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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

    DOE'S FIXED-PRICE CLEANUP CONTRACTS: WHY ARE COSTS STILL OUT OF 
                                CONTROL?

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 22, 2000

                               __________

                           Serial No. 106-137

                               __________

            Printed for the use of the Committee on Commerce

                    U.S. GOVERNMENT PRINTING OFFICE
65-911CC                    WASHINGTON : 2000

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

              Subcommittee on Oversight and Investigations

                     FRED UPTON, Michigan, Chairman

JOE BARTON, Texas                    RON KLINK, Pennsylvania
CHRISTOPHER COX, California          HENRY A. WAXMAN, California
RICHARD BURR, North Carolina         BART STUPAK, Michigan
  Vice Chairman                      GENE GREEN, Texas
BRIAN P. BILBRAY, California         KAREN McCARTHY, Missouri
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  JOHN D. DINGELL, Michigan,
ED BRYANT, Tennessee                   (Ex Officio)
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Glauthier, T.J., Deputy Secretary, accompanied by Carolyn 
      Huntoon, Assistant Secretary for Environmental Management, 
      U.S. Department of Energy..................................    11
    Jones, Gary L., Associate Director, Energy, Resources, and 
      Sciences Issues, accompanied by William Swick, Assistant 
      Director, U.S. General Accounting Office...................    25
    Miskimin, Paul A., President and Chief Executive Officer, 
      BNFL Inc...................................................    68
Material submitted for the record by:
    Glauthier, T.J., Deputy Secretary, U.S. Department of Energy, 
      responses for the record...................................    85
    Miskimin, Paul A., President and Chief Executive Officer, 
      BNFL Inc. letter dated August 4, 2000, enclosing response 
      for the record.............................................    82

                                 (iii)

  

 
    DOE'S FIXED-PRICE CLEANUP CONTRACTS: WHY ARE COSTS STILL OUT OF 
                                CONTROL?

                              ----------                              

                        THURSDAY, JUNE 22, 2000

                  House of Representatives,
                             Committee on Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2322, Rayburn House Office Building, Hon. Fred Upton 
(chairman) presiding.
    Members present: Representatives Upton, Burr, Bilbray, 
Bryant, Bliley (ex officio) and Stupak.
    Staff present: Dwight Cates, majority investigator; Anthony 
Habib, clerk; and Edith Holleman, minority investigator.
    Mr. Upton. Good morning, everyone. We're going to get 
started. I know Chairman Bliley has a very busy schedule this 
morning, as we all do, but in deference to that, I'm going to 
let him make the opening statement first, and I will follow.
    Chairman Bliley. Thank you very much, Mr. Chairman. Thank 
you for holding this important hearing to review the Department 
of Energy's efforts at fixed-price contracting.
    Throughout the 1990's, the Clinton-Gore administration 
initiated several important contract reform initiatives, 
including fixed-price contracting. Unfortunately, we are here 
to assess why another good reform effort has failed.
    In October 1998, the subcommittee held a hearing to review 
the Department's fixed-price contract with BNFL to clean up 
radioactive waste at Hanford. At the hearing the subcommittee 
heard from BNFL's CEO Mr. Tom Crimmins, who made a series of 
important commitments regarding BNFL's future performance under 
this contract. Surprisingly on the same day of the hearing, 
just 2 hours after his testimony, Mr. Crimmins was informed by 
the BNFL board of directors that he should resign effective 
immediately. We later found out that the BNFL board voted to 
seek his resignation well before the hearing, but did not 
inform him until after his hearing testimony.
    Given BNFL's conduct on the Hanford Project since that 
hearing, I am concerned that BNFL board allowed Mr. Crimmins to 
make what now seem to be empty commitments to the subcommittee.
    Secretary Richardson recently stated that BNFL's recent 
proposal at Hanford was outrageously expensive and inadequate 
in many ways. What is more outrageous, however, is that DOE 
failed to monitor the company's performance or to determine 
that BNFL was off the mark from the very beginning. Clearly if 
DOE were properly overseeing this contract, termination would 
have occurred much, much earlier.
    I am concerned that many of the mistakes made by DOE and 
BNFL at Hanford may also be repeated on other fixed-price 
contracts at the Oak Ridge site, the Idaho site, and I'm also 
concerned that these troubled projects may signal the end of 
fixed-price contracting.
    We expect the Department will select reliable contractors, 
negotiate sound contracts, and effectively manage major cleanup 
projects once they begin. The Department is ultimately and 
directly accountable for cost overruns or schedule delays 
whenever they occur. As a result of continued poor management 
and a lack of leadership from the Department, fixed-price 
contracting is experiencing serious problems. However, we 
cannot afford a return to the old cost plus gravy train 
contracting methods, but we also cannot afford to waste 
hundreds of millions of dollars and several years of poorly 
managed reform efforts. We need management consistency, 
meaningful contract reform, and a track record of cost control 
and successful cleanups at DOE sites.
    I am interested in today's testimony, and I thank the 
Chairman for this hearing, and I thank him for deferring to me 
for this opening statement.
    Mr. Upton. Thank you, Mr. Chairman.
    Welcome, everyone.
    Approximately 80 percent of the Department of Energy's 
annual budget flows directly to its site contractors, which 
employ more than 100,000 personnel across the DOE complex. 
Historically, the Department has relied on cost plus contracts 
which provide full reimbursement for its contractors' incurred 
cost plus a profit regardless of the contractor's performance.
    Cost-plus contracting seemed to work during the cold war 
when the government demanded the aggressive buildup of 
increasingly complex weapons systems. However, today the 
Department's largest budgetary responsibility is, in fact, 
environmental cleanup. Unfortunately, cleanup work under the 
Department's cost-plus contracts has resulted in a dismal and 
predictable record of cost overruns and schedule delays on 
several major cleanup projects. Many of the DOE's more costly 
mistakes, including the spiraling cost overruns at Hanford 
Spent Nuclear Fuel Project, have been well documented by this 
subcommittee in the past.
    In an attempt to turn the tide on DOE's cost-plus 
contracting problems, in 1995, former Secretary O'Leary 
introduced fixed-price contracting as a central contract reform 
initiative. Fixed-price contracts were intended to shift more 
of the risks associated with technical cost and schedule 
performance to the contractor. Many fixed-price contracts 
require the contractor to privately finance the cleanup work, 
and the contractor is paid only after successfully cleaning up 
the waste.
    Unfortunately, many of the Department's fixed-price 
contracts are experiencing the same problems experienced under 
cost-plus contracts. Today this subcommittee will review the 
Department's largest fixed-price contracts to assess why DOE 
has failed to control spiraling cost growth and contractor 
performance problems.
    This hearing is not the subcommittee's first hearing on 
fixed-price contracting. In the June 1997 oversight hearing, 
the subcommittee revealed the terrible outcome of the 
Department's first fixed-price-cleanup contract, the famous Pit 
9 disaster. Announced in 1995 with great fanfare by former 
Secretary O'Leary, the Pit 9 fixed-price contract with Lockheed 
Martin was supposed to cost a total of $200 million to complete 
cleanup of radioactive waste stored in thousands of barrels 
buried underground at the Idaho site. Due to a dispute 
regarding technology in waste characterization issues, Lockheed 
Martin stopped work at Pit 9. Nothing got cleaned up. DOE 
terminated the contract, and today Lockheed Martin is suing DOE 
for $271 million. A $200 million fixed-price contract with 
Lockheed Martin resulted in zero cleanup and a $271 million 
lawsuit against DOE.
    The purpose of the subcommittee's Pit 9 hearing was to 
highlight the Department's management problems so that other 
fixed-price contracts would not fail. At the hearing Secretary 
Pena promised the Department had learned from Pit 9's mistakes, 
provided a list of valuable lessons DOE would apply to its 
portfolio of new fixed-price contracts, including a $6.9 
billion Hanford tank waste contract, $1.2 billion advanced 
mixed waste contract at Idaho, and $238 million Oak Ridge 
Metals Recycling Project. Unfortunately when Secretary Pena 
left the Department in 1998, he took these valuable secrets 
with him because each of these fixed-price contracts are still 
experiencing schedule delays, cost overruns, and performance 
problems.
    The subcommittee held its second hearing on fixed-price 
contracting in October 1998 to review the Hanford tank waste 
contract. DOE's contractor, BNFL, originally proposed a total 
fixed price of $6.9 billion in August 1998 and began a 2-year 
design phase that would have been completed this summer, and at 
the 1998 hearing the subcommittee raised serious questions 
about the technical and financial risks associated with this 
first-of-its-kind effort.
    GAO called for DOE to closely oversee BNFL's work. The 
Department and BNFL assured the subcommittee then that all the 
bases were covered. However, just a few weeks ago, BNFL decided 
to revise its $6.9 billion fixed price a little bit and double 
it to $15.2 billion. BNFL's announcement shocked the 
Department. Secretary Richardson quickly decided not to proceed 
with BNFL. Unfortunately, DOE's oversight failed to anticipate 
these events and now the Department is scrambling to figure out 
how to proceed with the cleanup of Hanford's radioactive waste.
    DOE is also having trouble with its fixed-price contract 
with BNFL at the Oak Ridge site as well as the Idaho site. At 
Oak Ridge, BNFL agreed in 1997 to a $238 million contract to 
decontaminate and recycle metal from three buildings in the Oak 
Ridge complex. Last month DOE informed the committee that BNFL 
had formally requested an additional $116 million for the 
contract. DOE also told us BNFL plans to submit a request for 
another $54 million. Additionally, DOE may have to pay BNFL $40 
million to cover the cost of Secretary Richardson's decision to 
prevent BNFL from recycling contaminated nickel. In all, these 
cost increases could nearly double the price of the original 
$238 million contract, and that's nothing fixed about the price 
of the contract.
    At the Idaho site, the $1.2 billion advanced mixed waste 
contract is also headed toward some trouble. According to the 
GAO, the project is falling behind schedule due to difficulties 
associated with obtaining environmental permits which are the 
result of changes in the technical scope of the contract. The 
delayed environmental permits have delayed construction of the 
treatment facilities resulting in cost increases of at least 
$44 million above the original contract price, and these costs 
continue to increase, particularly if additional schedule 
delays are experienced. Technical uncertainties remain 
regarding the significant portion of the waste, up to 22 
percent of the waste, that raise additional questions about 
whether the project will meet future schedule and cost 
milestones.
    Today we are looking for answers, continue to look for 
answers as to why the Department's fixed-price contracts have 
failed to control cleanup costs or improve contract 
performance. All indications are that the Department has again 
failed to follow through on yet another important contract 
reform effort. Taxpayers always deserve better from DOE and its 
contractors in this particular mess. I look forward to hearing 
from today's witnesses on how we can fix these fixed-price 
contracts.
    I yield to the gentleman from the great State of Michigan 
Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman. For more than a 
decade, and particularly after the end of the cold war, this 
committee, the General Accounting Office, and others have been 
dissatisfied with the cost and progress of cleanup work at our 
nuclear weapons productionsites. There was a general consensus 
that the Department was not capable of managing these contracts 
in a cost-effective manner, and that it should turn them over 
to industry, which would compete for these contracts in the 
same manner they do in the private world.
    One of the most recent and worst examples of what could 
happen under the old cost-plus system was the in Tank 
Precipitator Project at Savannah River. This project began in 
1982 by the then prime contractor at the site. Problems with 
the technology that surfaced in 1983 were hidden. By 1992, 
there were warnings from the GAO, DOE red teams and others that 
the technology might not work, but the project went on and on 
through many administrations and many Secretaries as the 
contractors made continuous promises that the technology could 
be fixed, and DOE accepted them. Over $500 million was spent on 
a technology that produced so much benzene that it could not be 
operated. The lack of a precipitator delayed a larger project. 
There was no congressional oversight because the site contract 
hid the costs in its operation budget.
    Finally in 1999, GAO did a report for Mr. Dingell of this 
committee laying out the financial wasteland that this project 
had become. To his credit, Secretary Richardson, within days of 
learning of the report, removed the contractor.
    I must point out that by 1991, before this administration 
came into office, Congress and the General Accounting Office 
and the Department were more than ready to try something else. 
Various private contractors said they could complete cleanups 
faster and cheaper if they had more control. Pit 9, a small 
site in Idaho, was chosen as a pilot for using a fixed-price 
contract with all the risk on the contractor. The idea was no 
cleanup, no payment.
    We all know what happened. The waste wasn't fully 
identified. The technology did not work the way it was supposed 
to, and the price skyrocketed to the point where the contractor 
begged for a cost-plus contract. When denied, the contractor 
stopped work and was declared in default by DOE. The contractor 
and DOE are in court trying to settle their disputes about who 
is going to pay for what. The cleanup has not occurred, but 
this was not Savannah River. At least DOE had not spent money 
for years on a project that did not work.
    Projects that we will look at today each have a different 
story. Unlike Pit 9, these projects all have some level of 
success and forward movement. More importantly, taxpayer 
dollars have not been mindlessly spent for years on 
nonperforming contractors. When the cost estimates for the 
Hanford Tank Remediation Project came in, that was in April, at 
$15.2 billion, double the goal price set by BNFL in 1998, 
Secretary Richardson again moved quickly to terminate the 
contract and establish an alternative approach to cleaning--
alternative approach to contracting for cleanup. The contract 
itself established this off-ramp.
    It appears that the design completed at this stage is 
acceptable, but the government is not willing to accept the 
large contingencies that BNFL built into its financial 
projections. At Oak Ridge, BNFL is requesting significant 
contract price adjustments at Oak Ridge. There is dispute over 
the recycling of radioactive materials, but the cleanup of the 
site is not in question. It appears, moreover, that BNFL will 
absorb the majority of these additional costs and not the 
government, particularly if this committee maintains its 
oversight. That is exactly what a good fixed-price contract 
that puts the risk on the contractor should achieve.
    Another project, Mr. Chairman, the Advanced Mixed Waste 
Project in Idaho, is moving forward successfully at the design 
phase. Although State construction permits have not yet been 
received because of the contract provisions, DOE has spent very 
little money on this project to date while the contractor has 
spent over $100 million. It is too early to tell if the long-
term cleanup schedule in the budget will be met, but BNFL is 
not taking all the risk here. The contract contains a 5-year 
adjustment provision that will allow an increase in the price 
paid for treatment by DOE if BNFL's actual costs are greater 
than anticipated.
    The question for us today, Mr. Chairman, is not whether 
these contracts have gone forward without a single bump in the 
road, but whether this approach to contracting will result in 
smaller government outlays and more successful cleanups over 
the long run. What adjustments in approach should be made? I 
look forward to hearing positive suggestions from all the 
parties present today, including those on the dais, but perhaps 
we will finally admit that there is no silver bullet when it 
comes to cleaning up a 50-year legacy of our nuclear weapons 
production.
    With that, Mr. Chairman, I yield back the balance of my 
time.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. I thank the Chairman. I appreciate our panel of 
witnesses for coming. I know it's been a very difficult period 
of time for the Department of Energy recently, and not to make 
it too light, but I am pleased that the hard drives were 
recovered behind the Xerox machine. My only concern is I hope 
the scientists weren't trying to copy it. It's supposed to be a 
little bit of humor there. You all can loosen up a little bit.
    I did want to, as I sat and listened to our full committee 
Chairman's statement, and our subcommittee chairman's 
statement, say that I couldn't agree more, and I want to adopt 
both of those gentlemen's statements as well as my friend from 
Michigan Mr. Stupak's statement. It just seems to me as I read 
through the materials yesterday in preparation for this 
hearing, this is one of those just terribly frustrating things 
that I heard about before I came to Washington. Things that you 
can turn on the TV and expect to see on 60 Minutes or Dateline 
or something like that, and it is--I know it has to be 
frustrating to you and to the contractors, but it's terribly 
frustrating to us in Congress who have to go back home and go 
in front of people at town meetings and explain to them why 
this happens. Because there will be a story about this, and 
probably at some point one of the networks will pick it up and 
make an example out of it, as they should.
    I just cannot imagine this type of situation being allowed 
to exist in the private sector where all parties are in the 
private sector. I cannot accept that fact that more care is not 
taken in drawing up the specifications, the bid specifications, 
and letting the people bidding on that contract know precisely 
what you need, what you want. That way you avoid all these 
subsequent changes and things that are so expensive. And it 
just seems like if a better job was done on the bid 
specifications, and maybe that takes more work to decide what 
we want out of this and not end up with things like this $40 
million overrun because we can't allow BNFL to recycle this 
material in Oak Ridge.
    The second phase, negotiations of this contract. If you 
have good bid specifications out there, know what you want to 
do, both sides understand that, they don't come in after the 
fact and say, well, we didn't understand that, or we couldn't 
see this or that and we underbid, but negotiate. Good 
negotiations, arm's-length, in terms of what's out there, 
whether it's a bid process or negotiations, I don't know. And 
then importantly, as all speakers will talk about today, 
clearly better oversight is needed to make sure these overrides 
don't occur.
    I think in the past, particularly through the cost-plus 
contracts, again, you just have the opportunity to make all 
kinds of money there by running up the costs. We are trying to 
go to a better system. I think the fixed-price contract is the 
way to go, but the way it is being handled through this process 
I just described is not working either, and I think many people 
have grown in the government sector to rely upon the generosity 
of the government and knowing well if there is an overrun, they 
are going to pay for it. They have deep pockets.
    Again, I have a difficult time imagining something like 
this happening in a truly private-sector situation where they 
know big government is not back there to stand behind whoever 
made the mistake in the process. We seem to be in here always 
whining and moaning and groaning about these kinds of things, 
but there's a reason we do it, and we just hope for better. And 
I would yield back my time.
    Mr. Upton. Thank you.
    Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman. I have a superb opening 
statement, but I would like to ask that it be entered into the 
record and just make some general comments.
    Mr. Upton. It has to be unanimous consent.
    Mr. Burr. The gentleman would ask unanimous consent that 
his full opening statement be listed in the record.
    Mr. Bryant raises a very important question. Is this really 
the movie Groundhog Day, and do we just go over and over and 
over? I know the Secretary is tired of us drilling him on the 
same thing, but the fact is that the tool that we used to gauge 
our success or our failure is the General Accounting Office and 
their assessment. If they are not the appropriate ones, then we 
need to determine who is, and we need to bring them in and 
serve as a referee and try to tell DOE, you've done a good job 
or a bad job, or, contractor, you've done a good job or a bad 
job.
    But there's absolutely no substitute under a fixed-price 
contract for not being specific in the contract for what it is 
you want done, and it seems like every fixed-price contract 
that this committee has looked at allows tremendous 
opportunities for the unknown, and for the unknown to be later 
billed for, and for DOE to at that time make an assessment as 
to whether they want it done or don't want it done. That's not 
fixed price. That's not clearly defined.
    And I think the GAO made a very valid statement in their 
testimony, and that is, we're applying fixed-price contracts to 
things that you can't do it on, because if you don't know what 
needs to be cleaned up, how in the world can you ask somebody 
to bid with accuracy. And in the absence of being able to do 
that and to bid with accuracy, we say, there's a fudge factor 
over here, and then we are amazed when new numbers begin to 
come in.
    If, in fact, the Secretary was shocked, surprised, angered, 
whatever the description is, that Hanford moved from a $6.9 
billion to a $15 billion cost--I'd like to have the line 
manager from DOE who is over that site come in and tell me he 
didn't know that it was going to increase. I believe he would 
probably tell us in all honesty he knew it. I don't believe it 
was a surprise to the Secretary. If it was, somebody ought to 
be fired.
    But the fact is we're not performing in a fashion that the 
taxpayers deserve. We understand this is very, very difficult 
work. We have a very small pool of people we can turn to for 
the type of cleanup that we're asking the DOE to undertake. But 
I would stress on you, Mr. Secretary, today, and to the entire 
Department, the GAO has been very specific every time they've 
come to us, and they've said, we can't tell you for sure 
something can or can't be done, but we can make you this 
assurance: Without proper oversight anything can fail. And I 
would tell you that as you look at the experiences with the 
majority of the cleanups we looked at, we can't judge whether 
they could have succeeded or they were doomed to fail, but we 
can tell you that oversight doesn't exist because with 
oversight there are not surprises, and this committee responds 
to the surprises that you expressed that happened from your 
contractors and from fixed-price contracts.
    I'm hopeful that if this is the movie Groundhog Day, that 
we'll bury this one and we won't revisit it again.
    With that, I yield back, Mr. Chairman.
    Mr. Upton. Thank you.
    Mr. Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Let me clarify. I haven't seen Groundhog Day. If it doesn't 
show on United Airlines between San Diego and Washington, I 
don't see it. But I--let me just say to my colleagues, and I 
know you get tired of hearing the years of administration 
experience that this one member keeps harping about, but I 
think we need to be sensitive to the fact that as we see these 
horrendous problems, we don't just focus on the agency or the 
bureaucracy that administrates it, but also of the universe in 
which they operate in.
    First of all, let's admit it: When government funds are 
being spent, inherently there's a lack of accountability 
because it's nobody's money. It's everybody's money. I know 
that may sound absurd until you try to administer public funds, 
and people just don't seem to get that hot and heavy about the 
fact that there was a few dollars lost here, a few million 
here. After a while it starts adding up to a few dollars. But 
that happens in cities, counties, and Federal agencies. I know 
there are some people here would be outraged at me making that 
statement, but 25 years in government, you just don't have the 
sensitivity of one person saying, this is my money that you've 
blown.
    I guess that's our job sitting here. We represent the 
people whose money is being not utilized to its maximum extent.
    On the other side, especially when we're talking about 
environmental issues, and I want my colleagues on both sides to 
really hear this, there tends to be a mentality that money 
should not be a major factor with a lot of people who work on 
environmental issues. As if--it's almost sacrilegious to talk 
about--worrying about how much money it costs for a cleanup or 
for doing a certain strategy because it's wrapped in this 
environmental blanket, and thus make it is sacred and holy, and 
it's as bad as trying to look at how much somebody is giving or 
not giving at the collection plate at church.
    I think we've got to watch out, that there are people out 
there that I call environmental Jimmy Swaggerts that wrap 
themselves in a green blanket and say, give me more money 
because the Lord above says this is what is needed, and you are 
not going to care about the environment if you don't give me 
all the money I want on this issue. Then you've got the agency 
that is sitting there saying is it cost-effective with constant 
pressure to do overkill. You never see an agency being attacked 
by, quote/unquote, oversight groups for doing too much cleanup, 
for--you never see them from that side of saying, why did they 
spend more money on this?
    That's our job is to go the other way, but you've got huge 
pressure from the other side, from a bureaucracy's point of 
view, that you catch hell for not spending enough money and not 
doing enough and everybody saying you should have covered every 
base even if it would have cost $30 million more. And I've been 
guilty of that, too, I admit it.
    So I just ask that we take a look at this. When we talk 
about cost-effectiveness, if we talk about common-sense 
approaches to cleanup and environmental strategies like this, 
that it's not just an abstract word. When you look the common 
sense, when you lose the sensitivity to the bottom line, when 
you lose the fact that we have a trust to use the public's 
funds to its best use, then that is part of protecting the 
public from environmental problems. That's part of cleanup 
using every dollar effectively.
    I think that we need to say that maybe there needs to be 
some mindset changes that are outside the agency that is 
administering this fund. I think all of us are influencing this 
mindset, but at the same time that doesn't give an excuse for 
those who are being paid higher and administered for the good 
of the agencies.
    So I would close by saying, Mr. Chairman, this is not just 
a thing of dollars and cents. For every dollar that's wasted on 
one of these contracts, that's a dollar that could have been 
used somewhere else to clean up the environment. I think we've 
got to remember that again and again, and those of us who want 
to claim to be environmentalists have got to be as serious 
about the waste and environmental cleanup as we are of the lack 
of environmental cleanup, because they both equate to the same 
thing in the long run.
    I yield back, Mr. Chairman.
    I would ask unanimous consent that all members that have 
opening statements, particularly those that are not here, will 
have a chance to enter that into the record, and without 
objection, that will be the case.
    [Additional statement submitted for the record follows:]
Prepared Statement of Hon. Ron Klink, a Representative in Congress from 
                       the State of Pennsylvania
    Mr. Chairman, thank you for holding this hearing. In August of 
1997--over the protest of the minority--this Committee signed off on a 
reprogramming request to allow the Department of Energy to sign the 
sole-source contract with British Nuclear Fuels, Ltd. (BNFL) to clean 
up the gaseous diffusion plant at Oak Ridge that we are going to 
discuss today. It was a fixed-price contract, but not a competitively 
bid contract. Staff was told at the time that the Committee's decision 
to go forward was made because of political influence. We asked the 
Committee to look at this project in 1997, and we are pleased to see 
that our request has finally been granted.
    The contract has been a disaster. It was a sole source contract 
with a questionable procurement history that has never been 
satisfactorily explained. Its unusual financial structure was 
completely dependent upon the release of a continuous stream of 
volumetrically contaminated radioactive metal into national and global 
commerce through a non-public permitting process in the State of 
Tennessee. Thousands of tons of metal were involved. Despite all of its 
public statements that this metal would be very clean, DOE's contract 
has absolutely no clean-up standards in it. Despite all of DOE's 
representations to Congressional staff that, in England, BNFL had 
previously cleaned up and recycled volumetrically contaminated nickel 
in follow-up interviews with staff, DOE and BNFL both admitted that 
they had not done so. That metal sits in a building in England. The 
technology then selected to clean the nickel at Oak Ridge had never 
been used commercially.
    Moreover, notwithstanding statements from DOE and BNFL at that time 
that the recycled nickel will be used only in motorcycle batteries sold 
in Europe and Asia, there was no requirement that this be done. The 
expected battery factory with 500 'ohs in Oak Ridge disappeared almost 
as soon as the contract was signed.
    Mr. Chairman, it is well known that the American public has a 
visceral negative reaction to having radiation deliberately inserted in 
its products. The Nuclear Regulatory Commission has no standard for the 
free release of radioactively contaminated materials. This contract 
represented the first time that the Department of Energy had 
transferred knowingly contaminated materials to a contractor before 
cleaning it up to what are known as ALARA--or ``as low as reasonably 
possible'' standards. It violated DOE's own order for releasing 
volumetrically contaminated materials. And because the license for 
release was granted by the State of Tennessee, it was done secretly 
without notice to or input from either the scrap metal dealers and the 
steel industry which would process this material or the public which 
would use it. No one can track free released metal once it is put into 
commerce. Would it be in our silverware, our batteries, our teeth, our 
buckles, our soda cans? If this metal resulted in the contamination of 
even one steel mill, tens of millions of dollars in cost would be 
shifted to an unsuspecting party.
    We have come a long way since that time. After many meetings with 
the steel industry, labor unions, environmental groups and others, 
Secretary Richardson has halted the recycling of radioactive metal from 
the DOE complex contemplated in this contract and is looking at ways to 
use it within the complex. He set up a task force to review the 
Department's policies concerning the release of all radioactively 
contaminated materials, not just metal. I must thank him for the 
personal attention and the departmental resources that he has given to 
this issue.
    Recently, I introduced H.R. 4566, the Steel and Metals Consumers 
Radioactivity Protection Act, or the SCRAP Act, to protect steelworkers 
and the American public from excessive radioactivity in the products 
they make and use. The bill provides that scrap metal will not be 
recycled until a standard is set--through an open and public process--
to control the release of radioactively contaminated scrap across state 
and international boundaries.
    But we also have more routine problems in the Oak Ridge contract. 
There are cost overruns and the usual disputes over who knew what when 
the contract was signed. BNFL wants significant cost adjustments that 
would add 50 percent or more to the final price. As Lockheed Martin 
learned at Pit 9, it is extremely difficult for a contractor to 
successfully complete a fixed-price contract for cleaning up DOE's 
radioactive waste. The technological and other unknowns are too large. 
These projects are never as they appear to be.
    The question we must answer today is whether the problems would 
have been even worse under the traditional cost-plus contract. We 
cannot answer that question, although my inclination is to believe that 
the costs would have been even greater under the old system. Perhaps we 
in Congress must face the reality that these projects are much more 
complex, much more risky and much less certain than almost any other 
clean-up projects we have undertaken. They are not the same as building 
an office structure. Perhaps these contracts should be broken down into 
parts that can be accomplished with a fixed-price contract and those 
that cannot. I look forward to a further discussion on these matters.

    Mr. Upton. Our first two witnesses today include the 
Honorable T.J. Glauthier, Deputy Secretary of the Department of 
Energy; Ms. Gary Jones, Associate Director, Energy Resources 
and Sciences Issues, from the U.S. General Accounting Office. 
Welcome. You both have been before us before. You know our 
subcommittee rules, and it has been a long-standing tradition 
to take testimony under oath. Do either of you have objection 
to that? And if you would also perhaps identify the folks that 
are next to you.
    Ms. Jones. I have with me William Swick, who is an 
Assistant Director with GAO, and who is responsible for the 
direct work on the three projects that we're talking about 
today.
    Mr. Glauthier. I have with me Carolyn Huntoon, who is the 
Assistant Secretary for Environmental Management at the 
Department of Energy.
    Mr. Upton. Thank you. Committee rules also allow you to be 
represented by counsel if you wish that. I didn't think so.
    If you'd stand and raise your right hand.
    [Witnesses sworn.]
    Mr. Upton. You are now under oath. I would just like to 
note that we'll have a number of members, I'm sure, come and go 
during this hearing, and I know for myself I have a couple of 
amendments on the floor with my name on them that I'm going to 
be needing to participate on the House floor. So your 
statements are made in their entirety as part of the record, 
and at this time we'd like you to take some time, up to 5 
minutes or so, to summarize that.
    Mr. Glauthier, we'll start with you. Welcome.

 TESTIMONY OF T.J. GLAUTHIER, DEPUTY SECRETARY, ACCOMPANIED BY 
    CAROLYN HUNTOON, ASSISTANT SECRETARY FOR ENVIRONMENTAL 
   MANAGEMENT, U.S. DEPARTMENT OF ENERGY; AND GARY L. JONES, 
  ASSOCIATE DIRECTOR, ENERGY, RESOURCES, AND SCIENCES ISSUES, 
ACCOMPANIED BY WILLIAM SWICK, ASSISTANT DIRECTOR, U.S. GENERAL 
                       ACCOUNTING OFFICE

    Mr. Glauthier. Thank you very much, Mr. Chairman and 
members. I was struck by the opening comments of Mr. Bryant and 
Mr. Burr. I have seen the Groundhog Day film and lately have 
felt that that's what we're in with the security hearings that 
we've been talking about. It is good we found the disks, and 
hopefully we'll have more answers very shortly. It is nice to 
come before you today and talk about a different subject.
    Actually, listening to the opening comments, it seems that 
we have a lot of agreement on these issues. This is not a 
partisan issue, nor does it divide the Congress or the 
administration. It is an issue that we all care about: the 
response management of these programs and finding the best 
contracting forms, the best management forms for all of the 
work that we are doing. So, I appreciate your holding the 
hearing and having us here today.
    As I mentioned, I have Carolyn Huntoon, our Assistant 
Secretary with me, as well, to make sure that you have as much 
information as you can on these topics.
    Let me make a few remarks, and, as you indicated, the full 
testimony is in the record.
    I'd like to put these issues in perspective, if I may. The 
Department's environmental management program, as you've noted, 
is responsible for managing the enormous legacy of radioactive 
and hazardous contamination left over from 50 years of nuclear 
weapons production and research. We're responsible for storing, 
treating, and disposing of large volumes of liquid and solid 
nuclear wastes, safeguarding materials that can be used to make 
nuclear weapons treating and storing corroding nuclear spent 
nuclear fuel, and remediating extensive surface and groundwater 
contamination.
    Our Environmental Management Program manages about 30 
percent of all the Department's fixed-price contracts; that is, 
37 of the 132 fixed-price contracts in the Department, that are 
each over a half million dollars, and then, of course, many 
more subcontracts. The value is about $1.5 billion worth of 
fixed-price contracts in the Environmental Management Program. 
And we'll focus especially on 4 of these 37 in my comments 
today.
    The administration has made significant progress in 
cleaning up the legacy of waste. We've actually completed 
cleanup at 69 of 113 sites in the program. We've opened the 
Waste Isolation Pilot Project in New Mexico for the disposal of 
transuranic waste and have completed 59 shipments to the WIPP. 
At Hanford, we've removed the highly radioactive liquids from 
121 of the 149 old single-shell tanks, and we're on schedule 
for this fall to begin moving corroded spent nuclear fuel from 
wet storage near the Columbia River to safer dry storage 
farther away from the river, the K-Basins Project.
    Since 1996, at the Savannah River site, we've been 
operating the Nation's first vitrification facility for defense 
high-level liquid waste. By the end of this year, we'll have 
produced over 900 canisters of waste solidified in glass. At 
Idaho, we began transferring Three Mile Island spent nuclear 
fuel from wet storage into a new dry storage facility. Last 
year, overall, throughout the complex, we deployed over 120 new 
technologies developed over the years through the Environmental 
Management Program.
    This administration inherited a contracting method that was 
developed during the Manhattan Project and institutionalized 
during the cold war. Under the old management and operating, or 
M&O contracts, the Department reimbursed the contractors for 
all costs and assumed all risks. There was no competition for 
most of these contracts. Only a few private sector firms 
participated.
    This administration has taken the initiative, consistent 
with GAO's recommendations in the early 1990's, to reform the 
Department's old contracting and management practices. The 
increased use of fixed-price contracts is only one of a number 
of improvements that we have made in recent years. In the last 
6 years, we've increased the number of competitively awarded 
contracts for the management and operation of our major 
facilities by nearly an order of magnitude, as compared with 
the Department's record during the previous years. We've 
recruited contractors with environmental expertise rather than 
continue to rely on the traditional nuclear weapons production 
firms. Performance-based contracting as opposed to the previous 
practice of pay for effort has become the standard.
    Last year Secretary Richardson also strengthened project 
management by simplifying and clarifying the responsibility and 
accountability of line management for performance, by creating 
the Office of Engineering and Construction Management to 
establish baseline cost control processes and quarterly project 
reviews, by conducting independent external reviews, and by 
establishing the Deputy Secretary's Watch List for critical or 
troubled projects. More recently, the Secretary has taken 
additional actions to strengthen the Department's ability to 
sanction poor contractor performance and to reward outstanding 
performance, including allowing the Secretary to direct a 
contractor to remove its top manager for failure to perform.
    As the GAO has reported, the Department has successfully 
managed a number of our fixed-price contracts. For example, at 
the Hanford site, Bechtel Hanford alone has awarded 16 major 
fixed-price contracts for projects, including the construction 
and operation of the environmental restoration disposal 
facility for the safe long-term storage of the C reactor and 
for the deactivation of the N reactor. At the Savannah River 
site, the Department estimates it avoided over $25 million in 
costs as a result of utilizing fixed-price contracting for the 
M Area Mixed Waste Tank Remediation Project. And, another 
example at Oak Ridge, the Department may avoid up to $45 
million in costs through the use of a fixed-price contracting 
approach for the construction and operation of the 
Environmental Management Waste Management Facility.
    Of course, not all the projects for which we have awarded 
fixed-price contracts have met our objectives. In making the 
necessary changes, we've worked hard to act on the observations 
and findings of independent reviewers, including the National 
Academy of Sciences and the GAO. I'd like briefly to review our 
experience with some projects, namely, the four key projects 
referenced by the GAO in the subcommittee.
    First is the Pit 9 Project that you mentioned. In 1991, the 
Department conceived of this project as a pilot to change the 
way the Department acquired environmental services. The 
underlying objective was to shift the risk of performance away 
from the government, as under the traditional M&O approach, to 
the contractor who controlled the elements of the project 
necessary to get the job done. Pit 9 cleanup called for 
contractor-owned facilities and equipment, a fixed price for 
completed work, and a guarantee of performance. A number of 
companies, including the ultimate contractor, Lockheed 
Corporation, argued that existing technologies could be applied 
to remediate Pit 9 on a fixed-price basis without any further 
research and development. The proposed project also would 
demonstrate characterization, removal, and treatment 
technologies.
    Ultimately the contractor selected, Lockheed Martin 
Advanced Environmental Systems, failed to perform the contract 
under its terms and conditions and, as noted, has made claims 
against the Department through litigation for more than the 
amount of the original contract.
    The Department believes the fundamental difficulties 
encountered by the contractor resulted from the company's 
failure to apply sufficient technical and management skills to 
the project and from its own management, business, and 
technical decisions rather than from the Department's actions. 
Had this been set up as a cost-reimbursable contract, the 
government would have paid millions of dollars for Lockheed 
Martin's unsuccessful efforts rather than the corporation 
bearing the financial responsibility as it does now.
    Another case is the Hanford Project privatization, the Task 
Waste Remediation System, which has recently been renamed the 
River Protection Project. It's one of the largest environmental 
cleanup projects in the world. Approximately 54 million gallons 
of highly radioactive waste have been stored in 177 underground 
storage tanks, many of which are single-shelled and known to 
have leaked radioactive waste into the soil. The Department 
entered into an enforceable agreement with the State of 
Washington and with the EPA which includes requirements to 
remove the waste from the tanks, immobilize those wastes 
through the process of vitrification, and dispose of them. This 
contract was initially structured to provide strong financial 
incentives to achieve project schedule and performance goals 
and to provide project finance.
    Applying a lesson from the Pit 9 experience, and with the 
support of the Congress, the Department set up the project with 
interim phases and milestones to enable course corrections 
based on new information as the complex project evolved. 
Additionally, the Department established a number of project 
controls, including a variety of internal and external reviews.
    After BNFL's successful performance on the first phase of 
the contract in 1998, DOE authorized them to proceed with a 24-
month extended design period for a facility to treat the tank 
waste. At that time BNFL represented that it could produce, 
with 90 percent confidence, a project whose costs would not 
exceed $6.9 billion and was willing to stake $300- to $500 
million of their own equity on the outcome. However, in April 
of this year, the company produced a formal bid of $15.3 
billion. This bid was unacceptable from a financial, 
managerial, and cost perspective, a decision supported by our 
independent cost estimate.
    I might add, we thought as recently as February of this 
year that the costs were still going to come in close to the 
original number. Those were the reports that we were given from 
the company. Mr. Burr indicated someone should be fired, and 
someone has been. The contractor has been fired from this 
project. We're not going ahead with that contractor.
    Some cited the cost increases in the BNFL proposal as 
evidence of our managerial deficiencies regarding complex 
projects. We strongly disagree. BNFL first informed the 
Department of significant cost increases of the project at an 
informal briefing in early April, just 3 weeks before their 
formal bid was delivered. At no time prior to this briefing did 
we have any indication that the cost would escalate by anything 
close to this magnitude. At that briefing, the Department 
requested that BNFL identify options for reducing its costs 
when submitting its formal bid. The company, however, did not 
do so.
    Fundamentally, the Department was unable to enter into a 
privatization contract for the next phase of this project, 
because the contractor was unwilling to assume the financial 
risks originally envisioned by both parties. This unwillingness 
to assume risk was translated into increased costs and 
excessive conservatism in the contractor's proposal. We've been 
forced to restructure the project in order to meet our 
agreements with the State and to have a realistic overall cost. 
In part because the design was only 13 percent complete instead 
of the target level of 30 percent, we're not even able to seek 
fixed-price bids. We are seeking a strong competition and 
intend to select a new design construction firm by January 1.
    Mr. Upton. Mr. Glauthier, if I could just stop you there. 
We've gone a little bit beyond the 5 minutes, as you know. We 
also have a vote on. I think we'll have to stop temporarily, 
and we'll come back in about 10 or 15 minutes. Thank you. 
Recess.
    [Brief recess.]
    Mr. Upton. We're okay from votes for at least an hour they 
say.
    Mr. Glauthier, if you could briefly wrap up, and then we'll 
go to Ms. Jones.
    Mr. Glauthier. Thank you. I appreciate it. I will do this 
quickly and wrap it up and turn it over to your other witness.
    I would like to comment briefly on the fixed-price contract 
at Oak Ridge, the one that was signed in 1997 with BNFL to 
decommission three buildings and to recycle or dispose of the 
materials within them and to make them available for commercial 
reuse. Considerable progress has been made on this project. The 
cleanup is actually now over 22 percent complete. Nearly 16 
million pounds of material have been dismantled, and much of 
the waste has been disposed. However, it's not been pain-free 
and, as was noted earlier, the contractor has submitted a 
number of requests for equitable adjustments, adding up to a 
significant amount of extra money.
    We share the subcommittee's concern that this raises a red 
flag, calling for very close attention. We're concerned that 
contractor's management or control or change control systems 
were not well run. We believe that very few of the costs in 
these requests are justified and, ultimately, very little of it 
will finally be approved.
    Going forward, we're urging the contractor to improve the 
management system and we believe that that is happening. The 
current estimate to complete that project is about 5 percent 
higher than when the contract was awarded in 1997, although we 
may have to increase that as a result of specific policy 
changes we've made recently on recycled material. I'd be happy 
to discuss that more in the question period.
    I will not comment on the Advanced Mixed Waste Treatment 
Project at Idaho, but we'd be happy to discuss that in the 
question period. I will note, though, that our current estimate 
to complete that project is within 2 percent of the original 
contractor award in 1996.
    And then finally, I would like to present the lessons 
learned out of these experiences. Our feeling is that many of 
the lessons learned are very similar to the lessons or 
principles in the GAO reports over the years and in the 
comments that the committee has offered earlier. For one thing 
we agree that fixed-price contracts are not appropriate for all 
situations. Many factors, including the waste characteristics, 
the complexity of the project, the number of contractors 
willing to compete, the financing mechanisms available, the 
optimum allocations of risk, must be considered in determining 
the appropriate type of contract.
    Having said all that, we do also believe that fixed-price 
contracts are appropriate in a number of cases if we can define 
those characteristics well enough and we can get real 
competition, we can use fixed-price contracts effectively for 
faster program completion and better cost to the government. 
Thank you, Mr. Chairman. I'd be happy to answer questions.
    [The prepared statement of T.J. Glauthier follows:]
Prepared Statement of T.J. Glauthier, Deputy Secretary, U.S. Department 
                               of Energy
    Mr. Chairman and members of the Subcommittee, I appreciate the 
opportunity to testify about the Department of Energy's (DOE) 
experience with fixed-price contracting for environmental management 
projects. In recent years both the Department and the Subcommittee have 
recognized the need for the Department to strengthen its project 
management capabilities, to reform its contracting practices, and to 
better integrate the two.
    Under this Administration, the Department has incorporated many 
state-of-the-art private sector contracting and project management 
practices and principles into all of our operations. For example, in 
the last six years we increased the number of competitively-awarded 
contracts for the management and operation of our major facilities by 
nearly an order of magnitude, as compared to the number that had taken 
place in the previous ten years. This year alone, the Department is 
competing seven management and operating contracts, more than double 
the number of contracts competitively awarded between 1984 and 1994. 
Performance-based contracting, as opposed to the previous practice of 
pay-for-effort, has become the standard. The Department now routinely 
uses external independent reviews for major projects. In addition, we 
created an office within the Department to be the focal point for 
improving our project management practices for all DOE programs. 
Moreover, the Office of Environmental Management has created its own 
Office of Project Management to aid its field offices in the management 
of major projects.
    We recognize that there is still much work to be done--changes in 
old practices and work cultures take time to be fully implemented. We 
also recognize that not every attempt at fixed price contracting has 
met our objectives. However, we believe that we have applied the 
lessons learned from those situations to improve our contracting 
practices.
Environmental Legacy of the Cold War
    Understanding the contracting issues we face requires an 
understanding of the context for our contracting. The Environmental 
Management (EM) program is responsible for managing and cleaning up the 
environmental legacy of the nation's nuclear weapons production program 
and government-sponsored nuclear energy research. The scope and 
challenge of this task is enormous, involving managing large volumes of 
nuclear wastes, safeguarding materials that could be used in nuclear 
weapons, and remediating extensive surface and groundwater 
contamination. For example, the EM program is are responsible for:

 remediating 1.7 trillion gallons of contaminated ground water, 
        an amount equal to approximately four times the daily U.S. 
        water consumption;
 remediating 40 million cubic meters of contaminated soil and 
        debris, enough to fill approximately 17 professional sports 
        stadiums;
 safely storing and guarding more than 18 metric tons of 
        weapons-usable plutonium, enough for thousands of nuclear 
        weapons;
 managing over 2,000 tons of intensely radioactive spent 
        nuclear fuel, some of which is corroding;
 storing, treating, and disposing of radioactive and hazardous 
        waste, including over 160,000 cubic meters that are currently 
        in storage and over 100 million gallons of liquid, high-level 
        radioactive waste;
 deactivating and/or decommissioning about 4,000 facilities 
        that are no longer needed to support active DOE missions;
 implementing critical nuclear non-proliferation programs for 
        accepting and safely managing spent nuclear fuel from foreign 
        research reactors that contain weapons-usable highly enriched 
        uranium; and
 providing long-term care and monitoring--or stewardship--for 
        potentially hundreds of years at an estimated 109 sites 
        following clean up.
    Despite the complexity and size of its mission, EM has made 
substantial progress:

 Active cleanup is complete at 69 of 113 sites as of the start 
        of fiscal year (FY) 2000.
 The Waste Isolation Pilot Plant (WIPP) is open and disposing 
        transuranic waste. To date, WIPP has received 59 shipments of 
        transuranic (TRU) waste from Los Alamos National Laboratory, 
        Rocky Flats, and Idaho National Engineering and Environmental 
        Laboratory (INEEL), with the Hanford and Savannah River sites 
        expected to begin shipping this year.
 In FY 1999 alone, we disposed of 49,000 cubic meters of low-
        level waste, 14,000 cubic meters of mixed low level waste, and 
        282 cubic meters of transuranic waste at disposal facilities at 
        DOE sites and at commercial disposal facilities.
 Cleanup of all 22 large uranium mill tailings sites is 
        complete, as well as 5,300 ``vicinity properties,'' including 
        elementary schools and homes.
 At Rocky Flats, we continue to make great strides towards 
        meeting our 2006 closure goal, including removing all plutonium 
        pits from the site, beginning shipments of highly-enriched 
        uranium to other sites, and demolishing a major plutonium 
        research facility.
 At the Idaho National Engineering and Environmental 
        Laboratory, we completed the new dry storage facility for spent 
        nuclear fuel and began transferring Three Mile Island spent 
        nuclear fuel from wet storage to the safer new facility.
 In support of non-proliferation goals, we have now completed a 
        total of 14 shipments of spent nuclear fuel from foreign 
        research reactors from 23 countries since the beginning of the 
        Foreign Research Reactor (FRR) Spent Nuclear Fuel (SNF) 
        Acceptance Program in 1996--two joint combination shipments 
        from South America and Europe, seven shipments from Europe, one 
        from South America, one overland truck shipment from Canada, 
        one shipment from Australia, and two shipments from Asia.
 At the Hanford Site, we restarted plutonium stabilization 
        activities to reduce the risks posed by unstabilized plutonium 
        materials; we have resolved three of the four high-priority 
        safety issues for the high-level waste tanks, such as the 
        generation of high heat in one tank and a rise in the surface 
        level in another; and we have removed liquids from 120 of the 
        149 old, single-shell tanks.
 At the Savannah River Site, we are successfully operating the 
        nation's first defense high-level waste vitrification facility 
        for stabilizing over 34 million gallons of liquid wastes stored 
        in underground tanks. By the end of FY 2000, we expect to have 
        produced over 900 canisters of high-level waste ``glass''--
        approximately 15% of the total number of cans estimated to be 
        produced during vitrification operations.
 We continue to increase on-the-ground use of new innovative 
        technologies. During FY 1999, DOE sites used innovative 
        technologies 218 times in cleanup activities--129 of which were 
        used for the first time at a site. Moreover, since the 
        inception of the EM Science and Technology program, we have 
        seen over 500 deployments of over 200 new cleanup technologies. 
        The deployment of these technologies is yielding significant 
        benefits to the cleanup of the DOE complex, including: more 
        efficient removal of highly-radioactive tank waste; containing 
        and treating subsurface contamination; enhancing in situ 
        bioremediation of organic contaminants; treatment of mixed low-
        level waste; and better methods to deactivate, decontaminate 
        and dismantle facilities while ensuring worker safety and 
        minimizing risk to the surrounding environment.
Historical DOE Contracting Practices
    The Department and its predecessor agencies have historically 
managed a sizeable number of wide-ranging and high-dollar-value 
contracts to conduct its nuclear weapons production and environmental 
cleanup missions. Presently, the Department manages 132 active, multi-
year, fixed-price prime contracts each valued over $500,000, for a 
total contract value of more than $5.2 billion. Of these, the EM 
program manages 37 fixed-price contracts, valued at a total of nearly 
$1.5 billion. In turn, our prime contractors manage a large number of 
fixed price subcontracts.
    From the Manhattan Project during the Second World War through the 
Cold War, contracting practices of the Department and its predecessor 
agencies remained essentially unchanged. The management and operating 
(``M&O'') contract in common use at Department of Energy sites was a 
non-competitive, cost-reimbursable arrangement in which the government 
paid virtually all contractor costs and relieved the contractor of all 
risk. During this period, M&O contracts were typically awarded or 
renewed on a five-year basis without any competition. The pool of 
private contractors with nuclear weapons production expertise was 
limited and operations were shrouded in secrecy.
    Reviews by the General Accounting Office (GAO), the DOE Inspector 
General (IG), this Subcommittee as well as other Congressional 
Committees in the 1980s and the early 1990s identified numerous 
weaknesses in these historical contracting practices. For example, in 
testimony before this Subcommittee in 1993, GAO stated that ``At the 
core of the DOE's problems is a contracting philosophy dating back to 
the Manhattan Project'' in which ``contractors operate largely without 
oversight or financial risk.''
    A major area of criticism related to the Department's practice of 
accomplishing all site work on a cost-reimbursable basis. This ``cost-
plus'' approach provided little incentive to contractors to control 
costs or improve the quality of performance because the contractor's 
costs were routinely reimbursed--even if the contractor's performance 
was unacceptable and work had to be redone.
    Additionally, after the Cold War ended, much of the Department's 
mission shifted from the production of nuclear weapons to management 
and cleanup of the nuclear wastes and materials that were left from the 
nuclear weapons production era. In many instances, the contractors that 
had historically operated the DOE sites did not possess the 
environmental expertise to clean-up this legacy of contamination. The 
old practice of renewing and awarding contracts without open 
competition was not suited to the changing missions and needs at the 
Department's sites.
Recent DOE Reforms
    The Clinton Administration immediately recognized and responded to 
these contracting problems in 1993 by initiating comprehensive contract 
reform. The 1994 report, entitled Making Contracting Work Better and 
Cost Less, recommended a number of specific actions to make the 
Department's contracting practices more cost-effective. Among the key 
recommendations was to increase the use of fixed-price contracts at 
both the prime and subcontract levels, where appropriate. The report 
also recommended that work performed by non-competitively awarded M&O 
contractors be critically assessed to determine whether it could be 
more efficiently accomplished through competitively awarded contracts. 
Additionally, the report recommended that performance goals and 
indicators be developed for major site contracts to increase the use of 
performance-based contracts.
    Since that report, the Department has worked diligently to 
implement these reforms. The Department has:

 significantly increased competition, recompeting, since 1994, 
        28 M&O contracts worth over $40 billion. Indeed, over 94% of 
        our new (non-M&O) contracts were competitively awarded in FY 
        1999 (up from 93% in FY 1998). This exceeds the total number of 
        M&O competitions in the entire previous history of DOE and its 
        predecessor agencies. Of the eleven major facility management 
        contracts for the Environmental Management program, five of 
        these (for the Idaho, Miamisburg, Oak Ridge, Richland, and 
        Rocky Flats sites) were awarded to non-incumbents;
 spurred participation in DOE contracting by firms that had not 
        generally participated in DOE procurements for traditional M&O 
        contracts;
 brought in contractors with environmental expertise rather 
        than relying on traditional nuclear weapons production 
        contractors to perform cleanup and encouraged more contracting 
        out by facility management contractor to apply niche expertise 
        to defined projects;
 encouraged the use of fixed-price contracting, where 
        appropriate, both at the prime contract level and at the 
        subcontract level. For example, at Savannah River, from FY 1996 
        through FY 1999, an average of 97% of our total subcontracting 
        commitments have been awarded as fixed-price contracts--
        amounting to a total dollar value in excess of $1.25 billion. 
        Similarly, during the same period at the Hanford site, 100% of 
        the subcontracts awarded by the M&I contractor (Fluor Hanford, 
        Inc.) and the Environmental Restoration Management Contractor, 
        or ERMC (Bechtel Hanford, Inc.), have been awarded on a fixed-
        price basis--for a total contract value of $661 million;
 made performance-based contracting, rather than level of 
        effort, the norm;
 instituted an innovative, performance-based ``closure'' 
        contract at Rocky Flats; and
 worked to tailor the contracting mechanism to the job at hand.
    To further improve contractor performance, last year Secretary 
Richardson strengthened project management by:

 simplifying and clarifying the responsibility and 
        accountability of line management for program and project 
        performance;
 creating the Office of Engineering and Construction Management 
        in the Office of the Chief Financial Officer to improve project 
        management throughout DOE, including establishing baseline 
        change control processes, and quarterly project performance 
        reviews;
 conducting external independent reviews by highly experienced 
        project management professionals in the early planning stages 
        of a project (with additional reviews as appropriate in later 
        stages of design and construction), followed by the development 
        and tracking of corrective action plans, if needed, in order to 
        correct management, technical, or regulatory deficiencies prior 
        to any significant cost and schedule impacts;
 establishing a Project Engineering and Design (PED) funding 
        line and authorization to design projects for future years new 
        starts, which will enable a more credible baseline, derived 
        from 35 percent design, to be used for Line Item project 
        approvals;
 making greater use of the National Academy of Sciences in 
        reviewing projects; and
 establishing the Deputy Secretary's ``Watch List'' of critical 
        or troubled projects that will be subject to intense oversight 
        at the highest levels within the Department until identified 
        problems have been corrected.
    This year, the Secretary has taken additional actions, including:

 requiring all major systems critical decisions, baseline 
        change proposals, or site selections for all new missions to be 
        approved by the Deputy Secretary before proceeding to the next 
        acquisition phase; and
 strengthening the Department's ability to sanction poor 
        contractor performance and reward outstanding performance, 
        including allowing the Secretary to direct a contractor to 
        remove its top manager for failure to perform;
    The Office of Environmental Management (EM), under Assistant 
Secretary Carolyn Huntoon, has similarly improved program and project 
management, including establishing the Office of Project Management 
within EM. This new office supports our field offices in their project 
management efforts and assists Headquarters staff with their oversight 
of project implementation. Additionally, the office coordinates 
internal and external reviews of our projects and critical decisions 
for significant projects not reviewed by the Deputy Secretary.
    Beginning in 1996, EM also began to apply privatization, an 
innovative extension of traditional fixed-price contracting. Under 
privatization, the contractor would finance the project and would not 
receive the contractually specified payments from the government until 
the projects or services were delivered according to the terms of the 
contract. EM viewed the concept as an important means of taking 
advantage both of market forces and private industry expertise to 
improve technical and schedule performance and reduce the costs of some 
of its major cleanup projects. Moreover, shifting substantial 
performance risk to the contractor provides greater incentives to the 
contractor to complete the mission on schedule and within cost. Also, 
privatization facilities could be initiated earlier through reliance on 
private financing. Finally, the Environmental Management program had 
reason to believe that cost and schedule efficiencies could be achieved 
because of its outsourcing experience between fiscal years 1992 and 
1995, which showed substantial cost savings compared to the traditional 
M&O approach. The Congress supported this approach through authorizing 
legislation and the establishment of a separate appropriation account 
for privatization projects.
    A key attribute and advantage of EM's privatization approach is 
that it requires full life cycle planning of a project up front. This 
is a distinct advantage over traditional M&O approaches which often 
plan consistent only with the budget windows, which too often has given 
rise to rework as the full scope of the project is realized and after 
potentially considerable expense has been incurred.
    In accordance with the authorizing legislation for the Department, 
DOE has worked with the Congress in developing privatization projects. 
At present, Congress has authorized and appropriated funds for the 
Department to proceed with six privatization projects. These are the: 
Hanford Tank Waste Remediation System; Idaho Advanced Mixed Waste 
Treatment Project; Oak Ridge Transuranic Waste Treatment Project; Oak 
Ridge Environmental Management Waste Management Facility Project; Idaho 
Spent Nuclear Fuel Dry Storage Project; and Remote-Handled Transuranic 
Waste Transportation Project. (The Hanford TWRS privatization contract 
will be changed to a different contract type, as discussed later in 
this testimony. In addition, a Contact-Handled Transuranic Waste 
Transportation Project which was originally funded under the EM 
privatization account has been canceled by the Department as a 
privatization project, and is now being funded out of traditional 
operating funds.)
DOE Experience with Fixed-price Contracting
    EM has implemented various forms of fixed-price contracting as a 
means of improving performance, sharing risk with the contractor, and 
reducing costs. The results have generally been good, but, as would be 
expected when dealing with new approaches and complex issues, not 
devoid of problems.
    In its 1998 report, Alternative Financing and Contracting 
Strategies for Cleanup Projects, GAO found that the Department has had 
success with fixed-price contracting, noting that the Department is 
most successful when there is: a clearly defined work scope; a low 
probability of major changes to the work scope; sufficient price 
information and/or multiple contractors bidding to minimize the cost to 
the government while providing a fair profit to the contractor; and 
appropriate risk sharing between the parties.
    As the GAO has reported, the Department has been successful in the 
implementation of numerous fixed-price contracts. For example,

 at the Hanford site, Bechtel Hanford, Inc. alone has awarded 
        16 major fixed-price subcontracts with a total dollar value of 
        over $104 million, for projects including the construction and 
        operation of the Environmental Restoration Disposal Facility 
        (ERDF); the safe long-term storage of the C-Reactor; and the 
        deactivation of the N-Reactor;
 at the Savannah River Site, the Department estimates it 
        avoided over $25 million in costs (from an initial planned 
        expenditure of approximately $46 million through the M&O 
        contractor) as a consequence of fixed-price contracting for the 
        M-Area Mixed Waste Tank Remediation project; and
 at Oak Ridge, the Department may avoid up to $45 million in 
        costs (from an initial estimate of $81 million) through the use 
        of a fixed-price contracting approach for the construction and 
        operation of the Environmental Management Waste Management 
        Facility.
    The Department also has corrected previously identified 
deficiencies. For example, in 1998, this Subcommittee reviewed the 
contract and management problems with the Department's Hanford Spent 
Nuclear Fuel Project. At the time of the Subcommittee's review, the 
project was over budget and behind schedule, in large part due to an 
innovative but high risk project management strategy to accelerate the 
project that intentionally included only minimal cost and schedule 
contingency. GAO has expressed doubt that we would be able to meet the 
November 2000 date for beginning to move the spent fuel into safer 
storage. Due to increased management attention, placement on the Deputy 
Secretary's Watch List, strengthened project management by both DOE and 
the contractor, inclusion of realistic contingency to deal with 
problems that might be encountered, and increased use of incentives, 
the project is on track with our revised baseline to begin moving the 
spent fuel from the Hanford K-Basin into safer dry storage beginning in 
November of this year. A fixed-price contract is being successfully 
used to procure multi-canister overpacks for the project. To date, four 
hundred overpacks have been delivered on budget and ahead of schedule.
    Our new closure contract at Rocky Flats illustrates how strong 
project management and the appropriate use of contractual incentives 
can support the Department's efforts to accelerate cleanup and reduce 
costs. Prior to our effort to accelerate the closure of Rocky Flats, 
cleanup was estimated to cost over $31 billion and take longer than 50 
years. This Administration's accelerated closure goal is to close the 
site by 2006. The new performance-based contract includes performance 
incentives to motivate the contractor to complete cleanup of the site 
within budget and the target date of 2006. Specifically, the contract 
provides additional fee if the contractor delivers ahead of the 2006 
completion date, and significantly reduces that fee if the date is not 
achieved. Although it is premature to declare this project a success, 
it is clear that the innovative contractual approach at Rocky Flats 
represents a cornerstone of our management strategy to complete cleanup 
by 2006.
    Not all of the projects for which we have awarded fixed-price 
contracts have met our objectives. The Subcommittee and the General 
Accounting Office have focused on several of these projects. I would 
like to briefly review our experience with each of these projects, and 
describe the lessons we have learned. As we review these projects, it 
is important to distinguish between issues that are attributable to the 
particular contracting approach and those that are attributable to 
other factors.
Pit 9
    Pit 9 is one acre of 88 total acres of buried waste at the Idaho 
National Engineering and Environmental Laboratory (INEEL). The Pit 
contains plutonium-contaminated transuranic waste from Rocky Flats and 
low-level waste from INEEL. Remediation of this buried TRU waste is a 
significant issue in Idaho because the waste is over one of the largest 
aquifers in the nation--the Snake River Plain Aquifer.
    The Pit 9 project pre-dated this Administration's current contract 
reform and privatization initiative. In 1991, the department then 
conceived Pit 9 as a pilot for introducing fundamental changes in the 
way the Department acquired environmental services. The underlying 
objective of these changes was to shift the risk of successful contract 
performance to the contractor who controlled the elements necessary to 
get the job done--technology, facilities, equipment, and workforce. The 
Pit 9 cleanup project called for contractor-owned facilities and 
equipment, a fixed price for completed work, and a guarantee of 
performance. In undertaking the Pit 9 project, the Department was 
responding, in part, to comments from private industry and others that 
its traditional approach of relying on the M&O workforce for 
remediation on a ``cost-plus'' basis was inefficient and costly. A 
number of companies, including the contractor ultimately selected, 
argued that existing technologies could be applied to remediate Pit 9 
on a fixed-price basis without any research and development. The 
Department viewed the Pit 9 project as a market test to determine the 
capabilities and desire of the private sector to join the Department in 
this new contracting approach. In addition, the Department stood to 
benefit greatly from successful use of the proposed melter system and 
treatment system. If used successfully, these technologies could have 
been used to solve many of the Department's mixed waste problems at 
other sites.
    The project was also designed to demonstrate technologies for 
nuclear waste retrieval and treatment systems and stabilize Pit 9 
contamination, as well as to develop characterization data that could 
be used in making the remediation decisions for other burial pits and 
trenches at INEEL.
    The Pit 9 project was effected by the DOE management and operating 
contractor responsible for the management of INEEL through the award of 
a subcontract. Ultimately, the subcontractor failed to perform the 
subcontract under its terms and conditions. The prime contractor 
concluded that the performance difficulties encountered by the 
subcontractor resulted both from the subcontrator's failure to apply 
sufficient technical and management skills to the project and from its 
own management and technical decisions and terminated the subcontract 
for default. Had this been set up in the traditional manner as a cost-
reimbursable contract, the government would have paid millions of 
dollars for the subcontractor's unsuccessful efforts. Notwithstanding 
the subcontractor's performance failure, it remains the Department's 
responsibility to complete the cleanup. Because of the default on the 
subcontract, the Department is now pursuing an alternate cleanup path 
using a different contracting method.
    Although the Pit 9 subcontract did not achieve its ultimate 
objective, it did serve as a learning experience for the Department 
when it began to develop privatization and more traditional fixed-price 
contracts. Some of the key lessons learned include, among others:

 establishing interim milestones for early detection of non-
        performance;
 creating contractual off-ramps in the event that performance 
        expectations are not met;
 minimizing project risks to avoid prematurely committing to 
        technical solutions and/or fixed price mechanisms;
 improved waste characterization;
 strengthening independent cost analysis;
 enhancing DOE project management and oversight capability; and
 conducting project quarterly reviews.
    These lessons have been applied to subsequent projects such as the 
Tank Waste Remediation System (TWRS) and the East Tennessee Technology 
Park Decontamination, Decommissioning and Recycle Project (ETTP).
Hanford TWRS Privatization
    The Tank Waste Remediation System (TWRS) privatization project, 
recently renamed the River Protection Project (RPP), is one of the 
largest environmental cleanup projects in the world. Approximately 54 
million gallons of highly radioactive waste is stored in 177 
underground storage tanks, many of which are known to have leaked 
radioactive waste into the soil. The Department has entered into an 
enforceable agreement (known as the Tri-Party Agreement) with the State 
of Washington and the Environmental Protection Agency which includes 
requirements for DOE to remove the waste from the tanks, then 
immobilize, through the process of vitrification, and dispose of it.
    We recognize the technical, financial, and management challenges 
and risks inherent in the TWRS privatization project. From the 
beginning, our approach has been to provide strong incentives to 
achieve project schedule, cost, and performance goals and to minimize 
the total project cost to the American taxpayer. We have been working 
to establish a process that would lead to an appropriate contracting 
structure for the project that would:

 allocate risks to the party best able and motivated to manage 
        them;
 reduce the life cycle costs compared to traditional 
        contracting approaches;
 shift significant responsibility, accountability, and 
        liability for cost and technical performance to the private 
        contractor;
 obtain the best mix of private and public financing; and
 acquire products and services at a fixed price.
    Our experience with Pit 9 taught the Department that, among other 
lessons, interim milestones are required for early detection and 
correction of non-performance or ``course correction'' based on new 
information. This lesson is reflected in the fact that the TWRS 
privatization contract was set up in phases. This lesson has stood us 
in good stead on this project. As we have gained experience at each 
phase of the project, we have adjusted the approach appropriately, each 
time protecting the taxpayers' investment. Our experience with Phase I, 
Part A made it clear that: project risks needed better definition to 
attract third-party financing and to make the contractor willing to 
invest its own capital in the project; safety and financing 
considerations precluded building large pilot plants; and an equitable 
risk allocation between DOE and the contractors was needed.
    Consequently, we modified our approach in 1998 to optimize the 
technical approach and reduce the likelihood of performance failure. 
Specifically, we:

 adopted a phased approach to Part B of the contract rather 
        than commit prematurely to the entire project;
 authorized a 24-month period to complete up to 30 percent 
        design to minimize risks associated with design uncertainties;
 changed to a full production facility that will allow for 
        greater operational throughput and duration; and
 delayed the final price agreement to take advantage of 
        improved design and financial information.
    Additionally, the Department implemented a number of internal 
controls to better manage the project, including:

 creating an Executive Board of the most senior-level managers 
        within the Department to review major project issues and 
        recommendations and advise on the appropriate course of action;
 creating an independent Regulatory Unit which functions like 
        an external regulator, to ensure adequate safety and health 
        protection of workers and the public;
 conducting external independent reviews of the project's 
        readiness to proceed at all levels (i.e., contractor, DOE 
        Field, and DOE Headquarters) to support the pending 
        authorization-to-proceed decision;
 conducting external independent reviews of BNFL's safety 
        quality assurance and quality control at all DOE sites and at 
        its Sellafield, U.K., facility, to ensure that problems 
        experienced by the U.K. division of BNFL, Inc. have not carried 
        over to their U.S. counterparts;
 hiring financial experts to review BNFL's financial approach;
 obtaining an Independent Cost Estimate for the project; and
 instituting rigorous quarterly performance assessments of all 
        aspects of the contractor's performance--including cost, 
        schedule, and technical approach.
    In 1998, when DOE authorized BNFL to proceed with a 24-month design 
period for a facility to treat the Hanford Tank waste, BNFL represented 
that it could produce, with 90 percent confidence, a project whose cost 
would not exceed $6.9 billion and was willing to stake $300 to $500 
million of their own equity on the outcome. However, in February 2000, 
BNFL indicated that its cost estimate had grown to approximately $8 
billion, and, in early April, BNFL indicated that the price estimate 
had grown again--to approximately $13 billion. On April 24 of this 
year, the company produced a formal bid of $15.2 billion, which can not 
be supported based on our independent cost estimate. Additionally, the 
proposal provided only about 15% of the design for the facility. This 
bid was unacceptable from a financial, managerial and cost perspective, 
and we are moving aggressively to address the problem. We are now 
modifying our approach based on the lessons learned from all the 
preceding steps and are breaking the project into smaller, more 
discrete parts.
    Fundamentally, the Department was unable to enter into a 
privatization contract for the next phase of this project because the 
contractor became unwilling to assume the significant financial risks 
originally envisioned by both parties. This unwillingness to assume 
risk was translated into increased costs and unnecessary conservatism 
in the contractor--s proposal. This shift of risk onto the government 
was unacceptable to the Department, and so we will re-bid the project 
with a new contracting approach to seek a better deal for the taxpayer. 
Even with the new contract, we are committed to meeting the key Tri-
Party Agreement milestones for plant operation.
    Some cited the cost increases in the BNFL proposal as evidence of 
Departmental managerial deficiencies regarding complex projects. We 
strongly disagree. BNFL first informed the Department of the 
significant cost increases in the project at an informal briefing in 
early April, three weeks before the formal bid was delivered. At that 
briefing, the Department requested that BNFL identify options for 
reducing its costs when submitting its formal bid. BNFL, however, did 
not do so. In addition no time prior to this briefing did BNFL provide 
the Department with any indication that the costs would escalate by 
this magnitude.
    It is important to note, however, that this 24-month period did 
advance the project. The design that the BNFL/Bechtel team produced is 
technically sound and is being carried forward. Perhaps the single 
biggest benefit of this period is that the full life-cycle of this 
project has now been systematically estimated, even if design is not 
yet complete. We have a sound technical approach. And we have pilot 
scale operational experience with the low-level and high-level waste 
melter that showed they worked better than anticipated.
    We recognize that the Department still faces many challenges with a 
project of this complexity and magnitude and that those challenges must 
be managed. But this would be true no matter what contracting strategy 
we pursue.
    With respect to the path forward for the River Protection Project, 
the Department has committed to two key targets at this time: (1) by 
August 15, 2000, DOE will release a Request for Proposal to design and 
construct a vitrification facility; and (2) by January 15, 2001, a new 
contractor will be selected. Vitrification operations are still 
scheduled to begin in December 2007. In terms of estimated project 
costs, prior to receipt of BNFL's proposal, the Department 
independently prepared a Government Fair Cost Estimate (GFCE) using 
design information from BNFL. The Department's estimate process was 
structured to ensure that both DOE and BNFL were estimating the same 
scope of work and technical solution, but shared no cost information. 
DOE's GFCE is approximately 30% less than the BNFL estimate for 
comparable work scope.
ETTP
    Constructed as part of the Manhattan Project, the five massive 
uranium enrichment buildings at East Tennessee Technology Park (ETTP) 
in Oak Ridge, Tennessee, are extensively contaminated with hazardous 
and radioactive substances. In August 1997, the Department entered into 
an innovative, fixed-price contract with BNFL to decommission three 
buildings, recycle or dispose of the materials within them, and make 
them available for commercial reuse. This approach was expected to 
avoid approximately $500 million in additional costs anticipated by the 
government's cost estimate.
    Conducting this project as a fixed-price contract was attractive to 
the Department for a number of reasons:

 the project cost was significantly below the previous 
        estimates for the scope;
 the private contractor was responsible for financing much of 
        the initial work;
 the fixed-price contract limited the Government's risk and 
        uncertainty;
 the direct contract with the Department eliminated additional 
        layers of contractor management and overhead costs; and
 as the largest decommissioning project that EM has undertaken, 
        the contract served as a useful learning tool for the other 
        massive ``process'' buildings that will require cleanup and 
        dominate the D&D Fund appropriation, and ultimately drive the 
        ``critical path'' for the ongoing Oak Ridge cleanup program.
    Applying lessons learned from Pit 9 to this BNFL contract, the ETTP 
contract includes interim milestones to facilitate needed course 
corrections, and minimizes up front payments. Our Oak Ridge office is 
conducting regular project reviews and has strengthened the management 
capability for this contract by hiring additional construction managers 
to oversee activities in order to ensure that requirements are being 
met. In addition, DOE Oak Ridge has also contracted for additional 
legal support so that we can expeditiously review and address claims.
    Considerable progress has been made on this project; but that 
progress has not always been without problems. The contractor 
represents that costs incurred by the contractor and estimated costs 
for completion are in excess of the contractor's bid price. The 
contractor has submitted a number of Requests for Equitable Adjustments 
(REAs) to the contract price based on its belief that the Government 
bears some responsibility for cost increases. To date the Department 
has recognized responsibility for extra costs associated with one REA, 
that is, costs associated with roof damage for the decontamination 
facility caused by an Act of God. Similarly, changes in Departmental 
policy, such as instituting a moratorium on the release of metals that 
formerly had been volumetrically-contaminated, could give rise to a 
valid REA. It is our joint expectation to have all the REAs submitted 
to date addressed by August 1, 2000.
    The mere submission of an REA by a contractor does not mean that 
the Department is responsible for increased costs incurred. The 
Department is reviewing the remaining REAs and has no intention of 
granting them unless they are factually and legally supportable. As in 
the case of Pit 9, where the subcontractor attempted to recover the 
excess costs of its performance problems, this Department will not 
financially bail out fixed price contractors from risks that they have 
assumed under the contract.
    Despite the contractor's request for contract price adjustment, a 
considerable amount of work has been completed by the contractor. For 
example:

 cleanup of the three-building decontamination and 
        decommissioning project is over 22 percent complete;
 nearly 16 million pounds of clean material has been shipped to 
        off-site scrap recyclers; and an additional 14 million pounds 
        of metal was decontaminated prior to release (none of which was 
        subject to the Secretary's moratorium on the release of 
        formerly volumetrically-contaminated metals); and
 more than 10.5 million pounds of low-level waste and almost 23 
        million pounds of ``mixed waste'' pond sludge has been disposed 
        of, mostly at off-site commercial facilities.
    The Department is committed to completing this project in a manner 
that meets our expectations, is fair to the contractor, and effectively 
and efficiently utilizes the funds provided by Congress. BNFL is 
presently scheduled to complete the ETTP three-building project in 
March 2004, or six months longer than the original completion date of 
September 2003. The current estimated cost to complete the project is 
$249.4 million (unescalated), which is approximately five percent 
higher than the value of $237.8 million at the time of contract award. 
The project is being performed as a ``CERCLA Non-Time Critical Removal 
Action'' and thus has no regulatory milestones. The earliest critical 
project milestone (i.e., completion of dismantlement, removal of all 
material, and decontamination of 90% of Building K-33) is currently 
scheduled in the contract for June 2001; due to dismantlement and 
material processing delays, BNFL currently estimates that completion of 
this milestone cannot be achieved until July 2002. However, the 
contractor has changed management and methodology for work execution in 
an effort complete the project within the original overall schedule.
Advanced Mixed Waste Treatment Project
    The Subcommittee requested the General Accounting Office to examine 
the Advanced Mixed Waste Treatment Project (AMWTP), a fixed-price 
privatization project being undertaken at the Idaho National 
Engineering and Environmental Laboratory. The AMWTP would retrieve, 
sort, characterize, store, treat, certify, and load transuranic waste 
for transportation to off-site disposal. The project supports an 
enforceable agreement on mixed waste treatment and the 1995 Idaho 
Settlement Agreement requirement to ship the 65,000 cubic meters of 
waste to the Waste Isolation Pilot Plant, or other such facility 
designated by DOE, no later than December 31, 2018 . In December 1996, 
DOE awarded a contract to BNFL to provide the required services to 
prepare 65,000 cubic meters of this TRU waste for disposal. Again, 
learning from the Pit 9 experience, the contract was developed with 
three phases. The first phase--environmental, safety and health 
permitting and preliminary design--is nearly complete.
    The GAO has noted that the AMWTP is experiencing delays due to the 
delays in issuance of permits by the State of Idaho. GAO states that 
the schedule that the Department and the contractor adopted for the 
project anticipated that the necessary environmental permits would be 
issued in one year, whereas the State of Idaho predicted that two years 
would be necessary for the requisite permits to be issued.
    We do not believe that this is evidence of poor project management. 
Certainly, had DOE adopted a permissive schedule the project might not 
be ``behind''. The schedule which was adopted by DOE that included one 
year for permit issuance was chosen to ensure that the Department would 
be able to meet the milestones for the project set forth in enforceable 
agreements. The Department considered it reasonable to expect that the 
State of Idaho would work to issue permits to enable DOE to remain in 
compliance with those agreements. The delays in permit issuance are in 
large measure attributable to forces outside either the control of the 
Department or the State of Idaho--namely, the challenge to the 
incinerator portion of the project that emerged from citizens in 
Jackson, Wyoming.
    Moreover, we do not agree that schedule delays mean that a fixed-
price contract is inappropriate for this project. The issues regarding 
the appropriate schedule to set for attaining permits for this project 
would appear to be independent of the type of contract chosen.
    Although external events beyond the control of the contractor have 
affected project schedules, the current estimated cost to complete the 
AMWTP is $889.2 million, which is less than two percent higher than the 
contract award value of $876.1 million. The lawsuit has been settled, 
and the State of Idaho has provided a schedule for issuing the permits 
in July 2000. Impacts of the permit delays and the incinerator re-
evaluation on the project schedule and cost are being assessed. As a 
condition of the lawsuit settlement agreement, the Secretary decided to 
put the incinerator portion of the project on hold until a Blue Ribbon 
panel reviews alternative treatment technologies.
    Contract performance continues to be satisfactory, as indicated by 
the contractor's timely and high-quality technical work. With the 
settlement of the lawsuit over the incinerator portion of the AMWTP, 
and the expected issuance of the environmental permits in July 2000, 
facility construction should be able to proceed in August or September 
2000. Despite the delays, DOE believes it is probable that BNFL Inc. 
will complete facility construction and begin processing waste in time 
to meet the Idaho Settlement Agreement milestones. Phase II facility 
design is 72% complete.
    With respect to financing issues, BNFL may choose to self-finance 
through its corporate parent or obtain commercial financing, or may 
pursue some combination of self- and commercial financing, to fully 
implement the next phase of the project. To date the contractor has 
self-financed its activities.
Lessons Learned
    In general, we agree with many of GAO's observations. First, fixed-
price contracts are not appropriate for all situations. Many factors, 
including the waste characteristics, the complexity of the project, the 
number of contractors willing to compete, the financing mechanisms 
available, the optimal allocation of risks, all must be considered in 
determining the appropriate type of contract for a particular scope of 
work.
    Second, full private financing may not be viable. The Department 
has learned from the Hanford tank waste project that the initial 
concept of full private sector financing may impose too much risk upon 
the private contractor, which will then be reflected in a higher price 
for the government. We have learned that we need to adopt a balanced 
approach, whereby the risks are appropriately shared between the 
contractor and the government. Just as the M&O approach, where the 
government assumed all of the risks, may be inappropriate, so too may 
be the approach where the contractor assumes all of the risks. In the 
future we will be looking for the optimal allocation of risks among the 
parties.
    Third, we agree that effective project oversight is essential. 
Although we do not agree with certain statements that attribute each 
and every cost and schedule issue with our fixed-price contracts to 
Departmental managerial deficiencies, we agree that we can improve our 
project management abilities and this can help avoid similar issues in 
the future. We believe that over the past several years we have 
instituted a number of improvements in our management practices that 
will do just that.
    Finally, we agree the complexity of the project should be 
considered when determining whether a fixed-price contract is 
appropriate. We agree that we have had more difficulty with complex 
projects than with the more straightforward projects. However, by 
definition, these projects present more technical, cost, and schedule 
complexity and can be expected to be more difficult to manage than less 
complex projects. A key lesson that we have learned from these complex 
projects, therefore, is that a more flexible, phased contracting 
approach may be the most appropriate, with continuing oversight and 
check points.
    Although our contract and management reform efforts are beginning 
to bear fruit, we recognize that there is still room for improvement. 
We must continue to be vigilant managers, to continue to strengthen our 
project management and work to effect the necessary changes in the 
Department's culture that will make these kinds of contracting 
practices second nature to all employees. The Department spent 50 years 
building and living with one kind of contracting culture; it is 
unreasonable to expect that a culture so long in the making will be 
changed overnight.
Conclusion
    The Secretary and I are committed to strengthening our management 
systems to ensure we can address contract and project problems as they 
arise. We have already demonstrated our willingness to take decisive 
action quickly when contracting problems arise. The Secretary's 
contract and management reforms to date lay a good foundation for 
strengthening the Department's contract management practices. But it is 
too soon to see the full impact of these changes. As GAO itself noted, 
``. . . problems are expected in the weapons complex, given the 
technical risks and complexities involved . . . Changing DOE's contract 
management approach will not come easy . . . Changing that culture, 
which has lead to so many problems, will take time and a significant 
commitment on the part of DOE's leadership.'' We have made that 
commitment and share your interest in continuing to consider new ideas 
for improving contractor performance. We look forward to working with 
you to make those changes.

    Mr. Upton. Ms. Jones.

                   TESTIMONY OF GARY L. JONES

    Ms. Jones. Thank you. Good morning, Mr. Chairman. Thank you 
for the opportunity to be here to discuss DOE's privatization 
initiative.
    DOE began considering aspects of privatization in the early 
1990's and formalized this approach in 1995. The focus of my 
remarks this morning is on what DOE has accomplished with 
privatization of complex cleanup projects and our observations 
on the lessons that can be learned from these efforts.
    We have reviewed three of DOE's privatization projects for 
this committee, the Pit 9, and Advanced Mixed Waste Projects in 
Idaho and the Tank Waste Project at Hanford. DOE's goals for 
privatization were straightforward. Reduce project cost, speed 
the cleanup, and improve contractor performance. On these 
projects DOE had little success in achieving estimated cost 
savings, although there is still a chance for the Mixed Waste 
Project in Idaho. All three projects have or will likely incur 
schedule delays, and DOE has not been satisfied with the 
performance of the contractors for two of the three projects we 
reviewed. So the simple answer is, although DOE adopted 
privatization as a solution to its contracting difficulties, it 
has not been a successful alternative in all cases.
    Let's talk about what lessons can be learned from these 
efforts. DOE's experience indicates that the two strategies 
that underpin the privatization initiative, fixed-price 
contracting and private financing, will not work effectively 
for all cleanup projects. Federal Acquisition Regulation 
Guidelines note that the conditions most conducive to fixed-
price contracting include a well-defined scope of work, low 
probability of major changes to work scope, the existence of 
proven technologies, sufficient price information to determine 
a fair price, and appropriate allocation and sharing of risks.
    In contrast, the three projects we reviewed had changes in 
scope, uncertainties about waste characteristics and technical 
approach, unrealistic project schedules or unresolved technical 
issues. Therefore these projects may not have been good 
candidates for fixed-price contracts.
    With regard to the other component of privatization, 
private financing, it is not clear whether it's achievable for 
complex projects. None of DOE's privatized cleanup projects has 
secured commercial financing to date, although a few have been 
financed internally by the contractors. For example, on the 
Hanford Project BNFL planned to use both equity and debt 
financing. However, DOE agreed to pay BNFL for its commercial 
debt in the event of contract termination in order to make 
commercial financing more viable. DOE will terminate the 
contract before BNFL obtains commercial financing.
    Another goal of private financing was to provide incentives 
for good contractor performance. However, DOE has not been 
satisfied with the performance of contractors on two of the 
projects we've reviewed because of concerns about their ability 
to successfully complete the projects. Sharing the risk by 
using different mixes of public and private financing as well 
as using incentive fee contracts could also help ensure that 
contractors will perform effectively.
    A thorough analysis of financial alternatives is an 
important part of structuring a successful cleanup project. 
When DOE initiated each of the three projects we reviewed, it 
limited its analysis of contracting and financing alternatives 
to a comparison between a privatized approach and a cost 
reimbursement contract without performance incentives. In the 
past we have criticized such a narrow approach to making 
important contracting decisions.
    Based on this committee's questions, DOE analyzed other 
financing options for the Hanford Project. However, we have 
some concern about DOE's analysis. DOE assumed that a 
privatized approach would have no cost growth because the 
contractor would have incentives to control costs. In contrast, 
the DOE assumed that other options would have cost growth that 
would more than offset the higher cost of private financing. 
However, DOE has no convincing evidence to support these 
assumptions. In fact, its experience contradicts them.
    Also, DOE did not fully analyze the risk associated with 
assuming the responsibility for BNFL's debt in the event of 
contract termination. This decision has shifted significant 
performance risk from BNFL to DOE. A more complete evaluation 
of the actual risk assumed by the government may have resulted 
in a different financing alternative being more cost-effective 
for the government.
    In summary, Mr. Chairman, DOE cannot rely on privatization 
alone to fix contracting problems. It must look at 
privatization as just one of the many strategies that it can 
use to get the most out of the Federal cleanup dollars. In the 
future DOE must more carefully evaluate a complex matrix of 
factors, including how much of the waste has been 
characterized, the number of contractors willing to compete, 
financing options, and project risks and who is best prepared 
to assume them.
    Because effective DOE management and oversight are critical 
to selecting the appropriate contract type and financing 
mechanism as well as to successfully implementing the contract, 
DOE needs to continue to improve its technical, financial, and 
managerial oversight capabilities.
    Thank you, Mr. Chairman.
    [The prepared statement of Gary L. Jones follows:]
   Prepared Statement of Gary L. Jones, Associate Director, Energy, 
   Resources, and Science Issues, Resources, Community, and Economic 
            Development Division, General Accounting Office
    Mr. Chairman and Members of the Subcommittee: We are here today to 
discuss the Department of Energy's (DOE) privatization initiative as it 
has been applied to DOE's nuclear waste cleanup program. DOE oversees 
some of the most highly radioactive and polluted sites in the United 
States, primarily the consequence of over 50 years of producing nuclear 
materials for weapons. Cleaning up radioactively contaminated 
buildings, soil, and groundwater within the weapons complex and safely 
storing wastes is a major mission for DOE. The Department estimates 
that for the years 2000 through 2070, it will cost between about $150 
billion and $195 billion (1999 dollars) to complete this mission and 
provide long-term monitoring of the remaining sites. DOE primarily 
contracts with private companies to accomplish the cleanup. In the 
past, this effort was generally performed under cost-reimbursement 
contracts by contractors that managed and operated many of DOE's 
facilities. DOE financed the operations, owned the facilities, and paid 
the contractors regardless of what was accomplished.
    DOE started its privatization initiative in 1995 as a way to reduce 
the cost and speed the cleanup of its contaminated sites and to improve 
contractors' performance. The initiative was primarily an alternative 
contracting and financing strategy to foster open competition for 
fixed-price contracts; require the contractors to design, finance, 
build, own, and operate the facilities necessary to meet treatment 
requirements; and pay the contractors only for products or services 
delivered in accordance with the contracts. Since the initiative began, 
DOE has managed several of its complex and expensive cleanup activities 
as privatization projects.
    Concerns have surfaced about whether DOE's privatization initiative 
has yielded significant results when applied to the Department's more 
complex cleanup projects. Our testimony discusses (1) what DOE has 
accomplished by privatizing such projects and (2) our observations on 
the lessons that can be learned from these efforts. It is based on our 
past reviews of DOE's privatization initiative, including reviews of 
three complex cleanup projects requested by this Committee--two at 
DOE's Idaho Falls Site and one at the Hanford Site in Washington State. 
Collectively, the estimated contract prices for these three projects 
were about $8 billion. We have included a list of products at the end 
of this statement that we have issued on various aspects of DOE's 
privatization initiative.
    In summary:
     For the complex cleanup projects we reviewed, DOE's 
privatization initiative has had little success in achieving cost 
savings, keeping the projects moving forward on schedule, or getting 
improvements in contractors' performance. For example, on the Hanford 
tank waste project, DOE estimated savings of from $2.1 billion to $3.5 
billion by using the privatization approach. However, after dramatic 
growth in the project's estimated cost and concerns about the 
contractor's performance, DOE decided to terminate the contract. 
Similar problems on the Pit 9 project in Idaho led DOE to terminate 
that contract without achieving expected cost savings. Although DOE 
adopted privatization as a solution to its past contracting 
difficulties, recurring cost, schedule, and performance problems 
demonstrate that privatization has not been a successful alternative 
for complex cleanup projects.
     Several lessons can be learned from DOE's privatization 
efforts. DOE cannot rely on privatization alone to fix its past 
contracting problems; instead, it must carefully evaluate privatization 
as just one of the many contracting and financing strategies that it 
can use to get the most out of federal cleanup dollars. DOE's 
experience indicates that the two strategies that underpin the 
privatization initiative--fixed-price contracting and full private 
financing--will not work effectively for all cleanup projects. Rather, 
a complex matrix of decision factors must be analyzed before deciding 
how to contract for and finance a cleanup. These factors include how 
much is known about the characteristics of the waste, the number of 
contractors willing to compete, the financing options, and the risks 
posed by the project and the entity that is best prepared to assume 
them. Our review of the Hanford project indicates that future analyses 
of financing options need to (1) use more realistic assumptions about 
cost growth for various types of contracts and (2) better reflect the 
actual risks assumed by the government. Because effective DOE 
management and oversight are critical to selecting the appropriate type 
of contract and financing mechanism, as well as to implementing the 
contract successfully, DOE needs to continue improving its technical, 
financial, and managerial oversight capabilities.
Background
    DOE spends nearly $6 billion each year to clean up the weapons 
complex and provide long-term monitoring of the remaining sites. In the 
past, DOE primarily approached this mission by signing cost-
reimbursement contracts, telling contractors how to perform waste 
cleanup activities, and paying them for the amount of effort that was 
expended, regardless of what was accomplished. Under this arrangement, 
DOE financed the contractors' activities and owned the facilities. As 
part of a broader contract reform effort, and in an attempt to reduce 
costs and speed the progress of cleanup, DOE developed its 
privatization initiative.
    DOE's privatization initiative is primarily an alternative 
contracting and financing strategy. For cleanup projects, privatization 
means using competitively awarded, fixed-price contracts to purchase 
cleanup services. The contractor agrees to design, finance, build, own, 
and operate treatment facilities. DOE specifies the required end 
products or services--for example, treating waste to meet disposal 
requirements--and generally leaves the methods and technologies used to 
achieve those requirements to the discretion of the contractor. The 
contractor is expected to finance the project with private money 
instead of using federal appropriations. This means that the contractor 
must either use its own funds (equity) or borrow money (debt) in order 
to proceed with design, construction, and related activities until the 
project is operational and the contractor begins receiving payments 
from DOE for successfully treating units of waste.
    DOE expected that the competitive award process, the use of fixed-
price contracts, and the requirement for private financing would bring 
contractors of a ``best in class'' caliber to its projects. With the 
contractors' own equity and/or debt funding the projects, DOE also 
expected that the contractors would have significant incentives to 
complete the projects on schedule and within budget. Finally, DOE 
expected that privatization would allow cleanup to move forward while 
deferring the government's own budget outlays for several years until 
the contractors constructed facilities and prepared them for 
operations.
    The three cleanup projects we reviewed involved constructing and 
operating treatment facilities.1 (See table 1). The largest, 
a project at Hanford with an estimated contract price of $6.9 billion, 
involves treating highly radioactive liquid wastes. The two contracts 
at Idaho Falls, totaling about $1 billion, involve treating less 
radioactive solid wastes, some of which are mixed with sludges and 
other hazardous materials, that are buried in the ground or stored in 
drums or boxes. DOE has approved a total of eight privatization 
projects involving the construction and operation of facilities to 
treat wastes, although none have been approved since 1998. The eight 
projects are listed in appendix I.
---------------------------------------------------------------------------
    \1\ In its January 1997 report on privatization (Harnessing the 
Market: The Opportunities & Challenges of Privatization), DOE 
identified three different types of privatization initiatives that the 
Department would implement--eliminating functions, transferring assets, 
and contracting out. Eliminating functions involves eliminating from 
the Department those activities for which a federal role is no longer 
required--such as the transfer of the Elk Hills Petroleum Reserve to 
the private sector. Transferring assets involves the sale or transfer 
of real property or personal property, including disposing of surplus 
assets such as precious metals in DOE's inventory. Contracting out 
involves either the Department's directly contracting for services 
previously provided by federal employees or site operating contractors, 
or site operating contractors' subcontracting specific tasks to other 
companies instead of performing the tasks themselves. The majority of 
DOE's privatization efforts have involved contracting out. These 
projects take three main forms--treating wastes at contractor-owned and 
-operated facilities, removing existing contaminated facilities and 
structures, and providing services using existing DOE facilities.

                           Table I: DOE Privatization Cleanup Projects Reviewed by GAO
----------------------------------------------------------------------------------------------------------------
                                                                  Idaho advanced mixed
                                             Idaho Pit 9                 waste              Hanford tank waste
----------------------------------------------------------------------------------------------------------------
Date of contract award...............  Oct. 1994..............  Dec. 1996..............  Aug. 1998 \3\
Contractor...........................  Lockheed Martin          BNFL Inc...............  BNFL Inc.
                                        Advanced Environmental
                                        Systems.
Wastes to be treated.................  250,000 cubic feet of    65,000 cubic meters of   About 5 million gallons
                                        buried transuranic \1\   mixed waste \2\ stored   of highly radioactive
                                        and hazardous wastes     above ground in drums    wastes stored in
                                        and contaminated soil.   and boxes.               underground tanks
Contract price.......................  $200 million...........  $876 million...........  $6.9 billion (est.)
----------------------------------------------------------------------------------------------------------------
\1\ Transuranic waste contains man-made radioactive elements with atomic numbers higher than uranium, such as
  plutonium.
\2\ Mixed waste is a combination of radiological contaminants, such as plutonium, and hazardous but
  nonradiological contaminants, such as degreasing agents or acids.
\3\ The original contract was awarded in September 1996. The contract was modified in August 1998 to reflect
  DOE's revised approach to the project.
Source: GAO's presentation of data from DOE.

DOE's Objectives in Privatizing Complex Cleanup Projects Have Not Been 
        Met
    DOE has not achieved the cost savings or the schedule and 
performance improvements that it expected privatization would provide. 
Specifically, DOE estimated significant cost savings for each of the 
three projects. To date, however, none of these projects have achieved 
savings. (See table 2.) Instead, DOE terminated the contract on the Pit 
9 project, and intends to terminate the contract on the Hanford tank 
waste project, after the contractors estimated significant cost 
increases and experienced management problems. Savings on the advanced 
mixed waste project are too early to determine, since construction has 
not yet started. However, delays in starting construction are likely to 
increase the estimated contract price.

       Table 2: DOE's Estimated and Actual Savings to Date on Three Complex Privatization Cleanup Projects
----------------------------------------------------------------------------------------------------------------
                                                                  Idaho advanced mixed
                                             Idaho Pit 9                 waste              Hanford tank waste
----------------------------------------------------------------------------------------------------------------
DOE savings estimate.................  $134 million (1996       $670 million (1996       $2.1 billion-$3.5
                                        dollars).                dollars).                billion (1997 dollars)
Actual savings achieved..............  None--project            None to date--           None--contract is being
                                        terminated.              construction has not     terminated and
                                                                 started; construction    recompeted after
                                                                 delays will likely       significant growth in
                                                                 affect costs and         cost estimate
                                                                 potential savings.
----------------------------------------------------------------------------------------------------------------
Source: GAO's presentation of data from DOE.

    Contrary to DOE's expectations that privatization projects would 
stay on schedule, all three of the projects we reviewed experienced 
delays in meeting schedule milestones. In addition, a key feature of 
DOE's privatization initiative was that contractors would receive 
payments only for successfully treating waste. For two of the projects, 
DOE was dissatisfied with the contractors' performance, but it is 
unclear if DOE's dissatisfaction will prevent the contractors from 
being paid.
     The Idaho Pit 9 project was to start waste treatment 
operations in August 1996 and complete treating the waste by February 
1999. However, the contract was terminated in June 1998 because of 
problems with the contractor's performance. Treatment of the waste is 
now being considered as part of a future project at the site. Although 
Lockheed Martin Advanced Environmental Systems (Lockheed Martin) 
provided a corporate guarantee of performance under the contract, the 
case is now in litigation. DOE is trying to recover the $54 million 
already paid to Lockheed Martin, and Lockheed Martin is seeking 
additional payments of $271 million for its work on the failed project. 
DOE project officials said that it is unclear how the issues will be 
resolved or how responsibility for the costs incurred on the project 
will be assigned to the parties involved.
     The Hanford tank waste project was initially to start 
waste treatment operations in December 2002 and complete processing 
about 6 percent of the waste by 2007. In 1998, DOE changed its approach 
to the project and revised the schedule to start waste treatment 
operations in February 2007 and complete processing about 10 percent of 
the waste by 2018. In May 2000, DOE directed BNFL 2 to stop 
work, and it is now in the process of terminating the contract because 
of dramatically escalating costs and concerns about BNFL's performance. 
DOE expects to pay BNFL for the allowable costs it incurred on the 
project as well as negotiated termination costs. DOE has abandoned 
privatization for this project and plans to recompete a contract for 
the design/construction phase and compete a separate contract for the 
operations phase. DOE hopes to keep the project moving forward in 
accordance with the revised schedule, but DOE officials expect some 
delays to occur as these changes are implemented.
---------------------------------------------------------------------------
    \2\ BNFL Inc. is the U.S. subsidiary of British Nuclear Fuels plc, 
a public limited company in the United Kingdom. The British government 
is the sole stockholder of British Nuclear Fuels plc.
---------------------------------------------------------------------------
     The Idaho advanced mixed waste project was to start waste 
treatment operations in March 2003 and complete waste treatment by 
December 2018. BNFL's February 2000 estimate shows that waste treatment 
operations will begin in November 2003 and are to be completed as 
scheduled in December 2018. However, several uncertainties may affect 
the achievement of these milestones. First, the start of construction 
has been delayed because BNFL has not obtained the construction permits 
from the state and the Environmental Protection Agency. Second, to 
resolve a lawsuit, DOE has agreed to pursue technical or regulatory 
alternatives to incineration for up to 22 percent of the waste to be 
treated. It is unclear how long the search for alternatives will take 
or whether it will be successful. Finally, it is unclear if the 
flexibility built into the operational phase of the project will be 
sufficient to absorb these potential delays and allow the project to be 
completed on time. However, at this early stage of the project, there 
are no signs that DOE is dissatisfied with BNFL's performance.
    The cost, schedule, and performance problems we found on 
privatization projects are similar to problems found on other DOE 
cleanup projects that involved more traditional contracting and 
financing approaches. For example, our 1996 report on DOE's major 
system acquisition projects (generally projects costing $100 million or 
more), none of which were privatization projects, disclosed that at 
least half of the ongoing projects and most of the completed ones had 
cost overruns and/or schedule delays.3 Reasons for these 
problems included inadequate project oversight and insufficient 
attention to technical, institutional, and management issues. Although 
privatization was an attempt to address these types of problems, it has 
not yielded the desired results.
---------------------------------------------------------------------------
    \3\ See Department of Energy: Opportunity to Improve Management of 
Major System Acquisitions (GAO/RCED-97-17, Nov. 26, 1996).
---------------------------------------------------------------------------
Observations on DOE's Privatization of Complex Cleanup Projects
    We have the following observations based on our past and current 
reviews of DOE's privatization projects:
     Fixed-price contracts may not work effectively in all 
situations. DOE has had a strong preference for using fixed-price 
contracts as a key component of its privatization program. Federal 
Acquisition Regulation (FAR) guidelines note that the conditions most 
conducive to fixed-price contracting include a clearly defined scope of 
work, a low probability of major changes to the work scope, the 
existence of proven technologies, sufficient price information to 
determine a fair price, and an appropriate allocation and sharing of 
risks. In contrast, the three projects we reviewed had changes in 
scope, uncertainties about waste constituents and technical approaches, 
unrealistic project schedules, or unresolved regulatory issues that 
ended up affecting schedules or costs after the contracts were awarded. 
For example, on the Pit 9 project, the contractor changed the design of 
the chemical treatment system, a major component of the project, after 
construction of the building had started. Eventually, the chemical 
treatment system was modified so much that it no longer fit in the 
building as constructed. These inconsistencies with the FAR guidelines 
make it more likely that significant changes will occur during the life 
of the contracts. Therefore, these projects may not have been good 
candidates for fixed-price contracts.
    DOE's guidance on privatization encourages the use of fixed-price 
contracts for cleanup projects. In contrast, the U.S. Army Corps of 
Engineers has guidance that appears to be more consistent with the FAR 
guidelines for using fixed-price contracts. The Corps' general 
contracting guidance for hazardous, toxic, and radioactive cleanup 
projects states that fixed-price contracts are not the best contracting 
vehicle for complex radioactive waste cleanup projects. The guidance 
further states that the Corps increasingly relies on cost-reimbursement 
contracts for the design and operations phases of such projects. The 
primary reason the Corps has taken this position is that projects to 
clean up radioactive wastes can have significant uncertainties, 
including undefined amounts and concentrations of contaminants, which 
can affect costs and schedules. These conditions are similar to the 
uncertainties DOE has faced on its complex nuclear waste cleanup 
projects.
    DOE has been more successful using fixed-price contracts for 
projects whose conditions have more closely matched those specified in 
the FAR guidelines. Generally, those projects were not complex cleanup 
projects that involved constructing and operating treatment facilities. 
For example, DOE has used fixed-price contracts at Idaho Falls and 
Hanford to purchase laundry services for such items as contaminated 
workers' uniforms. DOE's operating experience under these contracts has 
confirmed savings of several million dollars each year.
     Full private financing for complex cleanup projects may 
not be a viable approach. It is not clear whether full private 
financing for complex projects is achievable or whether it will provide 
needed assurance that contractors will perform effectively. According 
to DOE officials, including the Director of the Office of Contract 
Reform and Privatization, none of these privatized cleanup projects 
have secured commercial financing to date, although a few have been 
financed internally by the contractors. For example, on the Pit 9 
project, Lockheed Martin financed project design and construction 
activities from its own equity funds and government progress payments. 
On the Hanford project, BNFL planned to use both equity and debt 
financing. However, in order to make commercial financing viable, DOE 
agreed to pay BNFL's commercial debt in the event of contract 
termination. DOE decided it would terminate the contract before BNFL 
obtained commercial financing. On the advanced mixed waste project, 
BNFL is currently funding activities using its equity. However, in the 
unlikely event that BNFL's financing is not sufficient for the entire 
project, DOE may need to consider other options, such as making 
progress payments or changing the contract to make financing the 
project more attractive to lenders. These potential changes would also 
affect the allocation of risk between the two parties.
    Full private financing also has not ensured that contractors 
perform satisfactorily. For example, the Pit 9 contract was terminated 
and the Hanford contract is being terminated because of concerns about 
the contractors' abilities to successfully complete the projects. On 
the advanced mixed waste project, it is too early to tell if BNFL can 
perform successfully.
    Overall, full private financing of cleanup projects is only one of 
several ways that DOE can encourage its contractors to perform. In 
addition to using different mixes of public and private financing, DOE 
could use an incentive fee structure in its contracts to tie a 
contractor's performance more closely to its potential profits.
     A thorough analysis of financial alternatives and risks is 
an important part of structuring a successful cleanup project. When DOE 
initiated each of the three projects we reviewed, it limited its 
analysis of contracting and financing alternatives primarily to a 
comparison between a privatized approach and a cost-reimbursement 
contract without performance incentives. In our previous work on 
privatization, we have criticized such a narrow approach to making 
important contracting decisions. On the Hanford project, after this 
Committee raised questions about the contract, DOE agreed to conduct a 
more comprehensive analysis of its financial alternatives. We are 
encouraged that DOE is considering a broader range of alternatives, but 
we have some concerns about DOE's analysis, particularly its 
assumptions about cost growth and its analysis of financial risks. 
These assumptions led DOE to conclude that privatization would be the 
least-cost alternative for the project.
    In its March 2000 draft report, Hanford Tank Waste Treatment 
Alternatives, DOE concluded that cost growth on federally financed 
projects would more than offset the higher costs associated with 
private financing. We have several concerns about this conclusion. For 
example, DOE assumed that with the privatization approach, there would 
be no cost growth once the project started because the contractor would 
have incentives to control its costs. In contrast, DOE assumed that 
with other options, cost growth would more than offset the higher cost 
of private financing. However, DOE had no convincing evidence to 
support the assumption that the privatization approach would have no 
cost growth. In fact, its experiences contradict this assumption. We 
also are concerned about DOE's use of point estimates of cost growth 
rates. Since estimates of cost growth under the various options 
considered are not precise, using one cost growth rate can lead to a 
misleading conclusion about the most cost-effective approach. To 
clearly show the uncertainty associated with the cost growth estimated 
for various contracting and financing options, we believe it would be 
more appropriate to represent the cost growth as a range of values 
instead of a single point estimate.
    DOE did not fully analyze or disclose the financial risks it 
incurred when it assumed responsibility, in the event of the Hanford 
contract's termination, for a large portion of BNFL's debt on the 
project. With this action, which DOE took so that BNFL could obtain 
private financing, significant performance risk shifted from BNFL to 
DOE. By contrast, under a more typical privatization project, the 
performance risk remains predominately with the contractor. Had the 
Hanford contract continued, it is not clear that DOE would have 
reflected this shifting of the risk in its cost analysis of financial 
alternatives, as we suggested in our October 1998 report on this 
project.4 A more complete evaluation of the actual risks 
assumed by the government on this project could have shown that a 
significant portion of the potential cost of the project shifted to the 
government, since the government's liability for BNFL's debt has a cost 
associated with it. Such an evaluation might have found a different 
financing alternative more cost-effective for the government.
---------------------------------------------------------------------------
    \4\ See Nuclear Waste: Department of Energy's Hanford Tank Waste 
Project--Schedule, Cost, and Management Issues (GAO/RCED-99-13, Oct. 8, 
1998).
---------------------------------------------------------------------------
     Regardless of the contracting and financing mechanisms 
used, effective oversight is essential to a project's success. In our 
past work, we have raised concerns about the adequacy of DOE's 
technical, financial, and managerial oversight capabilities, since 
DOE's oversight has not been sufficient to prevent schedule slippages 
or cost increases. For example, on the Pit 9 project, DOE was unable to 
ensure that Lockheed Martin was addressing significant design, safety, 
and performance problems, and the contract was finally terminated. On 
the Hanford project, we reported in 1998 that effective oversight by 
DOE, especially in the areas of project administration, technical 
issues, and support activities, would be critical to the project's 
success. DOE has invested considerable effort in establishing oversight 
mechanisms for technical, health and safety, risk management, and 
business and financial aspects of the project. Even so, DOE officials 
said in April 2000 that they were not aware of the extent of the cost 
increases that BNFL was estimating for the project until shortly before 
BNFL submitted its proposal on April 24, 2000. This lack of awareness 
raises questions about the adequacy of DOE's expertise to oversee this 
aspect of the project. As DOE continues to explore ways to improve the 
performance of its cleanup program, it will be especially important to 
ensure the effectiveness of its technical, financial, and managerial 
oversight capabilities, both in structuring contracts and in overseeing 
them. DOE has an initiative under way to strengthen its capabilities in 
this area. This initiative involves improved coordination and 
accountability for project management teams and increased oversight of 
critical projects by senior DOE management.
    In summary, Mr. Chairman, privatization has not been a successful 
approach for the complex cleanup projects we reviewed. In our view, DOE 
has not given sufficient attention to a number of factors when deciding 
how to contract for and finance such projects. These include (1) the 
type of waste and how well its constituents are understood, (2) the 
degree of competition available among private companies with the 
necessary cleanup expertise, (3) the financing options available, (4) 
the risks involved in the project and the entity that is best prepared 
to assume them, and (5) the capabilities of DOE's project oversight 
staff. In the future, DOE needs to more carefully evaluate these 
factors when making decisions about some of its most challenging 
cleanup responsibilities.
    Thank you, Mr. Chairman and Members of the Subcommittee. That 
concludes our testimony. We would be pleased to respond to any 
questions that you may have.
Contact and Acknowledgments
    For further information on this testimony, please contact Ms. Gary 
L. Jones at (202) 512-3841. Individuals making key contributions to 
this testimony included Carole Blackwell, Dwayne Curry, Doreen Feldman, 
Nancy Kintner-Meyer, Mehrzad Nadji, Tom Perry, and Bill Swick.
                               Appendix I

 Approved DOE Privatization Cleanup Projects That Involved Constructing
                        and Operating Facilities
------------------------------------------------------------------------
                                                       Status as of June
             Project                   Location              2000
------------------------------------------------------------------------
Tank waste remediation system...  Hanford...........  Contract
                                                       terminated during
                                                       design; project
                                                       to be recompeted
Pit 9...........................  Idaho Falls.......  Contract
                                                       terminated;
                                                       parties in
                                                       litigation
Advanced mixed waste treatment..  Idaho Falls.......  Ongoing--preconstr
                                                       uction
Low activity waste treatment....  Idaho Falls.......  Project cancelled
Spent nuclear fuel dry storage..  Idaho Falls.......  Ongoing--preconstr
                                                       uction
Transuranic waste treatment.....  Oak Ridge.........  Ongoing--preconstr
                                                       uction
Environmental management waste    Oak Ridge.........  Ongoing--preconstr
 management facility.                                  uction
Spent nuclear fuel transfer and   Savannah River....  No longer a
 storage.                                              privatization
                                                       project--converte
                                                       d from private to
                                                       federal financing
------------------------------------------------------------------------

                          Related GAO Products
    Nuclear Waste: DOE's Advanced Mixed Waste Treatment Project--
Uncertainties May Affect Performance, Schedule, and Price (GAO/RCED-00-
106, Apr. 28, 2000).
    Nuclear Waste: Department of Energy's Hanford Tank Waste Project--
Schedule, Cost, and Management Issues (GAO/RCED-99-13, Oct. 8, 1998).
    Department of Energy: Alternative Financing and Contracting 
Strategies for Cleanup Projects (GAO/RCED-98-169, May 29, 1998).
    Nuclear Waste: Department of Energy's Project to Clean Up Pit 9 at 
Idaho Falls Is Experiencing Problems (GAO/RCED-97-180, July 28, 1997).
    Nuclear Waste: DOE's Estimates of Potential Savings From 
Privatizing Cleanup Projects (GAO/RCED-97-49R, Jan. 31, 1997).
    Hanford Waste Privatization (GAO/RCED-96-213R, Aug. 2, 1996).

    Mr. Upton. There was a bet up here that you would be 
exactly 5 minutes, and it was won.
    I would just ask unanimous consent that a number of 
documents that we have be made part of the record. I know 
they've been cleared with both sides, so that's without 
objection. No one is here at the moment, but not a problem.
    [The information referred to follows:]
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    Mr. Upton. Mr. Glauthier, the Department stopped work on 
BNFL's contract at Hanford because BNFL announced in March that 
the cost had increased on the project from $6.9 billion to 
$15.2, as you know. The Department, as I understand, was 
unaware of the increases until the last minute, but according 
to a December 1999 assessment by DOE, BNFL was already 9 months 
behind in producing a pricing methodology for the project. Why 
did they go so long?
    Mr. Glauthier. Let me give you a current picture of things. 
First of all, we have not actually stopped work. What we're 
trying to do, in this transition period, is keep the design 
work proceeding so that there will not be a complete break in 
either the work or, especially, in the team. We want to keep 
some of the technical----
    Mr. Upton. I'll let you finish in a second, but I had 
understood that DOE had planned to notice BNFL with a 
termination earlier, in fact this month, but they've not done 
so. Do you intend--does DOE plan to do that or not?
    Mr. Glauthier. We are having discussions with them and 
trying to finalize the details of the termination. We do need 
to do that.
    Mr. Upton. How much of the 6.9 have they actually been 
awarded, all of it?
    Mr. Glauthier. Oh, no. The question of how much we will pay 
for the work they've done is one of the areas under 
negotiation. We do need to pay them for work that they've done 
that will be useful and is a legitimate cost to the government. 
I said earlier that cost may be in the range of $200 or $300 
million. We do not have a precise number, though. It will, 
obviously, take time to go over with them what they've actually 
done. We have stopped work on some aspects, such as the 
financing, which we do not want them to do because we're not 
going to proceed with that aspect of the project. The only 
things we've asked them to continue on is some of the design 
work while we carry out these negotiations.
    We do intend to do this promptly. I know there were 
statements earlier about dates that we might have actually 
terminated the contract and the like. Those statements were 
made by people working the project at the site, who are in 
charge of trying to conduct the negotiations. Those were goals 
which they've not been able to meet because of the complexity 
of the issues. The decisions that the Secretary made were to 
make sure that we have a transition here where we'll issue an 
RFP to other firms in August, and that we'll make a selection 
of a new contractor in January of 2001.
    Mr. Upton. But don't you think that if they had done this 
pricing methodology rate earlier, we would not have been in 
this crisis?
    Mr. Glauthier. Well, our discussions with them back in the 
fall and in the winter were that we were very concerned about 
their ability to come in with an effective cost for us and a 
management plan that would show us they were really on top of 
this project. As recently as February, though, the briefings 
that our people received from BNFL still indicated that the 
costs were close to the level of the earlier estimate. They 
might have been--I guess we were expecting perhaps a 10 or 15 
percent increase, instead of a $6.9 billion cost, a cost around 
$8 billion. That would have been a range we thought we could 
negotiate with them; we probably could come to something that 
was workable. We were quite surprised when we got indications 
later that the price was way, way above that.
    Mr. Upton. I know that the Secretary indicated that he 
was--I think in his words, he was surprised at the jump from 
$6.9 billion to $15.2 billion. I just feel if you'd been on top 
of them and had been working on the pricing methodology versus 
letting it lag for 9 months, the surprise and the alarm would 
have not been--perhaps you would have been able to get this 
thing under control without allowing it to get out of hand 
altogether and be forced really to try and seek yet another 
contractor to clean up this mess.
    Mr. Glauthier. I personally had the program give me a 
series of briefings during the fall and then in the winter in 
detail about the project, its cost, and what the critical 
financial issues were going to be. The independent cost 
estimate that we got from an outside engineering firm, was 
carried out in the same timeframe. Whether it was completed----
    Mr. Upton. Did they show the same? Did they show it to be 
$6 to $8 billion versus $15?
    Mr. Glauthier. Their cost was much closer to the original 
$6.9 billion. It was way below $15- and gave us some confidence 
that the technical work to be done here ought to come in closer 
to the original estimates.
    Mr. Upton. We're anxious to hear obviously from BNFL on the 
next panel. I know, Ms. Jones, we're actually going to ask you 
to stay a little bit longer if you're able to do that.
    Ms. Jones, according to the BNFL statement, it said the 
fixed-price approach at the Hanford tank waste contract served 
the government and the taxpayer well. What is your reaction to 
that statement?
    Ms. Jones. In our testimony today, we talked about certain 
criteria that we think are important for moving forward with a 
fixed-price contract. In this particular case I'm not sure that 
it was a good opportunity for using fixed-price contracting. 
There was a lot that was unknown. The type of contract that 
you're talking about was very large. The scope was not fully 
defined. So this was not the best case for using fixed-price 
contracting.
    I know that BNFL points out that they have a good technical 
approach. They have begun the design, and I think from a 
technical standpoint they were moving in the right direction. I 
can't say whether they would or would not have those things 
under a different contracting approach.
    Mr. Upton. The DOE reportedly told the Congress that it 
expected savings using fixed-price controls in the magnitude of 
25 to 50 percent as well as other benefits compared to a more 
traditional contracting approach. Your testimony stated that 
DOE privatization projects have not achieved those significant 
results, and what is your--why do you think that is the case?
    Ms. Jones. I think one point I'd like to make, Mr. 
Chairman, is that we've reported in the past that the cost 
savings estimates that DOE has done haven't always been well-
founded. Sometimes they compared apples to oranges, sometimes 
they didn't have a lot of good cost data to estimate savings. 
Sometimes they were using the wrong kind of base cost 
information.
    But to set that aside for a second, what we said in our 
testimony today was that they really haven't achieved 
everything that they hoped for out of privatization, 
particularly for these very large, complex projects. Pit 9, as 
we've all talked, that's in litigation. Certainly there will be 
no cost savings from that project. The Tank Waste Project at 
Hanford, DOE has already said they are not moving forward with 
that as a privatized contract, so, again, as they defined it, 
it has not worked. We have not seen cost savings there. For the 
Idaho Project, we have seen some indications that delays could 
affect the cost and the price, but there still is hope there 
that we can get some cost savings from that project as you move 
forward.
    Mr. Upton. As you know, this morning we sort of looked at 
Pit 9 and Hanford and a couple of others really, just a 
handful. And Mr. Glauthier's testimony talked about, I think, 
132 different sites that you've done, and 37, I think, you 
indicated had been completed. Are we looking at it wrong; is 
this just sort of a glaringly bad example, or is it--in general 
do you think that it's working? Have we just picked the wrong 
subset with tremendous increased costs because of this? What 
kind of sample--what kind of draw do we have here?
    Ms. Jones. GAO has always supported the kind of contract 
initiatives that the Department has been going through, and we 
supported fixed-price contracting, but the point is you have to 
use it in the right circumstances. I think the very large, 
risky projects that we're addressing here today probably were 
not the best choices, but fixed-price contracting has and will 
work in other situations.
    Mr. Glauthier. Could I add to that, Mr. Chairman?
    Mr. Upton. Go ahead.
    Mr. Glauthier. I think it's natural that some of these 
reviews will focus on the biggest projects and ones that seem 
to be having some trouble. If we don't think of it as a 
statistically representative sample, there are important 
lessons to be learned here.
    I think there is a lot of agreement in terms of why some of 
these things haven't worked in some of these cases, but I did 
want to point out in my comments earlier there are a large 
number of these kind of contracts out there. If we looked at 
some of those, I think you'd find there have been successes, as 
well as these others.
    Mr. Upton. One of the reasons I was a little bit late 
coming back from the floor from the vote, I wanted to find Joe 
Barton, who had chaired--I've not always been a member of this 
subcommittee, and I know that Joe chaired--Mr. Barton chaired 
these hearings as they looked at Pit 9 back in 1997, and as I 
talked with Joe--he can't believe it's still coming up--but in 
regard, one of the things we learned from that hearing was that 
DOE lacked the experienced personnel and management ability to 
manage and oversee the complex fixed-price contracts, and at 
that particular hearing Secretary Pena committed to the 
subcommittee that he would focus attention to Federal staffing 
issues to address the problem. However, a recent independent 
assessment of DOE's project management team at Hanford 
identified, quote, significant corrective actions are required 
before DOE can proceed even if BNFL had provided an acceptable 
bid.
    The question that I and other members of the subcommittee 
have to ask is what's happened to that commitment to improve 
the management capabilities, particularly in light of the fact 
for 9 months no one really tracked when some of this data was 
going to be available, and all of a sudden the cost doubled? 
It's not a minor sum from 6.9--some of our appropriator 
cardinals would like to have the amount of money that's the 
difference between 6.9 and 15.2.
    Mr. Glauthier. You're absolutely right, which is why we did 
not go ahead with it. We organized ourselves last winter when 
we first became concerned about some of this, so, when they did 
give us a proposal, we were able to evaluate it quickly and 
take action.
    On the broad question of management and how we can improve 
and strengthen our project management at the Department, we 
agree that that is very important. I've only been here a little 
over a year. One of my goals is to try and help improve that. 
I'm a businessperson and not a lawyer. In this town, that's 
unusual, but I think it is an indication of what we're doing.
    Last June, Secretary Richardson launched an initiative on 
project management, which applied to the whole Department, not 
just the environmental cleanup area. We've set up a new office. 
I mentioned the Office of Engineering Construction Costs, which 
is staffed by people we've brought in from outside DOE. It's 
staffed by General Clair Gill, who is a retired general of the 
Army, who has a lot of experience in project management. We 
brought in staff from the Corps of Engineers and from the Navy. 
We borrowed staff from NASA to try to get experience from the 
whole government on how to manage large, complex projects. 
That's just one example. We're trying a lot of initiatives so 
we can address this problem.
    Mr. Upton. Do you think that new management team will, in 
fact, prevent problems like this in the future? Will they have 
the tools and the funding and proper oversight to do that?
    Mr. Glauthier. We certainly hope that they'll help us 
reduce these problems. I don't think we'll ever totally 
eliminate them, but we're setting up a review system so that 
every major project will be reviewed. We've put in place new 
controls so that every project in the Department that's over 
$400 million total cost, has to come to me and a board review 
at four critical decision points. There will be a review before 
the decision is made to go to each next step: to go into formal 
design, to go into construction, to go into operation. Those 
reviews will be a very disciplined way to make sure we take a 
very careful look before we go to the next step. Those are the 
new things that we haven't done.
    Mr. Upton. I know my time has expired, but let me just ask 
one more question before I yield. Have you worked with the GAO 
hand and glove, particularly with some of the recommendations 
that they've made, and what is their reaction to what you've 
done?
    Mr. Glauthier. I'm sure we can work more closely. We have 
tried to take the recommendations and work with them. And, we 
have benefited from the studies that have been done over the 
last 10 years. We'll look for more opportunities to continue 
doing that.
    Mr. Upton. Ms. Jones, what's your reaction to the new team 
that has a couple of offices in the hallway?
    Ms. Jones. We haven't looked specifically at the new 
initiatives, such as the new Office of Project Management at 
headquarters. We think the Department is putting some things in 
place that will help in the future.
    One point I wanted to make is that we are talking about a 
major culture change in the Department, a culture from totally 
relying on the contractor to trying to be more proactive in 
terms of management and oversight. This is going to take time.
    But the other thing that I want to point out is that the 
comments you made earlier about the independent group that came 
in and looked at the Hanford project, they were talking about 
the folks onsite and having the right people in place onsite, 
not people back in headquarters. I think that the Department 
needs to look at both of those issues.
    There were also some comments in an independent report that 
the roles and responsibilities were not clear between 
headquarters and the site. These are the kinds of issues that 
we've been raising with the Department for years; issues that 
they still need to continue to work on.
    Mr. Upton. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Again, I thank the 
panel.
    Ms. Jones, I have three questions for you. What I'm going 
to do is read them to you and then let you acquire this record. 
If you could answer those in writing as a late filed exhibit to 
your testimony, I would appreciate it.
    Ms. Jones. I'll be happy to.
    Mr. Bryant. I have several questions for Mr. Glauthier that 
I need answered today, if possible, so we can kind of move 
through this quickly.
    In terms of fixed-price contracting, it's been a key 
element of DOE's privatization initiative. What concerns do you 
have about DOE's use of fixed-price contracts for complex 
nuclear waste cleanup projects?
    No. 2, DOE expected that the private financing of cleanup 
projects would shift the performance risk to the contractor and 
create significant incentives for them to perform, yet this 
appears not to have happened. And is full private financing a 
valid strategy for cleanup projects?
    Third question: GAO has frequently raised questions about 
DOE's oversight of its contractors as to whether it's effective 
or not, especially with fixed-price contractors. What are your 
concerns about DOE's oversight capacities or capabilities?
    If you could just file those in written response, and I 
with like to move on and ask some questions.
    Ms. Jones. We'd be happy to respond for the record.
    Mr. Bryant. Thank you.
    [The following was received for the record:]

    Question 1. What concerns do you have about DOE's use of fixed-
price contracts for complex nuclear waste cleanup projects?
    Response: DOE must carefully evaluate fixed price contracting as 
just one of many contracting strategies that it can use to get the most 
out of federal cleanup dollars. Complex cleanup projects typically have 
significant uncertainties including undefined amounts and 
concentrations of waste contaminants, which can affect costs and 
schedules. DOE has been more successful using fixed-price contracts 
when project conditions more closely match those specified in Federal 
Acquisition Regulations (FAR) guidelines. Those conditions which are 
most conducive to fixed-price contracting include a clearly defined 
scope of work, a low probability of major changes to work scope, the 
existence of proven technologies, sufficient price information to 
determine a fair price, and an appropriate allocation and sharing of 
risks. Therefore, fixed-price contracting may not be the optimum 
contracting method for complex cleanup projects like the ones we 
reviewed.
    Question 2. DOE's expected that the private financing of cleanup 
projects would shift the performance risk to the contractors and create 
significant incentives for them to perform, yet this appears not to 
have happened. Is full private financing a valid strategy for cleanup 
projects?
    Response: Based on DOE's experiences to date, full private 
financing may not be a valid strategy for complex cleanup projects. 
DOE's privatization approach has not been successful in shifting 
performance risk to the contractor for complex cleanup projects like 
the ones we reviewed. Thus far, none of DOE's privatized projects have 
secured commercial financing, although some of them have been financed 
internally by the contractors. Also, the government may have to accept 
more of the risk than originally envisioned to ensure that the 
contractor can obtain private sector financing. For example, on the 
Hanford tank waste project, in order to make commercial financing 
viable, DOE agreed to pay BNFL's commercial debt in the event of 
contract termination. Consequently, much of the performance risk DOE 
planned to shift to BNFL shifted back to the government. Given that 
shift of risk back to the government, we question whether the high cost 
of full private financing would have resulted in a ``best value'' for 
the government on that project.
    Question 3. What are your concerns about DOE's oversight capacities 
and capabilities?
    Response: Our concerns regarding DOE's oversight of fixed-price, 
privatization contracts are similar to concerns we have reported in our 
past work on other projects. In 1996, we raised concerns about the 
adequacy of DOE's technical, financial, and managerial oversight of 
large projects because DOE oversight had not been sufficient to prevent 
contractor performance problems that resulted in schedule slippage and/
or cost increases. We identified the same kinds of concerns on the 
complex privatization projects we reviewed. For example, DOE spent 
considerable effort in establishing oversight mechanisms for technical, 
health and safety, risk management, and business and financial aspects 
of the Hanford tank waste project. However, the external independent 
review panel that recently assessed the project's readiness to proceed 
stated that DOE's project management systems were not fully 
implemented, oversight positions were not fully staffed, and key 
project risks were not defined and mitigation plans were not in place. 
Not surprisingly, DOE officials said they were unaware of the cost 
increases that BNFL estimated for the project until just before BNFL 
submitted its contract pricing proposal in April 2000. This lack of 
awareness raises questions about the adequacy of DOE's effort and 
expertise to oversee this aspect of the project. As DOE continues to 
explore ways to improve the performance of its cleanup program, it will 
be especially important to ensure the effectiveness of its technical, 
financial, and managerial capabilities, both in structuring contracts 
and in overseeing them.

    Mr. Bryant. In terms of this issue with Hanford, after BNFL 
submitted its April 24 $15.2 billion proposal for cleanup of 
the Hanford tank, Secretary Richardson said he would terminate, 
as you have mentioned, BNFL's contract for tanks. Further, it's 
my understanding that you were to submit options to BNFL's 
contract in mid-May to the Secretary. What was the basis--his 
basis to terminate their contract, basis of his decision, and 
do you support that decision?
    Mr. Glauthier. Yes, I certainly do support the decision. 
The basis was a combination of cost, recognition that the cost 
was completely out of the range of what we felt was reasonable 
as demonstrated by both an independent cost estimate by an 
outside engineering firm as well as by our own analysis, and 
concern about the management team or lack of management team 
that was proposed. The firm, for example, was supposed to 
identify its project manager and the key management personnel 
who would carry this project forward, and that was not done in 
the submission that we received in April.
    Mr. Bryant. What options were presented to the Secretary in 
your report to him in May, and which did you recommend?
    Mr. Glauthier. We actually made the report on May 8. We did 
it a week ahead of schedule and felt that we'd been able to 
complete the analysis well enough to do it then. We were 
anxious to move quickly. We did not want to take all the time.
    We discussed with the Secretary options that would have 
included going ahead with one firm, trying to conduct basically 
a sole-source negotiation with one company to take over the 
contract and do the design and construction. We talked about 
whether or not to simply terminate the contract, hold a 
competition, and do nothing until we reached an appropriate 
point for a break in the work that was going on. The course we 
finally did decide on was to have a transition period of 
several months until we could award a new contract in January, 
try to keep the design process going so we make some more 
progress on that, and keep the key technical people together 
who would be available as a resource to whoever the successful 
bidder is. But the goal is to get quickly to issuing a new RFP, 
doing that in August, and trying to invite as much competition 
as possible so we can select a firm who would be qualified to 
do the work, technically sound, and give us a good competitive 
price.
    Mr. Bryant. One result of the termination of the BNFL 
contract is that the work schedule is going to slip. Would that 
be a fair statement?
    Mr. Glauthier. Some dates, of course, will slip, like 
beginning construction next summer probably won't be able to be 
met. But this option that we've chosen has the possibility, and 
the plan is, to still complete or meet the two major milestones 
that we and the State are most focused on. One of those is to 
have this facility actually constructed and ready to go into 
construction by 2007. The other is 2018, to complete the 
cleanup of the waste. We believe that we can meet those dates, 
although there is less contingency in terms of time slack in 
the schedule to do that.
    It's going to be tight, but that's one reason we chose this 
option. We could still meet the milestones that we've agreed to 
with the State.
    Mr. Bryant. Is it possible that in the future bidding that 
the dollar figure by any new contractor could also reach that 
same figure that BNFL proposed?
    Mr. Glauthier. We certainly hope so. One of the things 
we've done is restructure the contract as well.
    Mr. Bryant. You hope it reaches the same number that BNFL 
had proposed?
    Mr. Glauthier. The original number.
    Mr. Bryant. Just to be clear, that was not a very clear 
question, I apologize, as to which number I was talking about.
    Mr. Glauthier. One thing I did not mention as I described 
the options earlier presented to the Secretary is that each of 
those included a common element of restructuring the contract. 
The original contract was to design, build, and operate this 
facility for the whole 20-year period. What we've changed is to 
have one contract to design and build the facility and another 
contract to carry out its operation.
    We did that for a couple of reasons. One is we want to find 
a firm who has the best qualifications to design and build this 
facility. There are many more firms who would consider doing 
that than there are who would do that and also operate it----
    Mr. Bryant. That was in the $15 billion proposal from BNFL. 
Did that include operating it, building it and operating it?
    Mr. Glauthier. Yes, it did.
    Mr. Bryant. Actually you're restructuring it to lessen the 
job requirements, take away the operation, and just go back to 
the building, which possibly BNFL could do it cheaper than 
$15.2 billion?
    Mr. Glauthier. The cost estimate they've given us for that 
portion was also higher than it should have been, and we felt 
that it was not responsive either. So, we're comparing the 
appropriate pieces of this as we go forward.
    Mr. Bryant. Let me ask you another question. The BNFL 
Company claimed in its testimony that will follow that it has 
for the first time created a technical solution for the Hanford 
tanks. Do you agree with BNFL's assessment of its technology?
    Mr. Glauthier. We do think that the technical approach of 
using the melters and the like is right. We are very puzzled, 
frankly, that, with that assessment, they still came in with a 
price that was so much higher than they had given us 
originally. This is their technology. The reason they were 
chosen originally is that they are the firm who should be in 
the best position to give the government a good price and be 
able to deliver this well.
    There are two issues that cause us problems. One is their 
design; the pace of design was very slow. Instead of getting to 
30 percent design, which is where we really need to be to lock 
in a cost estimate, they'd only gotten about 13 percent of the 
design done. So there was a lot more uncertainty. They weren't 
as responsive on working this as they should have been.
    Another example involves one of the key elements of their 
technology: the melter, the glass melter that will do the 
vitrification work. The melter is part of their technology and 
part of what they already have in other operations, in England, 
for example. They projected in their original estimates that 
the melter would be available 60 percent of the time, so, of 
course, that affects your costs. They built a pilot here in 
Maryland that operates better than expected. It was available a 
larger percentage of the time. It actually produced at a higher 
rate of output than expected. It was about a third--or, in the 
end, about half of the output that we would have for the full-
size. So it was a pretty big pilot. It wasn't just a small, 
little pilot.
    Still, in the final estimate they gave us in April, they 
reduced the availability assumption to 40 percent. We thought 
they'd take it from 60 up to 70 or 80 percent, and it would 
make more of an economic proposal. For some reason they made it 
more conservative and assumed the melter to be less available 
than before. This is one example, but it puzzles us why this 
has come out the way it has.
    Mr. Upton. If the gentleman would just yield.
    Mr. Bryant. I'd be happy to yield.
    Mr. Upton. Did they provide a line item--when they bumped 
the cost from 6.9 to 15, did they--was that a line item in 
terms of the increases? For that particular example that you 
cited, what was the cost change?
    Mr. Glauthier. They provided a whole detailed new cost 
estimate. Essentially the original one was a preliminary 
estimate, and then this new one was a complete one.
    Let me defer to the Assistant Secretary here, Carolyn 
Huntoon.
    Ms. Huntoon. When they put in the proposal to us on April 
24, it was the final delivery of a series of packages of 
information, which had been coming in for several weeks, I 
believe. The data was for the team to assess, and each item 
that was to be specified was discussed, and the numbers were 
given. In our immediate assessment that followed in the week or 
so afterwards, before the Secretary made his decision, there 
were many, many items that had increased in cost that were 
delineated in that report.
    Mr. Bryant. Mr. Chairman, I just have one follow-up 
question and not necessarily on that point, but would like an 
answer. In January of this year, the Secretary decided to stop 
the sale of nickel from the BNFL Oak Ridge project. I think I 
alluded to that in my statement. Initially it was envisioned 
that BNFL would derive part of the funding for the contract and 
potentially some of its profit from the recycling from the sale 
of this clean material specific to nickel. What will be the 
cost to the government of this decision, and what path from 
here have you recommended on the nickel to BNFL?
    Mr. Glauthier. We are still trying to make the final 
decision on how to handle some of these materials. The decision 
at that time was that because the material had only surface 
contamination, it could be decontaminated and might be recycled 
as long as it met standards that were consistent with the 
Nuclear Regulatory Commission standards for other operations. 
But material that was volumetrically contaminated, internal to 
the material, could not be recycled. We clearly would have to 
absorb some costs of storing that material until such time as 
it might be able to be used or could be used in other 
applications.
    Let me refer this question in terms of detail cost to the 
Assistant Secretary.
    Ms. Huntoon. Again, that is one of the issues we are 
discussing with BNFL right now: the cost of them not selling 
the recycled nickel. The costs depend on what we would do with 
the material, whether we would hold it or dispose of it or 
what. But I think they are talking in terms of $30 to $50 
million range in there. That was one of the assessments that we 
made when the Secretary made the decision to put a moratorium 
on the release of volumetrically contaminated materials, that 
it would be at some cost, and we just haven't locked in that 
number yet.
    Mr. Bryant. Was the discussion as part of this specifically 
saying, what we want you to do, BNFL. I talked about specific 
proposals. Did that include their recycling not only surface-
contaminated, but volumetrically contaminated, everybody had 
their eyes wide open as to what we were dealing with when the 
contract was agreed to?
    Mr. Glauthier. Yes, that's right. I wasn't there and don't 
know the full assessment of this. But, this year, when the 
Secretary made his decision, it was based on the question of 
health; do we have an appropriate standard to be sure we're 
protecting the public health and safety? So, we realize that 
having made a change like this, and it is a change in the basic 
ground rules of the contract, we have a responsibility to cover 
that cost.
    Mr. Bryant. I agree with that, and certainly health and 
safety is a factor. My concern is the Secretary should have 
concluded that before the contract was issued so that we 
haven't, in effect, had to exhaust all this money correcting 
that error. In other words, that determination should have been 
made before the contract was issued that you cannot do this, 
rather than allowing the BNFL to build this into their bid and 
then come back after the fact and make this type of change, 
albeit a good one, and cost the government between $30 and $50 
additional million dollars.
    Mr. Glauthier. The contract was signed in August 1997 
before either Secretary Richardson or I was there and before 
the Assistant Secretary was there as well. So I agree with your 
point. It, clearly, should have been done originally, but at 
this point we are presented with the information that raised 
health and safety questions for us. What we can do is try to 
deal with the issue at the time.
    Mr. Bryant. I understand, but there was a Secretary there 
before Secretary Richardson.
    Mr. Glauthier. Yes. I think your point is right. We should 
have considered all those things.
    Mr. Bryant. Thank you. Thank you for your testimony. Thank 
you for listening to us.
    Mr. Glauthier. Thank you.
    Mr. Upton. Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman.
    Who did the performances of the evaluations constantly of 
the progress of contractors at Hanford?
    Mr. Glauthier. The BNFL project we've been talking about?
    Mr. Burr. Yes, sir.
    Mr. Glauthier. The team there onsite at Richland, 
Washington, has been there for about a year and has been----
    Mr. Burr. Who does the performance reviews, DOE, or do you 
let BNFL do their own?
    Mr. Glauthier. Oh, no. The Department of Energy does those.
    Mr. Burr. Is that somebody onsite?
    Mr. Glauthier. We have our Federal staff there. The Office 
of River Protection is doing those and then reporting to the 
Environmental Management Office here at headquarters on a 
regular basis.
    Mr. Burr. Did they ever give DOE headquarters a clue that 
we've got a problem; this is going to be much more expensive 
than what we thought it was going to be?
    Mr. Glauthier. Well, my understanding, and I'll let the 
Assistant Secretary respond in a moment, is that as late as 
February we were still asking the questions, and the answer we 
were getting from the contractor was that the cost was going to 
be in the $8-, maybe $8.5 billion total range, and we were 
concerned at that level, but we thought we could probably 
negotiate or work with them around the details. We had no clue 
it was going to be that high until just a few weeks before the 
bid.
    Ms. Huntoon. I think in the evaluation of the contractor, 
the Department of Energy staff that's onsite at the Office of 
River Protection was working relatively closely and watching 
and evaluating products from the contractor. We would get at 
least quarterly status reviews back in Washington of what the 
contractor was doing right and what they were doing not so 
well, with red, green, and yellow lights on various issues 
including----
    Mr. Burr. On the cost schedule they had yellow lights in 
November, they had yellow lights in February, and it wasn't 
until we got to May that we switched from all yellow to all red 
lights.
    Ms. Huntoon. Well, that's right.
    Mr. Burr. I'm looking at your chart, I guess.
    Ms. Huntoon. Yes.
    Mr. Burr. Does that display the surprise?
    Ms. Huntoon. Yes.
    Mr. Burr. Nobody at DOE knew there was a problem?
    Ms. Huntoon. The initial indication that we had, as the 
Deputy Secretary was saying, was in the February to March 
timeframe, when Mr. French, who is the project manager out 
there, was telling us that he got a feeling that the cost was 
creeping up. So, how much are we talking about? Well, this is 
when we were talking in the $8-ish--$8 billion range. Early 
April we had a visit, informal visit, from BNFL both out at 
Richland and here in Washington, and they indicated to us that 
the costs had grown considerably. I know T.J. and I both 
expressed our unhappiness with that information and the desire 
to make sure that, when they came in, there were alternatives 
with these cost numbers.
    Mr. Burr. The 1st of May, the Secretary put out a press 
release, and I quote, BNFL's proposal was outrageously 
expensive and inadequate in many ways.
    Share with us, if you will, where it was inadequate. I 
think we can all agree it's outrageously expensive. I'm curious 
as to where the other--because I don't pick up the ``inadequate 
in many ways'' in the DOE evaluation of performance.
    Mr. Glauthier. I think the most striking point for us was 
the inadequacy of the management plan that they had. The key 
question is this: you've got a project this complex, that is 
going to be run for 20 years; it's going to involve design, 
construction, and operation of this facility. Who is going to 
run it, who is really the person in charge, and what is that 
top team? That was one of the key points of evaluation for 
whatever they gave us.
    In April when they gave us a submission, they did not have 
that project person identified. We didn't know who that project 
manager was going to be. We don't see the ability of this firm 
to carry out the project successfully, so, even if the price 
had been what we originally expected, we would have had 
questions about their ability to actually complete it.
    So we were already concerned, and we were watching for what 
they were going to give us to show that they were capable of 
running this project effectively at any price.
    Mr. Burr. Clearly you've made an evaluation of BNFL as the 
contract is unfolding. The natural question would be--and I 
think GAO probably suggested this in every review that they've 
made--if you had a contract like this, why would there not be a 
separation between design and construction and then go back and 
look at a contract for operation?
    Mr. Glauthier. Well, the idea originally was to take an 
innovative approach. This firm already operates a similar kind 
of technology, vitrification elsewhere, and instead of paying 
them in the traditional way for each of these steps, if they go 
out, raise the financing, design and build this facility, then 
we'll pay for the product that they produce. As you provide 
services and produce these glass logs, we'll pay you by the 
log. And if you could have the freedom to design and build this 
thing without all the complexity of the government procurement 
system watching over your shoulder all the time and give you 
more of the ability to operate as would you in the private 
sector, then, the contention was that the costs would be lower, 
that everything would go faster and be less expensive.
    The concept is pretty good. If the technical side of this 
was good enough, if the characterizations of the waste was good 
enough, if the technical performance, the equipment was right, 
the concept wasn't bad. That's why it was all lumped together, 
why it was all one.
    Mr. Burr. Ms. Jones, you want to comment on what he said?
    Ms. Jones. I want to comment on a number of things that he 
said, Mr. Burr. One is that I think innovation is terrific, and 
I think that the Department is showing us some of that, but I 
also believe that for this particular contract, they were 
advised early on that maybe fixed-price and full private 
financing might not work. You're talking about a very complex, 
very, very costly project, and I think the risk involved for 
the contractor maybe wasn't totally factored into the analysis 
that was done. I think this committee and the GAO report that 
we did in 1998 asked them to look at financing alternatives.
    Mr. Burr. Would you not agree in the structure that we've 
seen not only in this contract but other contracts under a 
fixed price, that it is fixed price until you get to the 
section of the contract that addresses unforeseen costs, where 
it's a negotiation between the contractor and DOE, or the 
incentive based upon the need to accomplish something by a 
certain date, or performance bonus based upon evaluation? There 
are lot of ways in the private sector this would not be 
considered fixed-cost, would it?
    Ms. Jones. Correct. And I also think DOE needs to determine 
whether it should have a separate design phase, separate 
construction phase, separate operations phase, and when looking 
at each of those phases, what's the right contracting method to 
use? Should it be fixed-price? There are different kinds of 
ways to go about it, and the alternatives should be assessed 
for each phase.
    Mr. Burr. Let me move to another set of questions, if I 
could, Mr. Secretary. I think we've discussed this 2-year 
period of BNFL and their design of this treatment facility, and 
that there was a B(1) contract for the construction, design and 
construction. As part of the termination agreement--and you've 
said that you've terminated this contract. Have you terminated 
this contract, or do you intend to terminate this contract?
    Mr. Glauthier. Our intention is to do it. We have already 
indicated we are not going to carry out the full 20-year term 
of this contract. We have only stopped work on a few selected 
things so far, and the negotiations are going on right now in 
Washington, Washington State, to actually complete its 
termination. We need to take certain steps such as making sure 
we have the appropriate rights to use the technology or the 
design----
    Mr. Burr. Let me get into some of those specifics, if I 
could. As part of the termination settlement, DOE will pay BNFL 
for the cost of design work so far completed plus profit. In a 
recent interview DOE indicated that termination costs may be 
$245 million. BNFL has asked for $290 million, which includes 
$23 million in profit. However, BNFL's request for $290- does 
not include the cost of the pilot melter program or its 
intellectual property rights. If DOE decides to proceed with 
BNFL's design with another contractor, DOE will also have to 
pay BNFL for the pilot melter program and intellectual property 
rights.
    Now, clause h--25(h) of the contract clearly indicates that 
the total termination costs for BNFL's Hanford contract should 
not exceed the total funds obligated under clause (h)(2) of the 
contract. According to (h)(2) of the contract, and I've got 
that up here, the total obligated funds are $250 million. Why 
then is BNFL asking for $290 million in its June 2, 2000, 
letter to DOE's contract officer?
    Mr. Glauthier. Well, of course, you'll have to ask BNFL why 
they are asking for that much money.
    Mr. Burr. Does DOE plan to obligate more funds to the 
contract to meet BNFL's request?
    Mr. Glauthier. Of course we can't obligate anything more 
than we actually have authorized. It's possible, I suppose, if 
we decide that some of these costs were appropriate.
    Mr. Burr. You've already told us in your evaluation you've 
determined that they underperformed or didn't perform, and 
you've gone through an evaluation to come to a conclusion that 
you're terminating the agreement, and I would have thought in 
that thought process that you've looked at the contract, you've 
seen what you are obligated for, and that you've probably at 
this point made a determination as to what your obligations are 
financially to terminate this contract. What are they?
    Mr. Glauthier. We have our estimates, but there is a set of 
legal negotiations that have to go on between the government 
and the firm to actually establish the specific number, the 
specific item-by-item responsibilities. I believe I said 
earlier that we think the cost is going to be in this range of 
a couple hundred million dollars. I don't have a specific 
number that I'm willing to pinpoint, but given that kind of 
cost, we need to be sure we're getting the right value for 
that, that we are paying for work that has actually been done 
that we're legally responsible for under the contract.
    Mr. Burr. They are asking for $23 million in profits. Are 
you legally responsible for that?
    Mr. Glauthier. We might be if it's a termination for 
convenience of the government.
    Mr. Burr. Isn't that, in fact--aren't you terminating for 
convenience?
    Mr. Glauthier. That is what our intention is, that's right.
    Mr. Burr. So you're obligated for the $23 million.
    Mr. Glauthier. I don't know that specific number. We're 
obligated for some fee that will be determined. As you 
indicated, they have not performed all the things they've 
agreed to perform.
    Mr. Burr. BNFL has asked for another $34 million for the 
pilot melter program. However, clause (h)(49) of their contract 
specifically states that DOE can acquire the pilot melter data 
for a total cost not to exceed $25 million.
    I guess I would ask you does DOE plan to purchase the 
melter program, and if so, why would BNFL ask for $34 million 
if the contract says $25-?
    Mr. Glauthier. I'll give you the Assistant Secretary.
    Ms. Huntoon. I don't know why BNFL asked for $34-.
    Mr. Burr. Has anybody asked?
    Ms. Huntoon. I have not. I will.
    Mr. Burr. Did we just reach a point where we've said, you 
know, the most convenient thing for everybody is to end this 
contract because we were unclear on the operational stage, so 
the best thing we can do is part company, fight over what the 
settlement is, even though it was specified in the contract, 
and we'll give a little bit, as you said, Assistant Secretary, 
in reference to Mr. Bryant's question on what additionally will 
it cost in Oak Ridge, and you said some cost, $30- to $50 
million. Thirty to $50 million when I go home is not some cost. 
It's a hell of a lot of money.
    Ms. Huntoon. May I respond?
    Mr. Burr. Yes, ma'am.
    Ms. Huntoon. I did not mean that $30- to $50 million wasn't 
a lot of money. I hope it would be the lower number. What we 
need to understand is the cost, and I think that's a 
negotiation that has to take place with the contracting 
officers and the contractor on this nickel issue.
    Mr. Burr. Here's the trouble that I have. Before I was 
here, I was in the private sector. I wasn't a lawyer, so I 
didn't try to interpret what a contract said. I read this 
contract in the layman terms that I could, and it says there is 
a limit, $25 million. If X happens, you get $25 million. The 
question I asked is very simple. They billed you for $34-. Are 
you going to pay them $25-, or are you going to negotiate 
something in between, or pay them $34- which they asked for? I 
would hope that DOE's answer would be, we wrote a contract. 
It's $25-. We're going to pay them $25-.
    Mr. Glauthier. Congressman, our intention is to only pay 
what we absolutely have to and what we are responsible for.
    Mr. Burr. That doesn't answer my question. Is the contract 
valid?
    Mr. Glauthier. The reason I'm giving you the answer I am is 
that I'm not a contracting officer. I don't know all the 
elements there.
    Mr. Burr. I would hope prior to your testimony here that 
somewhere within the Department of Energy counsel has sat down 
and tried to interpret that contract for the questions that you 
expected that we would ask.
    Mr. Glauthier. And the negotiation is actually going on. If 
there is a limit like that, $25 million, then I certainly 
expect our people to pay no more than that. I would hope we 
will pay less, and we'll just have to do item by item.
    Mr. Burr. What you've shared with me is that DOE is 
currently in negotiations with BNFL to buy out of--to buy out 
the termination of this contract, and that it's not necessarily 
the numbers that were established up front that will be the 
cost of our exit.
    Mr. Glauthier. Even in the private sector, which is where I 
spent most of my career, when you terminate a contract, there's 
often some legal work that goes on to settle the final cost and 
that's what we're involved in now.
    Mr. Burr. You are also--you also must purchase certain 
intellectual property rights from BNFL if DOE plans to use 
their design. Pursuant to clause (h)(25) of the contract, these 
costs will have to be negotiated with BNFL. One, will you use 
their design, and if so, have you--can you estimate for us how 
much you will have to pay for the intellectual property rights?
    Mr. Glauthier. To answer the first part, we want to make 
the design available to bidders who will bid on this. We are 
not going to require that the bidders use their design or this 
particular approach, but we do expect that many bidders will do 
that. So we want to make sure that the rights are available for 
us to use on the project.
    As far as the second part of the question, Carolyn?
    Ms. Huntoon. The second part being the intellectual 
properties, paying for them again, I think that the discussions 
with BNFL, what we owe them, are taking place right now out in 
Washington or have been taking place and will continue until we 
terminate this contract.
    Mr. Burr. So we're negotiating the use of the intellectual 
property rights? Don't feel bad about saying it, because even 
in the contract we specified on other things what the amount 
when negotiating those, so I wouldn't expect--given that there 
wasn't a specific dollar amount on intellectual property 
rights, I would expect that we would have to negotiate it. 
Accepting the fact that there are intellectual rights, that you 
will accept their design for the project is an acknowledgment 
that, in fact, they were on the right track, and clearly the 
evaluation period throughout the process suggested, but up 'til 
May when the BNFL came in with a new number, their marks 
weren't too bad throughout the evaluations that were done by 
land management.
    Let me ask one final question. The Chairman has been very 
patient. How many people do you expect to bid on the new 
contract?
    Mr. Glauthier. I hope we can get as many as possible. We 
certainly would hope to have at least four serious qualified 
bidders, but I hope we can do better than that. I hope we can 
get a higher number.
    Mr. Burr. How many do you expect to bid, not hope to bid. 
How many do you expect to bid?
    Mr. Glauthier. I expect to see four bids, or more. 
Hopefully more.
    Mr. Burr. Do you expect those bids to be closer to the 6.9 
minus design and--what you negotiate out of this contract, or 
will they be closer to $15 billion?
    Mr. Glauthier. I hope they are listening to us. We are 
looking for a good, serious, tight design and for construction 
cost. That's one reason we've broken it down this way. Design 
and construction, that is what it's going to be for the next 7 
years. It's a defined period, and people ought to be able to 
get their arms around that and give us a good tight cost 
estimate. If it's not closer to our original numbers for that 
element of the project, then we're not going to be able to do 
it. Our independent cost estimate gives us some confidence that 
we will be able to get a bid that's in that range.
    Mr. Burr. I would take for granted that since you're 
hopeful that four people will bid, that you've probably talked 
to the bidders already. Do you expect BNFL to be one of those 
four?
    Mr. Glauthier. In fact, we have talked to the bidders, and 
we've a couple of different ways of approaching this. One is 
that we had a number of the firms who are interested all meet 
together to get some briefing, information on this out in 
Washington State, and then about a week or 2 weeks ago, we had 
firms individually come in and spend about 2 hours each with 
Ms. Huntoon and her staff and the procurement people to speak 
specifically about the project.
    So we have been actively trying both to make the 
information available and to encourage active support here.
    I'm sorry, the second part of your question?
    Mr. Burr. The second part is do you expect BNFL to be one 
of those four bidders on the second part of the contract that 
you're currently terminating?
    Mr. Glauthier. We're not precluding them. If BNFL wishes to 
bid, they may do so, but they would certainly have to address 
the various concerns that we have about the ones I've 
discussed.
    Mr. Burr. Let me rephrase my question. In the four that 
you've suggested to me, is BNFL one of them?
    Mr. Glauthier. No.
    Mr. Burr. Thank you. I appreciate both the Secretary and 
Ms. Jones for another review of similar things that we've 
looked at, and I yield back.
    Mr. Upton. I yield to the patient Mr. Bilbray.
    Mr. Bilbray. I have no questions at this time.
    Mr. Upton. Mr. Bryant, do you have additional questions?
    Mr. Bryant. No.
    Mr. Upton. I just want to say in conclusion, as we look at 
all the savings that are added up, could be added up for the 
fixed-price contracts, this one particular one seems like it's 
wiped them all away. To go from $6.9 to $15.2 billion is a very 
large sum, and knowing that it still is 20 years away, when I 
presume neither you or I will be in our present positions, and 
we wish this subcommittee the very best in those days and hope 
that this issue is put to rest. And we'll continue to oversee 
it, and we appreciate your testimony this morning, and we'll 
excuse you now. Look forward to seeing you probably next week, 
Wednesday.
    At this point, Ms. Jones, if you're able to stay and be 
able to take some questions.
    We will call Mr. Paul Miskimin, the CEO of BNFL, to the 
table.
    Mr. Miskimin, thank you for being patient. As you heard at 
the beginning, we have a long tradition of taking testimony 
under oath. Do you have any problem with doing so?
    Mr. Miskimin. No, sir.
    Mr. Upton. Committee rules allow you to be represented by 
counsel. Do you wish to have counsel with you?
    Mr. Miskimin. I have counsel here, yes.
    Mr. Upton. Do you want them to be sworn in as well?
    Mr. Miskimin. No, sir.
    Mr. Upton. If you wouldn't mind standing and raising your 
right hand.
    [Witness sworn.]
    Mr. Upton. Your testimony has been made part of the record. 
I would note that we have gone beyond where we thought we'd be 
at this point timewise. We're going to try to impose a 5-minute 
standard and be strict with that. You may begin. Thank you.

  TESTIMONY OF PAUL A. MISKIMIN, PRESIDENT AND CHIEF EXECUTIVE 
                       OFFICER, BNFL INC.

    Mr. Miskimin. Thank you for the opportunity to testify 
today, sir. Good morning. I'm Paul Miskimin, president and 
chief executive officer of BNFL Incorporated, based in Fairfax, 
Virginia.
    Mr. Chairman, in addition to my comments here today, I have 
a written statement I would like added to the record.
    BNFL is a U.S. subsidiary of British Nuclear Fuels plc. It 
brings to the U.S. nuclear industry the full complement of 
advanced technologies, management capabilities, record of 
accomplishment, lessons learned of over 50 years of continuous 
nuclear fuel cycle and waste management operating experience of 
its parent company.
    Incorporated in Delaware, based in Fairfax, Virginia, and 
wholly owned by BNFL Nuclear Fuels plc, BNFL Incorporated 
operates under its own board of directors consisting of three 
citizens of the United Kingdom and seven citizens of the United 
States. BNFL Inc. has about 1,000 employees, 93 percent of whom 
are U.S. citizens.
    As the committee is aware, as a result of difficulties 
associated with traditional cost-type contracts, the Department 
of Energy chose to award these projects that we're talking 
about to BNFL either on a fixed-price or privatized basis to 
transfer more risk and accountability to the contractor, us. 
These contracts aggressively challenge existing practices for 
accomplishing the work. BNFL Inc. was willing to bid on and 
enter into these contracts and accept the associated risks 
because we have the experience and technical capability to 
deliver the projects consistent with the government's 
aggressive schedule.
    While each of these projects has had some areas of 
difficulty, we are pleased to report in each case the 
government for the first time is presented with the means of 
accomplishing these major projects significantly within 
government estimates and requirements.
    I'd like to provide some details on the status of our three 
contracts in Idaho, Hanford and Oak Ridge. Overall cleanup is 
on track. BNFL has invested almost $500 million of the 
company's money in these projects.
    Oak Ridge, the ETTP Project. In Oak Ridge we are performing 
a major decontamination and demolition operation of the 
equipment and systems of three gaseous diffusion plant 
buildings that cover 96 acres and contain 126,000 tons of 
potentially reusable material. This job is being conducted in a 
partially radioactively contaminated environment by a fully 
trained and unionized work force of over 600 personnel. They 
are challenged on a daily basis by the industrial and radiation 
hazards associated with cleaning and dismantling these 50-year-
old buildings.
    The project has had its share of problems, some of which 
are our making. However, none of the costs associated with 
these problems that are our responsibility will result in an 
increase in cost to the government. Most of the contractual 
difficulties with this project have to do with unforeseen 
circumstances associated with the definition of the original 
work scope that could only be discovered once the facility 
began to be dismantled. We believe these changes to be 
compensable under the contract. The total request for 
adjustment that we have submitted for the Oak Ridge Project are 
$110 million.
    Mr. Chairman, the reality is under any contracting 
mechanism, a project of this nature and complexity will have 
numerous developments that call for contract changes. BNFL Inc. 
will make sure its facility is cleaned up and the project 
completed in accordance with the contract. This will occur 
despite the fact that our initial poor performance will cost 
BNFL Inc. almost $100 million which it will not recover from 
the government.
    Idaho, the Advanced Mixed Waste Treatment Project. In Idaho 
we are managing a privatization contract to design, build and 
operate the Advanced Mixed Waste Treatment Project at the Idaho 
National Engineering Environmental Lab. The primary purpose of 
this project is to process and prepare 65,000 cubic meters of 
transuranic waste for disposal at the Waste Isolation Pilot 
Plant in New Mexico. The project will help DOE meet court-
mandated milestones in the Idaho settlement agreement between 
DOE, State of Idaho, and the Navy. The settlement agreement 
requires that 65,000 cubic meters of waste be shipped out of 
Idaho by December 31 of 2018.
    Mr. Chairman, I'd like to say that the GAO's April report 
on this project is a fair and reasonable representation of the 
status of the project and is consistent with the status of the 
project at the time of the review. However, there are some 
significant points or impressions left by the report that I 
have addressed in my written testimony.
    I am pleased that to date, after 3\1/2\ years of diligent 
efforts to optimize the approach to the project's projected 
price, the government presently remains very close to that 
agreed contract signature. While some changes are expected due 
to government-directed changes, what is assured is that the 
government will not be obligated to fund cost increases 
regarding--arising out of our performance.
    Last, the Hanford Waste Treatment Plant. Mr. Chairman, as 
the American public is fully aware, the DOE's Hanford tank 
waste presents the largest single environmental project in the 
ongoing efforts to clean up the legacy of the cold war. In 
August 1998, the BNFL commenced the B-1 Project design phase 
leading to a final fixed price for service and decision on 
whether to proceed in August 2000. This is a fixed-scope, self-
financed, but cost-reimbursable contract with a $250 million 
ceiling to carry out this work.
    We had already in 1997 invested in a long lead technology 
program, about $25 million, with no DOE backing in order that 
important technical data would be available and sufficient to 
support the August 2000 decision date. At the commencement of 
the B-1 phase, BNFL had completed about 1 percent of the 
necessary design work. With so little design work done, no one 
could offer firm assurances for such a complex and unique 
project as to what the price for the project would be. Instead, 
BNFL provided its best assessment based on currently available 
information that $6.9 billion was an indicative price, and 
proposed that as a result of work during the B-1 phase, a 90 
percent confidence price would be proposed in April 2000. The 
price to be proposed in April 2000 was to be the basis for 
fixed-price contract that the parties contemplated entering in 
August 2000.
    In April 2000, BNFL Inc. submitted a fixed-price proposal 
for waste processing services totaling $15.2 billion over the 
20-year contract life, doubling the indicative price for the 
project. As required by our contract, this incorporated a 100 
percent private financing package backed by major financial 
institutions and including a prospective equity commitment of 
$400 million by BNFL to be committed for financial closing.
    I'm going to skip to the end because I know you are in a 
time crunch.
    I'll just conclude there and open for questions.
    [The prepared statement of Paul A. Miskimin follows:]
 Prepared Statement of Paul A. Miskimin, President and Chief Executive 
                           Officer, BNFL Inc.
    Good morning. I am Paul Miskimin, President and Chief Executive 
Officer of BNFL Inc., based in Fairfax, Virginia. BNFL Inc., the U.S. 
subsidiary of British Nuclear Fuels plc, is a full service nuclear 
waste management, decommissioning, engineering, and nuclear materials 
handling company that provides services to both the U.S. Government and 
the commercial nuclear industry. It brings to the U.S. nuclear industry 
the full complement of advanced technologies, management capabilities, 
record of accomplishment, and lessons learned of over 50 years of 
continuous nuclear fuel cycle and waste management operating experience 
of its parent company. In fact, the BNFL Group can provide the full 
spectrum of services across all areas of the nuclear fuel cycle, which 
it does with numerous customers throughout the world.
    As background, BNFL Inc. is a U.S. company, incorporated in 
Delaware, based in Fairfax, Virginia, and wholly owned by British 
Nuclear Fuels plc. BNFL Inc. operates under its own Board of Directors, 
consisting of three citizens of the United Kingdom and seven citizens 
of the United States. BNFL Inc. has about 1000 employees, ninety three 
percent whom are U.S. citizens.
    We are proud of our technological and operational accomplishments 
and have been working in the United States over the past 10 years on 
nuclear cleanup activities to transfer our UK-based technology and 
operations experience and capability to U.S. government and commercial 
industry efforts. Three of the projects we are currently performing 
represent some of the biggest environmental challenges in the United 
States. These projects are located in the states of Idaho, Tennessee 
and Washington, and are the subject of today's hearings.
    As the Committee is aware, as a result of historical difficulties 
associated with traditional cost plus award fee contracts, the 
Department of Energy (DOE) chose to award these particular projects on 
either a fixed price or privatized basis as an attempt to transfer more 
risk and accountability to the contractors. These contracts 
aggressively challenged existing practices for accomplishing the work. 
BNFL Inc. was willing to bid on and enter into these contracts and 
accept the associated risks because we were the only company with the 
experience and technical capability to deliver the projects consistent 
with the government's aggressive schedule. While each of these projects 
has had its particular areas of difficulty, we are pleased to report 
that in each case--even with the issues that are the subject of today's 
hearing--the government for the first time is accomplishing or has a 
plan and technologies to accomplish these major projects significantly 
ahead of any previous government estimate. This is due in part to the 
capability of the contractor, but also to the fixed price, incentivized 
nature of the contracts that drive the contractor to develop and settle 
on solutions to problems, versus continually reworking issues.
    The nature of the these particular contracts seem to be the central 
thrust of this hearing, in essence, that fixed price contracts could 
end up costing the taxpayer more than advertised. In most cases in the 
commercial environmental cleanup world, fixed price contracts do change 
in price or cost. However, that does not mean they are a bad 
contracting tool to deploy in progressing the cleanup of the cold war 
legacy. The fact of the matter is that this work is challenging, 
sometimes unpredictable, and often subject to change regardless of the 
contracting mechanism. The recent General Accounting Office (GAO) 
report DOE's Advanced Mixed Waste Treatment Project--Uncertainties May 
Affect Performance, Schedule, and Price (GAO/RCED-00-106, April 28, 
2000) points out that, ``. . . the Federal Acquisition Regulation 
allows for price adjustment if, for example, the scope of work changes 
drastically or BNFL encounters circumstances beyond its control.'' Even 
with change, in our estimation fixed price contracts can be a useful 
alternative to cost plus fee contracts. The DOE considers privatization 
and fixed price contracts and important part of contract reform, which 
has been generally endorsed as a positive and necessary effort.
    What are the advantages? Typically, because much planning is 
required prior to establishing fixed price contracts, significant 
performance and cost risk get transferred to the contractor, and a more 
rigorous process for justifying cost and other changes results. As the 
GAO pointed out in its report Department of Energy: Opportunity to 
Improve Management of Major System Acquisitions (GAO/RCED-97-17, Nov. 
26, 1996), DOE's traditional method of contracting and managing capital 
projects through cost type contracts resulted in cost overruns of 
sixty-three percent in half of the projects completed. Additionally, 
forty percent of its major projects were terminated after expending 
over $10 billion. Should we expect that fixed price contracts would 
never change in price or cost? Of course not, especially when dealing 
with 50-year old contaminated buildings that operated in an era of 
little regulation, or when dealing with first of a kind nuclear 
projects. What it does mean, however, is that the process for changing 
those contracts and in changing the cost basis of a project, must 
always be rigorous but maintain an eye on the ultimate goal; getting 
the job done at a fair price.
    Having discussed fixed price contracts in general, let's take a 
closer look at BNFL Inc.'s contracts at Idaho, Hanford and Oak Ridge. 
I'd like to point out to the committee that while there have been price 
increases due to increased scope or technical issues, there have been 
no cost overruns associated with either the Hanford or Idaho project, 
and BNFL Inc. has paid almost all project costs to date. In addition, 
while a number of figures associated with the Oak Ridge project have 
been used, the fact remains that any additional costs to the project, 
not specifically approved through the rigorous change process 
associated with our contract, will be borne by BNFL. In total, BNFL has 
invested almost $500 million to date in these projects. I would also 
indulge the committee, as a degreed nuclear engineer and a 38-year 
nuclear industry professional, that comparing problems encountered on 
the Oak Ridge project to decontaminate and dismantle 50 year old 
process buildings, and projecting those to projects to design and build 
new facilities, would be comparing apples to oranges. There is no 
comparison.
                         oak ridge ettp project
    On August 25, 1997, DOE and BNFL signed a $238 million contract for 
the East Tennessee Technology Park (ETTP) Three Building 
Decontamination, Decommissioning and Recycle Project in Oak Ridge, TN. 
This is a six-year fixed-price contract to dismantle, remove, and 
decontaminate the process equipment and support systems materials 
within three gaseous diffusion plant buildings making them available 
for commercial reuse by the end of 2003. The buildings, which cover a 
mammoth 96 acres, contain 129,000 tons of potentially reusable metal 
contained in the process equipment. At the outset, a major challenge 
for the Project was to safely decontaminate, salvage and recycle this 
metal--particularly nickel--which would then be credited back into the 
project to offset costs to the taxpayer.
    The project is a major dismantling and demolition operation being 
conducted in a partially radioactively contaminated environment by a 
fully trained and unionized workforce of over 600 personnel. They are 
challenged on a daily basis by the known and unknown industrial and 
possible radiation hazards associated with cleaning and dismantling 
these 50-year-old buildings. The capital investments at ETTP originally 
envisioned to conduct the project have been completed, with the 
exception of a new massive super-compactor, to be completed this fall. 
The nickel refining technology is fully developed and designed, 
although construction of the nickel recycle plant is on hold due to 
DOE's January 2000 nickel moratorium. In addition, sixteen percent of 
the second floor and 34% of ground floor in K-33 is cleared; 17,000 
waste drums have been removed from ETTP and shipped to Utah for 
disposal; and material is being removed at about 1,400,000 pounds per 
week.
    The project has also had its share of problems that one could 
expect with a job this size. Quite frankly, some of these problems were 
caused by early difficulties on our part in managing the ``ramp up'' of 
such a large workforce and project. In fact, my first major management 
decisions when I joined the company was to reorganize and consolidate 
our operations in Oak Ridge in September 1999, with a new management 
team. This team is doing a great job in moving the cleanup forward. 
Some of the difficulties were due in part to DOE having to work under a 
new contracting mechanism. Most of the difficulties, however, have to 
do with changes to or unforeseen circumstances associated with the 
original work scope that could only have been discovered once the 
facility began to be dismantled. However, the facts are that even with 
these challenges, only costs associated with changes to the original 
work scope and outside of the contractor's control will result in 
increased price to the government. Any increased costs associated with 
this project that are within the original parameters of the contract 
will be borne by BNFL. Our current expected costs to complete the ETTP 
project are still well below the governments estimate for this project.
    Mr. Chairman, this project is being performed by a fully unionized 
workforce represented by numerous unions that are doing a tremendous 
job. Unfortunately, as you know, from the outset a single local union 
that failed to get work on the project opposed this project. The union 
later enlisted the help of environmentalists who opposed the metals 
recycling aspect of the project. The labor union and the 
environmentalists have filed a lawsuit against different aspects of the 
project; however, the U.S. District Court summarily dismissed their 
lawsuit. However, as is their prerogative, a decision was later made by 
the DOE in December 1999 to halt at least one major portion of that 
contract, the recycling of previously contaminated nickel. This 
decision eliminated a significant revenue stream contemplated in the 
contract from the sale of recycled nickel, which affects the financial 
basis of the project and the contract. The ensuing adjustment that must 
take place, which will require an increased cost to the government, has 
been referred to as a cost overrun, however, it clearly is an 
additional cost to the project resulting from a DOE change in policy 
outside of the contractor's control. Thus, the contract must be 
equitably adjusted and the contract clearly provides for that event. On 
January 12, 2000, DOE issued a draft modification to the contract to 
implement this decision. The modification ultimately negotiated will 
have a cost increase of roughly $40-50 million. The final figure is 
currently being determined through a negotiation between DOE and BNFL. 
This is a fairly straightforward example of a change.
Summary of REA's
    There are other examples in which the company has experienced 
conditions and circumstances at the ETTP site that affect project cost 
and schedule that we believe are compensable under the contract's 
``Changes'' clause. This is accomplished through a very standard 
government and commercial process in which a contractor submits a 
Request for Equitable Adjustment (REA). The total requests for 
adjustment that we have submitted for the Oak Ridge project are $110 
million.
    More specifically, on October 28, 1999, BNFL Inc. submitted six 
REA's to DOE that addressed issues associated with Fire Protection, 
Storm Damage, Material Quantity Overrun, Crane Delay, Housing Panels, 
and the Radiation/Criticality Accident Alarm System, which BNFL Inc. 
has experienced as part of contract performance. The combined value of 
these REA's was estimated to be approximately $83 million, of which $11 
million has been incurred and $72 million was estimated or projected 
over the remainder of the project life. The REA's were submitted to DOE 
under the terms of the parties' contract for DOE's review and 
consideration and in order to allow DOE and BNFL Inc. to mutually 
mitigate their impact over the remainder of contract performance.
    On November 4, 1999, BNFL Inc. submitted three additional REA's 
associated with nickel loss, chromate duct gaskets and aluminum blades. 
These REA's are based on factual situations that were unknown to BNFL 
Inc. at the time of contract negotiation and commencement. The combined 
value of these three additional REA's was estimated to be approximately 
$27 million based on estimates of work to be performed by BNFL Inc. 
during the remainder of the contract.
    BNFL Inc. verbally briefed DOE on all the REA's as submitted. On 
December 9, 1999, DOE verbally accepted some liability for equitable 
adjustment for the Storm Damage and the Material Quantity Overrun 
REA's. BNFL Inc. and DOE had jointly performed a walk-down of the three 
project buildings to verify that the material quantities in the 
contract assumptions were accurate. The initial contract estimates were 
based on DOE's previous contract work. However, BNFL Inc.'s experience 
in removing material from the initial phase of K-33 indicated that 
DOE's estimates of the quantity to be removed were significantly low. 
All other REA's were verbally rejected.
    In February 2000, DOE and BNFL Inc. established negotiating teams 
to resolve the REA's. The Storm Damage REA was compromised and $1.9M 
was paid on June 6, 2000. Extensive discussions have continued with DOE 
regarding the Material Quantity Overrun REA. Agreement exists regarding 
the excess quantities; however, DOE has been developing its own 
independent estimate of the cost of this REA. Discussions on all these 
issues are ongoing.
ETTP Summary and Path Forward
    Mr. Chairman, as with any complex and hazardous technical project, 
BNFL Inc. has encountered unforeseen difficulties, some significantly 
affecting the workflow and schedule of the project. The original 
contract defined contract payments in terms of areas cleared. BNFL Inc. 
has determined that work can be performed more safely and efficiently 
with minimal waste by using dedicated crews to clear the building by 
systems and components rather than by areas. To this end, therefore, 
BNFL Inc. is financing $150 million in project costs versus a planned 
financing of only $50 million. On our own initiative and at our 
expense, we are constructing the largest compactor ever used, 
worldwide, in waste minimization. Of critical importance is that, 
notwithstanding all of the known and unknown changes to the project, 
the revised schedule--which adjusts some near-term milestones forward 
in time--shows that the project completion date is within the original 
contract completion date. The schedule takes into consideration the 
expectation that the super-compactor will be operational in December 
2000 and includes overtime and double-shift work. The schedule is 
contingent upon DOE providing government furnished equipment in the 
form of operational cranes and sufficient electrical power in K-31 and 
K-29 when BNFL moves into those buildings.
    Mr. Chairman, the reality is that under any contracting mechanism, 
a project as large and complex as this will have numerous developments 
that call for adjustments. While that does alter the overall price of 
the project, by performing the project in a fixed price manner, only 
changes that are outside of the contractor's control will affect the 
overall cost to the taxpayer. As I stated earlier, all other costs 
remain the liability of the contractor.
    BNFL Inc. is committed to successfully completing this contract in 
spite of unforeseen challenges and costs in its original fixed price 
bid. BNFL Inc. will live up its commitment and make sure that this 
facility is cleaned up and the project completed in accordance with the 
contract, knowing that our initial poor performance will cost BNFL Inc. 
almost $100 million, which it will not recover from the government. For 
such fixed price bids, but more importantly, any nuclear cleanup 
activity to be successful, the customer and the contractor must 
mutually recognize changed or unforeseen conditions and make prompt 
equitable adjustments. Trust and cooperation between the parties is 
essential.
             idaho--advanced mixed waste treatment project
    I would also like to discuss the Idaho Advanced Mixed Waste 
Treatment Project (AMWTP) based at the Idaho National Engineering and 
Environmental Laboratory (INEEL). In December 1996, the DOE awarded 
BNFL Inc. a privatized, fixed-price contract to design, construct, and 
operate AMWTP. The primary purpose of the AMWTP is to prepare 65,000 
cubic meters of transuranic and low-level mixed waste for disposal at 
the Waste Isolation Pilot Plant (WIPP). The contract is designed to 
help DOE meet court-mandated milestones in the Idaho Settlement 
Agreement between DOE, the State of Idaho, and the U.S. Navy. The 
Settlement Agreement requires that the 65,000 cubic meters waste be 
shipped out of Idaho by December 31, 2018.
AMWTP Background
    The AMWTP project is divided into three phases. Phase I consists of 
successfully completing the necessary preliminary permits and 
approvals, and continues through receipt of final permits expected now 
in August 2000. Phase II includes the detailed design, equipment 
development and manufacture, and facility construction, and runs to 
2003. Phase III consists of waste retrieval and facility operations, 
and runs from 2003 through 2018. Following completion of facility 
operations, the facility will be closed, decontaminated and dismantled 
within two years.
    The project is based at the Radioactive Waste Management Complex on 
the INEEL, which has received waste from other sites within the DOE 
complex, principally Rocky Flats. This waste is currently stored above 
ground, beneath earthen berms within a metal enclosure, and in RCRA-
permitted storage modules. The waste includes low level waste and 
transuranic wastes. The waste has been characterized by the DOE and its 
contractor's and is a mixture of physical forms, mostly organic, 
inorganic and metal. Some of the material is in the form of sludges, 
which is treated process waste. The waste is contained in drums and 
boxes that appear to be predominantly in good condition.
AMWTP--Comments on GAO Report
    Mr. Chairman, let me first say that the GAO's report, commissioned 
by this committee, is a fair and a reasonable representation of the 
status of the project, and is consistent with the status of the project 
at the time of the review. However there are some significant points or 
impressions left by the report that must be addressed. Most 
importantly, there are no cost overruns to the government associated 
with this project.
    Second, even with the delay in the start of construction caused by 
the delayed issuance of permits due to external factors, the project 
will be constructed in accordance with our contractual milestones. 
Third, while the permitting delays have caused a slip in our internal 
milestones to have the facility commissioned in time to meet the 
facility operational milestone, other efficiencies will allow for waste 
shipments out of Idaho to begin ahead of schedule, and consistent with 
our contractual requirements in support of the Settlement Agreement.
    The GAO report also suggests that the DOE's recent decision to 
defer the incineration of up to 22 percent of the wastes cast in doubt 
the ability to complete the treatment of wastes on time. The reality 
is, as a result of working closely with the Department and 
appropriately amending the contract in certain regulatory areas, we 
fully expect to complete preparing 97 percent of the wastes for 
shipment out of the state of Idaho to WIPP significantly before the 
2018 milestone. The remaining 3 percent will require some form of 
treatment. This will be addressed by the Blue Ribbon Panel appointed by 
DOE to review incineration alternatives, but our own studies suggest 
that this too can be completed before 2018, even with a delayed start 
date for this particular step.
AMWTP--GAO Comments on Price
    Finally, the GAO states that ``the final contract price is 
uncertain but will likely be higher,'' and identifies a number of 
factors that could impact the cost of this project to the government. 
However, as the report notes, the only effect to date has been a 
reduction in price of $18 million negotiated as a result of the 
reduction of regulatory requirements.
    The report also notes that the effect on construction delays could 
add roughly $44 million to the contract price in contract adjustment 
due to permitting delays resulting from the decision to defer 
incineration. BNFL Inc. does not disagree with that figure, although it 
is important to note that the costs are not yet fully known, and the 
consequences of this for price adjustment under the contract is still 
to be determined. More importantly, the effect of deferral of 
incineration will not be known until the report of the Blue Ribbon 
Panel is available later this year and DOE's requirements are known. 
However, BNFL believes that this potentially can be addressed without 
increase in cost or price.
    It is not possible to speculate how these different issues, and 
others in the future, will ultimately affect the price of this project 
to government. It should be noted that the cost of this project, 
determined through a competitively procurement, is nearly $700 million 
lower than the DOE estimate under the traditional M&O approach.
AMWTP Summary
    BNFL is pleased that to date, after three and a half years of 
diligent efforts to reappraise and optimize the approach to the 
project, the projected costs to government presently remain very close 
to those agreed at contract signature. Overall BNFL recognizes that 
under a fixed-price contract in which risks are allocated between the 
parties, there can be no certainty that the cost to government will not 
increase, even in the absence of directed changes. However what is 
assured is that the government will not be obliged to fund cost 
increases arising out of the contractor's performance.
                  hanford--waste treatment plant (wtp)
    Mr. Chairman, as the American public is fully aware, the DOE's 
Hanford site presents the single largest challenge in the ongoing 
efforts to cleanup the legacy of the cold war. In particular, the 
Hanford tanks --177 underground tanks containing 54 million gallons of 
highly radioactive waste, 67 of which are presently presumed to leak--
present an especially daunting challenge. Numerous initiatives over the 
years were started (and stopped) in an attempt to address this 
situation. The committee is fully aware of the history that led DOE to 
compete and ultimately selecting BNFL Inc. to pursue a privatized 
contract for the design, construction and operation of facilities to 
treat and immobilize these radioactive wastes, known as the Hanford 
River Protection Project, Waste Treatment Plant (WTP). This led to a 
phased approach to this large project that has culminated in our 
submittal of a compliant fixed price proposal of $15.2 billion, to 
design, built and operate over the course of 20 years, the largest 
processing facility in the DOE complex.
BNFL Experience--Applicability to WTP
    WTP is a unique, major and complex nuclear processing project. BNFL 
has completed 40 major nuclear processing projects in the past 20 years 
including projects comparable in scale and complexity, at a total 
historic cost of well over $15B. All these plants have operated 
successfully, and this experience represents an enormous database from 
which BNFL draws in approaching new projects.
    The most critical lesson from this experience is that before costs, 
schedule and performance can be confirmed sufficient development must 
be completed to confirm the choice of technologies and the flow sheet. 
Furthermore, the plant design must be sufficiently advanced, 
integrating the requirements of the process flow sheet, nuclear safety, 
regulatory requirements and operability.
WTP Contract Background
    As part of a competitive procurement, BNFL Inc. carried out an 
initial sixteen-month feasibility study for the treatment and 
immobilization of Hanford tank wastes over the period October 1996--
January 1998. Early on in the course of that study, BNFL Inc. discussed 
with DOE the need for considerably more project development work before 
it would be possible for the parties to enter into a privatization 
contract for fixed price treatment services. As this committee is fully 
aware, BNFL Inc. proposed in January 1998 to DOE that this be done as 
``an extended project development phase.'' This was negotiated with DOE 
and eventually commenced in August 1998 as the ``B-1 Project Design 
Phase'', leading to a final fixed price for services and a decision on 
whether to proceed in August 2000.
    BNFL Inc. estimated the cost of this phase at about $250 million, 
and having proposed a fixed price contract to perform this work, agreed 
to what is in effect a fixed scope, self-financed, but cost 
reimbursable contract with a $250M ceiling to carry out this work. As 
an incentive to minimize the cost of prospective services, incentive 
fees payable under the B-1 contract were to be determined by the cost 
estimate for those services that resulted from the B-1 work. BNFL Inc. 
had already (in 1997) invested in a long lead technology program ($25 
million) with no DOE backing, in order that important technical data 
would be available and sufficient to support the August 2000 decision 
date.
    At the time of completion of the feasibility study in 1998 and the 
commencement of the B-1 phase, BNFL Inc. had completed at most 1-2% of 
the necessary design and development work. With so little design work 
done, no one could offer firm assurances at such an early stage in such 
a major complex and unique project, as to what the price for the 
project would be. Instead, BNFL Inc. provided its best assessment, 
based on currently available information, that $6.9 billion was an 
``indicative price'', and proposed that as a result of work during the 
``extended project development phase'', a 90% confidence price would be 
proposed in April 2000. This indicative price and the corresponding 
cost estimate then became the target cost against which incentive fees 
would be paid for success in B-1. That price to be proposed in April 
2000 would have been the basis for a fixed price contract that the 
parties contemplated entering into in August 2000.
WTP--Part B-1 Deliverables
    In April 2000, BNFL Inc. completed a major set of the deliverables 
due under the contract. These included a large number of technical 
deliverable: plans, reports, designs, cost estimate, schedule, etc. It 
also included a fixed price proposal for waste processing services 
totaling $15.2 billion over the 20-year contract life. This was based 
upon the cost estimate and schedule developed, and as required by our 
contract, a 100% private financing package backed by major financial 
institutions, and including a prospective equity commitment of $400M by 
BNFL to be committed at the financial closing scheduled for August 
2000.
    The price proposed to DOE by BNFL Inc. in April 2000 was based upon 
the first detailed cost estimate performed for the project. That 
estimate was recently completed in March 2000. With an estimate in 
hand, the project team using the contractually specified pricing model 
computed the project price. The contract terms set out in great detail 
and specificity how the price should be developed; principally to 
protect the government from unjustified price increases.
    Each element of BNFL Inc.'s cost estimate and price is supported by 
detailed technical data, or verifiable assumptions and contract terms. 
It should be noted that BNFL Inc.'s proposed price was a fixed price 
over the 20 year term of this contract, and was payable only for 
completion of productive services, i.e. the delivery of waste processed 
and immobilized safely and in accordance with the product quality 
specifications. The increase in our fixed price proposal over our 
earlier indicative price reflects the transition from an indicative 
price based upon little information, to a substantiated price based 
upon detailed plans and proposals, and over 500 vendor quotations. In 
addition, the increase over the indicative price advised in 1998 
corresponds to an annual increase of about 5% per year. This price is 
fixed and cannot further escalate due to contractor performance.
WTP--Discussion of Current Status
    As you know, the DOE has indicated its intent to terminate its 
``privatized'' contract with BNFL Inc. I have discussed the contractual 
background at some length, Mr. Chairman, because this background is 
important to any conclusions you may draw about the applicability of 
and success of the DOE's initiatives at ``fixed price'' contracting. In 
addition, there has been much mischaracterization of these matters in 
the trade and popular press.
    I believe that the DOE contracting approach for the Hanford Tank 
Waste Treatment and Immobilization project has been extremely 
successful from the government's standpoint.The prospective 
privatization of the facility, and the prospective contracting of waste 
processing services at a fixed price, have provided BNFL Inc. with the 
strongest possible incentives to develop a technically and commercially 
robust solution. An effective integrated team of over 700 top flight 
engineers together with supporting staff has been built up since 1998, 
drawn from the best talent from BNFL and our partners, Bechtel 
National, SAIC and GTS Duratek.
    BNFL has permanently assigned over 70 of its very best and most 
experienced specialist engineers, in the fields of technology, process 
design, safety and operations, from the UK to form the technical core 
of this team. These have been supported with over 100 other specialists 
on short-term assignments, and access to BNFL's entire network of 
experience, which includes at our expense about 1000 technologists, 
engineers and scientists whose job it is to support the operation of 
these plants and to find better ways of achieving our mission and 
operating objectives. As I mentioned earlier, the discipline of the 
prospective fixed price contract has also led BNFL to invest its own 
money in developing the vitrification technology required for this 
project. This was necessary almost a year ahead of entering into the B-
1 contract in August 1998, in order that there could be sufficient 
confidence in the technology to support a decision to go forward in 
August 2000. This, together with the investment of nearly $250 million 
for the work in B-1 performed to date, constitutes a major corporate 
investment by BNFL in the success of this program.
    This allocation of corporate resources to support DOE programs is 
without precedent in the conventional DOE contracting arena, and is the 
product of the highly incentivized contractual form. Traditional M&O 
type contracts result in no more than a handful of senior people being 
assigned to the contract by an incoming contractor, and the investment 
and assumption of risk is typically limited to the costs of mounting a 
bid and proposal.
    The merits of the privatized and fixed price contracting approach 
may also be seen in the results produced over this period. All 
deliverables have been provided in compliance with the contract. As a 
result, the BNFL team has, for the first time in decades of government 
spending to address this problem, set out a technically sound solution 
to immobilizing the Hanford Tank wastes. We have provided a design, a 
detailed cost estimate and a schedule that can be the basis for 
proceeding, and that complies with the DOE and the Tri-Party Agreement 
clean up schedule. This is a design that integrates the demands of 
technology, process design, safety, operability and product quality 
assurance. It is robust, and meets the criteria that BNFL has set to 
merit investment against the disciplines of a fixed price contract for 
services in a privatized facility. Mr. Chairman, I truly believe that 
the costs we have derived for this project are soundly based, and 
provide government for the first time an indication of the financial 
liability represented by the tank wastes.
WTP Summary
    In my view, Mr. Chairman, the fixed price approach to this contract 
has served the government and the taxpayer well. What has been less 
successful has been the contractual requirement for 100% private 
financing, which has resulted in roughly doubling the cost to 
government through the additional cost of private capital. This feature 
has proved unaffordable to government. There are, however, other 
contracting scenarios that could substantially reduce the project price 
while maintaining a strong incentive structure.
    Mr. Chairman, I have deliberately focussed on the beneficial effect 
that the prospective fixed price terms have had on securing value for 
the government during the extended project development phase. However, 
I would like to add one further point: the fixed scope, ceiling price 
approach to the present B-1 phase has in effect acted like a fixed 
price. This has delivered the results that DOE has sought, and with 
changes to the contract value of less than 1%. This is both a 
recommendation for the contract form, and a tribute to the care with 
which DOE and BNFL developed the scope prior to commencing work.
                               conclusion
    Mr. Chairman and members of the Committee, thank you for your 
attention to this matter, and for this opportunity to testify. Fixed 
price contracting is the most common form of contractual approach used 
worldwide. Project financing through financial institutions is also a 
common industry practice. The challenge before the government and 
industry is whether these useful techniques can be adapted and used to 
benefit the government and the U.S. taxpayer. Despite problems with the 
first few projects attempted, significant cleanup progress is being 
made in many instances, at costs significantly below any previously 
projected through traditional government contracting practices. After a 
few short years, it is not yet time to give up on privatization or 
fixed price contracting as one of many available contracting approaches 
to address the legacy and challenges of winning the cold war.

    Mr. Upton. Mr. Burr.
    Mr. Burr. Thank you, Mr. Chairman.
    Why did you bid on Hanford? I just heard your description 
of the site and the challenges. I've read the contract. You've 
probably read the contract. Why did the BNFL bid on it?
    Mr. Miskimin. The BNFL bid on Hanford because it's a job 
right in our strike zone. It is similar to work that we do for 
ourselves on our own site in the U.K., and it was an 
opportunity to do that type of work in the United States and 
make a fair profit at it.
    Mr. Burr. You described the contract as a fixed-price cost 
reimbursed project.
    Mr. Miskimin. No, sir. I was reading too fast. I was simply 
talking about B-1, $250 million fixed-scope, cost-reimbursable, 
but it's capped at $250 million. I wasn't talking about the 
whole contract.
    Mr. Burr. You agree it's capped at $250 million.
    Mr. Miskimin. Yes, sir.
    Mr. Burr. You billed for $290 million, right?
    Mr. Miskimin. That is not the bill. That is the letter we 
submitted asking for termination costs. Termination costs go 
beyond----
    Mr. Burr. Termination costs is higher than the bill?
    Mr. Miskimin. There is no bill, sir. We paid for all this 
ourselves.
    Mr. Burr. Higher than the contract-specified amount?
    Mr. Miskimin. It is higher than the contract-specified 
amount, yes, because it would also include the cost of 
preparing the termination package and negotiating another cost 
not contemplated in the $250 million.
    Mr. Burr. Does the BNFL have a contract with DOE where the 
scope of the project that was agreed to under the contract has 
never changed?
    Mr. Miskimin. Yes. We operate as part of the Westinghouse 
Savannah River company team at Savannah River site.
    Mr. Burr. Subcontract?
    Mr. Miskimin. Subcontract through Westinghouse to DOE.
    Mr. Burr. That's a relationship you have with Westinghouse?
    Mr. Miskimin. Yes, it is. They are the DOE prime 
contractor.
    Mr. Burr. Clearly with subcontractors we've done a much 
better job of specifying the scope of work.
    On page 17 of your testimony, you pointed out that the 
merits of fixed-price contracting has served taxpayers well. I 
think some of us would question that right now, by the way. But 
you point out that the BNFL has provided all the deliverables 
in compliance with the contract. But according to DOE, the 
quality of many deliverables is simply very bad. DOE's recent 
performance assessment of BNFL's deliverables under the 
contract, four of the eight assessment criteria show serious 
problems with your contractual work, business and finance work, 
management and cost and schedule. Explain for us, if you can, 
why the line management from DOE has come to that conclusion.
    Mr. Miskimin. That is hard for me to explain on their 
behalf, but I will explain it as I see it from my side, from 
BNFL Inc.'s side.
    Although our contract required us to deliver literally 
thousands of sheets of deliverable to the Department of Energy, 
there is an extensive list of deliverables that we had to 
deliver by April 24. That proposal that went in was simply the 
last of several thousand sheets of deliverable. There are no 
deliverables that were not delivered.
    The comments on the management plan that there was not a 
senior person designated as the person who would be running the 
project for several years to come is a view of the Department 
of Energy, but the next phase of that project was not to start 
until August, and we have--and there was no requirement in the 
contract to name that individual. The person that's out at the 
project now running the transition, the chief operating officer 
for the company, Philip Strawbridge, was one of the candidates. 
Also, we were about to turn over the design and build 
responsibility to Bechtel. That person is not only named, but 
onsite.
    I would say it's a difference of opinion. We have had----
    Mr. Burr. Sounds like it's going to be an expensive one for 
DOE, though.
    Mr. Miskimin. Will it be expensive for DOE?
    Mr. Burr. Yes.
    Mr. Miskimin. As the Deputy Secretary said, we have a 
termination negotiations due, and that will be based on case 
law and a fair negotiation. I hope that it turns out to be a 
fair negotiation on both sides.
    Mr. Burr. Let me ask you, the former CEO of your company 
visited with us I think it was October 1998, and he committed 
that the company would work with DOE to develop a fixed price 
using, and I quote, an agreed-upon formula with our books 
completely open to DOE, and all the data will be certified cost 
data. According to recent DOE assessments of your performance, 
and I think those documents have been put in the record, BNFL 
has consistently failed to provide certified cost data for the 
Hanford site. The company's cost documentation is so bad, the 
Defense Contract Audit Agency has been unable to audit your 
proposals.
    One, have I accurately depicted the situation, and why has 
BNFL continued to provide what they promised they wouldn't do 2 
years ago?
    Mr. Miskimin. Sir, I have no information that says that the 
DCAA was unsatisfied with our proposals. In fact, the feedback 
we have had from the Department of Energy is they liked the 
product, and they think the estimate was sound and robust. That 
doesn't say to me that the DCAA had comments. Possibly those 
were not passed back.
    Mr. Burr. This comes out of our packet of information that 
I got, which was the DOE performance summaries, and on page 44 
of the assessment, expectation 4.557.1, DCAA is having 
difficulty auditing the BNFL cost documentation. Hopefully this 
is something that they've shared with you, and it's an 
evaluation of the performance of your company.
    Mr. Miskimin. The cost data that we submitted in--with our 
proposal was certified cost and pricing data. What you are 
showing me is a document I have not seen on the B-2 decision, 
the final BNFL assessment. I do not know if any BNFL people 
have seen it.
    Mr. Burr. I can appreciate your honesty there, and I'm just 
sorry that DOE didn't--isn't still around so we could figure 
out how an assessment of your performance, in fact, couldn't 
have been shared with you prior to the termination of a 
multibillion-dollar contract. Clearly we'll have to wait for 
the next running of Groundhog Day before we get an opportunity 
to ask what I think is a very vital question.
    But it really doesn't answer my question to you, and that 
is we had a promise, and I realize it was a former CEO, but 
just like we shared with the Secretary today, we hold Secretary 
Richardson committed to things Secretary Pena told us. So we 
hold BNFL committed to the openness and accuracy of their data 
reimbursement sheets, and if they are hard to understand, I 
hope, in fact, you will look into the commitments that have 
been made by prior CEOs and make sure that that commitment is 
fulfilled.
    Mr. Miskimin. Yes, sir, I am aware of many of those 
commitments. I'm not sure what the basis for this is. This 
would take some discussion. The comment is DCAA is having 
difficulty auditing the BNFL cost documentation. We have 
submitted literally thousands of sheets of cost estimate. That 
by itself could create some difficulty. Also, there are more 
than 500 vendor quotations that back up the cost information as 
well as numerous calculations that would make it difficult for 
anyone, including the DCAA.
    Mr. Burr. I've learned in this town to be very specific 
with my words, so let me take the opportunity to requote your 
CEO: An agreed-upon formula with our books completely open to 
the DOE, and all the data will be certified cost data.
    And I would only tell you anything short of that would not 
fulfill the commitment your company has made to this 
subcommittee 2 years ago.
    Let me ask you one last question. Does BNFL plan to bid on 
the cleanup phase of the Hanford project?
    Mr. Miskimin. We will not bid as a prime contractor on the 
design/build phase. There are other options, and that is to go 
as part of a team--the reason is we are not an engineer 
constructor. We are not a design/build engineer constructor. 
That would be companies like Fluor, Bechtel, Stone and Webster, 
Jacobs and others. We are more of a management, technology and 
operations company. The role that Bechtel plays on our team is 
that of design/build contractor. We are--so we would not bid as 
a prime on a design/build contractor.
    Mr. Burr. Why did you bid originally then?
    Mr. Miskimin. Because that was not a design/build contract. 
It's a life cycle cost starting all the way with process design 
and definition, technology through operations, and we hired 
Bechtel to do the design and build.
    Mr. Burr. I don't know the answer to this question. You 
might not either, so if you sidestep it, that's fine. If you 
bid for the cleanup, would that change in any way, shape or 
form your negotiations on the use of the melter or on the price 
tag of your intellectual property?
    Mr. Miskimin. I don't have a good answer for that.
    Mr. Burr. The likelihood is that it would be difficult for 
DOE to pay you for the use of intellectual property if, in 
fact, you were doing it, wouldn't it?
    Mr. Miskimin. Yes, sir. If the DOE were to continue us, 
there's no negotiation for termination.
    Mr. Burr. I think a case could be made if they go through 
with the termination of your contract, and you rebid under a 
different contract, that they are obligated to the original 
contract. I think probably the question of the use of your 
intellectual property, if you were the one using it, might not 
go very far though.
    Mr. Miskimin. There's no intention to say charge the 
Department of Energy twice for anything. If that would give us 
a competitive advantage, I'd be proud to use it.
    Mr. Burr. You have answered the question much more 
succinctly than I could have. I thank you for your honesty.
    Mr. Chairman, I yield back.
    Mr. Upton. Thank you.
    Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. I, too, need to leave 
here about 5 minutes ago. I've just got one quick series of 
questions, and then I will yield back my time after this.
    Welcome, and I want to refer you to 1997. Your company 
signed a $238 million fixed-price contract to clean up three 
gaseous diffusion plant buildings in Oak Ridge. It recently 
came to the attention of this subcommittee that you submitted 
claims for equitable adjustment on a number of issues, thus 
increasing the cost to the government. Could you explain what 
mechanism in this fixed-price contract allows you to ask for 
more money beyond the $238 million you initially signed up for?
    And while you are at it, just the other two questions 
quickly. Should the government have expected the price of a 
fixed-price contract to increase, and what is the current 
status of the project?
    Mr. Miskimin. Yes, sir. I guess I have to take the 
disclaimer that I'm not an attorney either, but I have dealt 
with contracts for a long time. All contracts of the fixed-
price nature are subject to change when the scope changes. 
That's--and that is allowed by the contract.
    Would you ask me the second part of it again?
    Mr. Bryant. Should the government have expected the price 
in a fixed-price contract to increase?
    Mr. Miskimin. Yes, sir, the government and BNFL should have 
expected changes on this contract because of the nature of the 
job. These buildings we're talking about are some of the 
largest on Earth, half a mile a side on a square building. They 
haven't been operated for many years. The records are poor. 
Knowledge of the plant equipment and design is very poor. Most 
people working today are not knowledgeable of those plants. 
There are still a few around ready to retire.
    We didn't--the Department gave us information based on 
prior contractor evaluations to bid on. Some of the prior 
contractor information that the Department provided to us was 
not correct, such as material quantities. There were design 
details that have come to light now that we've opened up 
components and we've opened up systems that neither the 
Department nor ourselves knew.
    In an ideal world there should be no changes, but in a 
practical world in a facility like this, one should expect 
change.
    Mr. Bryant. What's the current status?
    Mr. Miskimin. Current status is that we have submitted a 
total of nine requests for equitable adjustment totaling $110 
million at face value. One has been settled for storm system 
damages, which was a force majeure event, at $1.9 million. That 
was settled on June 6. One has been withdrawn by us because it 
relates to nickel. It's the presence of nickel fluoride in the 
nickel we were to recycle. The other seven are all in 
discussion and negotiation with the Department of Energy in 
various stages.
    Mr. Bryant. Thank you.
    Thank you.
    Mr. Miskimin. You're welcome, sir.
    Mr. Upton. Thank you, Mr. Bryant.
    I will try to be brief in my questions. You may have heard 
another vote has been called. So we'll conclude unless Mr. 
Stupak comes back.
    Mr. Miskimin, according to DOE's assessment of your $15.2 
billion fixed-price proposal on Hanford, BNFL made an error 
related in its tax calculations for the project that created an 
unnecessary $1 billion increase in the price. And accounting 
for that mistake would lower it, in fact, from $15.2 to $14.2 
billion. Are you aware of that billion-dollar error?
    Mr. Miskimin. No, sir, I'm not, because we've not had a 
formal evaluation and feedback by the Department on the 
proposal.
    Mr. Upton. In your testimony you stated that you formally 
submitted $110 million in requests for equitable adjustment on 
the Oak Ridge contract.
    Mr. Miskimin. Yes, sir.
    Mr. Upton. But according to the recent DOE response to 
Chairman Bliley's May 12 letter, BNFL submitted a formal 
request for $116 million. In addition, quote, the BNFL orally 
advised DOE that it intends to submit additional REAs totaling 
$54 million covering three other issues. What are the three 
other issues?
    Mr. Miskimin. We have no intent to submit additional REAs. 
That might be old information. I have no explanation for the 
$110- versus the $116- other than a typo.
    Mr. Upton. Ms. Jones, do you have anything that you would 
like to comment on regarding the testimony?
    Ms. Jones. No, not at this point, Mr. Chairman. Thank you.
    Mr. Upton. Well, I'd just might add I appreciate your 
testimony today. We may have additional questions from both 
myself and other members of the subcommittee that we'll send in 
writing. If you could prepare a response within a limited 
timeframe, that would be appreciated.
    Mr. Miskimin. Yes, sir. Would be pleased to do it.
    Mr. Upton. Thank you. The hearing is adjourned.
    [Whereupon, at 12:37 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                                                  BNFL Inc.
                                                     August 4, 2000
The Honorable Fred Upton
Chairman, House Commerce Committee
Subcommittee on Oversight and Investigations
U.S. House of Representatives
2125 Rayburn House Office Building
Washington DC 20515-6115
    Dear Chairman Upton: Thank you for your letter of July 21, 2000 and 
for the opportunity to answer your questions for the record in order to 
complete the Subcommittee's hearing on the Department of Energy's (DOE) 
fixed-price cleanup contracts.
    Enclosed please find my responses to your eleven questions. I hope 
this information, as well as that provided in my testimony before the 
Subcommittee, has been useful in your efforts to provided oversight to 
the DOE's programs.
    If you have any further questions or need for information, please 
contact me at (703) 4602000, or have your staff contact Richard Guay at 
(202) 785-2635.
            Sincerely,
                                           Paul A. Miskimin
                                                  President and CEO
Enclosure
                      Answers to Written Questions
    Question 1. Prior to termination, how many personnel did BNFL 
employ on the Hanford tank waste project?
    Answer: Prior to DOE's notice of the termination of our contract, 
there were a total of 692 personnel on the Hanford project. Of this 
number, 183 were employees of BNFL Inc. and its UK parent company, 
British Nuclear Fuels, plc (``BNFL plc''). The remainder of the 
personnel were employees of our subcontractors such as Bechtel, SAIC, 
GTS-D or numerous staff augmentation companies.
    Question 2. Of the personnel employed by BNFL on the Hanford tank 
waste project, how many personnel will be transferred or relocated to 
other BNFL projects? Also, how many personnel will continue on the 
Hanford tank waste project with BNFL or with another tank waste project 
contractor?
    Answer: Of the personnel employed by BNFL Inc. and BNFL plc working 
on the Hanford project, approximately 67--representing most of the 
senior technical and all of the key managerial personnel--have been 
reassigned or relocated to other BNFL projects and activities. 
Approximately 94 were laid off or are resigning, but we believe that 
many of these have found work with other contractors involved at the 
Hanford site. Another 20 plus BNFL employees will continue working for 
BNFL at Hanford on close out and termination responsibilities 
associated with the HANFORD-WTP contract.
    Question 3. Please estimate the costs BNFL will request from DOE to 
pay for intellectual property rights pursuant to clause H.25.g of the 
Hanford tank waste contract.
    Answer: We are not able to provide an estimate of the value of the 
intellectual property under clause H.25.g at this time. DOE and BNFL 
are establishing a process whereby BNFL will provide DOE with a list of 
the H.25.g. background intellectual property, DOE will inform BNFL 
whether it wants to acquire such intellectual property, and the parties 
will then negotiate the appropriate value that DOE must pay for the 
H.25.g. intellectual property.
    Question 4. According to DOE's assessment of BNFL's April 24, 2000 
$15.2 billion proposal, BNFL erroneously requested $600-700 million to 
pay for property taxes over the life of the project. Please explain why 
this error occurred. Please also explain what steps BNFL had taken to 
convince DOE and the State of Washington to reduce or eliminate 
property taxes on this project, and whether those efforts were 
successful.
    Answer: As part of its efforts to minimize costs to the project, 
BNFL Inc. sought relief from state and local property taxes through 
revision to existing Washington State legislation. Under traditional 
government contracts, the U.S. Government owns the waste treatment 
facilities, and they are exempt from state and local property tax. 
However, in a privatized contract, the Contractor owns the waste 
treatment facilities and state and local property taxes apply. This 
anomaly, not intended by DOE, BNFL or the state, would have imposed 
substantial additional taxes on the cost of the project that would have 
been ultimately reflected in the price and paid by DOE and the U.S. 
taxpayer. Due the consequential high price of this tax burden, 
continued DOE and Congressional support was brought into doubt, hence 
putting the project in jeopardy.
    BNFL Inc., with appropriate DOE support, was successful in getting 
the State of Washington to enact legislation granting the vitrification 
project a partial exemption from the state and local property taxes, 
yielding what was felt to be an appropriate state and local county tax 
structure in the early years of the project construction.
    When BNFL developed its $15.2 billion fixed price proposal, the 
detailed financial modeling inappropriately applied an annual tax levy 
rate to the accreting quarterly capitalized costs of the facility for 
sizing the property tax component of the price. This resulted in the 
erroneous high value of the property tax found by DOE in their 
assessment. When this was pointed out to us, BNFL immediately 
recognized and acknowledged the situation.
    Question 5. The Hanford tank waste contract at clause H.25.h limits 
the maximum liability for DOE under termination for convenience to the 
funds obligated under the contract, which is $250 million. Please 
explain why BNFL's request for $290 million is consistent with this 
clause, and the contract.
    Answer: The contract is incrementally funded, which means that 
funds are not obligated for the full amount of the contract, but are 
obligated gradually as needed. H.25.h refers to the amount of funds 
currently obligated under H.2. Prior to the termination announcement, 
the government had obligated $250 million. However, the contractor had 
given the required notice under clause H.2 that more funding would be 
required in order to continue work and carry out a termination. (The 
contractor has no obligation to incur costs or face liabilities in 
excess of obligated funds.) Clause H.37.h.1, as amended, contemplates 
that funding may be increased to as much as $316 million. As of this 
date the funding obligated to the contract for Part B-1 work plus 
termination, certain other costs, and fees is $302 million.
    Question 6. Please explain whether BNFL has invested more than $250 
million toward the work scopes defined in the `B-1 Project Design 
Phase' contract (not including the pilot melter), and, if so, please 
explain why BNFL has expended funds beyond the $250 million obligated 
under the contract.
    Answer: At this point, BNFL has invested approximately $220 million 
in performing the Part B-1 Design Phase. However, when DOE issued the 
termination, it triggered additional costs, such as the payoff and 
termination of subcontractors, severance pay for and relocation of 
employees, building and equipment lease termination costs and the loss 
of the undepreciated value of tangible property. In addition, 
termination triggers formal contract closeout activities and costs. All 
of these costs, triggered by the termination, account for the 
difference between the $220 and the $302 million currently obligated. 
However, neither of these figures, include the value of the pilot 
melter, the value of certain intellectual property and investment in a 
project associated with the use of the pilot melter. These are 
investments made by BNFL that are optional to DOE and therefore, are 
not specifically required to be covered under existing obligation 
authority,
    Question 7. Of the $290 million in termination cost itemized in 
BNFL's June 2, 2000 letter to DOE, please identify which costs are 
associated with preparing the termination package. Please also identify 
the cost of any other work not included in the scope of the contract, 
to which you referred in your oral testimony.
    Answer: The termination costs itemized in BNFL's letters include 
three main elements: (a) the costs already expended by BNFL in 
performing the contract over the last 2 years (approximately $220 
million), (b) the costs that must be incurred by BNFL in order to 
shutdown its operations and terminate subcontractors including the 
costs of complying with DOE directions during the termination process 
and (c) the costs of professional services and other work in preparing 
and submitting the termination settlement proposal and associated 
documentation, as required by DOE and the Federal Acquisition 
Regulations. The third category--the costs of preparing the termination 
package--is much smaller than any of the other elements. Also, as 
stated in response to the earlier questions, none of these three 
elements include the cost of the pilot melter, the value of certain 
intellectual property and other BNFL investments in a project 
associated with the use of the pilot melter.
    Question 8. According to testimony from Deputy Secretary Glauthier, 
BNFL's design pace was very slow. Please explain why BNFL had achieved 
on a 13% design in its April 24, 2000 proposal, instead of a 30% design 
which the contract called for.
    Answer: There is nothing in BNFL's Hanford contract that requires 
BNFL to achieve 30% design completion by April 24, 2000 or August 24, 
2000. However, we believe that there was a DOE expectation to this 
effect, based on 1998 conversations and estimates with the BNFL Inc. 
project manager and BNFL Inc. Chief Executive Officer as a reasonable 
benchmark for the project.
    The DOE expectation was that the project would be at or near 30% 
design by August 24, 2000. If BNFL Inc. had been allowed to continue 
its design through this period, rather than being judged on a required 
deliverable four months ahead of this schedule, we believe that the 
project would have been very near that point, at roughly 20-25 percent. 
From a technical perspective, we spent the projected number of design 
man-hours in B-1 that we had estimated, but because of the increase in 
the size of the project and facility, as a percentage of the total 
project, it was less than the 30% we had estimated.
    Question 9. BNFL has chosen the ``supercompactor'' technology to 
use on the Idaho Advanced Mixed Waste Treatment project. Where has BNFL 
used this technology and on what type of wastes? Can BNFL use the same 
kind of equipment it developed in other locations for the Idaho project 
or will adaptations be required?
    Answer: BNFL uses supercompactor technology in processing wastes at 
its Sellafield reprocessing facility in the U.K. This is used to 
process plutonium contaminated wastes similar to those to be processed 
at the Idaho Advanced Mixed Waste Treatment Project (AMWTP), and also 
low level radioactive wastes. In order to provide maximum assurance of 
project success, BNFL has minimized the design changes incorporated in 
the AMWTP supercompactor, while incorporating some improvements that 
have resulted from its U.K. experience.
    Question 10. According to your testimony, BNFL's ``initial poor 
performance will cost BNFL almost $100 million, which it will not 
recover from the government.'' Please describe the specific elements 
and causes of this poor performance, the costs associated with each 
element of poor performance, and why BNFL believes these costs are not 
recoverable under the contract. Please also indicate whether similar 
costs would be recoverable under a cost-plus type of contract.
    Answer: In my testimony before the Subcommittee I acknowledged that 
BNFL's initial performance under the ETTP contract was poor and will 
cost our company almost $100 million. This poor performance resulted 
from a number of contributing factors, including unforeseen technical 
challenges and early difficulties in managing the ``ramp up'' for such 
a large workforce and project. The resulting costs will be borne by 
BNFL rather than the government because the costs do not stem from any 
change to the scope or requirements of the ETTP contract.
    More specifically, the main contributing elements were in the areas 
of contractually quantifying high-risk areas, initial project 
management errors in ramping up the project, and failing to include 
adequate contingency. Under a typical cost plus arrangement, DOE would 
pay for all costs associated with these performance issues, and while 
it is difficult to put a precise estimate on the cost breakdown of 
their impact, a reasonable approximation would be $50 million, $30 
million and $20 million, respectively.
    Question 11. Please explain how Secretary Richardson's imposed 
moratorium preventing the sale of potentially contaminated scrap metals 
announced July 13, 2000, will impact BNFL's cost, schedule, and 
performance under the Oak Ridge ETTP contract.
    Answer: Based on DOE's plans, as we understand them, DOE will 
simply purchase all decontaminated materials from BNFL, rather than 
having us sell it to scrap dealers on the open market. Thus, BNFL will 
continue releasing materials (but to DOE not the market) based on our 
original contractual agreement and in compliance with the legal 
standards. It is BNFL's understanding that DOE will monitor the 
materials, segregate those that do not meet a Zero Detectable Limit, 
and dispose of the materials once a DOE national standard is 
established.
    If this DOE plan remains in effect and is fully funded, then it 
appears that the Secretary's decision will have little or no impact on 
the ability of BNFL to perform the contract. However, there likely will 
be increased cost adjustments to the government and some small 
adjustments to deliver or package the material directly to DOE.
                                 ______
                                 
 Responses for the Record of Hon. T.J. Glauthier, Deputy Secretary of 
                                 Energy
    Question 1. Please explain how Secretary Richardson's imposed 
moratorium preventing the sale of potentially contaminated scrap metals 
announced on July 13, 2000, will impact the cost and schedule for the 
Oak Ridge ETTP contract with BNFL.
    Answer 1. As a result of the Secretary's July 13, 2000, decision, 
we have directed the contractor to temporarily suspend the unrestricted 
release for recycling of scrap metals from radiological areas at the 
ETTP. In addition, the Department has indicated that it will buy and 
store any of this scrap metal that would have been released for 
recycling while the Department develops procedures through a public 
process to improve existing policies and practices for managing and 
releasing excess materials. The new procedures, to be completed by 
December 31, 2000, will also ensure that there is no release of scrap 
metals for recycling if contamination from DOE operations is detected 
using appropriate, commercially available monitoring equipment and 
approved procedures.
    The Department is currently working with BNFL to modify their 
contract to implement the Secretary's decision, and reflect the revised 
approach for conducting work without impacting cleanup schedules or 
workforce. Because the terms and conditions of the contract 
modification are still being developed, we cannot be more precise about 
any cost or schedule impact to the contract at this time.
Hanford BNFL Contract
    Question 2. The Hanford tank waste contract at clause H.25.h limits 
the maximum liability for DOE under a termination for convenience to 
the funds obligated under the contract, which is $250 million. Please 
explain why BNFL's request for $290 million is consistent with this 
clause.
    Answer 2. Contract Clause H.25.h limits DOE's liability to the 
funds obligated to the contract under Clause H.2, Obligations of Funds. 
Contract clause H.2 states that ``The Contractor will notify the 
Contracting Officer in writing whenever it has reason to believe that 
the amounts incurred, plus the estimated amounts to be incurred under 
this Contract in the next 120 days, less all payments previously made 
against those costs, if any, will in the event of termination for 
convenience, or otherwise, result in an amount to be due from DOE which 
exceeds the amount which has been obligated by DOE as specified in this 
Clause H.2.'' Consistent with this contract clause, it is important to 
note that the Part B-1 cost ceiling amount of $250 million (as modified 
through Modification No. M014) is not the sum total of the Government's 
funding liability under this contract for Part B-1. The Government is 
obligated to also fund imputed interest on the $250 million cost of 
Part B-1 performance, earned profit, plus allowable termination costs. 
BNFL's June 2, 2000 letter, which requested that the amount obligated 
to the contract be increased to $290 million, was submitted pursuant to 
Clause H.2, as was its July 19, 2000 letter requesting that the amount 
be increased to $308 million.
    At the time of termination, the Contracting Officer had obligated 
$250 million to the contract for Part B-1, and a total of $302 million 
was obligated on the contract as of July 21, 2000. Of the amount 
obligated, $100 million has actually been paid to the contractor (on 
August 4, 2000).
BNFL Hanford tank waste contract
    Question 3. If any of BNFL's deliverables are considered by DOE to 
be non-responsive, is BNFL entitled to full reimbursement for the costs 
of these deliverables under a termination for convenience?
    Answer 3. Under a termination for convenience and subject to the 
limitations set out in the contract, BNFL is entitled to recover 1) the 
costs incurred in performing the work terminated; 2) the costs of 
settling and terminating subcontracts; 3) a reasonable profit on the 
terminated work; and 4) reasonable costs of the termination settlement 
(including accounting and legal expenses). However, with respect to 
contract deliverables, clause H.37.b. of the contract limits BNFL's 
recovery in the event that rework is required to produce deliverables 
which conform to the Statement of Work requirements. The cost of rework 
must be separately accounted for and, to the extent such cost, when 
added to the amounts which would be due BNFL in the event of a 
termination for convenience, exceeds the Part B-1 ceiling amount ($250 
million), then the excess cost of the rework is not allowable. 
Accordingly, BNFL will recover the costs it incurred in producing the 
contract deliverables as part of its termination settlement, subject to 
the limitation on recovery for rework cost and any other limitations 
set out in the contract.
Hanford BNFL Contract
    Question 4. Please explain whether BNFL has in its $290 million 
request any costs for work not included in the scope of the Hanford 
tank waste contract. Please also explain what portion of BNFL's $290 
million request is associated with termination costs outside of the 
work scope of the contract.
    Answer 4. All work performed under the BNFL contract is and has 
been within the scope of work of the contract. There is no amount 
obligated to this contract for work outside the scope of the Hanford 
tank waste contract. The notice of termination for convenience issued 
by DOE to BNFL on June 29, 2000, provided instructions to BNFL and 
triggered a series of contract clauses and regulatory provisions that 
required BNFL to perform certain activities related to contract 
termination to preserve and protect property in which the Government 
has or may acquire an interest.
    BNFL's current estimate of termination costs submitted to the 
Department on July 19, 2000 is:

------------------------------------------------------------------------
                                                         In Millions of
          BNFL's Estimated Termination Costs                Dollars
------------------------------------------------------------------------
Undepreciated Value of Tangible Property.............                7.0
Bldg Lease Termination Liability.....................                1.0
Subcontract Termination Costs........................                9.0
Richland Closeout Costs*.............................               11.0
Professional Services for Closeout...................                5.0
BNFL HQ Termination Expenses.........................                8.0
Relocation BNFL UK...................................                2.0
Severance............................................                0.3
BNFL G&A.............................................                3.0
BNFL HQ Support......................................                3.0
Fee..................................................               22.0
Interest.............................................               10.0
Facilities Capital cost of Money.....................                0.5
B&O Tax..............................................                1.0
Total Estimated Termination Costs....................               83.0
------------------------------------------------------------------------
*Reduced from the estimate submitted by BNFL on July 19, 2000 as a
  result of discussions between BNFL and DOE.

    While DOE believes that BNFL's termination costs have been over-
estimated by BNFL, during the contract closeout process the Defense 
Contract Audit Agency will review the costs to assist in the 
Contracting Officer's determination of BNFL's allowable termination 
costs.
Hanford BNFL Contract
    Question 5. According to DOE's assessment of BNFL's April 24, 2000 
$15.2 billion proposal, BNFL erroneously requested $600-$700 million to 
pay for property taxes over the life of the project. Please explain why 
this error occurred.
    Answer 5. In the months prior to the BNFL submittal, there were 
discussions held between the State of Washington and BNFL regarding the 
waiving of property taxes. These discussions finally resulted in State 
legislative action to reduce taxes in the near-term (apparently based 
upon BNFL's ability to meet Tri-Party Agreement Compliance milestones 
regarding construction of the facility) and waive out-year property 
taxes. The erroneous inclusion of the $600-$700 million (including 
financing impacts) for payment of Washington State property taxes 
appears to be the result of a quality assurance lapse at BNFL, and was 
attributed by BNFL to a lack of understanding of Washington State 
Property tax law, and the unavailability of a key individual during the 
final review process for the document. When DOE brought the error to 
BNFL's attention, the error was quickly corrected.
Oak Ridge ETTP Contract with BNFL
    Question 6. Please describe BNFL's contract performance with 
respect to submitting certified cost and pricing data during the period 
of both the Hanford tank waste contract and the Oak Ridge ETTP 
contract.
    Answer 6. As part of an April 24, 2000 deliverable submittal, BNFL 
provided cost and pricing data for the Hanford tank waste project. 
While the data were presented in a format that made audit activities 
more difficult than expected, the contracting officer considered the 
data compliant with Federal Acquisition Regulation (FAR) requirements. 
The Defense Contract Audit Agency (DCAA) audit was never completed due 
to the termination of the BNFL contract.
    For the Oak Ridge ETTP contract, BNFL submitted certified cost and 
pricing data prior to contract award on August 25, 1997. Since that 
time, the Department has negotiated a number of modifications to the 
contract. BNFL has submitted certified cost and pricing data for all 
modifications prior to the date the modifications were signed where the 
price met the statutory and FAR threshold of $500,000 for submission of 
such data.
    DCAA is currently auditing a contract modification dated May 24, 
2000, for which BNFL submitted certified cost and pricing data for a 
negotiated price of $1.965 million for storm damage to the K-33 
building. The contract modification provides that this negotiated price 
may be adjusted upward or downward to reflect the results of the DCAA 
audit.
Hanford BNFL Contract
    Question 7. The Secretary has set an aggressive schedule of January 
15, 2001, to bid and award a new contract for the Hanford tank waste 
project. Given the problems experienced on this contract to date, 
please explain why DOE must commit to a new path forward and select a 
new contractor so quickly.
    Answer 7. The Department of Energy remains committed to protecting 
the Columbia River by moving forward with a new contract for design and 
construction of a treatment and immobilization plant for Hanford Tank 
waste. DOE has established this schedule to keep its commitments under 
the Tri-Party Agreement to begin processing tank waste by 2007.
Pit 9 Litigation
    Question 8. Please describe the current status of the ongoing Pit 9 
litigation with Lockheed Martin.
    Answer 8. The Pit 9 litigation arises out of a $180 million fixed-
price subcontract to remove and process, on a demonstration basis, all 
of the radioactively contaminated waste buried in Pit 9, one of many 
pits and trenches in the Subsurface Disposal Area. The subcontract was 
awarded in 1994 by the predecessor of Lockheed Martin Idaho 
Technologies Co. (LMITCO), and at the time, the management and 
operating (M&O) contractor for Idaho National Engineering Environmental 
Laboratory (INEEL) to Lockheed Martin Advanced Environmental Systems, 
Inc. (LMAES), another wholly owned subsidiary of Lockheed Martin 
Corporation (LMC). LMITCO subsequently replaced EG&G as the M&O 
contractor at the INEEL. In 1998, after LMAES failed to perform, LMITCO 
terminated the subcontract for default. LMC and LMAES then immediately 
filed suit in the United States Court of Federal Claims alleging, inter 
alia, that DOE had converted the Pit 9 subcontract into a prime 
contract with the federal government and that the termination for 
default was improper. In furtherance of its theory, LMC filed a 
certified administrative claim with DOE for $211 million (later revised 
for over $300 million). After an unsuccessful demand for repayment, 
LMITCO filed suit against LMAES in the United States District Court for 
the District of Idaho seeking return of $54 million which LMITCO had 
advanced pursuant to that subcontract and for other remedies.
    In the Idaho case, the parties are currently engaged in an 
extensive discovery schedule which will not be completed until 2002. 
This will involve the production of all non-privileged documents 
concerning Pit 9 by both parties and DOE and the depositions of 
numerous individuals who participated in the project.
    In the case before the Court of Federal Claims, the United States 
moved to dismiss the complaint for lack of jurisdiction because DOE was 
not a party to the subcontract which was executed, administered, and 
terminated by LMITCO. The Court initially denied that motion into a 
motion for summary judgement on which the Court could make a 
dispositive ruling. The parties subsequently agreed to that procedure 
and the Court has ordered the parties to file cross-motions for summary 
judgement on the threshold jurisdictional issue. While the government's 
motion is currently due on September 1, 2000, Lockheed is presently in 
the process of requesting an extension of the briefing schedule.
Fixed-Price Contracts
    Question 9. According to your testimony, the Office of 
Environmental Management manages 37 fixed-price contracts. Please list 
each contract. For each contract, please also provide the original 
contract value, the total funds spent to date, the DOE site where the 
contracted work is located, the number of requests for equitable 
adjustment (REAs) that have been requested on each contract, the total 
costs to the contract agreed to by DOE as a result of REAs, the year 
the contract was signed, the year the project was originally agreed to 
be completed, and the current date for project completion.
    Answer 9. Because of the extent of data requested and the need to 
work with more than ten DOE Headquarters and Field Offices to compile 
the necessary information, the Department requires additional time to 
provide a complete response. We expect to provide a response within a 
month.
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