United States General Accounting Office

GAO Report to Congressional Requesters

October 1998 NUCLEAR WASTE

Department of

Energy’s Hanford Tank

Waste Project—

Schedule, Cost, and

Management Issues

GAO/RCED-99-13

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-281093 

October 8, 1998

The Honorable Thomas J. Bliley, Jr.

Chairman, Committee on Commerce

The Honorable Joe L. Barton

Chairman, Subcommittee on Oversight and Investigations

Committee on Commerce

House of Representatives

Cleaning up waste produced as a by-product of 50 years of supplying the

nation’s nuclear materials for weapons is a formidable challenge. The

Department of Energy (DOE) spends over $5 billion per year on its program

to clean up radioactive and hazardous waste at its nuclear weapons

production sites. The Hanford Site, located in southeast Washington State,

has one of the greatest concentrations of radioactive waste in the world.

One of the most difficult cleanup challenges at Hanford involves the 177

underground storage tanks holding highly radioactive liquid waste, sludge,

and other materials. Cleaning up this waste is important because it poses a

significant risk to the environment and to surrounding communities.

Recently, DOE disclosed that waste leaking from some of the tanks has

reached the groundwater and threatens the nearby Columbia River.

In 1996, DOE decided it would purchase waste treatment services through

competitively awarded, fixed-price contracts to demonstrate treatment

technologies and treat at least 6 percent of the waste. Under these

contracts, competing contractors would finance, design, build, and

operate temporary waste processing facilities and be paid on a per-unit

basis if they successfully immobilized the waste for storage. DOE referred

to this approach as its privatization strategy. However, on August 24, 1998,

DOE signed a contract with only one contractor—BNFL, Inc. (BNFL),1 a

subsidiary of British Nuclear Fuels, plc., to design, build, and operate

permanent facilities to treat about 10 percent of Hanford’s tank waste.

In view of the billions of dollars that the government will spend treating

this waste, at your request we assessed the implications of DOE’s new

approach. This report discusses (1) how DOE’s current approach has

changed from its original privatization strategy; (2) how this change has

affected the project’s schedule, cost, and estimated savings over

conventional DOE approaches; (3) what risks DOE is now assuming with this

1

DOE and BNFL signed a modification to an existing contract. For simplicity, we refer to this as a

contract throughout this report.

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change in approach; and (4) what steps DOE is taking to carry out its

project oversight responsibilities.

As a starting point for our review, we used the report DOE issued to the

Congress in July 1998 outlining the proposed shift in its contracting

approach. We supplemented this with on-site reviews at Hanford; reviews

of DOE and contractor documents and plans; and discussions with DOE,

contractor, and industry officials at Hanford and in Washington, D.C.

Background Hanford’s aging underground tanks contain about 54 million gallons of

highly radioactive waste. Over the years, more than 1 million gallons of

waste have leaked into the soil. DOE currently estimates the total cost of

cleaning up the tank waste at more than $50 billion (in actual year dollars).

Since 1989, DOE has spent about $3.5 billion on this effort. To convert the

waste into a form for more permanent storage, the waste will be separated

into high-level and low-activity components2

 and then, through a process

called vitrification, converted into a glass-like material that can be poured

into steel containers where it will harden. The immobilized high-level

waste will be stored on-site for eventual shipment to a national repository,

while the low-activity waste will be permanently disposed of on the

Hanford Site.

DOE plans to use private contractors to conduct the vitrification work and

over the last several years has developed a contracting approach. In

February 1996, DOE issued a Request for Proposals for the tank waste

project. DOE envisioned that under this approach, two contractors would

build and operate demonstration facilities that would treat at least 6

percent of the waste. DOE referred to this part of the waste treatment effort

as phase I. DOE estimated that phase I would last at least until 2007 and

cost about $3.2 billion for the two fixed-price contracts and another $1.1

billion in contract support costs, for a total of about $4.3 billion. In

September 1996, DOE awarded a fixed-price contract for $27 million to

each of the two contractor teams to begin phase I by developing

preliminary facility designs and other preliminary project plans. One team

was led by BNFL and the other team was led by Lockheed Martin Advanced

Environmental Systems (Lockheed). In phase II, contractors would

compete for a contract to process the remaining tank waste.

2

Hanford’s tanks contain highly radioactive waste. When separated into high-level and low-activity

components, most of the waste will be low-activity radioactive waste. Low-activity waste has a wide

range of characteristics, but most of it contains small amounts of radioactivity in large volumes of

materials. The tanks also contain hazardous chemicals and heavy metals.

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DOE’s experience during the initial part of phase I led to a change in the

contracting approach. In May 1998, after reviewing the preliminary designs

and plans submitted by the two competing teams, DOE decided to continue

phase I with only one contractor—BNFL. DOE and outside expert reviewers

found that the approach set forth by the Lockheed team presented an

unacceptably high technical risk in attaining DOE’s cleanup goals, requiring

additional development and using technologies that, in some cases, were

largely unproven. In contrast, DOE concluded that BNFL’s technical

approach was sound, using technologies for waste treatment and

vitrification that were well developed and had been used in other waste

treatment situations. On August 24, 1998, DOE signed a fixed-price contract

with BNFL to continue with phase I by developing an approach that would

process at least 10 percent of Hanford’s tank waste by 2017. The contract

cost was estimated at about $6.9 billion (in constant 1997 dollars). The

contract is considered a fixed-price contract because DOE and BNFL agreed

to a target fixed-price per unit of processed waste. This price may be

adjusted in the year 2000 after technical aspects of the project become

more clearly known. DOE estimated that its other costs related to

supporting BNFL’s efforts would be about $2 billion, bringing the project’s

total estimated cost to about $8.9 billion.

Results in Brief The project as currently envisioned is substantially different from DOE’s

1996 initial privatization strategy. Although the project award was made on

the basis of a fixed-price contract, further competition between

contractors and short-term demonstration facilities have been eliminated

in favor of more permanent facilities that could operate for 30 years or

more and, therefore, would be available to treat additional tank waste. In

addition, the design phase as well as the date when DOE and BNFL are to

reach agreement on final contract price have been extended by 2 years to

August 2000. BNFL’s specific project financing arrangements which were to

be established in May 1998 have been deferred until August 2000. In

addition, to ensure that BNFL can obtain affordable private financing, DOE

has agreed to repay much of the project debt if BNFL defaults on its loans

and DOE terminates the contract. This is an unusual feature of a fixed-price

contract because the government normally does not agree to pay a

contractor’s debt as an allowable cost. If this commitment were structured

as a conventional loan guarantee, DOE would have had to estimate the

potential subsidy cost over the term of the loans and have the budget

authority to fund them before making the guarantee.

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The revised approach extends the completion date for processing the first

portion of the waste from 2007 to 2017, and total costs rise from

$4.3 billion to $8.9 billion, including $2 billion in DOE’s support costs (in

constant 1997 dollars). The increased costs are mainly the result of DOE’s

decision to build permanent facilities that will take longer and cost more

to design and build, and the higher financing costs and contractor profits

involved in operating these facilities over a longer period of time.

However, DOE estimated that this approach would save 26 to 36 percent

over contracting approaches it had used in the past, such as reimbursing a

contractor for its costs plus an agreed-upon profit amount. Because of

questions about DOE’s methodology for estimating savings, considerable

caution is needed in assuming how much the revised approach will save.

The revised approach represents a dramatic departure from DOE’s original

privatization strategy of shifting most financial risk to the contractor. The

contract now calls for DOE to pay BNFL for most of the debt incurred in

building and operating the facility if BNFL should default on its loans.3

Thus, DOE faces a financial risk not initially contemplated on the project

that could be in the billions of dollars. DOE agreed to assume this risk

because it did not think BNFL would be able to obtain affordable financing

unless the government provided some assurance that the loans would be

repaid. Given that the project still has a number of technical uncertainties

such as using waste treatment technology that has yet to be successfully

tested at production levels on Hanford’s complex and unique wastes, and

management challenges such as obtaining needed contracting expertise,

DOE’s financial risks are significant.

In an attempt to avoid repeating past mistakes in managing large projects,

DOE has identified additional expertise it needs and has developed several

management tools to strengthen its oversight of the project. For example,

DOE plans to have about an 80-member team to manage this effort, and it

has taken a number of steps to plan for better coordination among BNFL,

the contractors providing support services at Hanford, and its own staff.

The success of the project, however, will depend heavily on how well DOE

implements these plans. DOE has a history of not fully implementing its

management and oversight plans, and there are some early indications on

this project that DOE may be having difficulty ensuring that the proper

expertise is in place and fully funding project support activities.

3

Under the terms of the contract, if the lenders declare BNFL in default and accelerate the debt due,

DOE will terminate the contract for default or for the convenience of the government. In this event,

DOE will pay BNFL, as an allowable cost, the outstanding principal amount of the loans plus all

accrued and unpaid interest, less certain other adjustments.

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B-281093 

DOE’s Current

Approach Differs

Significantly From

Original Project

Strategy

DOE’s August 1998 contract with BNFL is a substantial departure from DOE’s

original privatization strategy. DOE said its contracting approach evolved as

it received feedback from private companies and financial advisors, as

well as input from the two contractor teams that submitted proposals

under the original approach. According to DOE, changes to its initial

approach were made to optimize the technical approach and to make the

project financially feasible or to reduce the likelihood of performance

problems. These changes fall into four main areas: competition, financial

issues, facility issues, and schedule revisions. Table 1 summarizes these

changes, and the sections that follow discuss why DOE made them.

Table 1: Summary of Major Changes to

DOE’s Privatization Contracting

Approach

Type of change Old approach New approach

Competition Two contractors throughout

phase I

One contractor

Financial issues-risk Contractors provide equity

and obtain private financing

guaranteed by corporate

assets

Contractor provides equity

and obtains private

financing but DOE commits

to repay contractor’s debt if

contract terminates

Financial issues-payment Payments made upon

delivery of treated waste

Up to $50 million interim

payment made before

waste is processed;

remaining payments made

upon delivery of treated

waste

Financial issues-setting prices Final price agreement set

by May 1998

Final price agreement

delayed 2 years to August

2000

Facilities issues Contractors build temporary

demonstration facilities to

process 6% of Hanford

waste by 2007

Contractor builds

permanent production

facilities to process at least

10% of Hanford waste by

2017

Schedule revision Construction to begin

December 1999

Design period extended;

construction to begin July

2001

Competition Unlike DOE’s original approach, the current approach is not competitive.

Because DOE found that the approach set forth by the Lockheed team was

unacceptable, DOE authorized only BNFL to proceed through the remainder

of phase I. The extent to which competition will be present in phase II is

unknown.

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Financial Issues DOE’s approach to financing the project has shifted. Instead of requiring

the contractor to obtain all needed financing without recovery from DOE if

the project fails, DOE is now planning to repay BNFL’s debts above its equity,

insurance, and other limited funds if BNFL defaults on its loans and DOE

terminates the contract. DOE officials said that the government’s

commitment to repay the contractor’s debt was needed, in large part, to

make the project financially feasible. DOE concluded that requiring

100 percent private financing without government backing of the private

debt could increase the financing costs so much that the project would not

be affordable. DOE also concluded that an increased governmental role in

backing the debt would reduce the overall cost of the project, but DOE had

no specific estimate of the amount of the reduced costs. Government

backing of the private debt is an unusual feature for a fixed-price contract

because the government normally does not agree to pay a contractor’s

debt as an allowable cost.

DOE has also shifted its financing strategy from providing payment to the

contractor only upon delivering the processed waste, to one where BNFL

may now receive a payment of up to $50 million before waste processing

begins.4 DOE said that such interim payments will help reduce the total

project cost by reducing long-term financing costs and providing an

incentive for BNFL to reduce the actual costs of waste processing.

Finally, neither contractor was willing to commit to a fixed-unit price and

schedule by May 1998 without adding significant contingency to the price.

The August 1998 contract identified a target price and set August 2000 as

the date at which the unit price will be fixed and BNFL’s funding

commitments will be established. DOE determined that this delay would

strengthen the feasibility and economics of the project, although agency

officials also indicated that information gained during this delay could also

lead to increased prices.

Facility Issues DOE is contracting for waste processing services that will be much

different from what was initially envisioned. DOE originally planned that

two contractors would build temporary waste processing facilities during

phase I that would test each contractor’s technological approach. These

facilities were estimated to have a useful life of approximately 10 years

and were considered “throw-away” buildings. According to DOE, both BNFL

and Lockheed concluded that shorter-term, throw-away facilities were not

4

The payment includes a base amount of $20 million for specific deliverables and an incentive fee

based on the extent that BNFL is able to reduce the project’s construction and operations costs or

identify contract changes acceptable to DOE that will reduce the overall system cost.

Page 6 GAO/RCED-99-13 Nuclear Waste
B-281093 

feasible and that longer-life facilities were needed to provide the required

levels of safety, operability, and maintainability. The contract now requires

the waste treatment facilities to be designed to operate for a minimum of

30 years and have the capability to increase capacity. DOE said that

although this approach means much more expensive facilities than

originally anticipated and, therefore, an increase in project costs for phase

I, longer-life, expandable facilities allow DOE more flexibility and options in

how the waste cleanup is completed.

Schedule Revision In addition to more permanent, costly facilities, the new contract extends

the design period and delays the start of construction about 19 months

beyond what was originally planned. DOE expected that construction of the

facilities would begin by December 1999. However, in their January 1998

proposals, both BNFL and Lockheed indicated that additional time was

needed to further develop project design and plans for meeting regulatory

and permitting requirements. The contractors believed that adhering to the

original schedule would carry too many uncertainties, and that they would

be unable to obtain needed project financing unless a more realistic

schedule could be negotiated. DOE believes that the change will allow

further design development before construction begins, thereby reducing

the risks associated with design uncertainties.

Different Approach to

the Project Extended

Schedule and

Increased Costs

Current schedule and cost estimates for the project are substantially

greater than DOE’s original estimates. In 1996, DOE estimated that in the

first phase of the project, two contractors would process 6 percent of the

waste by 2007 and up to 13 percent of the waste by 2011. DOE is now

estimating that phase I will last until at least 2017, an extension of up to 10

years. Several interim steps in phase I also have revised completion dates.5

 (See table 2.)

5

Some of these dates are later than the dates DOE has agreed to with its regulators, the Environmental

Protection Agency, and the Washington State Department of Ecology. DOE will need to renegotiate

these dates with its regulators. One of the milestones, the date to start high-level waste processing, is

earlier than the date agreed to with the regulators.

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Table 2: Changes in Estimated

Schedule for Hanford’s Waste

Treatment Project

Original

schedule

Revised

schedule

Extension

(months)

Contract modification

signed May 1998 Aug. 1998 (actual) 3

Fixed-unit price

established May 1998 Aug. 2000 27

Facility construction

started Dec. 1999 July 2001 19

Waste vitrification started Dec. 2002 Feb. 2007 50

Waste processing

completed 2007a 2017b 120

aDOE’s original schedule required the contractors to process 6 percent of the waste by 2007.

DOE had the option to extend waste processing an additional 4 years to 2011 to process a total

of 13 percent of the waste, depending on the contractors’ performance.

bDOE’s funding schedule shows that the project will be funded only through 2017. Additional time

will be required to deactivate the facilities.

One change in the project schedule was an extension allowing BNFL more

time to design and construct permanent, more durable waste pretreatment

and treatment plants. BNFL proposed extending the design phase by 24

months. BNFL reasoned that the additional design time would help reduce

the risks associated with a fast-track design/construct project and was

needed because more extensive structures were being proposed. BNFL’s

proposal to build more durable facilities with a longer useful life also

required a longer construction time. BNFL proposed this approach, and DOE

agreed to it, because (1) BNFL said that nuclear and worker safety

requirements could not be efficiently incorporated into the demonstration

facilities initially proposed and (2) permanent facilities provided

advantages in processing the tank waste that would remain after phase I.

The lengthened construction added about 4 years to the original schedule.

Also, it will take BNFL about 10 years to process the waste, or about 5 years

longer than if two contractors were doing so. In addition, BNFL included

additional schedule contingency to deal with possible start-up and

production problems.

Estimated costs for the project have also increased significantly. The total

project costs for phase I, including DOE’s support costs, increased from

$4.3 billion in the original estimate to process 6 percent of the waste to

$8.9 billion in the current estimate to process 10 percent of the waste, as

measured in constant fiscal year 1997 dollars. (See table 3.)

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Table 3: Changes in Cost Estimates for

Hanford’s Waste Treatment Project Constant fiscal year 1997 dollars in millions

Cost element Initial estimate Revised estimate Percent change

Contract price $3,200a $6,960b +118

DOE support costsc $1,050 $1,970 +88

Total costs $4,250 $8,930d +110

Cost per metric ton of

waste processed $0.76 $1.5 +97

aIncludes initial project costs.

bIncludes contract target price of $6.93 billion, initial project costs to date, and a $20 million fee

for successfully completing project requirements and funding arrangements to begin facility

construction.

cSupport costs are understated because they do not include the cost of the regulatory unit or

federal personnel costs. These costs were not readily available.

dThis estimate does not include the potential cost to the government of a possible BNFL default

on its loans with the private sector.

The waste processing facilities now being designed will cost nearly

$1 billion more to build than the demonstration facilities DOE originally

proposed. Because of the longer period during which investors will expect

a return on investments, equity and debt financing costs are expected to

increase from about $1 billion to more than $3 billion.

Cost Savings Estimate

Must Be Viewed With

Caution

As part of its revision of the project’s cost and schedule, DOE analyzed

whether the BNFL fixed-price approach was likely to save money when

compared with two alternatives: a management and operations (M&O)

contract or a cost-reimbursement contract with performance-based

incentives. In July 1998, DOE estimated the range of savings under its

revised approach for phase I at 26 to 36 percent when compared with

these two alternatives. The savings estimate of 36 percent was based on

comparing the proposed BNFL fixed-price approach with an M&O approach

based on past Hanford management and operating contractor cost data;

the estimate of 26 percent was based on a comparison with the estimated

cost for BNFL to perform the work under a cost-reimbursement contract.

Our review of DOE’s most recent estimates indicate that the savings

amounts should be viewed with considerable caution. For example:

M&O contracting approach should not be used as a comparison because an

M&O contracting strategy is no longer an approach that DOE would seriously

consider using. Until recently, DOE has generally used M&O contractors to

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manage its facilities. DOE’s M&O approach involved paying an on-site

contractor for management and operating services regardless of what was

accomplished. However, DOE is shifting to management and integration

contracts involving performance measures and incentive-based contracts.

DOE officials at Hanford told us that they used an M&O contract estimate

because they had historical experience with M&O contracts and had an idea

what the costs would be. However, we believe DOE’s cost savings analysis

could be more meaningful if it included a range of contracting options that

DOE would actually consider using, such as various combinations of

government and private financing. Because of the high cost of private

financing on this project and DOE’s agreement to assume the risk

associated with the debt, direct federal funding of part or all of the project

may actually lower total project costs without significantly increasing the

government’s level of risk.6 DOE discussed government versus private

financing in its report to the Congress on this project but did not present

information on the differences in total project costs. According to DOE

officials, during the next 2 years they will further evaluate the trade-offs

between using government and private debt to determine the best overall

mix of equity, debt, and government financing for the project.

Rough estimates are presented as precise numbers. Cost projections for

two of the contract alternatives DOE considered in its analysis are based on

what are called “rough order of magnitude” estimates. The margin of error

for these estimates is plus or minus 40 percent, meaning that the actual

cost could be up to 40 percent less than or greater than the estimate

presented. Because the order of magnitude estimates are subject to so

much variability, it is difficult to assign much credence to an overall

savings estimate based on these numbers.

Cost growth estimates are not used consistently. For the comparison

between a fixed-price contract and a cost-reimbursement contract with

performance incentives, DOE assumed that cost growth would be

68 percent for the cost-reimbursement contract, and the fixed-price

contract would have no cost growth. However, other evidence indicates

6

For a discussion of alternative financing approaches and related risks, see Department of Energy:

Alternative Financing and Contracting Strategies for Cleanup Projects (GAO/RCED-98-169, May 29,

1998).

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that fixed-price contracts may have greater cost growth than

cost-reimbursement contracts.7

Analysis does not reflect full range of cost savings estimates. Although the

potential cost savings DOE reported to the Congress show a range of 26 to

36 percent, DOE documents supporting the analysis show a range of 10 to

36 percent. According to DOE’s Director of the Office of Project and Fixed

Asset Management, DOE did not disclose the lower number in its report to

the Congress because it did not believe the lower number was adequately

supported.

This is not the first time DOE has based cost savings on questionable

analytical practices. In January 1997, we reported on the accuracy of the

information DOE provided to the Congress to support the Department’s

fiscal year 1997 request for privatization funds. DOE claimed that six

privatization projects had saved $1.1 billion. However, we found that DOE

had understated some project costs, used incorrect cost data, and made

cost comparisons using projects of different scopes.8

 In addition, our 1996

report on Hanford’s tank waste project also discussed the problems

associated with DOE’s practice of presenting rough order of magnitude

numbers as point estimates.9

7

DOE based the 68-percent figure on a study that found a 68-percent difference between two cost

estimates—an estimate developed in the study assuming an M&O contracting approach and a

government cost estimate for a privatized approach to the project. However, the study assumes that

the M&O costs will be greater and uses judgment to estimate the amount of the increase in costs,

rather than estimating the differences using actual historical data. (See DOE M&O Contractor Cost

Estimate, Burns and Roe, June 1998.) Other DOE-commissioned studies have reached different

conclusions about cost growth on DOE contracts by studying actual cost growth on DOE contracts.

For example, a 1993 study of DOE’s environmental management contracting and project management

practices found that for a representative sample of contracts, the actual cost of fixed-price contracts

exceeded the estimated costs by almost 75 percent. The primary cause of the cost increase was that

fixed-price contracts were used on poorly defined projects, which led to changes during construction

contributing to increased costs and schedule delays. In contrast, the study found that

cost-reimbursement contracts exceeded the estimated costs by 35 percent. See Department of Energy,

Office of Environmental Restoration and Waste Management, Project Performance Study, Independent

Project Analysis, Inc. Reston, Va. (Nov. 30, 1993).

8

See Nuclear Waste: DOE’s Estimates of Potential Savings From Privatizing Cleanup Projects

(GAO/RCED-97-49R, Jan. 31, 1997).

9

See Hanford Waste Privatization (GAO/RCED-96-213R, Aug. 2, 1996).

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Revised Approach

Shifts Significant

Financial Risk to the

Government

Under the revised contract approach, DOE faces a substantial financial risk

that could be in the billions of dollars. This risk comes mainly in the form

of an agreement to pay BNFL for much of the debt incurred in constructing

and operating the waste treatment facilities if BNFL defaults on its loan

payments and DOE terminates the contract. This agreement has the same

practical effect as a loan guarantee and is a dramatic departure from the

original privatization strategy.10 If DOE had provided a guarantee for BNFL’s

loans from a private lender, the Federal Credit Reform Act would have

required DOE to estimate the net present value of the subsidy cost of the

loan guarantee over the term of the loan and to have budget authority

available for this full cost before the guarantee could be provided. DOE

officials told us they agreed to back BNFL’s loans because lenders told DOE

that BNFL would not be able to obtain affordable financing without it. The

officials said the increased governmental role would likely reduce the

contract’s overall cost by allowing BNFL to borrow at lower rates.

So far, the amount of DOE’s potential liability is unknown, because the

amount of borrowing that will be covered under the commitment will

likely not be determined until the contract price is established and

financial closure occurs in August 2000. However, BNFL’s vice president

and project manager told us that DOE’s potential liability could be as much

as $3 billion. He said that in the case of a default, $3 billion is about the

maximum debt that would be outstanding after BNFL’s equity and

contingency funds were applied.11

Apart from this financial risk, DOE also faces other financial risks that are

not as significant as a default by BNFL, but could increase the project’s

overall price. For example, DOE is subject to making idle facility payments

to BNFL if DOE is unable to supply waste from the tanks. Also, the contract

contains provisions for renegotiating the agreed-upon price if certain

changes occur that could affect cost or schedule, such as DOE’s failure to

provide required support services, changes in environmental law, or other

10DOE’s agreement to pay BNFL its outstanding debt as an allowable cost if the contract is terminated

is close to, but not the same as, a federal loan guarantee. DOE’s agreement is a commitment DOE has

with BNFL, not with BNFL’s lenders, and therefore it does not meet the definition of a loan guarantee.

A federal loan guarantee is provided directly to a lender, not to the borrower. Agencies need legislative

authority to provide a loan guarantee.

11Debt for financing the project can be of two types: debt that is secured by BNFL’s assets (called

“recourse” debt) and debt that is secured only by the revenues BNFL expects to receive from treating

the waste (called “nonrecourse” debt). The agreement between DOE and BNFL applies only to

recourse debt. However, to this point, lenders appear reluctant to provide a significant amount of

nonrecourse funding because of the project’s numerous technical and operating risks. Thus, borrowing

against assets is likely to be the main source of capital for the project. DOE’s risk is made even more

substantial because BNFL is a separate corporation from its parent company and, therefore, lenders

may not be able to pursue BNFL’s parent company in the event of a contract termination.

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events that are beyond the control of the contractor. Some of these risks

would also exist under a more traditional contracting arrangement.

DOE’s financial risks hinge on a number of factors that could potentially

affect the project. We identified six main types of factors, which we

believe merit continued attention as the project proceeds.

Unverified Technology BNFL officials acknowledge that although the technology they plan to use

has been successfully applied in other settings, it has been tested only on

small amounts of Hanford waste in laboratories, and has not been used at

production facilities to vitrify the unique types of waste at Hanford. Under

DOE’s original approach, the success of the selected technologies was to be

demonstrated in temporary plants; in DOE’s revised approach, permanent

plants will be built. However, BNFL has developed various other

approaches to deal with the need to ensure that the technology will work.

These include conducting tests on certain aspects of the technology at

existing facilities at other DOE sites and in the United Kingdom and

constructing a prototype melter12 for the low-activity waste vitrification

process. These efforts are expected to continue as the vitrification

facilities are being designed and built. BNFL has assured DOE that its

technology will be fully tested and demonstrated before beginning

operations of its full-scale, high-level waste treatment plant in February

2007 and its low-activity waste treatment plant in January 2008. To ensure

that technologies are fully demonstrated, DOE expects to hire experts to

review BNFL’s demonstration plans and testing results. While DOE Hanford

officials also expect DOE headquarters to commission an independent

review of BNFL’s testing results, no plans for this review have been

developed.

Under its revised approach, DOE retains a significant part of the risk for the

success of this technology. In the worst case, if demonstration activities

fail or if they prove inadequate to ensure the success of full-scale

operations, the overall project may fail, and DOE will be liable for paying

off a significant portion of BNFL’s debt after BNFL’s resources are exhausted.

If demonstration activities show that the technology is usable but flawed,

treatment facilities may require expensive retrofitting to make them viable.

This could raise the cost of the fixed-price contract that DOE will negotiate

with BNFL.

12The melter is a large furnace that heats the waste to a high temperature and combines it with other

materials to produce a glass-like product.

Page 13 GAO/RCED-99-13 Nuclear Waste
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Rapid Plant Construction Although the revised approach gives BNFL additional time to design the

waste treatment and vitrification facilities, the schedule still poses some

potential risk. To give BNFL more time to design the facilities, DOE set back

the start of construction by about 2 years. However, even with this change,

construction will begin well before all of the design work is completed.

BNFL officials estimate that overall design work will be less than 50 percent

complete at the start of construction.

DOE and BNFL officials expressed confidence in the time line of the revised

approach. The officials said that the schedule is comparable to other

nuclear facilities BNFL has successfully built and operated. However, BNFL

officials also acknowledged that conducting simultaneous design,

construction, and technology testing carries some risk. To reduce this risk,

BNFL performs a periodic risk assessment to ensure that design and

technology testing concerns will be addressed as quickly as possible in the

next 24 months. Because of our experience in analyzing similar schedules

that have contributed to problems on other DOE projects, we believe that

the construction schedule is a potential factor affecting DOE’s risk.

Specifically, DOE projects such as the Defense Waste Processing Facility at

Savannah River, the Pit-9 cleanup project at the Idaho National

Engineering and Environmental Laboratory, and the Spent Fuel Storage

Project at Hanford13 experienced cost overruns and schedule changes that

suggest designs should be developed enough to mitigate such results.

There do not appear to be agency or industry guidelines on the extent to

which facility designs for complex, one-of-a-kind nuclear processing

facilities like vitrification plants should be complete before construction

begins. In an analysis of an earlier DOE proposal to build a waste

vitrification plant at Hanford, we raised similar concerns about concurrent

design and construction and pointed out that for an advanced light water

reactor, the Electric Power Research Institute recommended that

construction not begin until the detailed design is 90 percent complete.14 A

manager of the Institute’s Nuclear Power Group told us that advanced

light water reactors are similar in complexity to a vitrification plant.

13See Nuclear Waste: Defense Waste Processing Facility—Cost, Schedule, and Technical Issues

(GAO/RCED-92-183, June 17, 1992), Nuclear Waste: Department of Energy’s Project to Clean Up Pit 9

at Idaho Falls Is Experiencing Problems (GAO/RCED-97-180, July 28, 1997), and Nuclear Waste:

Management Problems at the Department of Energy’s Hanford Spent Fuel Storage Project

(GAO/T-RCED-98-119, May 12, 1998).

14Nuclear Waste: Hanford Tank Waste Program Needs Cost, Schedule, and Management Changes

(GAO/RCED-93-99, Mar. 8, 1993).

Page 14 GAO/RCED-99-13 Nuclear Waste
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Safety and Regulatory

Issues

Another factor potentially affecting the success of the project—and

therefore DOE’s financial risk—is whether the safety and other regulatory

requirements can be successfully met. For example, DOE’s Regulatory Unit

raised 90 issues with safety documents that BNFL submitted in

January 1998. DOE’s manager of the Regulatory Unit described the quality

of the BNFL safety documents as “poor” and said that the next set of safety

documents, submitted in August 1998, was also poorly done. These latter

documents were subsequently withdrawn by BNFL. The DOE manager said

that problems with safety documents could affect the project schedule and

cost and that BNFL needed to make immediate improvements in its

approach to safety. Several additional safety documents are required

before BNFL can begin construction of the facilities in the year 2001. Unless

the required safety documentation is approved, BNFL will be unable to start

construction on schedule. DOE’s Regulatory Unit is working to prevent

problems we found on two recent major projects—the Pit 9 project in

Idaho and the Spent Fuel Storage Project at Hanford—where problems

with the safety basis of the work delayed project schedules and caused

additional rework.

The BNFL project manager attributed the safety documentation problems

primarily to the early level of project design and said that BNFL will greatly

increase the staff addressing safety-related issues during the rest of phase

I. BNFL also has recently hired an experienced nuclear facilities licensing

manager to lead this effort. DOE has also taken steps to help ensure that

BNFL is addressing safety issues. For example, DOE has negotiated into the

contract provisions which (1) require periodic meetings between its

regulatory staff and BNFL to discuss safety issues and (2) provide for DOE

attendance at BNFL’s safety committee facility design review meetings.

The project also presents another regulatory challenge. DOE planned to

have the Occupational Safety and Health Administration (OSHA) regulate

worker safety at the plant. However, in May 1998, OSHA declined to assume

responsibility, citing a need first for statutory and regulatory changes to be

in place, as well as a full complement of the resources required. If OSHA

does not regulate worker safety, then DOE must do so. The manager of

DOE’s Regulatory Unit said that if this issue is not resolved by

January 2000, his unit will assume responsibility for regulating worker

safety so that construction can begin on schedule.

DOE’s Support Activities DOE is responsible for the following major support activities: sampling and

analyzing tank waste (characterization); providing infrastructure, which

Page 15 GAO/RCED-99-13 Nuclear Waste
B-281093 

includes roads, water, electricity, and wastewater treatment; retrieving

waste, which requires DOE to retrieve waste from the tanks and deliver it to

BNFL while keeping the chemical makeup of the waste within specified

ranges; and storing and disposing of waste after processing, which

requires DOE to temporarily store the high-level waste and permanently

store low-activity waste. DOE estimates that support activities will cost

about $2 billion including about $600 million for waste retrieval,

$40 million for characterization, and about $370 million for waste storage

and disposal. Although support activities are essential to project success,

many of them are still in the planning stages, and potential problems are

not yet apparent. At this time, the areas that appear to be most prone to

problems are waste retrieval and waste storage and disposal.

DOE’s ability to successfully retrieve waste for processing depends, among

other things, on the availability of double-shell tank space for storage and

transfer activities. According to DOE and contractor officials, double-shell

tank space is a major uncertainty because double-shell tanks are also

being used for other cleanup activities at the site. If the capacity needed

for waste storage exceeds the space available in the 28 double-shell tanks,

DOE’s ability to supply waste to the private contractor for processing will

be affected.

The storage of immobilized high-level waste in Hanford’s canister storage

building poses another risk to DOE’s ability to successfully support the

project. The risk is that the installation of equipment and subsystems

needed to store immobilized high-level waste in the canister storage

building could conflict with a schedule for another DOE project—storing

spent nuclear fuel removed from its current deteriorating storage facilities.

DOE’s site support contractor concluded that these two problems have a

high risk of adversely affecting the project. As a result, DOE could have to

make idle facility payments. In response, the site support contractor

identified a set of mitigating actions that it believes will reduce the risk

that the problems will adversely affect the project.

DOE’s Funding Stream for

the Project

DOE’s ability to fund the project within its own budget is an important

factor in ensuring that lack of funding does not lead to project termination.

DOE estimates that it will need more than $10 billion in actual year dollars

from fiscal year 1999 through 2017 to fund the $6.9 billion project cost—an

average of $537 million annually. During 7 of those years, payments to BNFL

are expected to exceed more than $1 billion per year.

Page 16 GAO/RCED-99-13 Nuclear Waste
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This funding represents a substantially increased need for funding at the

Hanford Site, where current annual budgets for all on-site cleanup

activities total about $1 billion. If DOE is unable to provide funding for the

privatization project when needed, the contract would likely be

terminated, triggering DOE’s liability to pay BNFL for the amounts borrowed

against the company’s assets.

DOE officials said that they did not yet have a detailed funding plan for how

they would find the additional funding within their budget. However,

assuming no significant increase from the Congress, DOE indicated that a

major source of funds would likely be funding made available when other

DOE sites, such as Rocky Flats and Fernald, are cleaned up and closed.

Given DOE’s track record in completing environmental cleanup projects,

however, we are concerned that the funds may not be available when they

are needed.

Another issue that could potentially affect DOE’s ability to ensure that

sufficient funding is available for the project relates to how the new

contracting approach is classified in the budget. Because of budget

limitations contained in the Budget Enforcement Act, cost estimates are

prepared for programs, including projects in DOE’s privatization program,

to ensure that the limitations are not exceeded. Federal agencies such as

DOE may acquire long-term assets in several ways, and each acquisition

strategy may be scored differently. For example, if the federal agency

offered a federal government guarantee to a private lender for a

contractor’s debt financing, the agency would have to estimate the subsidy

cost of the loan guarantee. This is a complex process and is based on the

risk of a default or nonpayment of the loans and other factors. The agency

would then need the budget authority for the full net present value of the

subsidy cost before it could make the guarantee.

Although the tank waste project is not structured as an explicit loan

guarantee, there is an increase in the government’s potential liability

associated with making BNFL’s loans an allowable contract cost in the case

of a default. Neither DOE nor the Office of Management and Budget has

estimated this potential additional cost. This scoring is of consequence

because it affects how much funding DOE will have to have on hand for the

project, and when.

Inconsistencies With

Guidelines for Fixed-Price

Contracts

The remediation of Hanford’s tank waste is a very costly, complex, and

risky effort regardless of the contracting approach DOE selects. In an effort

to balance risks and realize cost savings, DOE selected a fixed-price

Page 17 GAO/RCED-99-13 Nuclear Waste
B-281093 

approach. Federal acquisition regulation guidelines note that fixed-price

contracting works best when the possibility is low for changes with cost

and schedule implications. However, the BNFL contract cites at least 15

events, such as regulatory changes or failure to provide waste on a timely

basis, that could cause cost or schedule increases. The consequence of

such changes is that they would constitute a potential basis for adjusting

the fixed price or paying agreed-upon additional amounts.

Federal guidelines state that another factor contributing to the successful

use of fixed-price contracting is competition, which helps determine a

price that minimizes the cost to the government while providing a fair

profit to the contractor. DOE’s revised approach removes competition as a

check on price. Without competition, DOE may not have the same

assurance of obtaining the best value for the negotiated price. To

compensate for the lack of competition, DOE has required BNFL to provide

certified cost or pricing information for evaluating BNFL’s basis for its

proposed fixed-unit prices. Our reviews of DOE contracts have

demonstrated that entering into a fixed-price contract is no guarantee that

DOE will be successful in minimizing the cost to the government.

Effective DOE

Oversight Is Critical to

Project Success

Managing this large, complex project presents a significant challenge to

DOE. The agency’s continuing challenge will be to translate the plans it has

made into sustainable oversight efforts that are capable of overcoming

problems that have plagued many past waste cleanup projects.

DOE has had difficulty managing other large projects. Our past reviews

have shown a consistent pattern of poor management and oversight by

DOE. For example, in our 1996 report on DOE’s major system acquisition

projects (generally projects costing $100 million or more), we reported

that at least half of the ongoing projects and most of the completed ones

had cost overruns and/or schedule slippage.15 Some of the reasons for cost

overruns and schedule slippage included inadequate project oversight and

insufficient attention to technical, institutional, and management issues. In

addition, our reviews of individual DOE cleanup projects such as the

Defense Waste Processing Facility at Savannah River, the Pit 9 cleanup at

Idaho Falls, and the Spent Fuel Storage Project at Hanford all identified

problems with DOE’s oversight activities as factors contributing to project

difficulties.

15See Department of Energy: Opportunity to Improve Management of Major System Acquisitions

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

Page 18 GAO/RCED-99-13 Nuclear Waste
B-281093 

At least in part to respond to these past difficulties, DOE has developed

several systems and processes to manage the tank waste project at

Hanford and has subjected its plans to outside review. Despite these

efforts, however, outstanding issues concerning technical staff, site

support activities, and project administration may keep DOE from being

fully prepared to oversee the project.

Technical staff: DOE has established a team eventually expected to number

about 80 technical and managerial staff to oversee the project. This team,

the Waste Disposal Division at Hanford, will have authority both for

managing the BNFL contract and for overseeing the support activities of the

contractors that provide day-to-day management of the site. As of

August 31, 1998, the Division had about 30 vacancies, including key staff

such as the Deputy Project Manager and five of nine DOE staff in the

contract management group. DOE’s Director of Contract Reform and

Privatization said that the Hanford unit does not have all of the technical

skills necessary to ensure success in overseeing the project. He was

especially concerned about the shortage of contract expertise related to

administering fixed-price contracts. According to DOE’s contracting officer

at Hanford, none of the current DOE staff are experts in fixed-priced

contracting, although he hopes to be able to hire staff with these skills

soon. Staff with these and other skills are needed very soon because DOE

will be negotiating critical details of the contract, including the fixed price,

during the extended design phase of the project, which is currently under

way. DOE officials at Hanford plan to fill the vacancies during fiscal year

1999.

Site support activities: Also critical to project success will be the support

that site contractors must provide in preparing infrastructure

improvements, retrieving waste, and removing and storing the containers

of vitrified material. DOE must ensure that Fluor Daniel, the main

contractor managing the Hanford site, is able to provide the support

necessary for the project. In August 1997, DOE directed Fluor Daniel to

conduct an extensive study (called a “readiness to proceed”) to determine

what was needed to support the vitrification effort and to identify

potential problems. At the conclusion of the study, outside reviewers

commissioned by DOE and Fluor Daniel concluded that the support could

be provided if adequate funding was forthcoming. However, DOE and tank

farm officials said that the project is funded at about $23 million less than

needed for fiscal year 1999. DOE has requested full funding for fiscal year

2000, but the budget has not yet been finalized. According to the Director

Page 19 GAO/RCED-99-13 Nuclear Waste
B-281093 

of the Waste Disposal Division, failure to fully fund support activities in

the next couple of years could delay the project.

Project administration: Carefully administering the contract may also be

critical to ensuring that DOE and the contractor work together effectively.

Our review of another large cleanup project, DOE’s Pit 9 project in Idaho,

disclosed that substantially different views about the degree of oversight,

involvement, and interaction that was appropriate for the contract were

held by DOE, the contractor managing the contract for DOE, and the

subcontractor responsible for carrying out the project. Due in part to this

problem, the Pit 9 project has failed to meet cost and schedule targets and

the parties are now involved in lawsuits to settle their claims.

In part because of the Pit 9 failure, DOE paid considerable attention to

developing an approach to overseeing BNFL’s operations. For example, to

resolve procedural and other issues that may come up, DOE required BNFL

to establish four teams specifically covering project management; contract

and finance matters; interfaces; and environment, safety, and

health-related matters. To help with the complicated interrelationships

between DOE and its contractors, DOE has also followed a systems

engineering process that involves using “interface control documents” for

those areas where DOE or the site contractor have interrelationships with

the BNFL contract. Overall, the project has 23 such documents covering

areas such as infrastructure, emergency response, and permitting.

The contract also ensures DOE’s access to key information. For example,

BNFL will be conducting numerous tests to ensure that its treatment

processes will work. The contract stipulates that BNFL must deliver

completed test reports to DOE for numerous activities, such as validation of

chemical processes, qualification of proposed products, and effectiveness

of a nonradioactive pilot melter.

Finally, DOE has subjected its entire management process to both internal

and external review. As a first step, in January 1998, DOE issued a

self-assessment report on the Division’s readiness to proceed. The report

concluded that the management systems were behind schedule and

identified six key actions to be taken, including revising the project

management plan and developing a staffing plan. DOE then convened

independent assessments to look at various aspects of the authorization to

proceed. As of September 15, 1998, 20 of 91 recommendations made by the

reviewers were still open, including the need to establish interfaces

Page 20 GAO/RCED-99-13 Nuclear Waste
B-281093 

between the division and headquarters organizations and requiring

training in administering fixed-price contracts.

The potential problem here is not with DOE’s efforts to date but with its

willingness to fully implement the oversight plans it has developed for the

project. Our work over several years and on a variety of DOE activities has

disclosed a consistent pattern of DOE’s failure to fully implement the plans

that it develops. In a number of instances, we have tied project or program

difficulties directly back to these failures to implement key management

and oversight components. For example, in a 1993 testimony on the

environmental restoration management contract approach,16 we found

several DOE management and oversight weaknesses, including not fully

implementing project management plans. In a 1997 report,17 we found that

two projects at the Fernald, Ohio, site had weaknesses, including

insufficient DOE oversight of the contractor, inadequate testing of the

technology, and delays in completing planning documents. These

problems contributed to a $65 million cost overrun and almost 6 years of

schedule slippage. More recently, in a review of DOE’s management of

contaminated soils above the groundwater at Hanford,18 we found that

although DOE drafted a management plan by 1994, it never implemented

the plan. Four years later, after admitting that the tank waste has leaked to

the groundwater, DOE has still not implemented a comprehensive

management strategy.

Conclusions Remediating Hanford’s radioactive tank waste will be difficult and very

costly. In addition, given the nature of the tank waste and the challenges

associated with converting it to a more stable form for long-term storage,

the project involves substantial risk of encountering problems that could

result in further increases in schedule and cost. Because of contract

clauses that provide for adjustments in contract price, these risks are

largely shouldered by DOE. Furthermore, in order to make private financing

of the project feasible, DOE has also decided to pay, as an allowable cost,

any debt costs that BNFL is unable to pay in case it defaults on its loans and

DOE terminates the contract. As a result, DOE’s potential liability could

amount to several billion dollars. Given these circumstances, it is

16DOE Management: Implementing the Environmental Restoration Management Contractor Concept

(GAO/T-RCED-94-86, Dec. 1, 1993).

17Department of Energy: Management and Oversight of Cleanup Activities at Fernald

(GAO/RCED-97-63, Mar. 14, 1997).

18Nuclear Waste: Understanding of Waste Migration at Hanford is Inadequate for Key Decisions

(GAO/RCED-98-80, Mar. 13, 1998).

Page 21 GAO/RCED-99-13 Nuclear Waste
B-281093 

important that DOE have in place a skilled project oversight team fully

prepared to face the challenges ahead. However, problems already exist in

implementing the staffing plan and securing adequate funding for the

contract’s support services. We are concerned that if these problems are

not addressed quickly, they may adversely affect the project. Although a

contract has been signed, the $6.9 billion is an estimated cost because

design and financing issues have not been finalized and the final unit price

has not been set. Since this important information will be developed over

the next 21 months, the end of the design phase in August 2000 is another

critical point to assess the project before the most significant project costs

are incurred.

Recommendation We recommend that the Secretary of Energy take immediate action to fully

implement the Department’s management and oversight plan for the

Hanford tank waste project, including ensuring that (1) the oversight team

is fully staffed with the expertise required and (2) adequate funding is

available to provide the site support services called for in the contract.

Matters for

Congressional

Consideration

Because key aspects of the project and the associated contract are still

being developed, significant changes in project cost, schedule, and overall

approach could occur before the price is set. The end of the extended

design phase in August 2000 provides another decision point at which

these and other aspects of the project could be reviewed before the most

significant project costs are incurred. Therefore, the Congress may wish to

require DOE to include in its annual status report on privatization contracts

(1) the results of BNFL’s technology demonstration and testing using

Hanford’s waste, (2) a reassessment of the cost-effectiveness of the

proposed approach including the results of DOE’s analysis of different

financing alternatives, and (3) DOE’s overall preparedness to effectively

oversee the project.

Agency Comments We provided a draft of this report to DOE for review and comment. DOE

generally agreed with the report’s conclusions and recommendations and

also provided several comments and technical clarifications to the report.

The full text of DOE’s comments and our evaluation of them are included in

Appendix I.

Page 22 GAO/RCED-99-13 Nuclear Waste
B-281093 

Scope and

Methodology

To determine how DOE’s current project strategy has changed from the

original proposal, we reviewed the contract between DOE and BNFL and

DOE’s report issued to the Congress in July 1998. We also reviewed DOE,

BNFL, and other contractor documents related to the tank waste project. In

addition, we interviewed DOE and contractor officials at Hanford and in

Washington, D.C., to discuss the changes in the contract.

To determine how the project’s schedule, cost, and savings estimates have

changed from the original proposal, we reviewed DOE’s documentation

providing original schedule, cost, and savings estimates and compared

those to the current contract as outlined in the report to the Congress. We

also interviewed DOE and BNFL officials and outside financial experts to

understand the changes that have occurred to the project’s schedule, cost,

and savings estimates.

To determine the risks that DOE is now assuming with the change in

contract approach, we analyzed the contract, DOE’s report to the Congress,

and DOE and contractor documents describing the risks to the project. We

also interviewed those officials, in addition to officials at the Office of

Management and Budget and the Congressional Budget Office to discuss

the risks and budget issues associated with the change in contract

approach.

To determine the steps that DOE is taking to carry out its responsibilities

for overseeing the project, we reviewed DOE’s report to the Congress

describing how the Department is organized to manage the project, as well

as Department and contractor plans for managing the project. In addition,

we reviewed internal and outside assessments of DOE’s efforts to oversee

the project. Finally, we interviewed contractor and DOE officials, including

the Director of DOE’s Office of Contract Reform and Privatization.

Our review was performed from June through September 1998 in

accordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Energy. We will

also make copies available to others on request.

Page 23 GAO/RCED-99-13 Nuclear Waste
B-281093 

Please call me at (202) 512-8021 if you or your staff have any further

questions. Major contributors to this report were Chris Abraham, John

Cass, Dwayne Curry, Doreen Feldman, Susan Irwin, Nancy Kintner-Meyer,

Tom Perry, Tim Schindler, Stan Stenersen, and William Swick.

(Ms.) Gary L. Jones

Associate Director

Energy, Resources, and

 Science Issues

Page 24 GAO/RCED-99-13 Nuclear Waste
Page 25 GAO/RCED-99-13 Nuclear Waste
Appendix I 

Comments From the Department of Energy

and GAO’s Evaluation

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 26 GAO/RCED-99-13 Nuclear Waste
Appendix I 

Comments From the Department of Energy

and GAO’s Evaluation

Page 27 GAO/RCED-99-13 Nuclear Waste
Appendix I 

Comments From the Department of Energy

and GAO’s Evaluation

Page 28 GAO/RCED-99-13 Nuclear Waste
Appendix I 

Comments From the Department of Energy

and GAO’s Evaluation

Page 29 GAO/RCED-99-13 Nuclear Waste
Appendix I 

Comments From the Department of Energy

and GAO’s Evaluation

Page 30 GAO/RCED-99-13 Nuclear Waste
Appendix I 

Comments From the Department of Energy

and GAO’s Evaluation

The following are GAO’s comments on DOE’s letter.

Regarding our comments on the lack of competition for the remainder of

phase I, DOE emphasized that competition played an important role in

reducing costs early in the project and that DOE had instituted other

controls on the BNFL contract to help control and reduce costs such as

requiring certified cost or pricing data. DOE also emphasized that its

decision to back BNFL’s debt was essential for BNFL to obtain private

financing for the project. We believe our report adequately states these

views.

Concerning the payment of up to $50 million that DOE will make during the

extended design phase, DOE stressed that the payment will be made only

for specific deliverables under the contract and that DOE does not consider

this to be a progress payment. We clarified this in our report.

DOE said that it was important to mention that the revised project schedule

actually accelerated by 2 to 3 years the milestone for beginning to treat

high-level waste as set forth in the Tri-Party Agreement. We modified the

report to clarify that some milestones would be delayed while one

milestone, the date to start high-level waste processing, would be

advanced.

Regarding the changes in cost estimates, DOE said that the two approaches

involved processing plants of substantially different useful lives and,

therefore, capacity, which would ultimately bring down the unit cost of

operation. We presented processing quantities and costs only for phase I

because the current contract is only for phase I and BNFL intends to

recover all of its costs during phase I operations. Costs related to phase II

operations are not known. DOE also said the cost estimates for phase I

should be compared on a present-value basis because the two time frames

are quite different. Our analysis does compare the two costs on a

present-value basis, in constant fiscal year 1997 dollars.

DOE disagreed with our statement that direct federal funding of the project

may not significantly increase the government’s level of risk. DOE said that

direct federal funding would be accompanied by a significant increase in

the government’s level of risk. However, it is not clear how much of an

increase in risk there is between private debt which is in effect guaranteed

by the government and direct federal funding of the project. DOE did not

quantify this difference in risk or compare it to the significantly lower

financing costs that could be achieved through direct federal funding of

Page 31 GAO/RCED-99-13 Nuclear Waste
Appendix I 

Comments From the Department of Energy

and GAO’s Evaluation

the project. Our point was that DOE needs to conduct such an analysis in

order to ensure that it has a cost-effective approach to funding the project.

DOE said that this analysis will be accomplished during the next phase of

the project.

DOE said that our reference to a 1993 study by Independent Project

Analysis, Inc., was incomplete because we did not mention the reason why

cost growth on fixed-price contracts averaged 75 percent. The study found

that fixed-price contracts were used on poorly defined projects, which led

to changes during construction contributing to increased costs and

schedules. DOE asserted that a similar condition does not exist on the

Hanford tank waste contract. We added to our report the causes for cost

growth identified in the study. However, we disagree with DOE’s assertion

that similar conditions do not exist on the Hanford project. Instead, the

project risks and uncertainties we discuss in this report increase the

chances that the Hanford tank waste project could also experience cost

and schedule increases.

Finally, DOE felt that we inaccurately stated the risks associated with two

DOE support activities—waste retrieval and storage of high-level waste. DOE

said that Phase I waste will come almost entirely from double-shell tanks

and, therefore, tank capacity for storage and transfer of the waste should

not be a problem. However, sufficient double-shell tank space must be

available to blend and stage the waste before delivering it to BNFL in

batches. In May 1998, the Hanford Site support contractor determined that

there was a high risk of having inadequate tank storage capacity to meet

the needs of this project and at the same time support other site initiatives

such as the project to pump liquids from single shell tanks into the

double-shell tanks and the need to continue to receive waste into the tanks

from other Hanford activities. As part of the multi-year planning process,

the contractor is currently reevaluating this issue.

Regarding the on-site storage of high-level waste, DOE is correct in saying

that the risk of having a problem is reduced by the extended schedule.

However, DOE’s contractor still described it as a high risk in May 1998 due

to the modifications required to the storage building which will have to be

made during the same years that the spent fuel program is moving its

canisters into the building.

While DOE may be correct that potential waste retrieval and storage

problems can be managed, they clearly represent a risk to the project and

illustrate the need for an aggressive risk management effort.

(141217) Page 32 GAO/RCED-99-13 Nuclear Waste
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