United States General Accounting Office

GAO Testimony

Before the Subcommittee on Energy and Environment,

Committee on Science, House of Representatives

For Release

on Delivery

Expected at

10:00 a.m. EST

Thursday

March 6, 1997

DEPARTMENT OF

ENERGY

Improving Management of

Major System Acquisitions

Statement by Victor S. Rezendes,

Director, Energy, Resources, and Science Issues,

Resources, Community, and Economic

Development Division

GAO/T-RCED-97-92

Mr. Chairman and Members of the Subcommittee:

We appreciate the opportunity to discuss the Department of Energy’s

(DOE) performance in completing its largest and most significant projects,

which are referred to as major system acquisitions. As you know, DOE

considers these projects critical to fulfilling its mission. The projects are

also extremely costly and can be politically sensitive. Our testimony today

will summarize our November 1996 report on DOE’s management of its

major system acquisitions.1

 Specifically, we will address (1) DOE’s

performance in completing its major system acquisitions; (2) the key

factors that hinder the timely, cost-effective completion of the

acquisitions; and (3) what is being done to improve DOE’s performance.

In summary, from 1980 through 1996, DOE conducted 80 projects that it

designated as major system acquisitions. Thirty-one of the projects were

terminated prior to completion, after expenditures of over $10 billion.

Only 15 of the projects were completed, and most of them were finished

behind schedule and with cost overruns.2

 Further, 3 of the 15 projects have

not yet been used for their intended purpose. The remaining 34 projects

are ongoing, many with substantial cost increases and “schedule slippage.”

We believe there are four key factors underlying the cost overruns,

schedule slippage, and terminations of DOE’s most critical projects. These

are unclear or changing missions; the incremental funding of projects; a

flawed system of incentives both for DOE’s employees and contractors; and

a lack of sufficient DOE personnel with the appropriate skills to effectively

oversee contractors’ operations. On the positive side, DOE is implementing

several initiatives that could help improve the Department’s overall

management as well as the management of individual major system

acquisitions. We believe that their implementation offers DOE an excellent

opportunity to address the key factors.

Before we discuss these problems in greater detail, we will briefly describe

DOE’s varied responsibilities and federal guidance on the management of

major system acquisitions.

Background Over the years, DOE has conducted technically complex activities at

government-owned, contractor-operated facilities across the country.

1

Department of Energy: Opportunity to Improve Management of Major System Acquisitions

(GAO/RCED-97-17, Nov. 26, 1996).

2

Cost overruns are increases in a project’s original cost estimates.

Page 1 GAO/T-RCED-97-92
These activities have included developing and producing nuclear weapons;

operating nuclear reactors, uranium enrichment plants, and plutonium

production plants; performing research and development on both the

military and civilian uses of nuclear energy; promoting and funding

nuclear and other sciences; fostering energy conservation and efficiency;

managing federal petroleum reserves; and, more recently, cleaning up

environmental contamination resulting from its past operations. These

activities have involved large-scale, first-of-a-kind projects requiring

substantial construction and other expenses.

Office of Management and Budget Circular A-109, dated April 5, 1976,

defined projects that are critical to fulfilling an agency’s mission, entail the

allocation of relatively large amounts of resources, and warrant special

management attention as major system acquisitions. The circular requires

that these systems receive top-level management review and an integrated

approach to budgeting, contracting, and managing. In accordance with the

circular, DOE designated many projects as major system acquisitions

because of their high estimated costs (ranging from about $100 million to

many billions of dollars) and their perceived importance to fulfilling DOE’s

missions. From 1980 through 1996, DOE designated 80 projects as major

system acquisitions.

DOE’s Performance

on Major System

Acquisitions

As stated earlier, 31 of the 80 major system acquisitions that DOE

conducted were terminated prior to completion, after expenditures of over

$10 billion. The projects were canceled for a number of reasons. In some

cases, changing circumstances and/or world events simply caught up with

the projects, and they were no longer needed. For example, because of the

reduced demand for uranium enrichment services to fuel commercial

nuclear power plants, DOE canceled the Gas Centrifuge Enrichment Plant

after spending $2.8 billion. Other projects were canceled because of

changes in the administration’s policy. For example, DOE canceled five coal

demonstration plants, on which it had spent $459 million, because the

administration at that time did not believe that DOE should be funding

demonstration projects. Because of anticipated reductions in nuclear

weapons, DOE canceled a new tritium production reactor, after

expenditures of $1.2 billion.

In other cases, however, management problems and/or ineffective

oversight by DOE led to large cost overruns and schedule slippage.

Eventually, these problems led the Congress to terminate the projects. For

example, we reported to the Congress that DOE’s original cost estimate of

Page 2 GAO/T-RCED-97-92
$5.9 billion for the Superconducting Super Collider (a project intended to

conduct high-energy physics experiments) had grown to $8.3 billion; yet

we identified additional known cost increases showing that the total cost

would exceed $11 billion.3

 The Congress cut off funding for the project

after a total expenditure of over $2 billion.

Of the 15 projects completed, many incurred cost overruns and schedule

slippage. Further, three have not yet been used for their intended purpose.

For example, the Fuels and Materials Examination Facility at DOE’s

Hanford Plant was intended to fabricate and examine a full range of

breeder reactor fuels. However, the facility has never been operated for its

intended purpose because DOE’s breeder reactor program was terminated

in the early 1980s when the Congress cut off funding. The facility is now

being used for storage and office space. DOE spent $234 million on this

project.

As of June 1996, at least half of the 34 ongoing projects were experiencing

cost overruns and/or schedule slippage.4

 For example, the estimated total

cost for the Weldon Spring Remedial Action Project grew from about

$350 million to over $850 million and the project is more than 5 years

behind schedule. The Yucca Mountain Site Characterization Project’s

estimated cost has increased by more than $1 billion and the project is

more than 10 years behind schedule.

Factors Affecting

DOE’s Major System

Acquisitions

We believe the high rate of cost overruns, schedule slippage, and

terminations on DOE’s major system acquisitions can be traced to four key

factors:

• The constantly changing missions for DOE that often make it difficult to

maintain departmental and congressional support for these long-term,

high-cost projects.

• The funding of projects incrementally, from year to year rather than up

front, which subjects the projects to potential delays or terminations in

funding each year.

• A flawed system of incentives that does not always reward individuals and

organizations for doing “the right thing” and has often rewarded

contractors despite poor performance.

3

Federal Research: Super Collider—National Security Benefits, Similar Projects, and Cost

(GAO/RCED-93-158, May 14, 1993).

4

Complete original cost estimates and current cost estimates were available for 22 of the 34 ongoing

projects. Of the 22 projects, 17 were experiencing cost overruns, and 16 were experiencing schedule

slippage.

Page 3 GAO/T-RCED-97-92
• The difficulty in hiring, training, and retaining enough people with the

requisite skills to provide effective oversight and/or management of

contractors’ operations.

DOE’s missions have continued to evolve to the point where today’s DOE

bears little resemblance to the Department created in 1977. DOE is no

longer focused primarily on developing alternative sources of energy,

producing nuclear weapons, or modernizing the nuclear weapons

complex. Today, DOE’s focus has turned to maintaining the nation’s

scientific and technological leadership, cleaning up the environmental

contamination resulting from the past 50 years of operating the nuclear

weapons complex, and providing stewardship for the nation’s nuclear

weapons stockpile. Such changing missions, coupled with the fact that

these projects take years to complete and often cost billions of dollars,

make it very difficult for DOE to maintain the congressional and

stakeholder support needed to complete these projects.

To carry out its mission, DOE has historically received incremental funding

for its projects. One problem with incremental funding is that the budget

authority for the total cost of the project is not provided when the project

is approved. Furthermore, for many projects, particularly in their first

years of development and construction, the funding received is

considerably below the amount requested. This causes project schedules

to slip and costs to rise. For example, certain contractor expenses and

administrative costs (e.g., costs for heat, lights, water, security, etc.) will

accrue regardless of whether any progress is being made on the project.

As a result, projects that received only partial funding usually end up

costing more than originally estimated and years behind schedule.

Inappropriate incentives have also contributed to late and costly projects.

Past Secretaries of Energy have commented on the need to change the

incentives in DOE to focus less on production-oriented quotas and more on

other important issues, such as environmental health and safety and

efficient management. Some DOE managers view themselves as advocates

for their projects, which provides an incentive for them not to surface

potential problems that could cancel their projects. For example,

participants in the Superconducting Super Collider were focused on

continuing the project in order to maintain U.S. preeminence in

high-energy physics despite repeated reports of chronic management

problems and enormous cost overruns.

Page 4 GAO/T-RCED-97-92
Most DOE contracts have incentives—such as bonuses or penalties—to

prompt satisfactory contractor performance. However, we have found that

in some instances, DOE contracting officers did not use the penalty clauses

and gave contractors substantial bonuses despite subpar performance. For

example, during fiscal years 1986 through 1988, many safety and health

deficiencies at DOE’s Rocky Flats Plant in Colorado were repeatedly raised

by DOE safety staff. These included problems in the plant’s radiological

protection program and a lack of commitment by the plant’s management

to improve overall safety and health conditions. Despite this poor

performance, the contractor received over $26 million in bonuses during

this period. The plant was eventually shut down for safety problems,

among other things.

The last factor is DOE’s lack of technical expertise to oversee the design,

construction, and operation of its major system acquisitions. This problem

has been chronicled since DOE’s early years. A 1981 DOE task force and a

1987 report by the National Research Council both noted DOE’s lack of

technical capabilities and expertise. A March 1996 report by the Defense

Nuclear Facilities Safety Board echoed those same concerns. Throughout

a series of management reviews of DOE that we began in 1991, many DOE

managers told us that the lack of skilled staff in program, project, and

contracting oversight positions is one of the most fundamental problems

in the Department.

Efforts to Resolve

Acquisition Problems

There are no quick, easy solutions to DOE’s problems in keeping its major

system acquisitions on schedule and within budget. However, several

governmentwide initiatives could help. Recent changes to federal

procurement laws, including the Federal Acquisition Streamlining Act of

1994 and the Clinger-Cohen Act of 1996 (formerly called the Federal

Acquisition Reform Act of 1996) provide an impetus for agencies to,

among other things, improve the technical capabilities and performance of

their acquisition management staffs. This could help resolve a

long-standing problem at DOE. In addition, as of July 1996, the Office of

Management and Budget has required all federal agencies to request full

funding for fixed assets (including major system acquisitions). If a project

or separable segment5

 of a project is approved, the agency will receive

budget authority for the full amount of the project’s or segment’s

estimated cost and will not have to return to the Congress for additional

budget authority each year.

5

The guidance from the Office of Management and Budget allows for the full funding of economically

or programmatically separable segments of projects.

Page 5 GAO/T-RCED-97-92
The full-funding provision could have a significant impact on DOE’s

management of its major system acquisitions. The Department and other

stakeholders, such as the Congress, need to reach a consensus on which

of DOE’s major system acquisitions are most mission-critical. Then, by

knowing that the funding will be available when needed, DOE and its

contractors should be better able to stay within cost estimates and keep

the projects on schedule. DOE has begun to implement the full-funding

concept in its fiscal year 1998 budget.

Furthermore, in 1994, DOE began implementing management initiatives in

the areas of contract reform, strategic systems and life-cycle asset

management, strategic planning, information resources management

planning, and financial planning. Some of these initiatives, such as

contract reform, could improve many aspects of DOE’s contracting by

stimulating more competition and better control over the contractors. This

could lead to cost savings and quality improvements.

Observations We believe that these initiatives have the potential to help improve DOE’s

management of its major system acquisitions, but DOE may need help in

addressing some of the key factors. For example, this is an ideal time to

reevaluate DOE’s missions; however, DOE cannot do this alone because the

Congress plays a key role in setting the Department’s priorities.

Nevertheless, we believe that DOE’s management initiatives offer an

opportunity for DOE to begin addressing some of the factors affecting the

management of its major system acquisitions.

Thank you, Mr. Chairman and Members of the Subcommittee. That

concludes our testimony. We would be happy to respond to any questions

you may have.

(141035) Page 6 GAO/T-RCED-97-92
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