United States General Accounting Office

GAO Testimony

Before the Subcommittee on Oversight and Investigations,

Committee on Commerce, House of Representatives

For Release

on Delivery

Expected at

1:00 p.m. EDT

Monday,

July 28, 1997

NUCLEAR WASTE

Department of Energy’s Pit

9 Cleanup Project Is

Experiencing Problems

Statement of Victor S. Rezendes,

Director, Energy, Resources, and Science Issues,

Resources, Community, and Economic

Development Division

GAO/T-RCED-97-221

Mr. Chairman and Members of the

Subcommittee:

We are pleased to be here today to discuss a major Department of Energy

(DOE) cleanup project—remediation of wastes buried in Pit 9 at the Idaho

National Engineering and Environmental Laboratory. As you know, this

project is very important to DOE because it is one of several projects

where, through fixed-price contracting and private sector financing, DOE is

trying to reduce the cost of cleaning up waste sites while shifting the

consequences of poor performance to the contractors. While we have been

supportive of DOE’s efforts to reform its contracting practices, we have

also been concerned that the Department effectively manage this

transition. Because DOE has several billion dollars targeted for similar

types of projects, it is important that DOE be able to effectively structure

and oversee this type of contracting arrangement.

On the basis of our work for the Committee and the report we are issuing

today,1

 our testimony will address (1) DOE’s basis for selecting a

fixed-price contracting approach and a subcontract for the project, (2) the

basis for awarding the subcontract to Lockheed Martin Advanced

Environmental Systems, and (3) the current status of the project.

In summary, we found the following:

•DOE chose a fixed-price approach for the project because Department

officials believed a fixed price would help limit the project’s total costs

and provide an incentive for contractors to use efficient practices in

carrying out the cleanup by shifting the risk of nonperformance to the

contractor. DOE officials believed they had a better chance of achieving

these goals with a fixed-price approach than with a cost-reimbursement

approach, even though uncertainties existed about the actual wastes in the

pit. DOE also directed its M&O contractor at the Idaho Falls site to conduct

the procurement process for the selection of a subcontractor and to

oversee the project.

•The M&O contractor awarded the subcontract to Lockheed Martin

Advanced Environmental Systems on the basis of several key factors,

including the adequacy of its technical proposal, its apparent technical and

managerial expertise, its successful completion of the test phase, the

price—about $200 million, and a guarantee of performance—under which

the company would return all payments received if its treatment system

failed to work properly. Because of reservations about the maturity of the

technologies, the M&O contractor expanded the test phase of the

1

Nuclear Waste: Department of Energy’s Project to Clean Up Pit 9 at Idaho Falls Is Experiencing

Problems (GAO/RCED-97-180, Jul. 28, 1997).

Page 1 GAO/T-RCED-97-221
Mr. Chairman and Members of the

Subcommittee:

procurement from a review of references and results of prior work to

include pilot scale testing of key aspects of the proposed systems.

•Estimated completion of the project is at least 26 months behind the

original subcontract schedule. Furthermore, the waste retrieval and

processing facilities are not ready, and no retrieval or treatment of wastes

has begun. Instead, DOE has been assessed $940,000 in fines by its

regulators—the state of Idaho and the Environmental Protection

Agency—for failure to meet deadlines for submitting acceptable design

documents. Lockheed Martin Advanced Environmental Systems estimates

that its costs have already exceeded the subcontract price and has

requested $257 million for its work through June 30, 1997, as well as a new

cost-based subcontract to reimburse the company for all future costs.

These changes, if implemented, would bring the total subcontract price for

the Pit 9 cleanup to well over twice its original $200 million value. The

company’s basis for requesting more money is its view that problems with

the project are largely attributable to DOE and its M&O contractor for

improper administration of the subcontract, excessive interference, and

substantially changing the estimate of types and amounts of materials

contained in Pit 9. DOE officials said that it may be several months before

they have an official position on the company’s claims, but DOE and the

M&O contractor disagree with the assessment of what caused the problems

and instead point mainly to the subcontractor’s insufficient application of

technical and management skills on the project.

Discussions are continuing, and the outcome of the disagreement is

uncertain. Meanwhile, because of these contract difficulties and the

related legal implications, the M&O contractor has hired outside legal

counsel for the Pit 9 project and, under the terms of the M&O contract, DOE

is responsible for paying those legal fees. Whatever the outcome, the Pit 9

project, as originally conceived, is clearly a failure. It simply cannot be

completed in the time frame or within the price agreed to by the

subcontractor. This has important future implications because DOE’s

planned investment in privatization cleanup projects is growing—DOE

included over $1 billion in its fiscal year 1998 budget request for 11 such

projects.

Before we provide you with more specifics on these issues, we would like

to briefly describe Pit 9 and the cleanup strategy.

Page 2 GAO/T-RCED-97-221
Mr. Chairman and Members of the

Subcommittee:

Background Pit 9 is an inactive waste disposal pit, slightly larger than 1 acre in surface

area. From November 1967 through June 1969, various wastes ranging

from contaminated rags to storage drums with hazardous chemicals and

plutonium-contaminated sludge were dumped into the pit and covered

with a layer of soil. DOE estimated that the pit contains about 250,000 cubic

feet of transuranic and hazardous wastes2

 and contaminated soil needing

treatment. Because the wastes and soil are radioactive, retrieving and

treating them involves special handling so that workers are not exposed to

contamination and radioactive materials are not released to the

environment.

Starting in 1991, DOE and its regulators began exploring ways to remediate

Pit 9. They hoped that in doing so, they would also obtain information that

would help in cleaning up other locations at the Idaho Falls site. DOE and

its regulators agreed to clean up Pit 9 by retrieving soil and waste from the

pit, separating those materials that could be returned to the pit without

treatment, treating the remaining soil and waste to achieve at least a

90-percent reduction in volume, and packaging the remaining

concentrated material for on-site storage until final disposal. The project

was to proceed in three phases—proof-of-process by testing key

components on simulated wastes, limited production tests on actual pit

wastes, and then full-scale remediation of pit wastes.

Pit 9 is one of the first of several privatization projects at DOE sites. DOE’s

Office of Environmental Management, which is responsible for cleanup

efforts, intends privatization projects to involve fixed-price, competitively

awarded contracts. A private contractor would finance, design, build, own,

and operate any required waste cleanup facilities, and DOE would pay the

contractor only for a successful cleanup. This fixed-price approach is in

contrast to the Department’s past practices, where DOE used a

cost-reimbursement contract, told the M&O contractor how to perform

waste-related cleanup activities, and paid the M&O contractor regardless of

what was accomplished.

Now we will discuss our findings in greater detail.

2

Transuranic wastes are man-made radioactive elements produced from uranium during a nuclear

reactor’s operations and emit alpha particles. Alpha-emitters are dangerous because of inhalation

concerns. Hazardous wastes are wastes regulated by EPA and authorized states under the Resource

Conservation and Recovery Act of 1976. Hazardous wastes at Pit 9 include carbon tetrachloride and

mercury.

Page 3 GAO/T-RCED-97-221
Mr. Chairman and Members of the

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DOE Preferred a

Fixed-Price

Subcontract

DOE selected a fixed-price approach for the project despite some

indications that this approach was not well suited for an application such

as Pit 9. Limited guidance exists on selecting a contract type, but the

Federal Acquisition Regulation (FAR) suggests that a firm fixed-price

contract, which best utilizes the basic profit motive of the private sector,

should be used when the risk involved is minimal or can be predicted with

an acceptable degree of certainty. Given that there was little certainty

about the contents of the pit, this guidance seems to suggest that a

fixed-price contract may not have been the best approach.

Questions about whether a fixed-price approach was appropriate for the

Pit 9 cleanup surfaced during the early stages of the procurement process.

Responses to the draft request for proposal (RFP) included concerns from

interested firms that a fixed-price approach would have to reflect large

contingencies and could therefore result in higher bids from the

competitors. In addition, these responses stated that a fixed-price

subcontract could generate claims for additional reimbursement if work

outside the scope of the contract occurred.

Even with these concerns, DOE decided to use a fixed-price approach.

According to DOE officials at the Idaho Falls site, they realized that a

fixed-price approach to this cleanup entailed some risks due to the

uncertainties of the pit’s contents. However, DOE also believed there was

much to be gained, including information on how to effectively clean up

other DOE disposal sites, if this new approach were successful. In addition,

DOE had come under criticism from private industry for continuing to fund

what was perceived as research and development efforts of its M&O

contractors without any actual cleanup. According to senior DOE officials,

private industry was confident that it had the technology to clean up the

wastes and preferred a fixed-price arrangement. Therefore, senior DOE

officials at Idaho Falls and headquarters decided that the potential benefits

associated with fixed-price contracting outweighed the possible risks.

In conjunction with its decision to use a fixed-price approach to the Pit 9

cleanup, DOE also decided to have its M&O contractor—EG&G Idaho,

Inc.(EG&G)—conduct the procurement process, select the subcontractor,

and oversee the subcontractor’s efforts at Pit 9. According to DOE officials,

there were several reasons for choosing a subcontract for this effort:

(1) DOE believed that EG&G already had the necessary expertise to

evaluate the technical proposals submitted by interested firms and to

oversee the cleanup; (2) DOE considered the Pit 9 project to be within

EG&G’s area of responsibility; and (3) DOE believed the project could be

Page 4 GAO/T-RCED-97-221
Mr. Chairman and Members of the

Subcommittee:

executed more efficiently as a subcontract through EG&G because using

the M&O’s procurement and contracting standards would simplify and

streamline the procurement process.

Subcontractor

Selected Based on

Proposal, Experience,

Price, and

Performance

Guarantee

After several steps to provide information to interested firms, EG&G

received proposals from three competitors—a team led by Lockheed and

two other teams, one led by Rust Federal Services (formerly Waste

Management Environmental Services), and the other by Nuclear Radiation

Technologies Corporation. EG&G used a Source Evaluation Board (Board)

to review and evaluate the three proposals. The Board determined that the

Lockheed and Rust proposals were essentially equivalent, but the Board

had significant reservations about whether the proposed technologies

were sufficiently developed. According to DOE officials, the private

sector—including representatives from the two competing teams—had

been telling DOE and EG&G that proven, “off-the-shelf” technology was

capable of remediating the wastes in the pit. However, the Board believed

that while the components of the proposed systems may have been tested

individually, they had never been combined into a total system to treat

radiologically contaminated materials.

Although the Board had reservations, it also believed that these two

technical proposals reflected the best available processes at the time. To

mitigate concerns about the proposed technologies, the Board

recommended that, in going forward with the procurement, the

proof-of-process phase be expanded from a review of references and

results of prior work to include pilot scale testing of critical aspects of

both treatment systems.

Prior to the conclusion of the proof-of-process phase, EG&G sent a request

for pricing proposal to both teams. Although DOE’s original intent had been

to make no payments until actual remediation began, the request for

pricing proposal provided for some design milestone and construction

progress payments to keep the overall subcontract price lower by

offsetting the subcontractor’s cost of financing. Because of this change in

payment strategy, the request for pricing proposal also required a

corporate guarantee of performance to protect the government’s interests.

Under this corporate guarantee, if the subcontractor’s proposed system

did not pass the limited production test at completion of construction and

installation, the subcontractor would be required to return all payments

made to date. When the Rust team declined to provide the corporate

Page 5 GAO/T-RCED-97-221
Mr. Chairman and Members of the

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guarantee, EG&G deemed Rust to be nonresponsive to the request for

pricing proposal and disqualified them from further consideration.

The subcontract for the Pit 9 cleanup was signed in October 1994 and

included both design milestone and construction progress payments, unit

price payments for remediation of the contents of the pit, and lump sum

payments for decontamination and decommissioning and profits. Since

Lockheed replaced EG&G as the M&O contractor in 1994, to address the

potential conflict of interest associated with one Lockheed company

overseeing a subcontract with another Lockheed company, the Lockheed

M&O contractor prepared an organizational conflict-of-interest mitigation

plan that was reviewed and approved by DOE. This resulted in the M&O

contractor’s Pit 9 contract administration and oversight group being

sequestered from the rest of the organization, and the establishment of a

program oversight board to monitor the dealings between the M&O

contractor and the subcontractor.

Subcontractor Wants

to Renegotiate

Contract Because of

Schedule and Cost

Difficulties

Currently, the project is stalled. LMAES estimates it is at least 26 months

behind the original subcontract completion schedule and that its costs

have already exceeded the $200 million subcontract price. LMAES has asked

for $257.4 million in total reimbursable costs through June 30, 1997.3

 For

any work conducted after April 1, 1997, LMAES asked to convert the

existing subcontract to a cost-reimbursement basis. These changes, if

implemented, would bring the total subcontract price to well over twice its

original $200 million value. Furthermore, LMAES has substantially slowed

its work on the project to limit its costs and says it will not resume normal

construction activities unless the subcontract is satisfactorily

renegotiated.

In addition to possible increases in subcontract price, DOE has incurred or

will incur other costs related to Pit 9. For example, DOE has paid

$23.1 million for testing and preliminary design activities and $12.9 million

for project oversight by the M&O contractor, in addition to about $3 million

for DOE oversight costs. DOE was also assessed $940,000 in fines by its

regulators for failure to meet enforceable deadlines for submitting

acceptable design documents for the project, as specified in the Federal

Facility Agreement and Consent Order for the Idaho Falls site. DOE will pay

the fines and is studying its options for recovering the cost from either the

M&O contractor or LMAES. In addition, because of the contract difficulties

3

LMAES asked for $158.1 million in payments in addition to the $52.9 million already received through

March 1997. LMAES expected an additional $46.4 million to be recovered through future milestone

payments or some other method.

Page 6 GAO/T-RCED-97-221
Mr. Chairman and Members of the

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with LMAES, the M&O contractor has hired outside legal counsel for the Pit 9

project and, under the terms of the M&O contract, DOE is responsible for

paying those legal fees.4

Subcontractor Faults DOE

for Schedule and Cost

Problems

LMAES blames DOE and its M&O contractor for a large portion of the schedule

and cost problems. The company stated its case in its Request for

Equitable Adjustment to the M&O contractor and DOE. In summary, this

document focuses on three main factors that LMAES says were under DOE’s

control and led to the schedule and cost problems: (1) improper

administration of the fixed-price subcontract, (2) too much interference

with a fast-track approach that was necessary to meet contract deadlines,

and (3) changing estimates of Pit 9’s contents. LMAES argues that these

factors, particularly DOE’s involvement in design activities and changing pit

inventories, have materially changed the Pit 9 project from what the

subcontract originally required. Therefore, LMAES believes that its

corporate guarantee of performance is no longer applicable to the project.

Subcontract Administration LMAES says that it undertook the project with the expectation that it would

have comparatively more freedom on the privatized, fixed-price Pit 9

project than on a project procured under a cost-reimbursement approach,

while accepting more risk if it failed. The company assumed there would

be minimal government oversight and administration of the

subcontractor’s effort, because of DOE’s representation in subcontract

specifications that the Pit 9 project was an “integrated ’turnkey’ pilot”

effort, with the “subcontractor assuming maximum responsibility,

authority, and liability.” In contrast to what it expected, LMAES says that

DOE and its M&O contractor actually administered the subcontract using

substantial and intrusive oversight that was inconsistent with DOE’s

privatization concept. According to LMAES, the amount of oversight was a

problem because the number of review comments slowed its efforts and

left the company unable to exercise the degree of flexibility it expected

when it negotiated the subcontract. In having to respond to this degree of

oversight, LMAES said that it was performing unanticipated work, well

beyond the subcontract’s scope, in order to keep the project moving

forward.

4

We have previously reported on DOE efforts to control the legal expenses its M&O contractors incur

in defending themselves against class action lawsuits. See Managing DOE: The Department’s Efforts to

Control Litigation Costs (GAO/T-RCED-96-170, May 14, 1996); Managing DOE: The Department of

Energy Is Making Efforts to Control Litigation Costs (GAO/RCED-95-36, Nov. 22, 1994); and Managing

DOE: Tighter Controls Needed Over the Department of Energy’s Outside Litigation Costs

(GAO/T-RCED-94-264, July 13, 1994).

Page 7 GAO/T-RCED-97-221
Mr. Chairman and Members of the

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Fast-Track Schedule A fast-track, phased construction project is one where design and

construction work are performed simultaneously. Design and construction

stages are completed in phases so that when the design is completed for

part of the project, construction work on that portion of the project

begins. LMAES, DOE, and the regulators agreed to a fast-track approach for

the project in order to comply with the construction schedule specified in

the request for price proposal. LMAES said, however, that a fast-track

approach required that the subcontractor be allowed a great deal of

discretion in determining the manner, means, and methods of meeting the

project requirements within the agreed-upon price and schedule. The

company believes that DOE’s oversight and involvement was so excessive

as to remove all discretion for reducing the time required for project

completion. In addition, LMAES said that DOE did not provide all necessary

information in a timely manner, taking an average of 53 days to provide

review comments instead of the 30 days to which DOE agreed.

Contents of the Pit DOE has limited information as to the actual contents of the pit because, at

the time the wastes were placed in the pit, DOE did not intend to later

retrieve them. Few records were kept, and DOE has no precise knowledge

of what quantities and types of materials are in the pit. However, in 1991,

the M&O contractor initially estimated the types and quantities of

radioactive and other materials in the pit, based on available shipping

records, process knowledge, written correspondence, and other DOE

information. Those estimates were included in the subcontract. Then,

beginning in 1993, the M&O contractor initiated an effort to develop

additional information on all of the disposal pits and trenches at the Idaho

Falls site’s subsurface disposal area, including Pit 9. As a result, the

estimates for the Pit 9 contents were refined several times, and LMAES cites

multiple instances in which those revisions created the potential for

substantial changes in the proposed approach to remediating the waste. In

particular, LMAES is concerned about possible increases in salts, organics,

and radioactive products. These materials could affect both (1) the extent

of protection workers need to safely work in the treatment building and

(2) the speed at which material could be processed through the melter.

DOE Attributes Most

Problems to Subcontractor

Performance

DOE and its M&O contractor are studying LMAES’ claims and are involved in

discussions on how to move the project forward. However, the M&O

contractor has notified LMAES that both the M&O and DOE see no

justification for converting the subcontract to a cost-reimbursement basis;

instead, they expect LMAES to continue performing the subcontract as

awarded. DOE officials said that it may be several months before they have

Page 8 GAO/T-RCED-97-221
Mr. Chairman and Members of the

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an official position on LMAES’ other financial claims. However, DOE and the

M&O contractor have a substantially different view of why the cleanup is

behind schedule and its costs are above the subcontract price. They

attribute the schedule delays and cost overruns primarily to the

insufficient technical and managerial skills LMAES initially placed on the

project.

Subcontract Administration

and Fast-Track Schedule

DOE and its M&O contractor contend that their oversight of the project has

been related to their responsibilities for ensuring adequate consideration

of environmental safety and health. DOE, its M&O contractor, and its

regulators noted that initially LMAES personnel seemed particularly limited

in their knowledge about necessary regulatory requirements, including

those related to air emissions and dealing with nuclear materials, and, as a

result, submitted inadequate designs. Therefore, DOE and the M&O

contractor said that they had to provide much more oversight, including

more design review comments, than they expected for a fixed-price

subcontract situation. However, DOE officials do not agree that they were

slow in providing these review comments, as LMAES contends.

Contents of the Pit DOE and its M&O contractor also disagree with LMAES’ contentions regarding

the significance of the updated information about the contents of the pit

that they shared with LMAES. They noted that the updated information was

not a formal revision to the contractual estimate of the pit’s contents, and,

therefore, the subcontractor had the discretion whether to use it. DOE and

its M&O contractor further noted that LMAES’ subcontract proposal stated

that all technologies used in its proposed approach were proven in current

industrial-scale applications, and the treatment scheme was “very robust,

in that any chemical, radiological, or physical characteristic of waste in Pit

9 can successfully be processed.” LMAES also claimed that its treatment

scheme ensured that the Pit 9 process could successfully handle other

buried or stored transuranic and transuranic mixed wastes as well as

low-level mixed wastes and hazardous wastes in the DOE complex. Finally,

DOE and M&O contractor officials noted that the subcontract included a

clause allowing for future adjustments if differing site conditions were

encountered—for example, if the actual pit contents differ from the

estimates when excavation occurs.

Insufficient Technical and

Managerial Skills

DOE and M&O contractor officials said that they believed LMAES’ parent

corporation would use its vast worldwide resources to provide the

necessary expertise to accomplish the work. However, the officials

contend that this did not happen, at least in the early phases of the work.

For example, the officials point out that Lockheed reported in a 1995 peer

Page 9 GAO/T-RCED-97-221
Mr. Chairman and Members of the

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review of LMAES’ Pit 9 activities that there was a lack of adequate

nuclear-experienced personnel to successfully execute the design review

function, provide environmental safety and health oversight during

construction, and administer the environmental safety and health

functions during operations.

Another problem contributing to lack of progress on the subcontract,

according to DOE and M&O contractor officials, was the high number of

times the LMAES project staff has changed—as of May 1997, there have

been four project managers. LMAES acknowledges the turnover but

maintains that the administrative approach used by DOE and the M&O

contractor materially increased the complexity of the requirements

associated with the project, necessitating the assignment of managers with

more experience to get the job done. DOE officials said that with these

frequent changes in leadership, some important actions were left

unaddressed for a considerable length of time. For example, it was not

until February 1997, after the current manager was appointed, that LMAES

developed a complete system requirements document, which compiles the

system performance and design requirements of the subcontract into one

place so that managers can more clearly identify what the processes

should be designed to do.

DOE has also faulted the M&O contractor for its performance in overseeing

the Pit 9 project. DOE attributed the M&O’s declining performance on Pit 9

to a continued lack of management control systems, an apparent lack of

accountability in ensuring the timely submittal of two key documents to

regulators, and weak project management planning and prioritization of

issues. However, DOE also gave the M&O contractor credit for aggressively

trying to keep activities on schedule and resolve design-related issues at

the earliest opportunity. We could not determine the impact of the M&O

contractor’s performance at Pit 9 on the amount of its overall award fee.

However, since 1994, DOE has considered the M&O’s overall performance

under the contract to be “good,” with performance evaluation scores in the

86 to 90 percent range and performance award fees totaling $33.3 million

for the 2-year period.

Conclusions It remains to be seen whether DOE and its M&O contractor will be able to

hold Lockheed Martin Advanced Environmental Systems accountable for

the extra project costs, negotiate changes and pay substantially more to

complete the project, or attempt to recover the government’s investments

to date. Whatever the outcome, the Pit 9 project, as originally conceived, is

Page 10 GAO/T-RCED-97-221
Mr. Chairman and Members of the

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clearly a failure. It simply cannot be completed in the time frame or within

the price the subcontractor agreed to. This has important future

implications because DOE’s planned investment in privatization cleanup

projects is growing—DOE included over $1 billion in its fiscal year 1998

budget request for 11 such projects. In light of this growing DOE emphasis

on privatization, the outcome of the Pit 9 subcontract negotiations may

provide some insight into DOE’s overall ability to achieve privatization

goals, including lower project costs and the risk of nonperformance

shifted from DOE to the contractors.

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

concludes our testimony. We would be pleased to respond to any

questions you may have.

(141089) Page 11 GAO/T-RCED-97-221
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