U.S. Department of Energy

Office of Inspector General

Office of Audit Services

Audit Report

Management Controls over 

Warranties Involving Newly 

Constructed and Renovated

Facilities at National Defense

Laboratories

OAS-M-10-02 June 2010
Department of Energy

Washington, DC 20585

June 15, 2010

MEMORANDUM FOR THE MANAGERS, LIVERMORE SITE OFFICE, LOS ALAMOS

SITE OFFICE, AND SANDIA SITE OFFICE

FROM: George W. Collard

Assistant Inspector General 

 for National Security and Energy Audits

Office of Inspector General

SUBJECT: INFORMATION: Audit Report on "Management Controls over 

Warranties Involving Newly Constructed and Renovated Facilities at

National Defense Laboratories"

BACKGROUND

The Department of Energy's (Department) National Nuclear Security Administration's (NNSA) 

research, surveillance, and manufacturing capabilities are carried out in facilities, many of which 

are 50 to 60 years old. Since these facilities are beyond their economic lifetime, NNSA 

requested and acquired funding not only to construct new facilities but also to restore and 

revitalize older ones. These construction projects enable NNSA to maintain the critical 

capabilities necessary to support its programmatic efforts such as nuclear nonproliferation, 

counterterrorism, and emergency response work.

Between Fiscal Years (FY) 2004 and 2008, Congress provided over $1 billion in line-item and 

General Plant and Project funds to construct and renovate facilities at Lawrence Livermore, 

Sandia, and Los Alamos National Laboratories (Laboratories). NNSA plans to spend an 

additional $18 billion over the next 10 years to complete construction of facilities in the process 

of being built as of April 2009. To ensure quality, NNSA required Laboratories to have

construction contractors provide warranties for their equipment and work. Federal Acquisition 

Regulation 52.236-23 also requires design contractors to correct or revise, without compensation, 

any errors or deficiencies in design, drawings, and specifications. Laboratories also required that 

contractors reimburse the Laboratories for needed remediation if they did not satisfy the 

warranty terms after reasonable notice of defect.

Based on the significant amount of funds invested in construction projects at defense 

Laboratories, we conducted this audit to determine whether NNSA Laboratories exercised 

contract warranties to correct defects in equipment, material, workmanship, or design of newly 

constructed and renovated facilities.

RESULTS OF AUDIT

NNSA Laboratories had not always adequately managed contract warranties. Rather, the 

Laboratories performed work to correct defects in equipment, material, workmanship or design 

in the construction of facilities even though these items were covered by a warranty. In 40
2

(23 percent) of the 172 work orders performed between October 1, 2004, and September 30, 

2008, that we reviewed, Laboratories performed needed repairs or replacements themselves for 

items covered by a warranty. Additionally, one of the Laboratories did not seek indemnification 

from contractors that did not satisfy warranty provisions. When the Laboratories pursue these 

remedies in-house rather than exercise the provisions of the warranties, the taxpayers bear the 

burden of the repairs. For example: 

Livermore spent approximately $40,000 to repair tiled floors in the TeraScale Simulation 

Facility, including 6 different repairs within the first 10 months after final acceptance of 

the facility. According to Livermore officials, both the design and construction 

subcontractors agreed that the floor tile defect resulted from a design error. Livermore, 

however, did not attempt to recover the costs from the design subcontractor even though 

its contract required the design firm to correct, without compensation, defects caused by 

design omissions and errors;

Sandia repeatedly repaired a defective heating and ventilation unit at its Central Utility 

Building during the warranty period and replaced the unit two months after the expiration 

of a warranty; and, 

Los Alamos did not seek indemnification after unsuccessful attempts to have a warranty 

contractor make necessary repairs. In that case, Los Alamos replaced defective concrete 

at a cost of approximately $42,000 in its National Security and Science Building within 

nine months after accepting the facility. 

The Laboratories had not implemented effective controls to ensure that the warranty provisions 

specified in contracts were enforced. For 37 of the 40 work orders where the Laboratories 

performed work to repair or replace "in-warranty" items, we found that Project Managers did not 

provide warranty documentation, including warranty start dates or points of contacts from which 

to seek remedy, to personnel responsible for requesting, planning and performing work orders. 

Of particular note, Los Alamos' Project Acceptance and Closeout Procedure did not require 

construction Project Managers to transfer warranty documentation to facility operations 

personnel upon construction completion. As such, personnel were sometimes unaware of 

warranty options available.

Although personnel at Los Alamos and Livermore were aware that warranties may have existed 

for the remaining three work orders we examined, they did not have accurate or complete 

information to request warranty repairs. Initially, Livermore officials told us that the warranty 

for defective tile work was not exercised because management thought the warranty had expired. 

We found, however, that it actually was enforceable for about another two months under the 

construction contract. Subsequently, Livermore officials stated that they contacted the 

subcontractor and designer who cited the adhesive failure as a design error; however Livermore 

could not provide any documentary evidence to that effect. Livermore could have pursued 

correcting the tile problem under the architect's responsibilities for errors and omissions but had 

stopped tracking such design issues two years prior to final acceptance of the building. For the 

other two work orders, Los Alamos decided to perform the work themselves after the contractors 

were unresponsive to their requests to perform under the terms of the warranty. In these cases, 
3

Los Alamos managers were unaware that they could or were responsible for seeking 

indemnification from the contractors for the repair work.

Managers also told us, as a general observation, that it may not always be cost effective to 

exercise a warranty. We found this argument unpersuasive since the Laboratories did not 

perform cost benefit analyses to determine if it was cost-effective prior to performing work on 

in-warranty items. Further, unless management requests that contractors repair and replace 

defective work, the Laboratories cannot be certain that any additional costs will be incurred in 

exercising the warranties.

Warranties that were not exercised during the warranty period resulted in unnecessary repair 

costs. Based on a projection of our statistical sample of work orders, the three Laboratories 

likely incurred at least $1.5 million by performing repairs that were covered by a warranty 

between FYs 2004 and 2008. Unnecessary repair costs, also, reduced funds available for direct 

mission and other mission support work. In addition, the Laboratories increased the risk of 

voiding warranties and decreased the opportunities to seek remediation when construction 

contractors or equipment manufacturers were not notified prior to making the repairs. This risk 

could impact corrective actions since warranties generally require that the contractor be provided

the opportunity to remedy defects. To reduce unnecessary expenses, we made recommendations 

to improve the use of warranties to protect the Government's interest.

MANAGEMENT REACTION

NNSA management agreed with the report and the recommendations. Management's comments 

have been provided in their entirety in Appendix 3. 

Attachments

cc: Administrator, National Nuclear Security Administration

Deputy Secretary

Chief of Staff

Acting Director, Office of Project Management and Systems Support, NA-54

Director, Office of Acquisition and Supply Management, NA-63

Director, Office of Engineering and Construction Management MA-50

Director, Office of Risk Management, CF-80

Director, Office of Internal Controls, NA-66

Team Leader, Office of Risk Management, CF- 80

Audit Resolution Specialist, Office of Risk Management, CF-80
REPORT ON MANAGEMENT CONTROLS OVER WARRANTIES

INVOLVING NEWLY CONSTRUCTED AND RENOVATED FACILITIES

TABLE OF 

CONTENTS

Use of Warranties for Newly Constructed and Renovated Facilities

Details of Finding 1

Recommendations 4

Comments 5

Appendices

1. Objective, Scope, and Methodology 6

2. Prior Reports 8

3. Management Comments 9
Use of Warranties For Newly Constructed and Renovated Facilities

Page 1 Details of Finding

Use of Warranties The National Nuclear Security Administration's (NNSA) Lawrence 

for Newly Livermore (Livermore), Sandia (Sandia), and Los Alamos (Los 

Constructed and Alamos) National Laboratories (Laboratories) had not always 

Renovated Facilities exercised contract warranties to correct defects in equipment, 

material, workmanship or design in the construction of facilities. 

Rather, the Laboratories performed repair work themselves even 

though the defect was covered by a contract warranty. One of the 

Laboratories also did not seek indemnification from contractors 

that did not satisfy warranty provisions.

Laboratory Warranty Work

NNSA's Laboratories performed work that was covered by 

warranties. Through the inclusion of contract terms, NNSA 

Laboratories required construction contractors to warranty that 

their work conformed to contract requirements and was free of any 

defects in equipment, material, workmanship, or design for up to

one year after final acceptance of the work. Furthermore, when a 

contractor fails to remedy a defect within a reasonable amount of 

time after receipt of notice, the standard Laboratory contract terms 

allow for the replacement or repair of the defect or damage at the 

contractor's expense. To evaluate compliance with these terms we 

statistically selected and reviewed 172 work orders performed 

between October 1, 2004, and September 30, 2008, at 30 facilities 

located at the three Laboratories. Our testing revealed that 40 

work orders (23 percent) were for repairs that were covered by 

contract warranty provisions. For example:

Livermore repaired tile floors that began to uplift at its 

TeraScale Simulation Facility (TSF). Within the first 10 

months of final acceptance, Livermore made 6 different 

repairs to the tiles in the TSF. According to Livermore 

personnel, the adhesive did not adhere and caused the tile 

to bubble. Maintenance personnel stated that the adhesive 

was not applied correctly. Initially, Livermore officials 

told us that the warranty for tile work was not exercised 

because management thought that it had expired. 

Subsequently, Livermore officials told us they the 

Laboratory notified the tile subcontractor and designer, 

almost one year after final acceptance, and both agreed the 

tile problem was a design issue. Livermore, however, 

could not provide any documentary evidence of the 

designer's acceptance that there was a design issue. Under 

the terms of the design subcontract, the tile problem would 

have been covered under the designer's errors and 

omissions clause which, in effect, provides a warranty 
Page 2 Details of Finding

against defects caused by errors and omissions in the 

design. We found, however, that Livermore ceased 

tracking design errors and omissions for this facility 

approximately two years prior to the final acceptance of the 

building. Livermore spent approximately $40,000 to repair 

the tile and did not seek remedy for the repairs. 

Sandia replaced a heating and ventilation unit at its 

Central Utility Building that, according to technicians, was 

defective and repaired prior to being replaced. Even 

though management acknowledged that the warranty 

should have been extended due to prior repairs, Sandia 

spent approximately $20,000 to replace the unit. At its 

Microsystems and Engineering Sciences Application 

Facility, Sandia spent approximately $3,000 to replace 

defective and unreliable automatic flush units with manual 

units. Sandia performed these repairs less than one year 

after these facilities were completed.

Los Alamos did not seek indemnification after they 

replaced defective concrete at its National Security and 

Science Building (NSSB) at cost of approximately 

$42,000. After efforts to have the contractor repair the 

defective concrete failed, Los Alamos replaced the 

concrete themselves but did not seek remedy for the cost 

of the repairs. In the same building, Los Alamos also 

replaced a pipe fitting that did not meet specifications and 

failed. The improper fitting resulted in flooding which 

damaged equipment, walls, and ceilings. Los Alamos 

spent over $20,000 to replace the fitting and repair the 

damage. In both cases, Los Alamos performed the work 

less than one year after the facility was completed.

Laboratory Laboratories did not ensure that warranty provisions included in 

Controls construction contracts were enforced. In 37 of the 40 work orders

reviewed, the Laboratories did not provide warranty documentation 

to personnel responsible for requesting, planning and performing 

work orders. Therefore, personnel responsible for authorizing 

repairs on newly constructed or renovated facilities and its 

equipment were unaware that a warranty existed. At Los Alamos, 

for example, the Project Acceptance and Closeout Procedure, in 

effect at the time of our audit, did not require construction project 

managers to transfer warranties to facility operations personnel. 

Even though Los Alamos updated the Project Acceptance and 

Closeout Procedure in September 2009, the procedure did not 
Page 3 Details of Finding

address how construction project managers should transfer 

warranty information to building operations managers. Sandia had 

a process for transferring warranties, however, it did not track 

warranties for materials, workmanship and design. For example, 

Sandia's warranty database did not have a warranty recorded for 

the flush valves that were replaced during the warranty period.

In 3 of the 40 work orders, Los Alamos and Livermore 

management were aware that work on newly constructed facilities 

was warranted for defective equipment, materials or designs; 

however, incomplete and inaccurate information was available to 

the managers of the new facilities. For example, Livermore 

management told us they assumed the wrong warranty start date 

since not all warranty information, including the start date, had 

been accurately transferred. Livermore replaced the tiles in the 

TSF because, according to the Facility Manager, she thought the 

warranty had expired. Livermore also pointed out that it did not 

have recourse to obtain reimbursement since the amount of design 

errors and omissions for the facility was under a prescribed 

industry standard percentage. This industry standard, however, 

was not identified as a part of the contract provisions. In addition, 

as previously noted, Livermore stopped tracking design errors and 

omission approximately two years prior to final acceptance of the 

building.

Los Alamos was aware of the warranty provisions and tried to 

contact the warranty contractor to invoke the warranties associated 

with two of the work orders. Los Alamos managers, however, told 

us they did not know they could seek indemnification for replacing 

the concrete at the NSSB after the contractor was unresponsive to 

their request to remediate the defect under the warranty. 

We also found that Laboratories had not established requirements 

regarding the exercise of warranties and that, in some cases, the 

exercise of warranties were not regarded as cost-effective. None 

of the Laboratories, for example, had established policies or 

procedures requiring managers to pursue indemnification from 

contractors who failed to fulfill their responsibilities under 

warranties. Management also told us, as a general observation, 

that it is often more cost-effective for them to repair defective 

work than to pursue a warranty.

In each case we reviewed, however, the Laboratories had not 

performed a cost benefit analysis to verify that it was cheaper to 

perform the warranty repairs rather than require the contractors to 

perform work. For example, Livermore management stated that if
Page 4 Recommendations

they would have realized a warranty for repairing tile at the TSF 

was still in effect, they would not have pursued the warranty since 

the legal cost associated with pursuing the warranty may have 

exceeded the cost of the repair. Although the design contractor 

agreed to the design error, a cost resolution was not communicated 

with the design contractor prior to Livermore repairing the tile. 

Therefore, it was unclear if the contractor would have contested 

the applicability of the warranty and that any legal costs would be 

incurred. Additionally, we were unable to determine whether 

Livermore performed a cost benefit analysis regarding the floor tile 

repairs due to conflicting statements by Livermore officials about 

whether such an analysis had been performed and a lack of 

documentation. 

Warranty Repair Costs Warranty repairs made by the Laboratories to newly constructed 

and renovated facilities resulted in unnecessary costs. We 

estimated, based on our statistical sample of work orders, that the 

Laboratories may have incurred at least $1.5 million between 

Fiscal Years 2004 and 2008 on repairs that were covered by 

warranties. Unnecessary repair costs also could have reduced 

funds available for direct mission and other mission support work. 

The Laboratories also potentially voided warranties and reduced 

their opportunities for remediation when repairs or modifications 

were made prior to notifying the manufacturer since warranties 

generally require that the contractor be provided the opportunity to 

remedy defects.

RECOMMENDATIONS We recommend that the Managers, Livermore, Sandia, and Los 

Alamos Site Offices, direct their respective site contractors to 

develop and implement controls to:

1. Ensure that warranties are transferred between project 

management and facility operations personnel and that 

warranty information, including warranty start dates, and 

extensions are accessible to personnel responsible for 

requesting, planning and performing and authorizing work 

orders;

2. Seek remedy when manufacturers or construction 

contractors fail to remedy failures, defects or damage; and,

3. Analyze whether invoking a warranty or performing the 

work themselves is most cost effective prior to starting the 

work. 
Page 5 Comments

We also recommend that the Contracting Officers at each site 

determine whether the repair costs that were covered by a warranty 

were reasonable and allowable.

MANAGEMENT AND NNSA management agreed with the report and stated that the

AUDITOR COMMENTS recommendations to improve the management of warranties were

reasonable. The Livermore Site Office provided technical 

comments on a draft of this report. We made changes to the 

report, where appropriate, to address management's comments. 

Management's comments are included in their entirety in 

Appendix 3.
Appendix 1

Page 6 Objective, Scope, and Methodology

OBJECTIVE The objective of this audit was to determine if the National 

Nuclear Security Administration (NNSA) Laboratories exercised 

contract warranties to correct defects in equipment, material, 

workmanship, or design of newly constructed and renovated 

facilities.

SCOPE The audit was performed between July 2008 and April 2010 at 

Lawrence Livermore, Sandia, and Los Alamos National 

Laboratories (Laboratories). Our review included a statistical, 

dollar unit sample of work orders for repairs to newly constructed 

and renovated facilities and associated equipment between Fiscal 

Years (FY) 2004 and 2008.

METHODOLOGY To accomplish the objective, we:

Reviewed Federal regulations and Department of Energy 

directives and guidance pertaining to invoking and 

transferring warranties;

Reviewed reports issued by the Government 

Accountability Office and the Office of Inspector General;

Reviewed work orders requesting repairs for newly 

constructed and renovated facilities and associated 

equipment between FYs 2004 and 2008;

Held discussions with NNSA program officials and site 

offices as well as Laboratory project and facility 

management personnel; 

Performed physical observations at the Laboratories of 

repairs that were made to items under warranty; and,

Projected the estimated cost of performing warranty work 

using the Defense Contract Audit Agency's E-Z Quant 

Sampling Program, using a Dollar Unit Variable Sampling 

technique. 

We conducted this performance audit in accordance with generally 

accepted Government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe the 

evidence obtained provides a reasonable basis for our findings and 
Appendix 1 (continued)

Page 7 Objective, Scope, and Methodology

conclusions based on our audit objectives. The audit included tests 

of internal controls and compliance with laws and regulations to 

the extent necessary to satisfy the audit objective. Because our 

review was limited, it would not necessarily have disclosed all 

internal control deficiencies that may have existed at the time of 

our audit. We also reviewed performance measures in accordance 

with the Government Performance and Results Act of 1993 

relevant to facilities management. We found that the Laboratories 

did not have performance measures related to the audit objective. 

We did not rely solely on computer-processed data to satisfy our 

objectives. However, in those instances where we did utilize 

computer-processed data, we confirmed the validity of the data, 

when appropriate, by reviewing supporting source documents. 

NNSA management waived an exit conference.
Appendix 2

Page 8 Prior Reports

PRIOR REPORTS

Office of Inspector General Reports

Work Order Estimate and Cost Issues for Site Support Services at Los Alamos National 

Laboratory (DOE/IG-0780, October 2007). A review of work order task estimates 

revealed that a systemic problem existed in that actual costs frequently exceeded 

estimates, often by significant amounts. In one case, actual cost exceeded estimates by 

more than $100,000. In addition, there were significant issues relating to how the support 

service labor and material charges were calculated. For example, one employee charged 

35 hours to a work order after the work was completed. This happened because the Los 

Alamos National Laboratory did not use established controls that limited the amount that 

support services could exceed estimated costs. 
Appendix 3

Page 9 Management Comments
IG Report No. OAS-M-10-02

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