initial fee, and its relationship to the DEAR, will
essentially benchmark the fee for the life of the contract,
unless some very unusual and unforeseen circumstances arise.
 
The mechanism for implementing this policy is already in
place.  DEAR 970.5204D54, "Basic fee and award fee," is a
relatively new standard clause; it was incorporated in the
DEAR, and the WSRC contract, in June of 1991.  In Section
970.5204-54(b), Fee Negotiations, the clause states:
 
"If the parties are unable to agree on a 
reasonable fee, the contracting officer shall
unilaterally determine the basic fee and the
available award fee, subject to the clause of
this contract entitled Disputes."
 
We believe that effective use of this clause can help
maintain a basic relationship and continuity between
fixed-fee-equivalents initially negotiated, particularly
during competition, and those negotiated in subsequent fee
periods.
 
In summary, we noted a lack of consistency between fees bid
and accepted by the contractor during the initial
competitive fee negotiations, and (a) the contractor's fee
expectations and proposals in subsequent fee periods; and
(b) the fixed-fee-equivalents actually negotiated by the
Department in subsequent fee periods.  We further noted that
current contract reform efforts within the Department have
endorsed the benefits of recompeting expiring M&O contracts
rather than renewing them.  If one of the benefits of
recompeting these contracts, specifically a competitively
negotiated fee, is to be "lost" soon after the initial
contract is awarded, then the impact of contract reform will
be unnecessarily limited.
 
We concluded that it would have been advantageous to the
Department to have used WSRC's initially negotiated fees to 
benchmark fees paid to WSRC in subsequent fee periods.  We
believe a benchmarking of a contract's initial fees with the 
DEAR maximum fee schedules should be maintained in
subsequent fee periods unless significant changes in
circumstances warrant otherwise.
 
E.   DOCUMENTATION OF TOTAL AVAILABLE FEE NEGOTIATIONS
 
In conducting our review, we noted two instances in which SR
had not properly documented total available fee negotiations
with WSRC in conformance with DEAR requirements.  DEAR
915.808 requires that a price negotiation memorandum be
prepared after the conclusion of contract actions exceeding
$250,000.  The post negotiation section of this memorandum
is to "discuss the results of the negotiations leading to a 
final agreement, and, in a general sense, provide the
results of the negotiations in terms of the extent to which
prenegotiation objectives were met."
 
For FY 1990, SR ultimately negotiated a total available fee
with WSRC based upon a fixed-fee-equivalent of $20 million,
approximately twice the DEAR maximum.  These FY 1990
negotiations, which resulted in total available fees of
$31.5 million, essentially established the fee pattern for
the next three years.  Irrespective of the significance of
this negotiation, SR has never prepared a price negotiation
memorandum documenting the FY 1990 total available fee
negotiations.
 
In the second instance, SR negotiated with WSRC a total
available fee of $43.5 million for FY 1993.  The
modification of the contract to reflect this total available
fee was signed on March 19, 1993.  At the completion of our
field work, SR had yet to prepare a price negotiation
memorandum for these FY 1993 total available fee
negotiations.
 
 
VI.  RECOMMENDATIONS
 
     We recommend that the Deputy Assistant Secretary for
Procurement and Assistance Management:
 
     1.   Require that change(s) in either the number or
composition of fee bases used in calculating fees from
the maximum fee schedules in the DEAR, along with the
impact on total fees resulting from such changes, be
submitted to the DOE Headquarters Procurement Executive
for approval.
 
     2.   Establish a standard for weighting subcontracts in fee
bases, and a requirement for justification and approval
when the standard is exceeded.
 
     3.   Ensure that negotiated total available fees do not
include additional fee, either directly or indirectly,
for the purpose of assisting contractors in funding
"unallowable" incentive compensation programs.
 
     4.   Ensure that, as M&O contracts are competed/recompeted,
initially negotiated total available fees, and the
relationship of the fixed-fee-equivalents to the
maximum fee schedules within the Department of Energy
Acquisition Regulation, are used to benchmark fees
negotiated in subsequent periods, and that significant
changes in circumstances impacting the benchmarks are
documented.
 
     The Associate Deputy Assistant Secretary for Procurement and
Assistance Management concurred with Recommendations 1
through 4 above.  He stated that, regarding Recommendations
1, 2, and 3, the guidance contained in the DEAR is in the
process of being revised, and "Such revisions are 
anticipated to be submitted into the Rule Making Process
during October 1995."  Additional comments were provided as 
follows:
 
     Recommendation 2.  "We agree more specific guidance can be 
promulgated in this area.  To the extent subcontract costs
are included in the fee base, such costs should properly
reflect the extent of the prime contractor's involvement and 
risk.  However, it is recognized that the determination of
involvement and risk is subjective and is, therefore, not
easily subject to arbitrary standards.  However, we will
review this area of concern and to the degree possible,
specific guidance will be developed.  In situations where
subcontract costs in excess of the guidelines are included
in the fee base and justified, the action will be
appropriately documented."
 
     Recommendation 3.  "We agree that negotiated fees will not 
include additional fee for the purpose of assisting
contractor's (sic) in funding "unallowable" incentive 
compensation programs.  However, this is not to say that the
contractor may not use any fees earned as it deems
appropriate.  It is the policy of the Procurement Executive
and the DOE Headquarters that fees be calculated on fair and
reasonable costs under the contract.  Such costs do not
include specific amounts for incentive compensation
programs.  Compliance with this stated policy will be
ensured through the clearance review process."
 
     Recommendation 4.  "While we agree in principal with the
proposed concept, it must be recognized that negotiated fees
should reflect the current work the contractor is required
to perform.  In the past, as the work scope has changed, the
Department has been slow to adjust the fee to reflect the
change (increase or decrease).  Currently and in the future,
as the DOE program changes to reflect Departmental
realignment, the work scope provided to DOE management and
operating contractors will change.  The DOE must have the
latitude but be more timely in adjusting fee (increase or
decrease) to reflect these changes.  However, the original
negotiated fees will serve as a benchmark for subsequent
negotiations regarding added work."
 
     We recommend that the Manager, Savannah River Operations
Office:
 
     5.   Ensure that future price negotiation memorandums are
prepared in accordance with the requirements of DEAR
915.808.
 
     The Manager, Savannah River Operations Office, concurred
with Recommendation 5.  Subsequent to providing comments, SR
management, by a memorandum dated July 10, 1995, reminded SR
contract specialists that all contract actions were to be
documented as required by DEAR 915.808.  The contract
specialists were also reminded that post-negotiation
summaries, when required, are to be completed as soon as
practicable after the conclusion of negotiations.
VII. MANAGEMENT COMMENTS
 
     Both the Office of Procurement and Assistance Management and
the Savannah River Operations Office reviewed a draft of
this report and provided comments.  Some of their comments
were incorporated as changes to the report, and others,
along with our remarks, are presented below.
 
     Office of Procurement and Assistance Management
 
     The Associate Deputy Assistant Secretary for
Procurement and Assistance Management, in commenting on
the draft report, stated that "In general, the subject 
Inspector General (IG) Report was found to be accurate
and factually correct."  He continued on, however, to 
describe how the Department's approach in determining 
fees has been changing.  His specific comments include
the following:
 
". . .  [A Departmental] initiative resulted in 
the intentional identification of distinct
performance areas or key elements of work under
each contract.  The new 'task order' approach
changed past practice. . . .
 
"Each work area or 'program', as recognized, 
made independent demands on the contractor's 
resources and management skills. . . .  Having
begun to recognize that M&O contracts were
not for a single specific effort anymore . . . it
followed that in order to adequately motivate
and reward the contractors for each 'program'
area, the related fees would have to also
recognize this new program or task breakout,
as well as the breakout by category
           (R&D/Production/Construction). . . .
 
"The new approach is somewhat a kin, in 
contracting terms, to a Basic Ordering Agreement,
where the general scope of work, and structure
are identified at time of award, but the specific
work, cost and fees are established in
increments, from time-to-time. . . .  Further,
the estimated cost and fee for specific work
efforts, while considering the general parameters
of the initial award to the extent they remain
valid, reflects the complexity and risk of the
specific annual work requirement being
established.
"Under this new approach, the specific fee 
schedules are still applicable . . . but instead
of being applied at the total annual cost value
for one or two work categories, they are applied
to a number of distinct performance or program
areas which are agreed upon.  While this allows
for the possibility of higher fees, fees thus
determined are considered more reflective of the
specific demands placed on the contractor's 
resources and the risk of performance . . . .
 
"Contrary to the conclusions of the IG, what has 
been occurring over the past several years is not
fee 'inflation', but an adjustment to fee
resulting from the recognition that the previous
application of fee was not reflective of the
increased demands made of or risk borne by the
contractor to meet the Department's demands and 
expectations in respective program areas.
 
". . .  The period of review by the IG under the 
subject audit [inspection] report is for a period
where in the Department was attempting to analyze
fees in accordance with the new management
approaches.  Accordingly, it is to be expected
the files and documentation would be reflective
of a different approach from those used in the
past and as addressed in the regulation, thus
giving the appearance rules were not being
followed.  As a result of these and subsequent
changes being brought about by the Department's 
Contract Reform initiatives, the regulations and
guidelines will be changed to reflect the new
concepts."
 
     The Office of Inspector General believes that, if the
Department was moving to a task order mode, and thus
subdividing fee bases, as management commented, the
Department should have considered using less than the
maximum fixed-fee-equivalent allowed by the DEAR to
determine total available fee.  In our view, when the
maximum fee schedules were established, the Department did
not envision that a contractor would have eight separate fee
bases, as was the case with WSRC in FY 1994.
 
     Regarding management's comment that ". . . the previous 
application of fee was not reflective of the increased
demands made of or risk borne by the contractor to meet the
Department's demands and expectations in respective program 
areas.", we have noted that these changes in circumstances 
have not, in our opinion, been adequately addressed in the
fee justification documentation.  Furthermore, we continue
to question the increases in WSRC fees which have occurred,
in some instances, in the face of declining budgets and
performance scores.
 
     Savannah River Operations Office
 
     As a general comment on our draft report, SR pointed out
that approval had been obtained from both the Procurement
Executive, as required, and from programmatic officials for
WSRC fees exceeding maximum fee schedules within the DEAR.
Other SR comments, along with our remarks, are presented
below.
 
     o    SR commented that including 100 percent of the cost of
a subcontract within a fee base is not inconsistent
with the Federal Acquisition Regulation Weighted
Guidelines method of fee calculation.  In addition, the
DEAR indicates that the amount of a subcontract to be
included in a fee base is a judgemental issue.
Therefore, the report's conclusion that too much of a 
certain subcontract's value has been placed in a fee 
base is an opinion without a basis of support.
 
     Although our conclusion does represent an element of
judgement, we believe it can be supported on the basis of
DEAR 970.1509-6(b), which states, in part:
 
"The fee base, in addition to the above 
adjustments, shall exclude:  (1) Any part of the
following types of costs which are of such
magnitude or nature as to distort the technical
and management effort actually required of the
contractor:"  
 
             *   *   *   *   *   *   *
 
"(ii) Estimated cost or price of subcontracts and 
other major contractor procurements . . . ."
 
     This section of the DEAR indicates to us that a valuation of
Bechtel subcontract efforts at less than 100 percent,
and quite possibly less than the 80 percent used for
Bechtel Construction efforts, would be appropriate.  In
addition, we have noted that certain Bechtel efforts
now being placed in the fee base at a full 100 percent
valuation were only valued at 50 percent at the start
of the contract in FY 1989.
 
o    SR commented that "By negotiating the incentive 
compensation out of the contract as an allowable
cost, SR removed itself from interfering with the
contractor's managerial responsibilities to 
determine which of its employees were entitled to
receive incentive compensation payments.  The
removal of incentive compensation as an allowable
cost under the contract simply meant the costs
could not be directly billed to the contract.
SR's approach in 1994 was to recognize the 
incentive compensation program existed but to let
WSRC pay it out of WSRC's fee earnings.  This is 
in total consonance with Contract Reform in that
it epitomizes 'pay for performance' as well as
removes the Government from micro management of
the contractor."
 
     We would point out that when the Government funds a specific
contractor program, in this case incentive compensation,
either directly as an allowable cost, or indirectly by
increasing fee above what it would normally be, the effect
is the same in both cases - it represents a "cost" to the
Government.  While we are not advocating micro-managing
contractors, we believe there should be some assurance that
funds provided to a contractor for a specific purpose are
spent for that purpose.  Funding an incentive compensation
program through the mechanism of increased fee provides no
such assurance.
 
o    SR commented that the $3 million in the FY 1993 fee,
which the report attributes "specifically" for funding
WSRC's "unallowable" incentive compensation program, 
was incorrect; the agreement on fee was actually one
of ten agreements being collectively settled during
the negotiations.  However, SR further stated that "In 
FY 1994, incentive compensation continued to be
treated as an unallowable cost.  Any payment of
incentive compensation for WSRC will have to come out
of its fee."   
 
We have modified the text to indicate that the $3 million
fee increase was "in large part" to fund this program.
While recognizing that other issues may have had some
impact on reaching the $3 million figure, various written
comments in SR's procurement files would indicate that the 
$3 million was principally linked to the incentive
compensation buyout.
 
o    SR commented that ". . . no factual basis exists to 
support the [report's] hypothesis that SR effectively 
increased the [FY 1994] fixed-fee equivalent to $29
million in order to fund the incentive compensation
program.  The fee was established by developing the
$26 million cost-plus-fixed-fee (CPFF) equivalent and
then allocating the $26 million across the 10 program
areas.  Once the CPFF equivalent was established for
each area, the base and award fee dollars were
negotiated with WSRC, which in part was based upon the
willingness of WSRC to accept risk within each area.
There was no distortion of calculations to provide for
inclusion of $3 million for incentive compensation
payments."
 
Our conclusion that WSRC's FY 1994 fee arrangements 
included $3 million to fund WSRC's incentive compensation 
program, was based in large part, on a briefing document in
SR's procurement files.  This document, dated December 10, 
1993, summarized the results of a meeting at DOE
Headquarters concerning WSRC's FY 1994 fees.  Both SR and 
Headquarters officials attended the meeting.  Under the
heading "OUTCOMES OF THE MEETING," the document stated:
"IT WAS REAFFIRMED THAT THE FY93 $3M [MILLION] BUYOUT OF 
INCENTIVE COMPENSATION WILL CONTINUE IN FY94 AND FUTURE
YEARS."
 
o    SR commented that providing additional fee to WSRC for
the reactor restart program and the NPR program was
warranted, and further stated:  "Although both 
programs were recognized as covered under the broad
scope of the contract, fees for management and
operating contractors are based upon budgetary dollars
and difficulty of work.  No one within DOE
contemplated the reactor restart program would grow to
the proportions it did.  This is evidenced by the
constant reschedule revisions resulting in the program
changing from a six-month restart schedule to one
which lasted over 4 years and required extensive
resources.  The NPR decision had not been made when
the contract was competed and the scope of work merely
recognized such a program might occur and would be
within the general scope of the contract. . . .  Once
the decision was made to pursue the NPR, funding and
the complexity of the program justified the additional
fees in our, and HQ's, opinion."
 
o    SR commented that the FY 1992 fee calculation labeled
"standard" in Appendix IV of our report was actually
one of various fee calculation methods being compared.
SR further commented that, in addition to calculating
fees using these methods, they had made a "market 
price" comparison between WSRC's 1991 fees and fees 
paid to other M&O contractors, as shown below:
 
                                           Budget     Total Fee
                      Location              (MM)         (MM)     Percentage
 
                Rocky Flats-EG&G            $890         $26         2.9
                                         (9 months)
 
                Hanford-Westinghouse        $1,032       $18.2       1.76
 
                Oak Ridge-                  $1,500       $26.3       1.75
                  Martin Marietta
 
                SR-WSRC                     $2,054       $32.6       1.59
 
 
SR further commented:  "Based upon this comparison, it 
appeared the fee for WSRC in 1991 was in fact in line
with the 'market price' for M&O contractors.  The 1991
fee for WSRC was totally in line with the other M&O
contractors' fee even though the WSRC fee included the 
42 percent multiplier over the calculated fee."
 
We analyzed the above data, which was in fact transmitted
to Headquarters by SR in justification of WSRC's 1992 fee, 
and came to different conclusions, as explained below:
 
a.   The magnitude of EG&G's fee was due to EG&G having the 
"Accountability Rule" provisions, including the
associated increased financial risks, in its contract.
The "Accountability Rule" reduces the indemnification
of the contractor and makes it liable for certain
"avoidable" costs.  Accordingly, the method of
calculation for total available fee is different.
WSRC does not have these provisions in its contract
and is not subject to these risks.  Using the
"Accountability Rule" provisions, EG&G's fee structure 
was based on a 100 percent "basic" fee (or
fixed-fee-equivalent) of $8.667 million and a 200
percent award fee pool of $17.333 million.  If EG&G's 
"basic" fee was converted to WSRC's 1991 fee 
structure, using WSRC's contract provisions, the 
result would be a 50 percent base fee of $4.333
million and a 100 percent award fee pool of $8.667,
for a total available fee of $13 million.
Furthermore, $13 million would represent 1.46 percent
of EG&G's budget of $890 million.  This was less than 
WSRC's 1.59 percent of its budget, even though WSRC's
budget was 230 percent larger than EG&G's.  As 
previously stated, maximum fee schedules are
regressive and provide for declining fee percentages
as budgets increase.
 
b.   Westinghouse/Hanford's total fee is erroneously stated 
as $18.2 million; the actual amount, according to
procurement officials in DOE's Richland Operations 
Office, was $16.2 million, or 1.57 percent of its
budget.  In contrast, WSRC's total fee was 1.59 
percent of its budget, even though its budget was
approximately double that of Westinghouse/Hanford.
Again, given that the maximum fee schedules in the
DEAR are regressive, and prescribe smaller fee
percentages for larger efforts, it would be expected
that WSRC's fee percentage would be lower than 
Westinghouse/Hanford's, not higher as was the case.  
Furthermore, Westinghouse/Hanford had $12.88 million,
or approximately 80 percent of its fee at risk in the
award fee pool, where as WSRC had only 67 percent of
its fee at risk.
 
c.   Martin Marietta's total fee of $26.3 million included 
84 percent, or over $22 million, at risk in the award
fee pool, versus 67 percent at risk for WSRC.
 
o    SR commented that the importance of the revised WSRC
fee curve in FY 1994 was overlooked in Appendix IV of
this report.  A mid-satisfactory rating (numerical
performance score of "80") under the revised curve
would result in the contractor earning only 45 percent
of its available award fee, versus 50 percent under
the previous curve.
 
We agree that the contractor would earn less under the
revised award fee curve with a numerical performance score
of "80."  We noted, however, that WSRC's historical 
performance scores through the first ten performance
periods averaged "84.2," which is higher than a
mid-satisfactory rating.  An earned numerical performance
score of "84" in FY 1994, applied to the revised fee curve,
would have resulted in an increase in paid fee of $400,000.
                                                      APPENDIX I
 
 
                    DEFINITIONS OF TERMS USED
 
 
Fixed-Fee-Equivalent:  The fee that would be paid if a contract
were a "cost-plus-fixed-fee" contract instead of an "award fee"
contract.
 
Total Available Fee:  The total available fee for an "award fee"
contract, made up of two components, Base Fee and Award Fee
Pool.
 
Base Fee:  A percentage of the Fixed-Fee-Equivalent, anywhere
from zero percent to 50 percent, that remains "fixed," and is
paid in equal monthly installments.
 
Award Fee Pool:  The remainder of the Fixed-Fee-Equivalent
after the Base Fee is deducted, that is then [normally] doubled
in amount, and "earned" by the contractor based upon the
contractor's performance. 
 
Award Fee Split:  The percentage of the Fixed-Fee-Equivalent
placed in the Base Fee, and the remaining percentage, doubled,
placed in the Award Fee Pool.  Generally expressed as two
numbers, such as 40/120 (signifying 40 percent of the
Fixed-Fee-Equivalent is in the Base Fee, with the remaining 60
percent being doubled to 120 percent in the Award Fee Pool.)
 
Fee Base:  An estimate of necessary allowable costs, to include
some percentage of subcontract costs, used in calculating the
Fixed-Fee-Equivalent from the Maximum Fee Schedules.
 
Maximum Fee Schedules:  Tables within the Department of Energy
Acquisition Regulation which specify maximum fees
(Fixed-Fee-Equivalent) which should be paid under M&O contracts
based upon type of effort (e.g., Production, Research &
Development, Construction Management) and size of effort (Fee
Base).
                                                   APPENDIX II
                    FEE EVALUATIONS AND DOLLARS
                Westinghouse Savannah River Company
                  April 1, 1989 D March 31, 1994
 
                   Numerical                                   Available     Award Fee     Total Fee
   Evaluation     Performance   Adjective        Base          Award Fee      Dollars       Dollars
     Period          Score       Rating *         Fee           Dollars        Earned        Earned
 
   (FY 1989)
04/1/89D9/30/89      81           Good       $1,250,000**     $7,500,000    $3,937,500     $5,187,500
 
   (FY 1990)
10/1/89D3/31/90      90         Excellent    $5,000,000**    $10,000,000    $7,500,000    $12,500,000
04/1/90D9/30/90      85           Good       $5,000,000**    $10,000,000    $6,250,000    $11,250,000
 
   (FY 1991)
10/1/90D3/31/91      80       Satisfactory   $5,450,000**    $10,850,000    $5,425,000    $10,875,000
04/1/91D9/30/91      88           Good       $5,450,000**    $10,850,000    $7,595,000    $13,045,000
 
   (FY 1992)
10/1/91D3/31/92      84       Satisfactory   $6,500,000      $13,500,000    $8,032,500    $14,532,500
04/1/92D9/30/92      89           Good       $6,500,000      $13,500,000    $9,787,500    $16,287,500
 
   (FY 1993)
10/1/92D3/31/93      82       Satisfactory   $8,000,000      $13,750,000    $7,493,750    $15,493,750
04/1/93D9/30/93      78       Satisfactory   $8,000,000      $13,750,000    $6,187,500    $14,187,500
 
   (FY 1994)
10/1/93D3/31/94      85       Satisfactory   $4,500,000      $20,000,000   $12,762,250    $17,262,250
 
   Total                                                                                 $130,621,000
                                                                                         MMMMMMMMMMMM
 
 * Adjective Rating terminology and Numerical Performance Score relationship changed beginning 10/01/90:
 
        60 and below    Unsatisfactory
        61D75           Marginal
        76D85           Satisfactory (Good prior to 10-01-90)
        86D95           Good (Excellent prior to 10-01-90)
        96 and above    Outstanding
 
 
** Since the Statement of Work for Naval Fuels was deleted on October 1, 1991, we did not include Fixed
   Fees paid for Naval Fuels Materials Facility, in the amounts of:  $750,000 during FY 1989;
   $1,500,000 during FY 1990; and $124,000 during FY 1991.
                                                    APPENDIX III
 
      SUMMARY OF WSRC TOTAL AVAILABLE FEE NEGOTIATIONS AND
                  PAYMENTS DATA BY FISCAL YEAR
                      (Dollars In Millions)
 
 
     Fiscal Year                   1989(a)     1990       1991       1992       1993      1994
 
     Total Budget                   765       1,501      2,054      2,017      2,127     1,822
 
 
          WSRC Initial
          Fee Proposal
 
     Fixed-Fee-Equivalent (FFE)     6.0        70.0 (b)   24.4       61.6       66.0      39.0
     No. of Fee Bases                ?         Wtd.         ?         54         61        19
                                            Guidelines
     Award Fee Split               25/150      (c)        50/100     50/100     50/100    33/134
     Base Fee                       1.5        70.0       12.2       30.8       33.0      13.0
     Award Fee Pool                 9.0        (c)        24.4       61.6       66.0      52.0
     Total Available Fee           10.5        70.0       36.6       92.4       99.0      65.0
 
     SR "Negotiation Target" Fee
 
     FFE from Fee Schedules         5.628      14.0       15.338     18.669     25.964    26.05
     Adjustment Factor              D5%        +42%       +42%       +42%       +23%       -0-
     Revised FFE                    5.347      20.0       21.78      26.51      32.0      26.05
     Number of Fee Bases             2           4          4          4          5         8
     Award Fee Split               25/150      50/100     50/100     50/100     50/100    Various
     Base Fee                       1.337      10.0       10.9       13.0       16.0       5.241
     Award Fee Pool                 8.020      20.0       21.8       27.0       32.0      44.084
     Total Available Fee            9.357      30.0       32.7       40.0       48.0      49.325
 
     Maximum Fee/DEAR
     (1 Fee Base/Schedule)
 
     FFE                            5.628      10.1       11.7       14.2       14.7      16.4
     Number of Fee Bases             2           2          2          2          2         3 (d)
     Award Fee Split (Actual)      25/150      50/100     50/100     50/100     54/92     31/138
     Base Fee                       1.407       5.05       5.85       7.1        7.938     5.084
     Award Fee                      8.442      10.10      11.70      14.2       13.524    22.632
     Total Available Fee            9.849      15.15      17.55      21.3       21.462    27.716
 
     Final Negotiated Fee
 
     FFE                            5.0        20.0       21.75      26.5       29.75     29.0 (e)
     Award Fee Split (Actual)      25/150      50/100     50/100     50/100     54/92     31/138
     Base Fee                       1.25       10.00      10.90      13.00      16.00      9.00
     Award Fee Pool                 7.50       20.00      21.70      27.00      27.50     40.00
     Total Available Fee            8.75       30.00      32.60      40.00      43.50     49.00
 
     Total Fee Paid
 
     Base Fee                       1.250      10.000     10.900     13.000     16.000     4.500 (a)
     Award Fee                      3.938      13.750     13.020     17.820     13.680    12.762 (a)
     Total Fee                      5.188      23.750     23.920     30.820     29.681    17.262 (a)
 
 
(a)  Six month period.
(b)  Fixed Fee rather than FFE.
(c)  Not applicable.
(d)  1st year SR used "Construction Management" Maximum Fee Schedule.
(e)  "Effective" FFE reflecting higher award fee ratios; "Actual" FFE was $26.05 million.
                                                      APPENDIX IV
 
 
    ANALYSES OF TOTAL AVAILABLE FEE NEGOTIATIONS BY FISCAL YEAR
 
 
     FY 1989 TOTAL AVAILABLE FEE NEGOTIATIONS
 
     During May 1988, DOE received proposals from two companies,
Martin Marietta Corporation (MMC) and Westinghouse Electric
Corporation (Westinghouse), to manage and operate the
Savannah River Site.
 
     DOE Initial Procurement Actions
 
     In July 1988, DOE's Source Evaluation Board was directed to 
conduct contract negotiations with both offerors, prior to
the final contractor selection being made.  It was believed
that "significant advantage could be secured by DOE by 
conducting contract negotiations during the competitive
source evaluation process."  In August, both offerors 
delivered signed contracts to DOE, representing their best
and final offers.
 
     DOE's Initial Negotiation Actions
 
     Upon receipt of these contracts, DOE entered into
     negotiations with both companies.  Part of these negotiations
involved establishing both a fixed-fee-equivalent and a
total available fee for the initial six month contract
period, beginning April 1, 1989, and extending through the
remainder of FY 1989, which ended on September 30, 1989.
 
     A direct comparison of MMC and Westinghouse fee proposals
for this initial six month period cannot be made because
each company proposed and negotiated fees on a different
basis.  Specifically, MMC negotiated a combined fee for
itself and its three declared subcontractors.  The final
fixed-fee-equivalent negotiated for MMC, before conversion
to an award fee basis, was $6 million.  WEC, on the other
hand, negotiated a $5 million fixed-fee-equivalent for WSRC,
with negotiation of a fee for its one major subcontractor,
BSRI, being deferred.  Subsequent to WSRC's selection by 
DOE, WSRC negotiated, and DOE approved, a $3.8 million
fixed-fee-equivalent with BSRI.  In addition to the above
fees, MMC and Westinghouse each negotiated a $750,000 fixed
fee for the Naval Fuels Materials Facility.
 
     DOE's Prenegotiation Fee Objective
 
     Prior to negotiating fees with WEC for the initial six month
period ending September 30, 1989, DOE's Source Evaluation 
Board established a fixed-fee-equivalent negotiation
objective of $5,346,914.  This "target"
fixed-fee-equivalent, developed by Savannah River Operations
Office procurement personnel, was based upon the following
key determinations:
 
     (1)  The total budgeted dollars for the period were
allocated among only two fee base segments,
"Production" and "Research and Development."
 
     (2)  All subcontracts in the fee bases, including BSRI, were
discounted by 50 percent to more accurately reflect
Westinghouse's actual management efforts.
 
     (3)  The maximum fee schedules in DEAR 970.1509D5 were used
to calculate the fixed-fee-equivalents for both the
"Production" efforts and "R&D" efforts.  These fees
totaled $5,628,330.
 
     (4)  The total fixed-fee-equivalent calculated using steps
1D3 above was adjusted downwards by 5 percent to
$5,346,914, in accordance with the requirements of DEAR
970.1509D4(b), for the following five factors:
management; complexity; resources; risk; and "other"
factors.
 
     In addition to the "target" fixed-fee-equivalent of
$5,346,914 to be used as the basis for an award fee, DOE
also developed a second "target" fixed fee of $1,225,766.
This second amount, which was to remain a fixed fee, was for
managing the Naval Fuels Materials Facility.  This second
fee, like the first, was calculated from the maximum fee
schedules in DEAR 970.1509D5, and adjusted downwards by 5
percent.
 
     WEC's FY 1989 Fee Proposal (6 months) and Subsequent 
Negotiations
 
     Westinghouse submitted its fee proposal to DOE on July 28,
1988.  It requested a fixed-fee-equivalent of $6 million to
     manage and operate SRS for the six months ending September 30,
1989, broken down into a 25 percent base fee of $1.5 million
and a 150 percent award fee pool of $9 million.  It also
requested a fixed fee of $1.5 million to manage the Naval
Fuels Materials Facility.
     After negotiations with DOE, Westinghouse agreed to a
fixed-fee-equivalent of $5 million, to be broken down into a
25 percent base fee of $1,250,000 and a 150 percent award
fee pool of $7,500,000, for a total available fee of
$8,750,000.  Westinghouse further agreed to a fixed fee of
$750,000 for operating the Naval Fuels Materials Facility.
 
     The $5 million fixed-fee-equivalent Westinghouse accepted
for FY 1989 was 11 percent less than the $5,628,330
developed from the maximum fee schedules in DEAR 970.1509D5.
The $750,000 fixed fee accepted for the Naval Fuels
Materials Facility was 42 percent less than the $1,290,280
fee developed from the maximum fee schedules.
 
     At the time these fees were being negotiated and accepted,
Westinghouse was still in competition with Martin Marietta
Corporation.  DOE had not yet made a selection as to which
contractor would manage and operate the Savannah River Site.
 
     A summary of key data pertaining to the FY 1989 total
available fee negotiations, as well as for FY 1990 through
FY 1994 total available fee negotiations, is provided in
Appendix III to the report.
 
     FY 1990 TOTAL AVAILABLE FEE NEGOTIATIONS
 
     On June 19, 1989, DOE's Savannah River Operations Office 
wrote to Westinghouse Savannah River Company, the
Westinghouse Electric Company subsidiary now managing and
operating the Savannah River Site, and requested its fee
proposal for FY 1990.  In this letter, SR stated that the
fee proposal should be developed in accordance with DEAR
970.1509 and submitted no later than July 20, 1989.
 
     WSRC's Initial FY 1990 Fee Proposal
 
     On September 19, 1989, sixty days late, and less than six
months after the start of the new contract, WSRC submitted
its FY 1990 fee proposal to SR, requesting a
fixed-fee-equivalent of $70 million.  WSRC had developed its
fee request using a "weighted guidelines" approach, as
described in DEAR 915.970D2.  The total fee developed by
WSRC using weighted guidelines was $91.4 million; WSRC
reduced this amount to $70 million because of letter of
credit funding and the use of government facilities.
 
     WSRC's request for a $70 million fixed fee, developed 
through a weighted guidelines approach, far exceeded the
total fixed-fee-equivalent that could be supported by the
maximum fee schedules in DEAR 970.1509-5.  WSRC's request 
was seven times as large as the annualized
fixed-fee-equivalent the contractor had accepted for FY
1989, when competing against Martin Marietta Corporation.
Use of weighted guidelines for management and operating
contracts is specifically prohibited in DEAR 915.970D4.
Furthermore, both the Request for Proposal (RFP) and the
contract, which WSRC had signed the previous year, stated
that fees would be determined in accordance with DEAR
970.1509.
 
     In a letter accompanying its fee proposal, WSRC indicated
that it had used weighted guidelines to develop its fee
proposal because the fee schedules "no longer reflect the 
relationship between DOE and its contractors in light of the
current atmosphere."  The WSRC letter further discussed the 
increased risks to the contractor, increased demands upon
corporate resources, and increased oversight activities
resulting in adverse publicity.
 
     On October 6, 1989, the Director of SR's Contracts and 
Services Division (i.e., Procurement) wrote DOE Headquarters
Procurement and stated that, with the exception of Naval
Reactors, Westinghouse had submitted weighted guidelines fee
proposals for all its DOE M&O contracts, including those at
Richland and Idaho.  The Director further indicated that,
since weighted guidelines for M&O contracts was prohibited
by the DEAR, SR intended "to take no action toward fee 
negotiation with WSRC until guidance is provided from
Headquarters."
 
     SR's Initial FY 1990 Prenegotiation Fee Objective
 
     On February 8, 1990, the Chief of SR's Contracts Management 
Branch, while indicating that firm guidance had still not
been received from DOE Headquarters Procurement, submitted a
prenegotiation plan for negotiating WSRC's FY 1990 fees.  
The Director of SR's Contracts and Services Division 
approved the plan that same day.
 
     This prenegotiation plan established a total
fixed-fee-equivalent negotiation objective of $9,628,535.
This amount was developed in essentially the same manner as
the FY 1989 fee objective:
 
     (1)  The SRS budget was divided into two fee base segments,
"Production" and "R&D."
 
     (2)  All subcontracts in the fee bases were reduced by 50
percent; the only exception, and the one change from FY
1989, being that Bechtel's "direct" efforts were 
reduced by only 35 percent.  (Subcontractors supporting
Bechtel efforts continued to be reduced by 50 percent.)
 
     (3)  The fee schedules in DEAR 970.1509D5 were used to
calculate the fixed-fee-equivalents for both
"Production" and "R&D" efforts.  These fees totaled
$10,135,300.
 
     (4)  The total fixed-fee-equivalents calculated in steps 1D3
above were adjusted downwards by 5 percent to
$9,628,535, based upon DEAR 970.1509D4b.
 
     During a review of SR's procurement files, we noted an 
unsigned, undated draft memorandum from SR's Deputy 
Assistant Manager for Administration to DOE Headquarters
Procurement.  This memorandum indicated that, after
discussions with WSRC, SR was subsequently persuaded to
reevaluate this initial fee objective, taking into
consideration organizational changes by both SR and WSRC, as
well as changes in operating requirements.
 
     SR's Revised FY 1990 Prenegotiation Fee Objective
 
     On March 28, 1990, the Director of SR's Contracts and 
Services Division submitted a revised FY 1990 fee objective
to SR's Deputy Manager.  The new objective set a $14 million 
fixed-fee-equivalent, up from the previous amount of $9.6
million.  SR's Deputy Manager approved the $14 million fee 
objective on the same day, March 28, 1990.
 
     The most significant change in arriving at this revised fee
objective involved splitting the one "Production" fee base
in the previous estimate into three smaller "Production" fee
bases, and calculating a separate fee for each fee base.
Specifically, the previous estimate for "Production" effort
was calculated on a fee base of $1.158 billion, and provided
a fee from the DEAR fee schedule of $6.66 million.  The
revised estimate subdivided the "Production" effort into
three separate fee bases as follows:
                                                                    Total
                                             Fee Base        Fixed-Fee-Equivalent
                     Production Effort     (In Millions)         (In Millions)
 
                     Site Operations           $  755               $ 5.45
                     Reactor Restart              382                 4.31
                     New Production
                       Reactor                     20                  .85
 
                     Totals                    $1,157               $10.61
                                               MMMMMM               MMMMMM
 
 
The maximum fee schedules in DEAR 970.1509D5 are structured
to provide declining fee percentages as the volume of the
work increases; conversely, smaller work efforts carry
higher fee percentages.  Breaking a large work package (or
effort) into smaller segments, and calculating a separate
fee for each of the smaller segments, results in a larger
total fee.  By dividing the one fee base into three smaller
segments, and calculating a separate fee for each, SR
increased the total fixed-fee-equivalent for the
"Production" effort by 59 percent, from $6.66 million to
$10.61 million.
 
     The other major revision to the earlier fee estimate
involved elimination of the 5 percent reduction in the total
fixed-fee-equivalent, previously made in accordance with
DEAR 970.1509D4(b).  This change added an additional
$700,000 to the revised estimate.
 
     The breakout of the Reactor Restart and New Production
Reactor segments from Site Operations was justified by SR
due to "major changes since September 1988 in organizational 
alignment, both by DOE and WSRC, and in operating
requirements . . . ."  Three specific reasons for the new 
approach were cited by SR:
 
     (1)  An unexpected shift of emphasis from reactor operations
to reactor restart has caused DOE/SR to establish a
separate project office and for WSRC to also set up a
separate organization.  This special effort was "not 
existing or contemplated at the time of contractor
selection and contract award."
 
     (2)  Both DOE/SR and WSRC have set up special offices to
manage the New Production Reactor effort.  "Again, this 
was a condition that did not exist at the time of the
original negotiation."
 
 
     (3)  There has been a greater involvement of Westinghouse
Electric Corporation corporate personnel than
originally expected.  "In addition, infusion of WEC 
personnel . . . has occurred at a rate much greater
than expected."
 
     We noted that many of the "major changes" cited as
justification for increasing WSRC's FY 1990 fee calculation 
had been previously addressed in the original Request for
Proposal in early 1988, and did not, in fact, represent
actual changes in scope.  Specifically, the description of
work in the original RFP, and later in the contract,
indicated that the contractor would be expected to "upgrade"
facilities, and to manage programs ". . . intended to 
expand, alter, enhance, or improve the production of defense
nuclear materials . . . ." [e.g., Reactor Restart.]  
 
The RFP further stated "The SRP is a candidate site for the 
New Production Reactor (NPR).  If the NPR is assigned to the
SRP and if the Contractor is so directed by SR, the
Contractor shall provide project management, design, and
construction services for a reactor . . . ."
 
     With respect to WSRC's reactor restart efforts, it is 
evident from a letter written by the then Secretary of
Energy to the President of WEC in July 1989, less than four
months after the start of the contract, that restarting
reactors was a major discussion point during contract
negotiations.  The Secretary stated in his letter, in part:
 
"However, I am particularly disturbed that you 
did not find it sufficiently important to notify
me personally that, in the last three months,
Westinghouse had slipped the proposed restart
date for the first reactor by nine months.  The
fact that Westinghouse would propose such a
delay raises doubts about the validity of the
assurance Westinghouse provided to the
Department during the Savannah River contract
award process and the personal assurances which
you gave me during our previous discussions of
this matter.
 
             *   *   *   *   *   *   *
 
 "The concerns I have expressed above regarding 
shortcomings in the Westinghouse plans for
reactor restart should not be interpreted to
mean that I expect a further schedule slippage.
. . .  I am requesting that you become
personally involved in this effort to assure
that previous Westinghouse commitments to DOE
with respect to the Savannah River Site are
met."
 
     Additionally, regarding the support being provided by WEC
corporate personnel, WSRC's contract with DOE provided for 
reimbursement of WEC's costs for this support under special 
contract clauses.  In addition to reimbursement of costs,
WSRC's contract was also modified on September 19, 1989, to 
provide for separate fees to be paid on all Reactor Restart
program support being provided by WEC divisions and
subsidiaries.
 
     DOE Negotiations with WSRC
 
     On March 28, 1990, SR transmitted WSRC an offer for a total
available fee for FY 1990 based on the $14 million
fixed-fee-equivalent.  During the course of negotiations
with WSRC, SR personnel revised their offer upwards to a
fixed-fee-equivalent of $15 million, coupled with an award
fee split of 40/150 (which exceeded the guidelines in the
DEAR regarding maximum award fee splits).  SR increased its
offer with the belief that this increase could bring the
negotiations to a conclusion.
 
     WSRC did not accept SR's offer, and subsequently made two 
counter proposals in writing on April 20, 1990.  The first
proposal was based on a fixed-fee-equivalent amount of $22
million and an award fee split of 50/100.  The second was
based on a fixed-fee-equivalent of $20 million and an award
fee split of 40/150.
 
     On April 30, 1990, the Director of SR's Contracts and 
Services Division provided SR's Deputy Assistant Manager for 
Administration with two draft documents for review:  a
Contracting Officer's determination to award WSRC a total 
available fee based on a $15 million fixed-fee-equivalent
with an award fee split of 40/150; and a request to
Headquarters for Procurement Executive approval to exceed
the fee schedules and maximum award fee guidelines.  The
Contracting Officer's draft determination made the statement 
that "Each of the . . . [WSRC] alternatives proposed fee 
amounts which continue to be considerably in excess of the
amounts which SR considers to be reasonable within the
guidelines of the DEAR fee policy for management and
operating contractors."
 
     In the course of preparing these documents, the Director of
SR's Contracts and Services Division learned that WSRC had 
made two additional counter proposals, each based on a
fixed-fee-equivalent of $20 million, but with award fee
splits of 50/120 and 40/120.
 
     On May 24, 1990, SR senior management met with the Deputy
and Associate Directors of DOE Headquarters' Office of 
Procurement and Assistance Management.  SR had requested the
meeting to seek approval to award WSRC a total available fee
based upon a fixed-fee-equivalent which would exceed the
DEAR's maximum fee schedules.  SR indicated that the 
increased fee would be appropriate based upon:
 
     (1)  The degree of Westinghouse corporate involvement;
 
     (2)  The large infusion of Westinghouse corporate personnel
into the WSRC organization;
 
     (3)  Complexity and difficulty of the total contract task
(e.g., reactor restart); and
 
     (4)  WSRC's exposure to multiple oversight agencies and 
activities.
 
     SR requested that the fixed-fee-equivalent amount, on which
to establish the base and award fees, be increased to a
total of $20 million.  This was $6 million more than the $14
million which SR had stated could be supported by
application of the maximum fee schedules.  Headquarters
approved the request on May 29, 1990.
 
     FY 1990 Fees Finalized
 
     On June 4, 1990, eight months after the beginning of FY
1990, Modification M020 to the WSRC contract finalized
WSRC's FY 1990 fees.  Based upon a fixed-fee-equivalent 
amount of $20 million and an award fee split of 50/100, WSRC
was awarded a FY 1990 base fee of $10 million and an award
fee pool of $20 million, for a total available fee of $30
million.  In addition, WSRC received a fixed fee of $1.5
million for the Naval Fuels Materials Facility.
 
     Instead of rendering the draft Contracting Officer's
determination of fee based upon a fixed-fee-equivalent
amount of $15 million, SR essentially accepted WSRC's last 
offer based upon a $20 million fixed-fee-equivalent, while
adjusting the award fee split from 40/120 to 50/100.  This
$20 million fixed-fee-equivalent was over twice as large as
the $9.6 million maximum fixed-fee-equivalent originally
approved by SR's Director of Contracts and Services Division 
in the February 8, 1990, prenegotiation plan.
 
     DEAR 915.808, Price Negotiation Memorandum, requires that a
post negotiation summary be prepared that "shall discuss the 
results of the negotiations leading to a final agreement,
and, in a general sense, provide the results of the
negotiation in terms of the extent to which prenegotiation
objectives were met."  SR has never prepared the required 
post negotiation summary for this $31.5 million contract
modification.
 
     FY 1991 TOTAL AVAILABLE FEE NEGOTIATIONS
 
     During June 1990, SR's Deputy Manager provided SR's
Assistant Manager for Administration with guidance which was
essentially used in developing WSRC's FY 1991 fee.  In an 
inter-office memorandum, the Deputy Manager wrote "Let's 
calculate a fee for '91 just like we did the $15 mil, then 
add the $5 mil "kicker" adjusted on a pro-rata basis for any
increase from the $15 mil basic number. . . ."  
 
     On July 3, 1990, SR requested that WSRC submit a FY 1991 fee
proposal by August 1, 1990.  After an initial response on
August 1, and subsequent clarification of several issues,
WSRC presented SR with its FY 1991 fee proposal on September
13, 1990.  This proposal requested a fixed-fee-equivalent of
$24.4 million with an award fee split of 50/100; WSRC
further requested a fixed fee of $131,000 for the Naval
Fuels Materials Facility.
 
     SR's FY 1991 Prenegotiation Fee Objective
 
     On December 18, 1990, the Director of SR's Contracts and 
Services Division provided the SR Manager with a
prenegotiation plan for WSRC's FY 1991 fees.  The fee 
objective in this plan was developed in a manner almost
identical to development of the FY 1990 fee.  Specifically,
the 1991 fee objective was based on the following key
determinations:
 
     (1)  In addition to the "R&D" effort, the "Production"
effort was broken down into three separate fee bases:
Site Operations, Reactor Restart, and New Production
Reactor.
 
 
 
     (2)  All subcontracts in the fee bases were discounted by
varying percentages to more accurately reflect WSRC's 
actual management effort.
 
     (3)  No downward fee adjustment factor was applied to the
maximum fees calculated from the fee schedules.
 
     (4)  The total fees from the maximum fee schedules ($15.338
million) were adjusted upwards by the same percentage
as used in FY 1990 (42 percent) to represent "the value 
of the special factors (WEC corporate involvement,
infusion of WEC personnel into SRS [Savannah River
Site], complexity of contract effort, and exposure to
multiple oversight agencies)."
 
     Based upon the above determinations, the Director of SR's 
Contracts and Services Division recommended that the FY 1991
total available fee be established using a
fixed-fee-equivalent of $21.78 million, and an award fee
split of 50/100.  In addition, a fixed fee negotiation
target of $124,000 was recommended for the Naval Fuels
Materials Facility.  The SR Manager approved the
prenegotiation plan on December 21, 1990.
 
     A draft memorandum from the SR Manager to the Assistant
Secretary for Defense Programs discussed SR's past and 
current efforts to negotiate a fee with WSRC.  In part, it
stated:
 
          "Last year's settlement required DOE to agree to a 
significant increase of almost 70% over the
FY '89 annualized amount of $17.5 million [total 
available fee] which was the initial fee
negotiated with WSRC under the new contract
effective 4/1/89.  To justify last year's 
settlement, SR used every 'poetic license'
available in the DOE Fee Curve regulations as
well as adding an additional $5 million to the
CPFF [fixed-fee-equivalent] amount for 'factors'
which were not appropriately addressed in the
regulations such as degree of outside oversight,
and extent of corporate and other Westinghouse
involvement, etc.  SR applied the same
computational and 'factor' approach to an
increased FY '91 budget in arriving at this 
year's number . . . ."
 
     SR's prenegotiation plan stated that SR's fee objective had
been coordinated with Headquarters Procurement.  Unlike FY
1990, however, the required approval was not documented.
 
     FY 1991 Fees Finalized
 
     SR presented its fee position to WSRC on January 4, 1991.
Based upon a fixed-fee-equivalent of $21.78 million, SR
offered WSRC a base fee of $10.9 million (50 percent) and an
award fee pool of $21.7 million (100 percent), for a total
available fee of $32.6 million.  Protracted negotiations
then ensued, involving not only the fee, but also inclusion
of a new DEAR award fee clause.  In an April 23, 1991,
letter, WSRC agreed to both SR's fee offer and inclusion of 
a new clause, "H.1 Award Fee," in their contract with DOE.
Modification M034 was subsequently executed on June 4, 1991,
to incorporate these agreements into the contract.
 
     We noted that, by breaking the total FY 1991 "Production"
fee base into three segments, SR obtained a $3,687,000 (47
percent) increase in the calculation of the
fixed-fee-equivalent, from $7,776,000 to $11,463,000.  With
a 42 percent add-on being applied to this $3,687,000
increase for "special factors," the total increase in fee
due to this splitting of the fee base was $5,236,000.
     Furthermore, a fee calculated from the maximum fee schedules,
using only one "R&D" fee base and one "Production" fee base
and without any "add-on's", would have amounted to a 
fixed-fee-equivalent of $11.65 million, or 53 percent of
SR's $21.78 million negotiated fixed-fee-equivalent. 
 
     FY 1992 TOTAL AVAILABLE FEE NEGOTIATIONS
 
     On July 17, 1991, SR requested that WSRC submit a FY 1992
fee proposal by August 15, 1991; WSRC submitted its proposal
on September 12, 1991.
 
     WSRC's FY 1992 Fee Proposal
 
     WSRC requested a fixed-fee-equivalent of $61.6 million, and
an award fee split of 50/100, providing a base fee of $30.8
million, an award fee pool of $61.6 million, and a total
available fee of $92.4 million.
 
     WSRC's FY 1992 fee proposal illustrates the fee impact from 
dividing the total budget into smaller and smaller segments,
and calculating a separate fee for each subdivision/fee
base.  In their proposal, WSRC divided the FY 1992 budget
among 22 separate work packages, and then further subdivided
each work package into three separate components:
"Production;" "Research and Development;" and "Construction 
Management."  This breakdown potentially produced 66 
separate fee bases; 54 had budgeted activity for which a
separate fee was calculated by WSRC.  The sum of these 54
separate fees, calculated using the maximum fee schedules,
was a fixed-fee-equivalent of $61.6 million.
 
     WSRC's Revised FY 1992 Fee Proposal
 
     On October 3, 1991, SR informed WSRC that their fee proposal
was far in excess of what could be justified under the DEAR.
SR stated that the fee conditions for FY 1992 were
essentially unchanged from FYs 1990 and 1991, and requested
WSRC to resubmit the proposal, consistent with DOE policies
and regulations.
 
     In a letter, dated December 5, 1991, WSRC defended the
methodology used in developing its initial fee proposal.
However, WSRC also stated that "In the spirit of attempting 
to reach an agreement for FY-92, we have made arbitrary
reductions in the amount previously submitted."  WSRC's new 
fee proposal was reduced to a fixed-fee-equivalent of $30
million, split into a base fee of $15 million and an award
fee pool of $30 million, for a total available fee of $45
million.  Four days later, WSRC also indicated to SR that
they would like to discuss, along with the fee, a cost
efficiency incentive program.  Under this program, unearned
award fee pool dollars could possibly be earned by
completing specific cost reduction efforts.
 
     SR's FY 1992 Prenegotiation Fee Objective
 
     SR calculated its FY 1992 fee objective for WSRC in a manner
identical to FY 1991.  Specifically, the "Production" effort
was broken down into the same three segments:  Site
Operations; Reactor Restart; and New Production Reactor.
Subcontracts in the fee base were discounted by varying
percentages.  Also, the fees calculated from the fee
schedules were again adjusted upwards by 42 percent, the
same percentage applied in FYs 1990 and 1991.  This upwards
adjustment was to represent the value of "special factors"
(WEC corporate involvement, infusion of WEC personnel into
SRS, complexity of contract effort, and exposure to multiple
oversight agencies).
 
     SR calculated a fixed-fee-equivalent of $18.669 million from
the maximum fee schedules.  Applying the 42 percent factor
increased this amount by $7.841 million, to a total
fixed-fee-equivalent of $26.51 million.  Using an award fee
split of 50/100, SR's FY 1992 total available fee target was 
$40 million ($13 million base fee, $27 million award fee
pool).
 
     In addition to the above fee, and at the suggestion of SR's 
Manager, SR also proposed a cost incentive fee not to exceed
$5 million.  The incentive would be designed to reward WSRC
for "hard dollar" cost savings.  The source of funding for
this cost savings incentive would be unearned award fee pool
dollars carried over from the first six month evaluation
period during FY 1992.
 
     FY 1992 Fee Finalized
 
     On January 28, 1992, SR wrote to DOE Headquarters
Procurement confirming that a base fee/award fee pool amount
of $13 million/$27 million (based on a fixed-fee-equivalent
of $26.51 million) had been proposed and accepted by WSRC.
SR also requested approval to establish a cost savings
incentive program with WSRC for FY 1992, not to exceed $5
million.  DOE Headquarters Procurement approved SR's request 
on February 13, 1992; the contract was subsequently modified
(Modification M057) on June 5, 1992, to reflect these
agreements.
 
     We noted that, by splitting the "production" fee base into
three segments, SR had once again, as in FYs 1990 and 1991,
developed a fixed-fee-equivalent that exceeded the maximum
fee schedules.  This fact is readily apparent from SR's own 
documentation of its preparations for negotiating the FY
1992 fee.  SR calculated various fee "options" using
different methods and assumptions.  One set of fee
calculations was entitled '"standard" fee calculation' and
used the maximum fee schedules to calculate a fee.  Of
particular interest, under this "standard" fee calculation,
the "production" fee base was left intact, and not divided
into three segments.  The total fees calculated using this
"standard" method were $14.203 million, or 54 percent of the
$26.51 million fixed-fee-equivalent finally set as the
prenegotiation target.
 
     FY 1993 TOTAL AVAILABLE FEE NEGOTIATIONS
 
         On August 6, 1992, SR requested that WSRC submit a FY 1993 fee
     proposal; WSRC submitted its fee proposal on August 27, 1992.
 
     WSRC's FY 1993 Fee Proposal
 
     In its fee proposal, WSRC requested a fixed-fee-equivalent
of $66 million.  Using an award fee split of 50/100, WSRC
further proposed a base fee of $33 million and an award fee
pool of $66 million, for a total available fee of $99
million.
 
     WSRC had developed its proposed fee by allocating the FY
1993 budget among 31 separate work packages, and then
     subdividing each work package into three separate components:
"Production;" "R&D/AE Design;" and "Construction 
Management/Construction."  This breakdown potentially 
produced 93 separate fee bases; 61 had budgeted activity for
which a separate fee was calculated by WSRC.  The sum of
these 61 separate fees, calculated using the maximum fee
schedules, was a fixed-fee-equivalent of $66 million.
 
     In discussing the fee proposal, WSRC stated that, if DOE
accepted its proposal, WSRC would be "willing to waive, for 
purposes of FY 1993 only, any claim to reimbursement of
incentive compensation earned by its employees during the
period."  The elimination of employee incentive compensation 
as an allowable cost was one of the items being negotiated
along with the FY 1993 fee.  Other items also discussed by
WSRC included modifications to the Personnel Appendix, a
Task Order Contracting clause, plans for the "Accountability 
Rule," a Cost Reduction Incentive program, and a proposal to 
extend the WSRC contract through September 30, 1999.
 
     WSRC's discussion of employee incentive compensation in its 
fee proposal was most likely the result of a letter from
SR's Manager to WSRC, dated July 23, 1992.  In this letter, 
SR's Manager stated that he had concluded that it was no 
longer in the best interests of the Government to recognize
individual incentive award payouts as allowable costs under
the prime contract.
 
     On September 18, 1992, SR responded to WSRC's proposal, 
stating that WSRC's use of a task order/work package method 
for calculating its fee was inappropriate, resulting in a
fee that was twice as large as the prior year.  SR requested
WSRC to resubmit its fee proposal based upon a total
contract cost approach consistent with methods used in prior
years.  SR also indicated agreement with the WSRC approach
of funding WSRC's employee incentive compensation program 
out of fee, rather than as a claimed cost.
 
     SR's FY 1993 Prenegotiation Fee Objective
 
     On October 9, 1992, SR requested DOE Headquarters approval
to establish WSRC's FY 1993 fee based upon a            
fixed-fee-equivalent of $32 million, with a 50/100 base
fee/award fee split of $16 million/$32 million, for a total
available fee of $48 million.
 
     SR pointed out to DOE Headquarters two changes from FY 1992
in developing this proposed fee.  In discussing the first
change, SR briefly stated that the budget had been broken
into five categories for FY 1993 versus the four categories
utilized in recent years.  SR stated that this change was
"to recognize the increased significance of the 
Environmental Restoration and Waste Management and DWPF
[Defense Waste Processing Facility] Programs."
 
     The second change, discussed by SR in greater length,
concerned how much the fixed-fee-equivalent should be
adjusted upwards to reflect the special factors of:  (1) WEC
corporate involvement; (2) infusion of WEC personnel into
SRS; (3) complexity of contract effort; and (4) exposure to
multiple oversight agencies.  The fixed-fee-equivalent had
been increased by 42 percent during FYs 1990 - 1992 to
reflect these four factors; for FY 1993, SR proposed that
the increase in fixed-fee-equivalent for these factors be
limited to 26 percent (later recalculated at 23 percent).
 
     The combined effect of these two changes was to increase the
FY 1993 fixed-fee-equivalent calculated by SR over what it
would have been had SR's FY 1992 method of calculation been 
used.  Breaking the budget into five segments resulted in
additional fee that more than offset the reduction of the
upwards "adjustment" of the fixed-fee-equivalent from the 42
percent used in previous years down to 23 percent.
 
     In calculating the FY 1993 fixed-fee-equivalent, SR
eliminated the New Production Reactor as a fee base
subdivision; this $33 million "Production" fee base in FY
1992 had essentially ceased operations by FY 1993.  Instead,
SR substituted a new and much larger third "Production"
subdivision, the $425 million Environmental Restoration and
Waste Management effort.  In FY 1993, SR also broke out as a
separate fee base the DWPF.  This $238 million effort,
categorized as "Production" activity in previous years, was
switched to "R&D" effort, concomitantly carrying a higher
fee percentage.  Specifically, SR calculated its proposed FY
1993 fixed-fee-equivalent from the maximum fee schedules as
follows:
                                                                Fixed-Fee-Equivalent
                                                                  Per Maximum Fee
                                                Net Fee Base          Schedules
                        Subdivision             (In Millions)       (In Millions)
 
                         Production
                      Site Operations                $657            $6.217
                      Reactors                        423             5.259
                      Environmental
                        Restoration                   425             5.264
 
 
                      Research & Development
                      Savannah River Laboratory       177             4.718
                      DWPF                            238             5.189
 
                      Totals                       $1,920           $26.647
                                                   MMMMMM           MMMMMMM
 
 
     SR then:  (1) reduced this $26.647 million
fixed-fee-equivalent by $683,000 to reflect a 35 percent
reduction in the fee base for the Bechtel subcontract; and
(2) increased the fixed-fee-equivalent by $6,036,000 to
reflect the 23 percent upwards "adjustment" for the four
special factors.  This resulted in the total proposed
fixed-fee-equivalent of $32 million.
 
     We noted that the impact of changing the fee base structure
in FY 1993 was to increase the fixed-fee-equivalent by
$7,737,000, from $18,227,000 to $25,964,000.  After applying
the 23 percent upwards "adjustment" factor to the
$7,737,000, the dollar impact increased to $9,517,000.
Reduction in the upwards adjustment of the
fixed-fee-equivalent, from 42 percent in FY 1992 down to 23
percent in FY 1993, on the other hand, reduced the fee
calculation by only $4,933,000.  Thus, the net effect of the
FY 1993 changes was a $4,584,000 increase in the
fixed-fee-equivalent.
 
     We further noted that, had the fixed-fee-equivalent been
calculated in the same manner as in the beginning of the
contract (as shown in the following table), with one
"Production" fee base, one "R&D" fee base, and DWPF
classified as "Production" effort, the total
fixed-fee-equivalent would have been $14,704,000, or 46
percent of the $32 million fixed-fee-equivalent SR was
proposing to DOE Headquarters.  The $14,704,000 was
calculated as follows:
                                                                   Fixed-Fee-Equivalent
                                                                     Per Maximum Fee
                                                  Net Fee Base          Schedules
                  Subdivision                     (In Millions)       (In Millions)
 
                  Production
 
                  Site Operations                    $  657              $
                  Reactors                              423
                  Environmental
                    Restoration                         425
                  DWPF                                  238
 
                                                      1,743               10.670
 
                  Research & Development
 
                  Savannah River Laboratory             177                4.718
 
                                                                          15.387
 
 
                  Less Fee Reduction for Bechtel
                    Subcontract                                            <.683>
 
                  Totals                             $1,920              $14.704
                                                          MMMMMM              MMMMMMM
 
Based upon this analysis, we believe that SR should have
been writing DOE Headquarters Procurement to justify fees of
118 percent, rather than 23 percent, above the maximum fee
schedules.
 
     After SR submitted its $48 million total available fee
proposal to DOE Headquarters Procurement, discussions
ensued between SR and Headquarters officials.  The outcome
of these discussions, according to the Chief of SR's M&O 
Contractor Oversight Branch, was that DOE Headquarters set
the limit on DOE's total available fee offer to WSRC at 
$43.5 million.  On November 11, 1994, SR subsequently
communicated to WSRC an offer of $16 million base fee/
$27.5 million award fee pool, for a total available fee
of $43.5 million.
 
     FY 1993 Fee Finalized
 
     After further discussions between SR and WSRC, a letter of
agreement was signed on December 24, 1992.  This agreement
established a $16 million base fee/$27.5 million award fee
pool for FY 1993, based upon a fixed-fee-equivalent of
$29.75 million.  The letter also documented nine additional
agreements, to include a cost reduction incentive program
for a one year trial period and the elimination of
incentive compensation paid in FY 1993 as an allowable
cost.
 
 
     On March 19, 1993, Modification M068 to the WSRC contract
was executed, formalizing the agreements reached in the
December 24, 1992, letter.  This modification also revised
the Personnel Appendix to WSRC's contract, to state:  "No 
incentive compensation payments are authorized as allowable
costs for CY 1992 performance [paid in FY 1993] of exempt
employees.  Future incentive compensation payments will
only be allowable if they are made in accordance with a
plan approved in advance by the Contracting Officer."                                            
 
     Although required by DEAR 915.808, SR had not, at the
conclusion of our inspection fieldwork, prepared the price
negotiation memorandum for this $43.5 million contract
modification, which would normally document both the basis
of the prenegotiation fee objectives and the extent to
which these objectives were met.
 
     Impact of Incentive Compensation on FY 1993 Fee
 
     We discussed the $3 million increase in WSRC's base fee 
from FY 1992 to FY 1993 (from $13 million to $16 million),
and the $500,000 increase in award fee pool (from $27
million to $27.5 million) with management officials of both
SR and WSRC.  Officials from both organizations stated that
the increase in FY 1993 total available fee was, in part,
due to WSRC now having to absorb the cost of employee
incentive compensation as an unallowable cost.
 
     An earlier unsigned SR internal document to SR's Manager, 
dated October 6, 1992, which we noted in SR's procurement 
files, had discussed the possible role of fee as a method
of indirectly funding WSRC employee incentive compensation
costs, while avoiding claims by WSRC for employee incentive
compensation as an allowable cost under the contract.  This
document stated, in part:
 
"D there are two ways WSRC can recover IC 
[incentive compensation] costs:  through fee
or as an allowable cost.  I would prefer the
fee approach as this would exclude any DOE
involvement in the process."    
 
             *   *   *   *   *   *   *
 
"D For '93, we believe that by splitting out EM 
[Environmental Restoration and Waste
Management] into a separate fee base and
continuing the calculational approach used in
the last two years, we may be able to get to a
fixed fee of $16MM and an award fee of $32MM
for a total of $48MM.  Additionally we will be
giving them the 'open-ended' hard savings
program recently approved by S-1. . . .
 
"D The above would, in my mind, provide more than 
enough in additional fixed fee to cover the
cost of the IC program [$2.7MM last year] and
an additional amount to reflect something for
Task order contracting.  The formal record
would not show that we have done either! . . .
 
          "I recommend we proceed with trying to get HQ 
 concurrence to our fee option."
 
     Prior to signing Modification M068, WSRC indicated to SR
that the issue of additional fee in exchange for absorbing
the cost of an employee incentive compensation program was
     not going to end with the FY 1993 fee.  In a January 28, 1993,
letter to SR's Assistant Manager for Administration, WSRC's
General Counsel wrote:
 
"Our agreement is that WSRC will make no 
claim for incentive compensation paid during
FY-93.  Since Clause I.73 DEAR 970.5204D13
ALLOWABLE COSTS AND FEES (COST REIMBURSEMENT
MANAGEMENT AND OPERATING CONTRACTS)
(DEVIATION) (AUG 1988) provides that
incentive compensation is an allowable cost,
WSRC reserves the right to charge incentive
compensation paid in future years to the
contract unless other agreements are
reached."
 
     FY 1994 TOTAL AVAILABLE FEE NEGOTIATIONS
 
     On July 8, 1993, SR requested that WSRC submit a FY 1994 fee
proposal which would be innovative and motivate WSRC to
achieve various Departmental objectives.  SR requested this
proposal by September 1, 1993.
 
     WSRC's FY 1994 Fee Proposal
 
     On October 14, 1993, WSRC submitted its FY 1994 fee proposal
to SR.  In its proposal, WSRC divided the total budget into
ten discrete packages.  Each of these ten packages was then
further divided, where appropriate, among three components:
(1) "Production;" (2) "R&D/AE Design;" and (3) "Construction 
Management/Construction."  Each of these components was 
treated as a separate fee base, and a fee was calculated
from the appropriate maximum fee schedules within the DEAR.
Out of the 30 possible fee bases (ten packages with three
components each), 19 had budgeted activity on which fees
were calculated, producing a total fixed-fee-equivalent of
$39 million.
 
     WSRC further proposed that this $39 million
fixed-fee-equivalent be converted into a base fee of $13
million and an award fee pool of $52 million, for a total
available fee of $65 million.  Rather than applying a common
award fee split, such as 50/100, across all work packages,
WSRC proposed varying splits of 50/100, 25/150, and 0/200.
All of these proposed splits conformed to options within the
DEAR.  WSRC's stated intention was to place more of its fee 
at risk (e.g., 0/200) in areas it judged to be most critical
to the Department's mission.  In addition, WSRC identified 
four special initiatives for which, if not achieved, WSRC
would forfeit various amounts of fee, totaling $2.2 million
overall.
 
Finally, WSRC stated in its proposal that "The fee figures 
do not include or consider in any way the treatment of FY94
incentive compensation as anything but an element of
allowable cost."
 
Development of SR's FY 1994 Offer
 
On December 3, 1993, SR's Manager was briefed regarding 
WSRC's proposal.  SR's Manager made a decision to adopt
WSRC's approach of allocating fee among ten areas of 
performance, and to vary the award fee split ratios in order
to increase the fee risk in key areas to the contractor.  SR
also decided to request DOE Headquarters permission to
establish WSRC's FY 1994 total available fee at the same 
level as FY 1993.  The FY 1993 total available fee was based
on a fixed-fee-equivalent of $29.75 million, and split up
into a base fee of $16 million and an award fee pool of
$27.5 million.  SR noted in their briefing charts that the
$16 million base fee included a $3 million allowance for
Incentive Compensation.
 
On December 9, 1993, SR management met with DOE Headquarters
officials and presented the fee concept proposed by WSRC,
along with its own recommendation for establishing the FY
1994 fee based upon a fixed-fee-equivalent of $29.9 million,
versus the FY 1993 fixed-fee-equivalent of $29.75 million.
One of the concerns expressed at this meeting was that SR's 
proposed fee did not properly reflect the budget decline.
With an approximate 10 percent decrease in the FY 1994
budget, DOE officials thought WSRC's fee should also have 
declined from FY 1993 levels.  The outcomes of this meeting
included SR's agreement to recalculate the 
fixed-fee-equivalent to reflect the decline in budget.  It
was also reaffirmed at the meeting that "the FY93 $3M 
[million] buyout of incentive compensation will continue in
FY94 and future years."
 
SR subsequently developed a fee proposal based upon a
fixed-fee-equivalent of $26.050 million.  SR spread this fee
over the ten tasks proposed by WSRC using award fee split
ratios varying among 0/200, 10/180, 25/160, 25/165, 30/150,
and 30/160.  The combined effect of these ratios resulted in
an overall award fee ratio of 20/169, resulting in a base
fee of $5.241 million and an award fee pool of $44.084
million, for a total available fee of $49.325 million.
After receiving DOE Headquarters approval for this proposal,
SR presented it to WSRC on December 22, 1993.
 
In January 1994, further discussions took place between SR
and WSRC regarding the allocation of base fee and award fee
pool, and the restructuring of the award fee curve (i.e.,
the percent of award fee pool earned for various performance
scores).  Negotiations culminated with agreement on a base
fee of $9 million, an award fee pool of $40 million, and a
revised award fee curve.  SR verbally received DOE
Headquarters approval on March 11, 1994, and Modification
M093, incorporating this agreement into the contract, was
executed on April 8, 1994.
 
Award Fee Ratios
 
In previous years, the award fee split ratios did not exceed
maximums specified in DEAR 970.1509D8.  Specifically, the
     award fee pool did not exceed twice the fixed-fee-equivalent,
after the base fee was deducted.  As further explanation,
expressed in percentages, if the base fee were set at 40
percent of the fixed-fee-equivalent, the maximum award fee,
per the DEAR guidelines, would be set at twice the remaining
fixed-fee-equivalent (twice 60 percent, after the 40 percent
base fee was deducted), or 120 percent of the
fixed-fee-equivalent.  The ratio in this instance would be
expressed as 40/120.  For 1994, however, SR negotiated
ratios that frequently exceeded these DEAR maximums, as the
following table indicates:
                       Negotiated Ratios      Conforming Ratios per DEAR
 
                            0/200                       0/200
                           34/162                      34/132
                           36/154                      36/128
                           40/140                      40/120
                           50/126                      50/100
                           50/135                      50/100
                           65/112                      65/70
 
For FY 1994, the negotiated fee was ostensibly based on a
fixed-fee-equivalent of $26,050,000.  WSRC's total available 
fee for FY 1994, however, actually represented a
fixed-fee-equivalent of $29 million ($9 million base fee and
one-half of the $40 million award fee pool).  This assertion
is based on the guidelines reflected in the maximum
potential award fee schedule in DEAR 970.1509-8(d), which
establishes maximum potential award fee pools at twice the
amount of the fixed-fee-equivalent allocated to the pool.
In effect, a fixed-fee-equivalent dollar is converted into
two award fee pool dollars, or vice-versa.  Applying this
ratio, WSRC's $40 million award fee pool is the equivalent 
of $20 million in fixed-fee-equivalent.
 
This effective increase in the fixed-fee-equivalent, from
$26.05 million to $29 million, was achieved by assigning
award fee split ratios that exceeded the guideline ratios
(1:2) in the DEAR, thereby increasing the award fee pool.
It is further noted that this $3 million effective increase
in the fixed-fee-equivalent corresponds with the $3 million
identified by SR as necessary to fund WSRC's unallowable 
employee incentive compensation program.
 
FY 1994 Fee Bases
 
In calculating the $26,050,000 fixed-fee-equivalent for FY
1994, SR broke the budget into eight segments as shown
below:
 
                  (Continued on next page)
                                                       Net Fee Base
                              Subdivision              (In Millions)
 
                               Production
 
                       Site Operations                    $ 687
                       Environmental Restoration
                         and Waste Management               346
                       Savannah River Technology
                         Center                              45
 
                        Research and Development
 
                       Defense Waste Processing
                         Facility                           155
                       Savannah River Technology
                         Center                             110
 
                        Construction Management
 
                       Site Operations                      164
                       Savannah River Technology
                         Center                              66
                       Defense Waste Processing
                         Facility                            44
 
                       Total                             $1,617
                                                         MMMMMM
 
 
It should be noted that a portion of the Savannah River
Technology Center's budget was included in "Production" 
activity.  FY 1989 was the last time SR had identified
"Production" activity within this organization's operations.                            
If the FY 1994 budget were broken into the three fee
categories of Production, R&D, and Construction Management,
and the Defense Waste Processing Facility was reclassified
as a "Production" activity, as done for FY 1989, then the
maximum fees from the DEAR fee schedules would have totaled
$16,396,000.  By splitting its budget into eight separate
fee bases, SR increased the calculation of
fixed-fee-equivalent by $9,654,000, or 59 percent, to
$26,050,000.
                                                     ATTACHMENT A
 
                        MAXIMUM FEE SCHEDULES
                         Per DEAR 970.1509-5
                  Effective Prior to June 19, 1991
 
 
                         PRODUCTION EFFORTS
    DDDDDDDDDDDDDDDDDDDDBDDDDDDDDDDDDBDDDDDDDDDDDBDDDDDDDDDDD
                        3            3    Fee    3 Increment
         Fee Base       3    Fee     3 (Percent) 3 (Percent)
    DDDDDDDDDDDDDDDDDDDDEDDDDDDDDDDDDEDDDDDDDDDDDEDDDDDDDDDDD
    Up to $1 million....3............3      7.00 3      7.00
    1,000,000...........3    $70,000 3      7.00 3      6.05
    3,000,000...........3    191,000 3      6.37 3      5.25
    5,000,000...........3    296,000 3      5.92 3      4.18
    10,000,000..........3    505,000 3      5.05 3      3.50
    15,000,000..........3    680,000 3      4.53 3      3.30
    25,000,000..........3  1,010,000 3      4.04 3      2.86
    40,000,000..........3  1,439,000 3      3.60 3      2.41
    60,000,000..........3  1,921,000 3      3.20 3      2.07
    80,000,000..........3  2,335,000 3      2.92 3      1.50
    100,000,000.........3  2,635,000 3      2.64 3      1.10
    150,000,000.........3  3,185,000 3      2.12 3       .60
    200,000,000.........3  3,485,000 3      1.74 3       .50
    300,000,000.........3  3,985,000 3      1.33 3       .40
    400,000,000.........3  4,385,000 3      1.10 3       .30
    500,000,000.........3  4,685,000 3       .94 3
    Over 500M...........3  4,685,000 3   1/ +.30 3
    DDDDDDDDDDDDDDDDDDDDADDDDDDDDDDDDADDDDDDDDDDDADDDDDDDDDDDDDD
    1/ Excess
            MAXIMUM FEE SCHEDULES Per DEAR 970.1509-5
                 Effective Prior to June 19, 1991
 
 
                RESEARCH AND DEVELOPMENT EFFORTS
   DDDDDDDDDDDDDDDDDDDDDBDDDDDDDDDDDDBDDDDDDDDDDDBDDDDDDDDDDD
                        3            3    Fee    3 Increment
         Fee Base       3    Fee     3 (Percent) 3 (Percent)
   DDDDDDDDDDDDDDDDDDDDDEDDDDDDDDDDDDEDDDDDDDDDDDEDDDDDDDDDDD
   $25,000..............3     $2,500 3     10.00 3      9.74
    50,000..............3      4,938 3      9.87 3      8.97
    100,000.............3      9,420 3      9.42 3      8.22
    200,000.............3     17,640 3      8.82 3      7.64
    400,000.............3     32,920 3      8.23 3      7.28
    600,000.............3     47,480 3      7.91 3      6.92
    800,000.............3     61,320 3      7.67 3      6.69
    1,000,000...........3     74,700 3      7.47 3      6.38
    3,000,000...........3    202,300 3      6.74 3      6.11
    5,000,000...........3    324,500 3      6.49 3      5.53
    10,000,000..........3    601,000 3      6.01 3      4.82
    15,000,000..........3    842,000 3      5.61 3      4.15
    25,000,000..........3  1,257,000 3      5.03 3      3.60
    40,000,000..........3  1,797,000 3      4.49 3      3.10
    60,000,000..........3  2,417,000 3      4.03 3      2.40
    80,000,000..........3  2,897,000 3      3.62 3      1.88
    100,000,000.........3  3,273,000 3      3.27 3      1.12
    150,000,000.........3  3,833,000 3      2.56 3       .65
    200,000,000.........3  4,158,000 3      2.08 3       .55
    300,000,000.........3  4,708,000 3      1.57 3       .45
    400,000,000.........3  5,158,000 3      1.29 3       .35
    500,000,000.........3  5,508,000 3      1.10 3
    Over 500M...........3  5,508,000 3  1/  +.35 3
    DDDDDDDDDDDDDDDDDDDDADDDDDDDDDDDDADDDDDDDDDDDADDDDDDDDDDDDDD
    1/ Excess
                                                     ATTACHMENT B
 
              MAXIMUM FEE SCHEDULES Per DEAR 970.1509-5
                      Effective June 19, 1991
 
 
                        PRODUCTION EFFORTS
    DDDDDDDDDDDDDDDDDDDDBDDDDDDDDDDDBDDDDDDDDDDDBDDDDDDDDDDD
                        3   Fee     3    Fee    3 Increment
     Fee Base (dollars) 3 (dollars) 3 (Percent) 3 (Percent)
    DDDDDDDDDDDDDDDDDDDDEDDDDDDDDDDDEDDDDDDDDDDDEDDDDDDDDDDD
    Up to $1 million....3...........3...........3      7.00
    1,000,000...........3   $70,000 3      7.00 3      6.20
    3,000,000...........3   194,000 3      6.47 3      5.55
    5,000,000...........3   305,000 3      6.10 3      4.48
    10,000,000..........3   529,000 3      5.29 3      3.88
    15,000,000..........3   723,000 3      4.82 3      3.39
    25,000,000..........3 1,062,000 3      4.25 3      3.06
    40,000,000..........3 1,521,000 3      3.80 3      2.67
    60,000,000..........3 2,054,000 3      3.42 3      2.35
    80,000,000..........3 2,524,000 3      3.16 3      2.14
    100,000,000.........3 2,952,000 3      2.95 3      1.32
    150,000,000.........3 3,613,000 3      2.41 3      1.02
    200,000,000.........3 4,123,000 3      2.06 3      0.56
    300,000,000.........3 4,678,000 3      1.56 3      0.48
    400,000,000.........3 5,162,000 3      1.29 3      0.41
    500,000,000.........3 5,574,000 3      1.11 3..........
    Over 500M...........3 5,574,000 3...........3   1/ 0.41
    DDDDDDDDDDDDDDDDDDDDADDDDDDDDDDDADDDDDDDDDDDADDDDDDDDDDDDDD
    1/ 0.41% excess over $500 million.
                     MAXIMUM FEE SCHEDULES
                      Per DEAR 970.1509-5
                    Effective June 19, 1991
 
 
                RESEARCH AND DEVELOPMENT EFFORTS
    DDDDDDDDDDDDDDDDDDDDBDDDDDDDDDDDDBDDDDDDDDDDDBDDDDDDDDDDD
                        3     Fee    3    Fee    3 Increment
     Fee Base (dollars) 3  (dollars) 3 (Percent) 3 (Percent)
    DDDDDDDDDDDDDDDDDDDDEDDDDDDDDDDDDEDDDDDDDDDDDEDDDDDDDDDDD
    25,000..............3      2,500 3     10.00 3     10.00
    50,000..............3      5,000 3     10.00 3     10.00
    100,000.............3     10,000 3     10.00 3      8.00
    200,000.............3     18,000 3      9.00 3      8.00
    400,000.............3     34,000 3      8.50 3      7.50
    600,000.............3     49,000 3      8.17 3      7.00
    800,000.............3     63,000 3      7.88 3      7.00
    1,000,000...........3     77,000 3      7.70 3      6.40
    3,000,000...........3    205,000 3      6.83 3      6.25
    5,000,000...........3    330,000 3      6.60 3      5.68
    10,000,000..........3    614,000 3      6.14 3      5.22
    15,000,000..........3    875,000 3      5.83 3      4.43
    25,000,000..........3  1,318,000 3      5.27 3      3.86
    40,000,000..........3  1,897,000 3      4.74 3      3.38
    60,000,000..........3  2,572,000 3      4.29 3      2.99
    80,000,000..........3  3,170,000 3      3.96 3      2.46
    100,000,000.........3  3,662,000 3      3.66 3      1.54
    150,000,000.........3  4,434,000 3      2.96 3      1.04
    200,000,000.........3  4,955,000 3      2.48 3      0.61
    300,000,000.........3  5,561,000 3      1.85 3      0.53
    400,000,000.........3  6,095,000 3      1.52 3      0.46
    500,000,000.........3  6,556,000 3      1.31 3..........
    Over $500M..........3  6,556,000 3...........3    1/0.46
    DDDDDDDDDDDDDDDDDDDDADDDDDDDDDDDDADDDDDDDDDDDADDDDDDDDDDDDDD
    1/ 0.46% excess over $500 million.
 
                                       IG Report No. DOE/IG-0377
 
                     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 Inspsector General, please contact Wilma
Slaughter on (202) 586-1924.
