GAO

United States General Accounting Office

Report to the Chairman, Subcommittee 

on Water and Power, Committee on 

Resources, House of Representatives

May 2000 BUREAU OF 

RECLAMATION

Information on 

Operations and 

Maintenance Activities 

and Costs at 

Multipurpose Water 

Projects

GAO/AIMD-00-127

Page 1 GAO/AIMD-00-127 Bureau of Reclamation

United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-283210 Letr

May 31, 2000

The Honorable John T. Doolittle

Chairman, Subcommittee on Water and Power

Committee on Resources

House of Representatives

Dear Mr. Chairman:

This report responds to your request that we review the Bureau of 

Reclamation’s operation and maintenance (O&M) of federal water projects. 

In response to our previous work regarding the Bureau’s sources and uses 

of funds at the multipurpose water projects it operates and maintains, you 

asked us to review in more detail the Bureau’s O&M activities. Specifically, 

you asked us to answer the following questions:

• How does the Bureau define O&M activities?

• What latitude does the Bureau have in deciding which O&M costs to 

charge to customers?

• How does the Bureau account for O&M costs? 

• How does the Bureau define overhead?

• How does the Bureau calculate the O&M costs that it charges to 

customers?

• What concerns have been raised by customers about excessive O&M 

costs and to what extent do customers have an opportunity to review 

cost origins and recommend reductions?

• How do the Bureau’s cost recovery practices compare to those of other 

entities?

To respond to your request, we conducted audit work at the Bureau’s 

Washington, D.C. headquarters and Denver, Colorado office, and at its MidPacific and Pacific Northwest regions. We also conducted audit work at the 

U.S. Army Corps of Engineers, State of California, and at the offices of 

representatives from water users’ interest groups and customers from 

projects representing most of the Bureau’s O&M costs in the Mid-Pacific 

and Pacific Northwest regions. We interviewed knowledgeable personnel 

at each audit site to obtain information relevant to the questions we were 

asked to answer. 
B-283210

Page 2 GAO/AIMD-00-127 Bureau of Reclamation

We also reviewed and analyzed relevant legislation and documents, 

including (1) reclamation law, (2) a 1998 Bureau report to Congress on 

O&M activities,1

 (3) a 1999 Bureau cost accounting report,2 (4) federal 

guidance for determining and accounting for the full costs incurred by 

federal agencies in providing goods and services, (5) Corps documents 

pertaining to O&M activities and cost accounting, (6) State of California 

documents pertaining to O&M activities and cost accounting, and 

(7) customers’ bills and contracts related to the Bureau’s water-related 

activities. In addition, we obtained written responses from Bureau officials 

to document the Bureau’s position on selected questions and observed a 

budget review meeting held by the Mid-Pacific Region for its customers.

The scope of our review included the Bureau’s O&M activities and costs 

related to the Bureau’s delivery of water for irrigation and municipal and 

industrial uses, but did not include reviewing the Bureau’s efficiency in 

performing O&M activities or incurring the related costs. We conducted our 

review from June 1999 through March 2000 in accordance with generally 

accepted government auditing standards. We provided the Department of 

the Interior and the Bureau of Reclamation copies of a draft of this report 

for review and comment. They generally agreed with the thrust of our 

report’s conclusions and recommendations. We have incorporated their 

views, including certain technical comments from the Bureau, into the 

report, as appropriate, and have reproduced the comment letter in 

appendix II. Appendix I describes our objectives, scope, and methodology 

in detail.

Background The Bureau of Reclamation operates single and multiple-purpose water 

projects. Major project purposes include supplying water for irrigation and 

for municipal and industrial use; producing hydropower; and providing for 

flood control, recreation, and fish and wildlife protection. The facilities 

necessary to serve these purposes are diverse, as are the related operations 

and maintenance activities conducted by the Bureau. 

1

Annual Costs of Bureau of Reclamation Project Operation and Maintenance for Fiscal Years 

1993-97, Bureau of Reclamation, September 1998. 

2

Standard Processes of Costing Business Practices, Bureau of Reclamation, September 30, 

1999.
B-283210

Page 3 GAO/AIMD-00-127 Bureau of Reclamation

The Bureau’s costs of operating and maintaining its projects are classified 

as either reimbursable or nonreimbursable. Reimbursable costs are 

recovered from customers; nonreimbursable costs are not and are instead 

borne by the federal government. Generally, costs associated with 

supplying water for agriculture and for municipal and industrial use and 

hydroelectric generation are reimbursable. Costs that are related to these 

reimbursable purposes, either directly or indirectly, are to be distributed or 

allocated to those purposes. Reimbursable costs are billed to, and 

recovered from, water supply and power customers. Costs related to power 

generation generally are recovered by the federal power marketing 

administrations (PMA) through power rates. Costs related to flood control, 

recreation, and fish and wildlife enhancement generally are 

nonreimbursable. 

The Bureau’s major funding appropriation for O&M activities is the Water 

and Related Resource appropriation, which is included in the Energy and 

Water Development Appropriation. The costs funded by this appropriation 

can be related to either reimbursable or nonreimbursable purposes. The 

Bureau also receives a Policy and Administration appropriation. Costs 

funded by this appropriation are nonreimbursable by law.

In September 1997 the Conference Committee for the 1998 Energy and 

Water Development Appropriations Bill asked the Bureau to prepare a 

report on the O&M costs of its projects for fiscal years 1993 through 1997. 

This included a request that the Bureau report total annual O&M costs and 

the amount and percentage of those costs attributable to overhead for each 

project. The Bureau’s report in response to this request was issued in 

September 1998.

Because of the number and diverse nature of the questions you asked us to 

address, we are responding in a question and answer format. The answers 

to your specific questions follow.

How Does the Bureau 

Define O&M Activities?

The term operations and maintenance, or O&M, is commonly used by many 

different types of organizations in referring to the normal activities they 

undertake in conducting their endeavors. The Bureau defines operations as 

“activities related to the normal performance of the functions for which a 

facility or item of equipment is intended to be used.” Examples of 

operations costs include the costs of operating facilities and equipment, 

utilities (electricity, water, sewage), fuel, janitorial services, window 

cleaning, rodent and pest control, upkeep of grounds, vehicle rentals, waste 
B-283210

Page 4 GAO/AIMD-00-127 Bureau of Reclamation

management, and salaries and wages for personnel who perform these 

functions.

The Bureau defines maintenance as “the upkeep of constructed facilities 

and structures and capitalized equipment necessary to realize the originally 

anticipated useful life of a fixed asset.” The Bureau incurs maintenance 

costs for activities such as preventive maintenance, replacement of parts or 

components of equipment, periodic inspection and assessment of the 

condition of equipment, periodic adjustment, lubrication, and cleaning 

(nonjanitorial) of equipment, painting and resurfacing, special safety 

inspections, and other actions to ensure continuing service and to prevent 

breakdown. Examples of typical Bureau O&M activities are shown at 

table 1.

Table 1: Examples of Bureau of Reclamation O&M Activities

Source: Annual Costs of Bureau of Reclamation Project Operation and Maintenance for Fiscal Years 

1993-97, Bureau of Reclamation, September 1998.

Our review of reclamation law did not surface any legally encompassing 

definition of the activities that comprise the operation and maintenance of 

Bureau facilities. Federal courts have confirmed the Secretary of the 

Operations Maintenance

• Monitoring river flows • Upgrading or replacing automated control systems

• Operating the gates and valves in a dam for water releases • Painting and refinishing facilities, such as dam gates and office 

buildings

• Preparing annual operating plans • Ordering and maintaining equipment and parts inventories

• Long-range forecasting of river conditions • Inspecting facilities and equipment at regular intervals

• Reporting on the results of project operations • Periodically tearing down, inspecting, and rebuilding pumps and 

other equipment

• Developing and updating standing operating procedures • Lubricating equipment at prescribed intervals

• Land resources management activities

• Environmental compliance activities

• Administering the laws and contracts that apply to water projects

• Responding to occasional emergencies

• Keeping irrigation canals free of weeds

• Health and safety code compliance activities

• Handling and managing hazardous materials

• Bureau review of O&M performed by customers of Bureau-owned 

facilities
B-283210

Page 5 GAO/AIMD-00-127 Bureau of Reclamation

Interior’s broad discretion to define what can properly be assessed as O&M 

expense. This discretion is constrained by the provisions of appropriations 

acts and other authorities. Bureau contracts require that water supply 

customers pay for O&M expenses assigned to irrigation or municipal and 

industrial purposes. Some contracts generally define what O&M expenses 

are. For example, one contract for the supply of irrigation water provides 

that the

“costs which make up the construction and operation and maintenance obligations to be 

paid by the Contractor to the United States under this contract shall embrace all 

expenditures of whatsoever nature or kind in relation to the function for which the charge is 

made, including, but without limitation by reason of this enumeration, cost of surveys and 

investigations, labor, property, material and equipment, engineering, legal work, 

superintendence, administration, overhead, general expenses, inspections, special services, 

and damage claims of all kinds, whether or not involving the negligence of officers, agents, 

or employees of the United States. The Secretary’s determination as to what costs are 

properly chargeable, the amount thereof, and the classification of those charges for 

repayment purposes shall be conclusive.”

The Bureau defined the O&M activities associated with its projects in its 

1998 report to Congress by describing its complex mission and by 

providing examples of the widely varied activities it conducts. The report 

stated that the Bureau is “responsible for the O&M of an extensive 

infrastructure of constructed facilities, including diversion and storage 

dams, pumping plants, powerplants, canals and laterals, pipelines, and 

drains.” Further, it said that the Bureau is “also responsible for 

management of the federally owned lands on which these facilities are 

located and for the natural and cultural resources of those lands.” 

What Latitude Does the 

Bureau Have in 

Deciding Which O&M 

Costs to Charge to 

Customers?

The Bureau’s ability to determine which O&M costs to charge to customers 

is governed by general provisions of reclamation law, project-specific 

legislation, and specific provisions of contracts the Bureau enters into with 

water users. Within these constraints, the Bureau3

 has broad discretion in 

defining which of the activities it undertakes constitute O&M that can be 

charged to customers. Federal accounting standards and guidance 

provided by the Office of Management and Budget (OMB) indicate that the 

full costs incurred by the federal government in providing services should 

3

The authority to make this determination is delegated to the Bureau by the Secretary of the 

Interior.
B-283210

Page 6 GAO/AIMD-00-127 Bureau of Reclamation

be recovered from beneficiaries of those services, unless such cost 

recovery is legislatively precluded.

We reviewed the Bureau’s exercise of its discretion in determining which 

O&M costs to charge to customers in four areas. The areas we reviewed 

were Policy and Administration costs, costs funded with Area Manager 

funds, Associated O&M Program costs, and certain employee benefit costs. 

We found that, in accordance with specific legislation, the Bureau was not 

recovering the Policy and Administration costs. For the other three 

categories of costs, we found that the Bureau was not recovering them 

even though certain of these costs are recoverable and guidance contained 

in OMB Circular A-25 and federal accounting standards indicates that the 

costs should be recovered. Each of these areas is discussed in the following 

sections.

Appropriations Act 

Prohibits Recovery of Policy 

and Administration Costs 

The Bureau classifies all costs funded from its Policy and Administration 

appropriation as nonreimbursable. As such, the costs are not recovered 

from customers. We reviewed the Bureau’s authority for classifying costs 

funded by the Policy and Administration appropriation as nonreimbursable 

and found that the legal basis for excluding costs funded by the Policy and 

Administration appropriation from recovery is clear. The Bureau’s fiscal 

year 2000 appropriations act, for example, specifically states that the 

Bureau’s Policy and Administration Appropriation is to be 

nonreimbursable.

We reviewed a limited number of costs funded by the Bureau’s Policy and 

Administration appropriation in 1998 and found that they were reasonably 

in accordance with the definitions of Policy and Administration costs that 

the Bureau provided to Congress in its budget request.
B-283210

Page 7 GAO/AIMD-00-127 Bureau of Reclamation

Certain Other Costs the 

Bureau Does Not Recover 

Can and Should Be 

Recovered

The Bureau does not recover certain other costs indirectly related to water 

supply that are not specifically exempted from recovery by legislation. 

These indirect costs should be recovered from customers in accordance 

with OMB Circular A-25, which provides guidance for federal agencies to 

use in setting fees to recover the full costs of providing goods or services.4

OMB Circular A-25 defines full costs as all direct and indirect costs of 

providing the goods or service. This definition is consistent with that 

contained in federal accounting standards.5

 The federal accounting 

standards define the full cost of an entity’s output as “the sum of (1) the 

costs of resources consumed by the segment that directly or indirectly 

contribute to the output, and (2) the costs of identifiable supporting 

services provided by other responsibility segments within the reporting 

entity, and by other reporting entities.” Applying the definitions of “full 

cost” used in OMB Circular A-25 and federal accounting standards 

indicates that the full cost of the water supplied by the Bureau includes all 

direct and indirect costs incurred in providing these services and that these 

costs should be recovered, except where precluded by law. The indirect 

costs that could be recovered are included within Area Manager funds, 

Associated O&M Programs,6

 and certain pension and postretirement health 

benefits costs for Bureau employees.

Area Manager Funds The Bureau’s Budget Review Committee established Area Manager funds in 

fiscal year 1997 “to be distributed to area offices in recognition of their 

expanded role and participation in broader policy issues and budget and 

program formulation activities.” In fiscal year 1998, Area Manager funds 

were used for activities in two regions—the Pacific Northwest Region and 

the Great Plains Region—where the amounts funded totaled $883,000 and 

$348,000 respectively. 

4

The purpose of OMB Circular A-25 is to implement a law commonly known as the User Fee 

Statute. However, its guidance may be used by agencies in setting fees authorized by other 

laws to the extent that it does not conflict with the requirements of those laws.

5

Financial Accounting Standards Advisory Board Statement of Federal Financial 

Accounting Standards (SFFAS) No. 4, Managerial Cost Accounting Concepts and Standards 

for the Federal Government, June 1995.

6

Beginning in the fiscal year 1998 budget, the Bureau discontinued the Associated O&M 

Programs terminology and included their constituent programs in its “Bureauwide” budget 

category.
B-283210

Page 8 GAO/AIMD-00-127 Bureau of Reclamation

We found that Area Manager funds have been used to fund such activities 

as 

• meeting periodically with irrigation district managers to discuss Bureau 

policy and initiatives;

• developing out-year programs and budgets and discussing these budgets 

with irrigation district managers; and

• responding to requests from irrigation districts seeking easements 

across Bureau-held lands. 

Since these are indirect costs of supplying water, we asked the Bureau why 

they were being excluded from reimbursable O&M. The Bureau responded 

by citing the following language from the Fact Finders Act.7

“The cost and expense after June 30, 1945, of the Office of the Commissioner8 in the District 

of Columbia and, except for such cost and expense as are incurred on behalf of specific 

projects, of general investigations and of nonproject offices outside the District of 

Columbia, shall be charged to the reclamation fund and shall not be charged as a part of the 

reimbursable construction or operation and maintenance costs.”

We reviewed the authority that the Bureau cited for classifying costs 

funded by Area Manager funds as nonreimbursable. While it exempts from 

recovery the cost of “general investigations”9

 and “nonproject offices,” in 

our opinion it does not exempt from recovery the types of costs we 

identified, such as discussing with irrigation district managers, budgets that 

benefit the irrigation purpose and projects. These costs should be allocated 

on a reasonable basis to irrigation projects for recovery from water 

customers, instead of being classified as nonreimbursable, in accordance 

with the full cost definitions included in OMB guidance and federal 

accounting standards. 

Associated O&M Programs The Bureau’s O&M report identified a group of individual programs that are 

collectively called Associated O&M Programs. The report stated that the 

7

Fact Finders Act of April 19, 1945 (59 Stat. 54) (43 U.S.C. §377).

8

Commissioner of the Bureau of Reclamation.

9

General investigations are studies and planning efforts designed to “acquire and analyze 

data and to formulate plans for improved management and development of water and 

related land resources.” Examples of activities undertaken as general investigations include 

water conservation studies and studies related to the construction of new facilities for water 

supply or delivery.
B-283210

Page 9 GAO/AIMD-00-127 Bureau of Reclamation

Associated O&M Programs group involves a variety of services “in support 

of its overall project O&M program.” As such, these are indirect O&M costs 

incurred by the Bureau. The Bureau’s O&M report listed examples of 

activities that had been funded by Associated O&M Programs, including

• developing new and improved O&M practices and procedures,

• providing the Bureau’s water and power users with information on the 

latest technical and nontechnical advances in the O&M of water and 

power projects,

• disseminating information concerning the agency’s overall O&M policies 

and programs, and

• providing for consistency and follow-through on the effectiveness of 

O&M programs from an agencywide perspective.

We reviewed some individual programs within the Associated O&M 

Programs group and identified some with purposes related to water supply, 

including

• the Negotiation and Administration of Water Marketing Program, which 

involves the administration of repayment contracts and operational 

studies for water marketing purposes, 

• the Operation and Maintenance Program Management Program, with 

purposes that include standardization of O&M practices, and

• the Examination of Existing Structures Program, which provides for the 

review of Bureau facilities with respect to public safety, emergency 

management, and efficient energy and water management practices. 

Because some of these are indirect costs of supplying water, we asked the 

Bureau why they were being excluded from reimbursable O&M. The 

Bureau again responded that its authorization for excluding the costs was 

the Fact Finders Act. As discussed previously, while the Fact Finders Act 

exempts from recovery the cost of “general investigations” and “nonproject 

offices,” in our opinion it does not exempt from recovery costs such as 

those we identified that benefit a reimbursable project purpose. 
B-283210

Page 10 GAO/AIMD-00-127 Bureau of Reclamation

Certain Pension and Health 

Benefits Costs

The Bureau’s water rates do not recover the full cost to the federal 

government of providing Civil Service Retirement System (CSRS) pensions 

and postretirement health benefits for current Bureau employees engaged 

in work directly related to water supply.10 The employee and the Bureau 

both contribute annually toward the costs of future CSRS pension benefits. 

Since the employee and Bureau contributions toward CSRS pensions are 

less than the full cost of providing the pension benefits, the federal 

government must, in effect, make up the funding shortfall. In addition, 

neither the Bureau nor the employee pays the federal government’s portion 

of postretirement health benefits, which will eventually be paid by the 

general fund of the Department of the Treasury. 

As is the case in other federal agencies, CSRS employees and the agency 

each pay a fixed percentage of the employee’s salary—7.25 percent for 

employees and 8.51 percent for the agency—to offset future pension costs. 

However, the combined contribution does not cover the full cost of the 

employee’s future pension benefits, which amounted to 24.2 percent of 

salary as of September 30, 1999. Thus, for fiscal year 1999 the funding 

shortfall was about 8.44 percent of every CSRS employee’s salary. The 

annual funding shortfall associated with pension benefits will be eliminated 

over time as CSRS employees leave the government and are replaced with 

Federal Employees Retirement System (FERS) employees, provided that 

FERS pension benefits remain fully funded annually.

The full cost of the federal government’s portion of postretirement health 

benefits (for both CSRS and FERS employees) is likewise not paid by 

federal agencies, including the Bureau, during the period of the 

beneficiaries’ employment. The Office of Personnel Management estimates 

that over $2,550 per employee would need to have been contributed in 

fiscal year 1999 to cover the cost of each employee’s postretirement health 

benefits earned. However, no fund has been established to accumulate 

assets to pay for these future benefits, which will eventually be paid by the 

federal government. In contrast to the situation regarding CSRS pensions, 

the annual funding shortfall associated with postretirement health benefits 

will not be eliminated as CSRS employees are replaced by FERS 

10According to Office of Personnel Management officials, pensions for employees covered 

by the Federal Employees Retirement System (FERS) are fully funded each year and 

cumulatively, so there are no similar unrecovered costs related to Bureau employees 

covered by FERS.
B-283210

Page 11 GAO/AIMD-00-127 Bureau of Reclamation

employees, since it is an entirely separate benefit program not related to 

individual retirement systems.

We analyzed the unrecovered costs for fiscal year 1999 related to CSRS 

pensions and postretirement health benefits at the Bureau’s Mid-Pacific 

Region Central Valley Project (CVP) and at its Pacific Northwest Region. 

The results of our analysis are shown in table 2.

Table 2: Fiscal Year 1999 Unrecovered CSRS Pension and Postretirement Health 

Benefits Costs for Bureau Employees Involved in Water-Related Activities at CVP 

and the Pacific Northwest Region

a

Our analysis covered pension and postretirement health benefits for current employees only; we did 

not analyze the costs associated with retirees.

We previously reported that CSRS and postretirement health benefits costs 

associated with electricity generated by the Corps and the Bureau and 

marketed by the PMAs were similarly not being recovered.11 In 1998 the 

Corps and the Bureau began estimating these costs and providing the 

results to the PMAs. The PMAs have begun recovering, through electricity 

rates, the full cost of CSRS pension and postretirement health benefits for 

their employees and for employees of the Bureau and Corps who are 

involved in power-related activities. The Bureau did not, however, make 

similar calculations for CSRS and postretirement health benefits costs 

associated with water supply and has not included these costs in its annual 

O&M rates.

Dollars in thousands

CVP

Pacific Northwest

Region

CSRS pension benefits $305 $ 77

Postretirement health benefits 404 120

Totalsa $709 $197

11See Power Marketing Administrations: Cost Recovery, Financing, and Comparison to 

Nonfederal Utilities (GAO/AIMD-96-145, September 19, 1996), Federal Electricity Activities: 

The Federal Government’s Net Cost and Potential for Future Losses (GAO/AIMD-97-110, 

September 19, 1997), and Power Marketing Administrations: Repayment of Power Costs 

Needs Closer Monitoring (GAO/AIMD-98-164, June 30, 1998).
B-283210

Page 12 GAO/AIMD-00-127 Bureau of Reclamation

As with certain costs included in Area Manager funds and Associated O&M 

Programs, the costs of pensions and postretirement health benefits for 

Bureau employees are O&M costs incurred by the Bureau in providing 

services to project customers and recovering them is not precluded by 

specific legislation. Guidance contained in OMB Circular A-25 and federal 

accounting standards indicates that these costs should be recovered. 

How Does the Bureau 

Account for O&M 

Costs?

The Bureau expenses O&M costs on an annual basis. For cost accounting 

purposes, Department of the Interior (DOI) policy requires that the Bureau 

classify costs into direct and indirect categories and ensure that these 

classifications are consistently used.

In June 1999 the Bureau established a team to study cost accounting 

practices. The team’s goal was to “develop and implement a common and 

consistent set of business practices for defining, charging, reporting, and 

explaining both direct and indirect costs” within the Bureau. The team 

identified a number of needs that the current system did not meet, 

including

• lack of a common Bureau definition for indirect cost,

• lack of consistency between offices in charging costs,

• need for standard business practices that recognize and accommodate 

valid and justifiable differences between offices,

• flexibility for unique operations that result from project-specific 

legislation and organizational differences, and

• need to provide managers with the knowledge and tools to understand 

and explain costs.

The resulting Standard Processes of Costing (SPOC) Business Practices, 

issued in September 1999, represents current Bureau policy. This report 

provides guidelines for charging regional indirect costs. It also provides 

cost-charging examples from the Bureau’s Reclamation Service Center, 

regional offices, and area offices and describes how the costs should be 

displayed to customers and others. 

The SPOC report defines direct costs as “all costs which can be specifically 

and readily identified with an output or which can be specifically and 

readily identified with two or more outputs through a reasonable and 

economically feasible allocation.” An output is defined as “a product or 

service specifically relating to a project or program.” The report defines 

indirect costs as “costs that are jointly or commonly used to produce two 
B-283210

Page 13 GAO/AIMD-00-127 Bureau of Reclamation

or more outputs but are not specifically identifiable with any of the outputs 

in an economically feasible way or through a reasonable allocation.” 

Bureau personnel are guided by examples of direct and indirect costs as 

provided in the DOI Financial Management Manual and the SPOC report. 

Table 3 shows examples of direct and indirect costs from the SPOC report.

Table 3: Examples of Bureau of Reclamation Direct and Indirect Costs

Source: Developed by GAO based on data from Standard Processes of Costing (SPOC) Business 

Practices, Bureau of Reclamation, September 30, 1999.

DOI policy also requires that the Bureau determine the cost of projects and 

services by reasonably distributing and allocating direct and indirect costs. 

Figure 1 shows how the Bureau distributes and allocates direct and indirect 

costs to the various reimbursable and nonreimbursable purposes served by 

water projects.

Direct costs Indirect costs

• Labor and equipment used on a specific program or task, such as 

maintenance on a water pump at a pumping station. The 

mechanic’s time, tools, and supplies are all direct costs of the 

pumping station.

• Labor and other costs not used on a specific program, such as 

services to the entire region provided by a staffing specialist in a 

regional office. The specialist’s time, training, travel, and supplies 

are indirect costs.

• Travel associated with a specific project. • Space rental, postage, telephone expenses, and utilities (if not 

related to a specific program or task).

• Printing and data processing services associated with a specific 

program or project.
B-283210

Page 14 GAO/AIMD-00-127 Bureau of Reclamation

Figure 1: Bureau of Reclamation Cost Accounting—Allocation and Distribution

Direct Costs

Power Municipal &

Industrial Irrigation

Power Sales Project Water

Contracts

Costs Recovered

Costs Incurred

Reimbursable Costs (See note 2)

Power Rates

Charged by Power

Marketing

Administrations

Rate & Term

Repayment

Determination

-Direct labor

-Direct materials & equipment

-Outside contractors

-Reclamation Service Center direct project costs

(labor costs & indirect support costs)

Program/Project Costs

Costs Distributed

Direct Costs Indirect Costs
B-283210

Page 15 GAO/AIMD-00-127 Bureau of Reclamation

Indirect Costs

(Pooled for distribution)

(See note 1)

Recreation

Land

Resource

Management

Other

Nonreimbursable Costs (See note 3)

Management &

Administrative Costs

Area Office

Project General

Expense

Regional Offices

Water

Conservation Flood Control Fish & Wildlife

Note 2 - Reimbursable Costs: Costs are

recovered by receipts from customers

and from miscellaneous revenues.

Some reimbursable costs are not

recovered because of legislative

write-offs or other adjustments.

Reclamation

Service Center

-Department of the Interior

-National Business Center (Interior)

-Reclamation Service Center

-Regional & area offices

Indirect Costs

(Not pooled for distribution)

Excluded Management &

Administrative Costs

-Associated O&M Programs (nonproject)

-Policy & Administrative costs

Commissioner's office

Reclamation Service Center leadership

Regional & area office leadership

-Area Manager funds

Excluded

Costs

(Nonreimbursable)

Note 3 - Nonreimbursable Costs: Costs are

generally nonreimbursable but specific

legislation may make some of these costs

either fully or partially reimbursable.

Note 1 - Indirect Costs (Pooled)

1-Reclamation Service Center

-Centralized accounting

-Wide-area network

-Automated, centralized information systems

-Services purchased under contract

2-Regional Offices

-Financial management

-Human resources

-Acquisitions

-Property management

-Information resources

-General management

3-Area Offices

-Same categories as regional offices
B-283210

Page 16 GAO/AIMD-00-127 Bureau of Reclamation

How Does the Bureau 

Define Overhead?

During the fiscal year 1998 appropriations process, the Conference 

Committee on the Energy and Water Development Appropriations Bill 

asked the Bureau to report the “overhead rate” associated with its projects 

for fiscal years 1993 through 1997. The resulting report stated that the 

Bureau does not normally use the term overhead, nor is the term defined in 

the Federal Financial System. Consequently, the Bureau developed a 

definition of overhead specifically for use in the report to Congress. The 

Bureau defined “overhead rate” to be the indirect costs it identified as 

constituting overhead divided by total annual O&M costs.

The Bureau definition of overhead included some, but not all, indirect 

costs. Policy and Administration, Associated O&M Programs, and certain 

area office12 indirect costs were excluded. The Bureau then calculated and 

reported the overhead rate applicable to specific projects and to the agency 

as a whole based on the portion of indirect costs that met its definition of 

overhead. The Bureau reported an agencywide overhead rate—overhead 

costs as a percentage of total O&M costs—ranging from 6 to 8 percent 

during fiscal years 1993 through 1997. 

The report stated that the excluded area office indirect costs related to a 

variety of administrative services and support functions, such as clerical 

and secretarial staffs. The Bureau did not consider these costs to be 

overhead because each area office’s administrative and support costs 

related closely to projects. Consequently, the costs were not considered to 

be overhead, nor were they classified as direct costs. The costs were shown 

separately in a category called “Project General Expense.”

The Bureau’s report stated that even if these area office indirect costs were 

included in the definition of overhead, the Bureau’s agencywide percentage 

of overhead costs to total O&M costs would not have exceeded 15 percent 

in any of the 5 fiscal years under consideration.13

12Each area office represents a designated geographic area within its respective regional 

office’s boundaries. Area office responsibilities include O&M for dams, pumping stations, 

canals, and other Bureau facilities.

13We confirmed the Bureau’s statement. The range was from 12.2 to 14.9 percent during this 

period.
B-283210

Page 17 GAO/AIMD-00-127 Bureau of Reclamation

The Bureau’s report disclosed that Policy and Administration and 

Associated O&M Program costs were excluded because they are not 

reimbursable by project customers.14 The resulting calculation of 

overhead—using only reimbursable costs—is meaningful to project 

customers, who are primarily concerned with costs they have to pay for. 

We agree that this definition of overhead is meaningful to project 

customers. However, a definition that includes all indirect costs provides 

important additional information to the Congress and others. Table 4 

provides a calculation of Bureauwide overhead that includes the indirect 

costs—Policy and Administration, Associated O&M Programs, and certain 

area office costs—that were not part of the Bureau report’s customeroriented definition.

Table 4: Recalculation of Bureauwide Overhead if All Indirect Costs Are Included, Fiscal Years 1993 Through 1998

Source: Developed by GAO based on data from Annual Costs of Bureau of Reclamation Project 

Operation and Maintenance for Fiscal Years 1993-97, Bureau of Reclamation, September 1998, and 

from additional cost data provided by the Bureau of Reclamation.

14As discussed previously, the Associated O&M Program costs that are related to 

reimbursable project purposes and not legislatively precluded from recovery should be 

recovered because they are indirect O&M costs and OMB guidance and federal accounting 

standards indicate that they should be recovered. 

Dollars in millions

Bureauwide overhead Percentage of overhead to total O&M

Fiscal year Per report All costs included Per report All costs included

1993 $31 $149 8% 30%

1994 27 151 7 32

1995 22 135 6 28

1996 24 143 6 29

1997 25 152 6 28

1998 Not reported 150 Not reported 27
B-283210

Page 18 GAO/AIMD-00-127 Bureau of Reclamation

How Does the Bureau 

Calculate the O&M 

Costs That It Charges 

to Customers?

The Bureau’s contracts with customers for supplying water are of two 

types: repayment contracts and water service contracts. The Bureau 

calculates O&M costs charged to customers in accordance with the 

provisions of these different types of contracts. For repayment contracts, 

the customer’s O&M costs are generally based on the percentage of the 

reservoir’s water supply to which the customer is entitled. For water 

service contracts, costs are based on the amount of water delivered 

multiplied by the rate applicable to the particular customer. 

The following discussion describes, in general, how the Bureau calculates 

the O&M charge for each type of contract. The examples are derived from 

repayment contracts as used by the Bureau’s Pacific Northwest Region and 

water service contracts as used by the Mid-Pacific Region’s Central Valley 

Project. Both examples assume that there is no Bureau charge for any O&M 

related to the conveyance of water, since this function has largely been 

taken over by the customers in both regions. The calculations shown are 

generalizations—specific contractual terms can result in a difference in 

how O&M charges are calculated for individual contracts. Moreover, while 

our examples cover only O&M costs, customers are also responsible for 

repaying certain capital costs of the facilities from which they receive their 

water.

Repayment Contracts Repayment contracts are the most common legal instrument that the 

Bureau uses to obtain reimbursement from its customers for O&M costs 

incurred by Bureau projects. Generally, the O&M costs charged to the 

customer are allocated based upon the share of the reservoir water supply 

the customer is entitled to by contract; in some cases, certain other O&M 

charges may be based on benefits received in proportion to all project 

benefits. The customer must pay O&M costs in advance, based on the 

Bureau’s internal budget estimates for the upcoming year. The customer’s 

bill is subsequently adjusted for the difference between actual costs 

incurred and advance payments that have been made based on estimates.

For example, for a repayment contract entitling Customer A to 10 percent 

of the water stored in a particular dam’s reservoir, the O&M charge is 

calculated as follows:

• The Bureau estimates that for fiscal year 1999, the reimbursable O&M 

costs for the dam, including both direct and certain indirect costs, will 

total $100,000. Customer A’s share of the Bureau’s estimated fiscal year 
B-283210

Page 19 GAO/AIMD-00-127 Bureau of Reclamation

1999 O&M is 10 percent of $100,000, or $10,000. Customer A must pay 

this “up front,” i.e., before the Bureau performs the work.

• The Bureau’s actual O&M costs for the dam turn out to be $90,000. 

Customer A’s share of actual costs is 10 percent of $90,000, or $9,000. 

• Customer A’s bill for fiscal year 2000 estimated O&M costs will be 

credited for the $1,000 overpaid in fiscal year 1999.

Water Service Contracts The Bureau’s most common use of water service contracts is at its Central 

Valley Project in California. Under water service contracts, contractors pay 

a combined capital and O&M charge for each acre-foot15 of water delivered. 

The contracts typically entitle the customer to a specified quantity of water 

annually. The O&M costs paid are based upon a rate the Bureau establishes 

for each individual customer. The rate is composed of separate charges for 

each of the services the Bureau provides to the customer. Water storage, 

marketing,16 pumping, drainage, and conveyance are the primary services 

involved.

The Bureau establishes a charge for each of these services by estimating 

the annual total O&M costs expected to be incurred by that service—for 

example, for water storage. Total annual estimated water storage O&M 

costs are then divided by the total quantity of water expected to be 

delivered during the year. The result is a unit charge for water storage that 

is applied to each acre-foot of water sold to each customer. 

The Bureau’s Central Valley Project has two types of water service 

contracts—cost-of-service and fixed-rate. For cost-of-service contracts, the 

O&M cost the customer pays annually is the rate the Bureau calculates 

based on budgeted costs and water delivery projections. For fixed-rate 

water service contracts, the O&M cost is based on the rate established by 

contract. For both types of contracts, if actual costs exceed the contract 

payments, the Bureau establishes an “O&M deficit” that is carried over to 

future years for payment. If actual costs are less than contract payments, 

excess payments are applied to interest, O&M deficits, and capital 

15An acre-foot of water is the volume necessary to cover 1 acre to a depth of 1 foot. It is 

approximately 326,000 gallons of water.

16Water marketing costs are for those administrative activities associated with the sale of 

project water, including contracting, contract administration, water accounting, and water 

ratesetting functions. Certain environmental mitigation costs are also included in the water 

marketing component of rates.
B-283210

Page 20 GAO/AIMD-00-127 Bureau of Reclamation

repayment (an amount assessed to cover project construction costs) in 

accordance with Central Valley Project ratesetting policies.

Under both cost-of-service and fixed-rate water service contracts, 

customers pay O&M in advance. The advance payments are based on the 

Bureau’s O&M budget estimate and the amount of water expected to be 

delivered. The customer’s bill is adjusted for the difference between actual 

costs incurred and payments that have been made based on estimates. The 

following examples show how the customer’s costs are calculated for both 

cost-of-service and fixed-rate water service contracts.

Water Service Contract 

Cost-of-Service O&M Cost 

Calculation

A cost-of-service water service contract entitles Customer B to a maximum 

of 15,000 acre-feet of water per year. The Bureau estimates that it will be 

able to deliver 15,000 acre-feet to Customer B in fiscal year 1999. The O&M 

charge is calculated as follows:

• The services Customer B uses are water storage and water marketing. 

Customer B does not use, and is not charged for, other services that can 

comprise the Bureau’s water service contract rate (e.g., water 

conveyance, pumping, and drainage).

• The Bureau estimates that it needs to charge $4.61 per acre-foot for 

water storage in order to cover all of the O&M costs that are related to 

water storage. The Bureau also estimates that it needs to charge $4.63 

per acre-foot to cover all of the O&M costs that are related to water 

marketing costs. Consequently, the rate Customer B is charged for O&M 

costs is $9.24 per acre-foot. 

• Customer B pays a total of $138,600 in estimated O&M costs in advance 

of water delivery ($9.24 per acre-foot multiplied by the 15,000 acre-feet 

estimated amount of water delivery). 

• After actual costs become known, Customer B’s total fiscal year 1999 

payments are applied to the customer’s allocated costs. Excess 

payments generate capital and/or deficit repayment, while a shortage 

generates a deficit. 

Water Service Contract 

Fixed-Rate O&M Cost 

Calculation

For a fixed-rate water service contract under which Customer C is to pay 

$3 per acre-foot for water delivered, the O&M charge is calculated as 

follows: 

• Customer C’s estimated water delivery is 2,000 acre-feet in fiscal year 

2000.

• Customer C prepays $6,000 ($3 per acre-foot multiplied by 2,000 acrefeet).
B-283210

Page 21 GAO/AIMD-00-127 Bureau of Reclamation

• Customer C is delivered 1,500 acre-feet in fiscal year 2000. The contract 

with Customer C, however, requires Customer C to pay for 2,000 acrefeet, whether or not it actually was delivered. The total cost based on 

actual deliveries is $4,500. Therefore, Customer C has made payments of 

$1,500 in excess of cost.

• Customer C is credited for $1,500 against its allocated capital costs. 

• If the contract’s fixed rate is inadequate to cover the Bureau’s actual 

O&M costs, Customer C incurs an O&M deficit that is carried over to 

future years for payment. A contract might have an accumulated deficit 

at the end of the contract term. 

What Concerns Have 

Been Raised by 

Customers About 

Excessive O&M Costs 

and to What Extent Do 

Customers Have an 

Opportunity to Review 

Cost Origins and 

Recommend 

Reductions?

We met with representatives from 31 organizations who were Bureau 

customers, or represented the interests of Bureau customers, in the 

Bureau’s Mid-Pacific and Pacific Northwest regions. A list of the customers 

we contacted can be found in appendix I. 

The customers we contacted were generally concerned about the level of 

the Bureau’s costs and their ability to influence costs. Some customers 

thought the Bureau’s overhead costs were excessive. Others were more 

concerned with total O&M costs. 

The Bureau’s 1998 SPOC report recognized that concerns had been raised 

by customers in the recent past in regard to their perception that the 

Bureau’s O&M costs were excessive. Some customers stated that the 

Bureau’s O&M report, which showed relatively low overhead costs, was not 

convincing to them and did not alleviate their concerns about Bureau costs. 

The customers commented that the report’s results were largely dependent 

upon how indirect costs were defined and that they were concerned that 

their water rates contained costs that should have been nonreimbursable 

and therefore excluded. Finally, some customers commented that the 

Bureau report concerned itself primarily with indirect costs and did not 

adequately address the issue of why water rates have continued to 

increase. 

A directive from the Bureau’s Commissioner dated September 24, 1998, 

required Bureau regions to involve customers in the budget process. We 

confirmed that in the Mid-Pacific and Pacific Northwest regions, customers 

have been given increased opportunities by the Bureau to review budget 

data. Both regions had held meetings to present budget estimates and to 

obtain customer comments. The customers told us that the Bureau’s recent 
B-283210

Page 22 GAO/AIMD-00-127 Bureau of Reclamation

initiative to “get them involved” in the budget process was a “good start.” 

Detailed customer comments included the following:

• Mid-Pacific Region customers we interviewed stated that they were 

generally encouraged by this year’s efforts by the Bureau to get them 

involved in the budget process. However, they said they need a great 

deal more detail to be able to make substantive determinations as to the 

appropriateness of O&M activities and charges. For example, they 

stated that they would like enough detail to be able to identify Policy 

and Administration costs in order to ensure that they were not being 

charged for costs that are by law nonreimbursable.

• Some Mid-Pacific Region customers expressed concern that there was 

no mechanism for them to determine whether the Bureau had acted 

upon any of their comments. They stated that they would like to obtain 

feedback with regard to the extent to which their suggestions were 

implemented. Bureau regional officials responded that timely feedback 

was difficult because of OMB restrictions placed upon the release of 

data before the budget is enacted, but that they would work with 

customers on providing this information.

• Pacific Northwest Region customers generally were encouraged by the 

Bureau’s efforts to involve them in the budget review process. However, 

some customers commented that they did not have enough detail to 

identify indirect costs. 

• Some Pacific Northwest Region customers complained that the final bill 

that they received from the region was not sufficiently detailed—that it 

was just a one-line bill for O&M costs for the year. Regional officials 

stated that they were studying the possibility of providing more detail in 

the bills.

• Some Mid-Pacific Region customers stated that the water marketing 

costs that were included in rates were excessive. They stated that they 

did not know what these costs were for and that increases were 

troubling because there appeared to be “no end in sight.” Bureau MidPacific Region officials stated that details on water marketing costs and 

other information about rates were communicated to customers 

attending customer group meetings, such as those held by the Central 

Valley Project Water Association, and in responses to questions posed 

directly to ratemaking staff. Customers were optimistic that the budget 

review meetings and the new cost accounting policies adopted by the 

Bureau in its SPOC report would provide increased opportunities to 

review these costs. 
B-283210

Page 23 GAO/AIMD-00-127 Bureau of Reclamation

• Some Pacific Northwest Region customers said that the Bureau’s basis 

for classifying costs as O&M, rather than capitalizing them, was 

unclear.17 However, most customers contacted in both regions were not 

concerned about the Bureau’s capitalization policy and generally 

understood the basis for the decisions the Bureau made. They stated 

that these decisions were governed by the specific terms within the 

individual contracts and by published guidance the Bureau uses that 

lists specific items and establishes criteria to determine whether the 

cost should be capitalized. 

• Two Mid-Pacific Region customer groups that we contacted had taken 

over the responsibility for O&M on some of the Bureau’s water 

conveyance facilities. One of the groups stated that its O&M costs were 

lower than the Bureau’s had been because it was using fewer employees 

to do the same work. The Bureau responded that the comparison was 

invalid because the customer group overstated the number and costs of 

employees that the Bureau had used. An official from a group that 

represents many customers of the Central Valley Project—the largest 

project in the Mid-Pacific Region—told us that it would be difficult to 

substantiate any such claims that facilities taken over by customer 

groups are operated more efficiently than they had been by the Bureau.

How Do the Bureau’s 

Cost Recovery 

Practices Compare to 

Those of Other 

Entities?

As previously discussed, the Bureau manages large multiple-purpose water 

projects and is required to recover reimbursable costs it incurs from water 

service and other customers. The U.S. Army Corps of Engineers and the 

State of California’s State Water Project offer meaningful comparisons to 

the Bureau. The Corps is a federal entity that manages multiple-purpose 

water projects with cost recovery requirements. California’s Department of 

Water Resources manages the State Water Project, which is the largest 

multiple-purpose water project managed by a nonfederal entity in the 

United States. 

Both Corps projects and the California State Water Project have 

reimbursable and nonreimbursable project purposes that are similar to 

those of the Bureau. These include reimbursable purposes, such as water 

service and electrical power production, and nonreimbursable purposes, 

such as recreation, fish and wildlife protection, and flood control. 

17Classifying costs as O&M and expensing them in the year incurred puts greater upward 

pressure on current rates than capitalizing the costs and recovering them over a period of 

years.
B-283210

Page 24 GAO/AIMD-00-127 Bureau of Reclamation

Laws applicable to the Bureau of Reclamation and Bureau interpretations 

of those laws lead to some differences in the types and amounts of costs 

the Bureau classifies as reimbursable when compared to other entities. 

Some differences are described below.

• The Bureau excludes costs funded by its Policy and Administration 

appropriation from recovery, in accordance with the specific provisions 

in the appropriations laws that are applicable to the Bureau. The 

California State Water Project does not have a similar legislatively 

mandated exclusion.

• The Corps excludes costs funded by its General Expense appropriation 

from recovery. However, unlike the Bureau, the costs funded by this 

appropriation are limited to the agency’s headquarters and division 

levels. We did not review the Corps’ legal authority for excluding these 

costs from recovery.

• The Bureau classifies some categories of indirect costs as 

nonreimbursable because they are of “Bureauwide” benefit rather than 

benefiting any specific project. These include the Associated O&M 

Programs costs and costs paid for by Area Manager funds.18 According 

to Corps and State of California officials, neither the Corps nor the 

California State Water Project excludes similar categories of indirect 

costs from recovery.

• Neither the Bureau nor the Corps recovers the full cost of employee 

pensions and postretirement health benefits.19 State of California 

officials advised that the full pension and health benefits costs 

associated with the State Water Project are recovered from customers. 

Federal power marketing administrations offer another contrast. These 

organizations market power produced at the Bureau’s multiple-purpose 

projects. The power marketing administrations are recovering the full 

employee pension costs that are related to the production of power at 

Bureau facilities.

18As discussed previously, the Area Manager funds and Associated O&M Program costs that 

are related to reimbursable project purposes and not legislatively precluded from recovery 

should be recovered because they are indirect O&M costs and OMB guidance and federal 

accounting standards indicate that they should be recovered. 

19As discussed previously, the employee pensions and postretirement health benefits costs 

that are related to reimbursable project purposes and not legislatively precluded from 

recovery should be recovered because they are indirect O&M costs and OMB guidance and 

federal accounting standards indicate that they should be recovered. 
B-283210

Page 25 GAO/AIMD-00-127 Bureau of Reclamation

Conclusions To recover the full cost of providing services, the Bureau needs to identify 

and include in its billing all O&M costs that are related to reimbursable 

project purposes. The Bureau cannot have assurance that it is recovering 

all reimbursable costs until it undertakes a review of all costs funded by 

Area Manager funds and Associated O&M Programs and identifies costs 

that are either directly or indirectly related to reimbursable project 

purposes. 

Recovering these costs, and the full costs associated with employee 

pension and health benefits, would help ensure that the federal 

government’s net costs related to the services provided by the Bureau are 

minimized. 

Recommendations To fully recover all appropriate costs, we recommend that the Secretary of 

the Interior direct the Commissioner, Bureau of Reclamation, to

• examine Area Manager funds and Associated O&M Programs to identify 

costs related to reimbursable project purposes and recover those costs 

from the benefiting customers, and

• calculate and begin recovering the full costs of employee postretirement 

health benefits and CSRS employee pension costs related to 

reimbursable project purposes. 

Agency Comments and 

Our Evaluation

The Department of the Interior generally agreed with the basic thrust of the 

report’s conclusions and recommendations—that the Bureau of 

Reclamation needs to identify and recover appropriate costs related to 

providing services to project beneficiaries. DOI’s comment letter is 

reproduced in appendix II. 

DOI stated that, due to the complexity of the cost recovery issue and its 

potential impacts, it has asked the Bureau of Reclamation to more fully 

review the report and its recommendations and provide a preliminary 

report on them to Bureau and DOI officials by June 9, 2000. Specifically, 

DOI stated that (1) the Commissioner of the Bureau of Reclamation and the 

Solicitor would review costs charged to Area Manager funds and 

Associated O&M Programs to determine whether more of these costs can 

be recovered from project beneficiaries, and (2) the Solicitor would review 

the Bureau’s legal authority to recover the full costs of employee 
B-283210

Page 26 GAO/AIMD-00-127 Bureau of Reclamation

postretirement health benefits and CSRS pension costs that are related to 

reimbursable project purposes. 

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

date. At that time, we will send copies to Representative Calvin M. Dooley, 

Ranking Minority Member, House Subcommittee on Water and Power, 

Committee on Resources; Representative Joe Barton, Chairman, and 

Representative Rick Boucher, Ranking Minority Member, House 

Subcommittee on Energy and Power, Committee on Commerce. We are 

also sending copies of this report to the Honorable Bruce Babbitt, 

Secretary of the Interior, the Honorable Eluid L. Martinez, Commissioner, 

Bureau of Reclamation, and other interested parties. Copies will also be 

made available to others on request.

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-9508. Key contributors to this report were Dave 

Bogdon, Mark Connelly, Michelle Dimodica, Brian Eddington, Larry Feltz, 

Rob Martin, and Jack Warner.

Sincerely yours,

Linda M. Calbom

Director

Resources, Community, and Economic Development

Accounting and Financial Management Issues
Page 27 GAO/AIMD-00-127 Bureau of Reclamation
Page 28 GAO/AIMD-00-127 Bureau of Reclamation

Appendix I

Objective, Scope, and Methodology ApendxiI

The Chairman, Subcommittee on Water and Power, House Committee on 

Resources, asked us to review several issues relating to the Bureau of 

Reclamation's operation and maintenance (O&M) of federal water projects. 

The specific objectives of our review were to determine 

(1) how the Bureau defines O&M activities, (2) the Bureau's latitude in 

deciding which O&M costs to charge to customers, (3) how the Bureau 

accounts for O&M costs, (4) how the Bureau defines overhead, (5) how the 

Bureau calculates the O&M costs that it charges to customers, (6) what 

concerns have been raised by customers about excessive O&M costs and to 

what extent customers have an opportunity to review cost origins and 

recommend ways to reduce them, and (7) how the Bureau's cost recovery 

practices compare to those of other entities. We met with Bureau 

customers in order to obtain their views on relations with the Bureau and 

the extent to which the Bureau has been responsive to their concerns.

As agreed with the requester, our review was limited to the Bureau's 

delivery of water for irrigation and municipal and industrial use. We did not 

review the Bureau's activities related to hydroelectric power production or 

to any nonreimbursable functions at multipurpose Bureau facilities, such 

as recreation, flood control, or fish and wildlife protection. Our work was 

also limited to O&M activities and costs; we did not review the recovery 

and treatment of capital construction costs. In addition, we did not assess 

the Bureau's efficiency in performing its O&M activities or in incurring 

related costs.

We conducted audit work at the Bureau's Washington, D.C. headquarters 

and Denver, Colorado office, and at its Mid-Pacific and Pacific Northwest 

regions. We also conducted audit work at the U.S. Army Corps of 

Engineers, State of California, and at the offices of representatives from 

water users' interest groups and customers from projects representing 

most of the Bureau's water sales in the Mid-Pacific and Pacific Northwest 

regions. We interviewed knowledgeable personnel at each audit site to 

obtain information relevant to the questions we were asked to answer. We 

also reviewed and analyzed relevant legislation and documents. In addition, 

we obtained written or oral responses from Bureau officials to document 

the Bureau's position on selected questions and issues and observed a 

budget review meeting held by the Mid-Pacific Region for its customers. 

The following section details the methodology used in our analyses and any 

additional restrictions on the scope of our work. 
Appendix I

Objective, Scope, and Methodology

Page 29 GAO/AIMD-00-127 Bureau of Reclamation

Determining How the 

Bureau Defines O&M 

and Overhead and 

Accounts for O&M 

Costs

To determine how the Bureau defines O&M and overhead and how it 

accounts for O&M costs (objectives 1, 3, and 4), we reviewed and analyzed 

relevant legislation and documents, including reclamation law; a 1998 

Bureau report to Congress on O&M activities and overhead;1

 a 1999 Bureau 

cost accounting report;2

 Department of the Interior and Bureau of 

Reclamation policies, accounting manuals, and other cost accounting 

guidance; and certain contracts with water supply customers. We also 

reviewed sample O&M bills the Bureau issued to various water customers 

and traced the charges in these bills back to Bureau accounting records. In 

addition, we consulted with Bureau Denver office officials to develop a 

flowchart that documents how the Bureau's costs are allocated and 

distributed.

Determining How the 

Bureau Calculates 

O&M Costs 

To determine how the Bureau calculates O&M (and overhead) costs 

(objective 5), we reviewed DOI and Bureau policy and procedures for 

determining O&M costs and discussed these policies and procedures with 

Bureau officials. We also traced sample O&M bills issued to customers 

back into Bureau accounting records to test the Bureau's ability to break 

O&M bills down into their constituent elements of materials, labor, and 

indirect costs and discussed our findings with Bureau personnel. 

We reviewed repayment and water service contracts and discussed 

contract provisions with Bureau regional officials. We used this 

information to develop generalized examples of how a customer's O&M bill 

would be calculated under both types of contracts.

1

Annual Costs of Bureau of Reclamation Project Operation and Maintenance for Fiscal Years 

1993-97, Bureau of Reclamation, September 1998. 

2

Standard Processes of Costing Business Practices, Bureau of Reclamation, September 30, 

1999.
Appendix I

Objective, Scope, and Methodology

Page 30 GAO/AIMD-00-127 Bureau of Reclamation

Determining the 

Bureau's Latitude in 

Deciding Which O&M 

Costs to Charge 

Customers

To determine the extent of the Bureau's latitude to designate costs as O&M 

(objective 2), we reviewed and analyzed relevant legislation, DOI and 

Bureau accounting policies and procedures, and the Bureau's O&M report. 

We reviewed Bureau capitalization policies and analyzed Department of the 

Interior Office of Inspector General reports relating to the Bureau's past 

practices in accounting for O&M costs. We met with Bureau customers to 

obtain their views on the Bureau's practices regarding the designation of 

costs as O&M and certain Bureau contracts with water supply customers.

We reviewed the Bureau's authority to include and exclude O&M costs 

from recovery. This review included analyzing the legislation pertinent to 

the appropriations that funded the costs; questioning Bureau officials; 

reviewing the legislation cited by the Bureau as justifying its determination 

that the costs were nonreimbursable; and identifying costs associated with 

the Bureau's exclusions. 

To define the full cost of the services provided by the Bureau, we reviewed 

(1) Office of Management and Budget (OMB) Circular A-25, which provides 

guidance for use in setting fees to recover the full costs of providing goods 

and services and (2) Statement of Federal Financial Accounting Standards 

(SFFAS) No. 4, Managerial Cost Accounting Concepts and Standards for 

the Federal Government. OMB Circular A-25 defines full cost as all direct 

and indirect costs of providing goods and services and is consistent with 

guidance for full cost reporting contained in SFFAS No. 4.

To determine whether the activities funded by the Policy and 

Administration appropriation are reasonably in accordance with Bureau 

definitions of Policy and Administration costs, we reviewed and discussed 

with Bureau representatives, supporting documentation for a limited 

number of charges judgmentally selected from Bureau-prepared lists of 

transactions recorded as Policy and Administration costs in September 

1998. To determine the nature of costs charged to Associated O&M 

Programs, we reviewed Bureau-prepared lists of costs charged to 

Associated O&M Programs by Bureau headquarters and regional offices 

during November 1997 and September 1998. From those lists we chose a 

limited number of judgmentally selected individual transactions and 

discussed the nature of those costs with a Bureau official.
Appendix I

Objective, Scope, and Methodology

Page 31 GAO/AIMD-00-127 Bureau of Reclamation

Identifying Specific 

Concerns That Have 

Been Raised by 

Customers and the 

Extent to Which 

Customers Have an 

Opportunity to Review 

Cost Origins and 

Recommend Ways to 

Reduce Them

To identify specific concerns that customers have raised about excessive 

O&M costs and the extent to which customers have an opportunity to 

review the origins of O&M costs and recommend ways to reduce them 

(objective 6), we spoke to Bureau Mid-Pacific and Pacific Northwest region 

customers and customer groups from 31 organizations (the groups are 

listed at the end of this appendix). We selected a sufficient number of 

customer representatives to ensure that we had contacted parties 

representing more than a majority of the water supplied by the Bureau in 

each region, including both irrigation water supply and municipal and 

industrial water supply customers. These customers and customer groups 

were selected judgmentally and do not represent a projectable random 

sample.

We obtained customers' views on the O&M bills they receive from the 

Bureau and asked about recent trends in the amounts of these bills. We also 

asked about the extent to which the Bureau involves them in the O&M 

budget process and the extent to which they feel the Bureau is responsive 

to customers' concerns. 

Determining How the 

Bureau's Cost 

Recovery Practices 

Compare to Those of 

Other Entities

To determine how the Bureau's cost recovery practices compare to those 

of other entities (objective 7), we identified two entities—the U.S. Army 

Corps of Engineers and the California State Department of Water 

Resources—that, like the Bureau, operate extensive, multiple-purpose 

water development projects. We discussed the policies and procedures for 

defining and accounting for O&M practices with officials of the Corps at 

their Washington, D.C., headquarters and selected division, district, and 

area offices, and with officials of the California State Department of Water 

Resources at their Sacramento, California, headquarters. We compared 

those policies and procedures with those we found used by the Bureau of 

Reclamation.

We conducted our review from June 1999 through March 2000 in 

accordance with generally accepted government auditing standards. We 

obtained written agency comments on a draft of this report, which are 

reproduced in appendix II.

We contacted the following organizations during the course of our work.

Black Canyon Irrigation District, Idaho

Boise Project Board of Control, Idaho/Oregon
Appendix I

Objective, Scope, and Methodology

Page 32 GAO/AIMD-00-127 Bureau of Reclamation

California Department of Water Resources

Central Valley Project Water Association, California

Chowchilla Water District, California

Contra Costa Water District, California

East Columbia Irrigation District, Washington

Exeter Irrigation District, California

Fresno Irrigation District, California

Friant Water Users Authority, California

Ivanhoe Irrigation District, California

Kennewick Irrigation District, Washington

Kittitas Reclamation District, Washington

Lindmore Irrigation District, California

Madera Irrigation District, California

Nampa and Meridian Irrigation District, Idaho

Payette River Water Users' Association, Idaho

Quincy-Columbia Basin Irrigation District, Washington

Roza Irrigation District, Washington

San Luis and Delta-Mendota Water Authority, California

Santa Clara Valley Water District, California

Saucelito Irrigation District, California

Shaffer-Wasco Irrigation District, California

South Board of Control, Owyhee Project, Idaho/Oregon

South Columbia Basin Irrigation District, Washington

South East Colorado Water Conservancy District, Colorado

South San Joaquin Municipal Utility District, California

Sunnyside Irrigation District, Washington

Tea Pot Dome Water District, California

Terra Bella Irrigation District, California

Westlands Water District, California

Yakima-Tieton Irrigation District, Washington
Page 33 GAO/AIMD-00-127 Bureau of Reclamation

Appendix II

Comments From the Department of the 

Interior ApendxiI
Appendix II

Comments From the Department of the 

Interior

(913859) Letr Page 34 GAO/AIMD-00-127 Bureau of Reclamation
Ordering Information The first copy of each GAO report is free. Additional copies of 

reports are $2 each. A check or money order should be made out to 

the Superintendent of Documents. VISA and MasterCard credit 

cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are 

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and 

testimony. To receive facsimile copies of the daily list or any list 

from the past 30 days, please call (202) 512-6000 using a touchtone 

phone. A recorded menu will provide information on how to obtain 

these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet, 

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web home page at: 

http://www.gao.gov

To Report Fraud, 

Waste, or Abuse in 

Federal Programs

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00