MEMORANDUM FOR THE SECRETARY
     
FROM:          John C. Layton
               Inspector General
     
SUBJECT:       INFORMATION:  Report on "Audit of Renovation
               and New Construction Projects at Lawrence
               Livermore National Laboratory"
     
BACKGROUND:
     
Lawrence Livermore National Laboratory must periodically
renovate existing facilities or build new ones to accomplish 
its missions or to provide infrastructure to support its 
missions.  The objective of the audit was to determine if 
Livermore's proposed renovation and new construction projects 
met mission needs while minimizing the cost to the Government.
     
DISCUSSION:
     
In pursuing three projects, estimated to cost over $78
million, Livermore had not demonstrated that it had selected the
best alternatives for meeting the Department's needs while
minimizing cost.  Livermore was able to pursue these projects
because Oakland did not ensure that the laboratory had performed
cost and benefit analyses of all alternatives.  Further, Oakland
did not establish benchmarks to assess the reasonableness of the
total costs of designing, constructing, and managing these
projects.  As a result, it was likely that the Department was
spending more than necessary on renovation and new construction
projects at Livermore.
     
Although the projects met mission needs, we recommended that
the Manager, Oakland: (i) require Livermore to perform analyses
of expected costs and benefits for alternatives; (ii) evaluate
the adequacy of Livermore's cost and benefit analyses of
alternatives; (iii) establish benchmarks based on industry and
other government agency cost data to assess the reasonableness of
Livermore's total design, construction, and project management
costs; and (iv) select the alternative that meets established
needs at the least cost to the Government.
     
The Manager, Oakland Operations Office, agreed with the
recommendations.
     
Attachment
     
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                    This report can be obtained from the
                       U.S. Department of Energy
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                               P.O. Box 62
                          Oak Ridge, Tennessee  37831
 
 
 
 
                                
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
 
 
 
 
                                
        AUDIT OF RENOVATION AND NEW CONSTRUCTION PROJECTS
                                
            AT LAWRENCE LIVERMORE NATIONAL LABORATORY
                                
                                
                                
 
 
 
 
 
 
 
 
 
 
          
 
 
Report Number:  WR-B-97-06      Western Regional Audit Office
Date of Issue:  June 9, 1997    Albuquerque, New Mexico 87185
        
       
 
 
        AUDIT OF RENOVATION AND NEW CONSTRUCTION PROJECTS
            AT LAWRENCE LIVERMORE NATIONAL LABORATORY
 
 
 
                        TABLE OF CONTENTS
                                
                                
 
 
                                                            Page
                                                              
         SUMMARY ..........................................  1
         
                                                              
PART I - APPROACH AND OVERVIEW ............................  2
         
         Introduction .....................................  2
         
         Scope and Methodology ............................  2
         
         Background .......................................  3
         
PART II- FINDING AND RECOMMENDATIONS ....................... 5
                                                              
         Livermore's Proposed Projects.....................  5
         
                                                              
PART III- MANAGEMENT AND AUDITOR COMMENTS .................  11
 
                                                              
 
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                    OFFICE OF AUDIT SERVICES
                  WESTERN REGIONAL AUDIT OFFICE
 
 
        AUDIT OF RENOVATION AND NEW CONSTRUCTION PROJECTS
            AT LAWRENCE LIVERMORE NATIONAL LABORATORY
 
 
Audit Report Number:  WR-B-97-06                June 9, 1997
 
 
                             SUMMARY
                                
   The Oakland Operations Office (Oakland) is responsible for
acquiring facilities needed to satisfy mission needs and to do so
at the least cost to the Department of Energy (Department).  The
objective of the audit was to determine if proposed renovation
and new construction projects at the Lawrence Livermore National
Laboratory (Livermore) met mission needs while minimizing cost to
the Government.
   
   In pursuing three projects, estimated to cost over $78
million, Livermore had not demonstrated that it had selected the
best alternatives for meeting the Department's needs while
minimizing cost.  Livermore was able to pursue these projects
because Oakland did not ensure that the laboratory had performed
cost and benefit analyses of all alternatives.  Further, Oakland
did not establish benchmarks to assess the reasonableness of the
total costs of designing, constructing, and managing these
projects.  As a result, it was likely that the Department was
spending more than necessary on renovation and new construction
projects at Livermore.
   
   Although the projects met mission needs, we recommended that
the Manager, Oakland: (i) require Livermore to perform
analyses of expected costs and benefits for alternatives;
(ii) evaluate the adequacy of Livermore's cost and benefit
analyses of alternatives; (iii) establish benchmarks based on
industry and other government agency cost data to assess the
reasonableness of Livermore's total design, construction, and
project management costs; and (iv) select the alternative that
meets established needs at the least cost to the Government.
Oakland agreed with the recommendations and will implement them
starting with the Fiscal Year 1999 project submission and
validation.
   
   
 
______________________________
OFFICE OF INSPECTOR GENERAL
 
                             PART I
                                
                      APPROACH AND OVERVIEW
 
INTRODUCTION
     
   The Department strives to perform its tasks at the least cost
commensurate with quality results.  Consistent with the
Department's vision, Oakland should ensure that Livermore
performs systematic analyses of expected costs and benefits of
alternatives, and selects the least costly alternative to design,
construct, and manage renovation and new construction projects.
Accordingly, the objective of this audit was to determine if
Livermore's proposed renovation and new construction projects met
mission needs at the least cost.
     
SCOPE AND METHODOLOGY
     
   The audit was conducted at Oakland and Livermore from April
to October 1996.  According to a construction project line-item
list covering Fiscal Years (FY) 1991 through 2005, Livermore had
43 renovation and new construction projects totaling over $1.5
billion in various stages of planning or construction.  The scope
of the audit was limited to line-item projects which were
planned, proposed, or funded for FY 1996 through FY 2001.
Planned projects were those in the pre-conceptual design stage.
Proposed projects were those where the conceptual design studies
were under way or completed but the projects had not been funded.
Funded projects were those that were approved for design,
construction, project management, and had received funding.  We
judgmentally selected and reviewed eight projects totaling $161
million.  The eight projects included a planned renovation of an
experimental building into office space, three planned phases of
the major re-roofing of 11 buildings, a proposed combined fire
station and medical facility, a proposed new facility for genomic
and biology research, a proposed project to re-roof 4 buildings,
and a funded contained-firing facility for a firing bunker.
     
   To accomplish the audit objective, we:
     
   o  reviewed Office of Management and Budget (OMB) Circulars,
      and Departmental Orders;
   
   o  interviewed Departmental Headquarters, Oakland, and
      Livermore personnel responsible for managing, reviewing, 
      and evaluating program funding and construction proposals;
   
   o  reviewed construction project documents, such as validation
      reports, project listings, and design reports;
   
   o  toured existing facilities and sites where construction
      projects were planned, proposed, or funded;
   
   o  reviewed the contract for performance objectives relating 
      to management of facilities;
     
   o  obtained an independent cost estimate from the U.S. Army
      Corps of Engineers (Corps) for the proposed combined fire 
      station and medical facility project; and,
     
   o  obtained design, construction, and project management cost
      data for fire stations from three municipal fire districts.
     
   In reviewing the eight projects, we determined if these
projects were necessary to meet mission needs.  Further, we
examined whether Livermore evaluated alternative ways of meeting
these mission needs, including any analyses of costs and
benefits, to determine if Livermore identified the least costly
alternatives.  In order to determine whether the proposed budget
for the combined fire station and medical facility project was
the least costly alternative, we established two benchmarks.
First, we requested the Corps, a Federal agency, to develop an
independent estimate as a benchmark to evaluate the
reasonableness of Livermore's total design, construction, and
project management budget estimate for this project.  We asked
the Corps to base its independent estimate on the same conceptual
design report that Livermore used to develop its estimate, and
time period that Livermore used for starting and completing the
design and construction of this project.  We also requested the
Corps to include all applicable overhead costs in the independent
estimate.  To arrive at a comparable estimate, we adjusted the
Corps' estimate to account for (i) additional costs (such as
costs for activation, standard equipment, project liaison, and
reporting requirements) that Livermore would incur for this
facility that the Corps would not normally include in a budget
submission, and (ii) direct costs for requirements not clearly
identified in the conceptual design report (such as additional
underground electrical and mechanical work and relocation
requirements).  Second, we obtained total design, construction,
and project management cost data from three municipal fire
districts as an additional benchmark to evaluate the
reasonableness of Livermore's budget estimate.
   
    The audit was performed according to generally accepted
Government auditing standards for performance audits and included
tests of internal controls and compliance with laws and
regulations to the extent necessary to satisfy the audit
objective.  We reviewed significant internal control procedures
for evaluating the need, alternatives, and cost for renovation
and new construction projects.  Since we did not rely extensively
on computer-processed data, we did not fully assess the
reliability of that data.  Because our review was limited, it
would not necessarily have disclosed all internal control
deficiencies that may have existed at the time of our audit.  On
October 7 through 9, 1996, the results of the audit were
discussed with program and project managers from Oakland's
Engineering and Facility Management Division, Oakland's Livermore
Site Management Division, Oakland's Berkeley Site Office, and the
pertinent officials from Livermore.
   
BACKGROUND
     
   Livermore, operated by the University of California since
1952, is involved in multiple areas of research and development
supporting the Department's missions in national security,
science and technology, energy resources, and environmental
quality.  Livermore must periodically renovate existing
facilities or build new ones to accomplish its missions or to
provide infrastructure to support its missions.
   
   For example, in accomplishing the Department's mission in
science and technology (biomedical science), Livermore will
request approval and funding for the design, construction, and
project management of the proposed genomic and structural biology
facility.  This project will cost about $40 million and provide
80,000 square feet of laboratories, office space, and support
areas.  In 1995, Oakland validated and included this project in
its FY 1997 budget submission.  However, the Department did not
approve nor include this project in the FY 1997 budget because of
other priorities and limited construction funds.  In May 1996,
Oakland granted Livermore approval to resubmit this project for
validation and inclusion in the FY 1999 budget submission.
   
   In another mission-related project, Livermore received
approval and funding to build the $49 million contained-firing
facility at Site 300.  Livermore will use this contained facility
in support of the Department's national security Stockpile
Stewardship and Management Program.
   
   To improve its infrastructure, Livermore is pursuing the
renovation of Building 431, estimated at $33 million.  The
project involves converting a 1950's era high-bay experimental
facility (five stories high) into an office building with a
central atrium.  The planned renovation will create a minimum of
180,000 net square feet of office and support space to house
about 800 employees.  Another infrastructure project that we
reviewed was the combined fire station and medical facility
project to be built at the laboratory's Site 300.  Livermore's
estimated budget for this project, which will provide 8,500
square feet of space, is about $5.3 million, based on its 1998
Field Budget Process submission.
     
 
                             PART II
                                
                   FINDING AND RECOMMENDATIONS
                                
                 Livermore's Proposed  Projects
                                
FINDING
   
   The Department should renovate and construct only facilities
that satisfy mission needs at the least cost.  However, Livermore
was pursuing three projects, estimated to cost over $78 million,
despite the fact that it had not demonstrated that the proposed
approaches for the projects were the best alternatives for
meeting the Department's missions while minimizing the cost to
the Government.  Livermore was able to pursue these projects
because Oakland did not ensure that the laboratory had performed
cost and benefit analyses of all alternatives.  Further, Oakland
did not establish benchmarks to assess the reasonableness of the
total cost of designing, constructing, and managing these
projects.  As a result, the Department was at risk for spending
more than necessary on renovation and new construction projects
at Livermore.
   
RECOMMENDATIONS
     
   We recommend that the Manager, Oakland Operations Office:
   
      Require Livermore to perform cost and benefit analyses of
      alternatives.
   
      Evaluate the adequacy of Livermorems cost and benefit
      analyses of alternatives.
   
      Establish benchmarks based on industry cost standards or
      other government agency cost data to assess the reasonable-
      ness of Livermore's total budgeted costs to design, construct, 
      and manage renovation and new construction projects.
   
      Select the best alternative for meeting mission needs at 
      the least cost.
   
MANAGEMENT REACTION
   
   Oakland agreed with the recommendations.  Detailed management
and auditor comments are provided in Part III of this report.
   
   
                       DETAILS OF FINDING
   
   The Department's projects should satisfy mission needs at the
least cost.  According to the Department's February 1994 report,
Making Contracting Work Better and Cost Less, the Department must
ensure that its tasks are performed at the least cost
commensurate with quality results.  OMB Circular A-11 and
Departmental Order 430.1 provide the control framework for
implementing this principle by requiring the Department to
justify renovation and new construction projects based on how the
projects meet mission needs and to analyze expected costs and
benefits.
   
LIVERMORE'S ANALYSES OF ALTERNATIVES, COSTS, AND BENEFITS
   
   Livermore, however, was pursuing projects that it had not
demonstrated to be the best alternatives for meeting the
Department's mission needs at the least cost.
   
Genomic and Structural Biology Facility
   
   Livermore's proposed $40 million genomic and structural
biology facility may not be the least costly alternative to meet
space requirements for anticipated increases in biomedical
workload.  Livermore's justification for this project stated that
existing facilities would be inadequate to absorb the additional
workload created by the proposed doubling of funds to $49
million over the next three years.  Livermore, however, did not
conduct detailed analyses of the costs and benefits associated
with alternative ways of providing the space.  Although Livermore
program managers discussed some alternatives, the analyses of
costs and benefits of the alternatives were not conducted.  For
example, the program managers discussed modular buildings as an
alternative but then, without any cost analyses or cost
comparisons, dismissed them as being not cost effective.
   
Renovation of Building 431
   
   Renovation of Building 431 may not be the best approach to
provide replacement office space at the laboratory.  Livermore
envisions that this renovation project would revitalize an
underutilized asset (Building 431) and provide adequate office
space for about 800 employees currently assigned to substandard
facilities that are no longer considered economically reparable.
The project has an estimated cost of $33 million, plus or minus
50 percent.  However, this renovation would create excess space
because the office space per employee is more than allowed under
the contractual space standard.  Livermore's proposed renovation,
for example, would create about 225 net square feet per employee.
The contractual space standard, in contrast, is 165 square feet
per employee or 132,000 square feet for 800 employees.  By
renovating 180,000 square feet, Livermore would have 48,000
excess square feet.
   
   Livermore had not performed cost and benefit analyses of
alternatives in determining how best to meet office space needs
at the least cost.  Such analyses are particularly important for
a project like this that has a "soft" total estimated cost, which
ranges from $16.5 million to $44.5 million.  At $33 million or
below, the cost per square foot of office space may be similar to
the cost of new construction.  However, once cost begins to go
above $33 million, it could be less expensive to construct a new
office building.  Other alternatives to renovation could include
the use of modular buildings.
   
Fire Station and Medical Facility
   
   Livermore's budgeted cost of over $5.3 million to design,
construct, and manage the proposed fire station and medical
facility project compared unfavorably with the Corps' estimate,
as adjusted, of about $3.8 million, a difference of about $1.5
million.  The Corps estimated it would cost them about $2.9
million to design, construct, and manage this project.  We added
to the Corps' estimate (i) $420,000 for standard equipment and
activation costs and $156,000 for Livermore's liaison and
reporting costs, and (ii) $297,000 for requirements that were not
clearly identified in the conceptual design report.  The $1.5
million difference between estimates prepared by Livermore and
the Corps generally involved about $1 million of indirect cost
allocations that are required by the Department's Budget
Formulation Handbook and about $500,000 attributable to
escalation rates prescribed by the Department and a contingency
factor based on Livermore's assessment of risk.
 
   In addition to comparing Livermore's budgeted cost to the
Corpsm estimate, we also compared it to actual cost data for
similar structures acquired by local governments in the San
Francisco Bay Area.  This benchmarking exercise disclosed that
Livermore's budgeted cost compared unfavorably to costs incurred
by three San Francisco Bay Area fire districts that built three
new fire stations.  On a per square foot basis, Livermore's
estimated design, construction, and project management costs were
more than double that of the actual design, construction, and
project management costs incurred by the fire districts.  Table 1
compares, by square foot, Livermore's proposed cost and the cost
incurred by three fire districts for fire stations.
   
   
                             Table 1
                                
                     Comparison of Square Footage Cost
                         Between Livermore and Others
                                                
                              Cost Per   Percentage Less
          Entity              Square        than
                                Foot       Livermore's
                                              Cost
        Livermore               $629            
                                                
        Fire Districts:                         
        Los Altos County         304*         52
        South County             303*         52
        Dougherty Regional       291*         54
   
    * Actual fire district costs were escalated to
     correspond to the same time period that Livermore used
     for starting and completing the design, construction,
     and project management of the fire station and medical
     facility.
   
     As Table 1 shows, Livermore's square footage estimated cost
was the most expensive.  Although the fire districts' costs were
for the design, construction, and project management of fire
stations only, Oakland's project manager stated there were no
significant differences in industry square footage cost standards
between a fire station and a medical clinic.
   
ALTERNATIVES AND INDUSTRY STANDARDS
 
   Livermore's authority to manage construction projects from
initial planning through construction does not eliminate
Oakland's responsibility to (i) explore all alternatives and
analyze the costs and benefits for each alternative, and (ii)
establish benchmarks based on industry standards to assess the
reasonableness of Livermore's total design, construction, and
project management cost estimates.  Both OMB Circular A-11 and
Departmental Order 430.1 require Oakland to meet these
responsibilities.
   
Alternatives
   
   When the genomic and structural biology facility project was
first validated in 1995, Oakland did not ensure that Livermore
had analyzed the costs and benefits of all alternatives.  In May
1996, when Oakland approved Livermore's request to resubmit this
project for validation and inclusion in the FY 1999 budget
submission, the laboratory still had not performed cost and
benefit analyses of alternatives.  Oakland stated, after
discussions with the Office of Inspector General (OIG), that it
would request Livermore to perform cost and benefit analyses in
determining whether this project or another alternative was the
best option to meet the mission need.
   
   For Building 431, Oakland was not aware that Livermore had
not taken action to analyze the costs and benefits of
alternatives in meeting replacement office space needs.
Livermore was planning to submit this project to Oakland for
approval to proceed with the conceptual design study in early FY
1997.  As with the genomic and structural biology facility,
Oakland directed Livermore to evaluate all alternatives to meet
future office space requirements and to complete cost and benefit
analyses in identifying the least costly alternative.
   
Industry Standards
   
   Oakland had not established benchmarks, based on similar
projects by other government agencies or industry, for assessing
the reasonableness of Livermore's total estimated budget for the
proposed fire station and medical facility.  During project
validation, Oakland evaluated the reasonableness of the direct
cost estimate for constructing the building by comparing it to
similar buildings completed by the U.S. Air Force and with
industry square footage standards.  In addition, Oakland (i)
verified Livermore's direct cost estimate associated with project
management and design and construction management by using
General Services Administration Design and Construction Lookup
Tables, and (ii) reviewed Livermore's utility construction
estimate.  However, Oakland did not evaluate Livermore's total
cost estimate (direct and indirect costs) against industry
standards in assessing the reasonableness of the total estimate
and identifying alternatives for lower design, construction, and
management costs for this project.
   
    In responding to a draft of this report, Oakland agreed to
work with Departmental Headquarters to establish construction
project benchmarks.  However, Oakland expressed a preference to
base its benchmarks on Departmental experience rather than that
of other agencies.  Our understanding of the Departmental
position regarding the importance and usefulness of benchmarking
and our audit work in this area suggest that this position is not
consistent with the current Departmental focus.  As stated in the
Department's report, Making Contracting Work Better and Cost
Less, Oakland needs to base its benchmarks on other governmental
and private industry experiences to effectively assess the
reasonableness of Livermore's total costs.  To base its
benchmarks on only Departmental experience does not meet the
intent of the Department's position and could make it difficult
for Oakland to establish performance requirements essential to
identifying, verifying, and controlling costs of construction
projects and helping the Department perform its tasks at the
least cost commensurate with quality results.
     
   The problem with basing benchmarks on Departmental experience
is that it inappropriately confers a status of cost efficiency on
the Department's activities.  An example of this is architect and
engineering costs within the Department.  In September 1990, the
OIG issued Report No. DOE/IG-0289, Departmentwide Audit of
Architect and Engineering Design Costs, which concluded that the
Department's architect and engineering costs averaged more than
twice that of private industry.  Six years later, not much had
changed, based on the contents of Report No. DOE/IG-0387 (March
1996), Audit of Architect and Engineering Costs at the Idaho
National Engineering Laboratory.  That report disclosed that
architect and engineering costs for 65 conventional construction
projects (for example, warehouses, office buildings, and
laboratories) at the Idaho National Engineering Laboratory (INEL)
were 81 percent higher than comparable industry standards.  When
the INEL architect and engineering costs for 20 conventional
construction projects were compared to the State of Idaho's
design costs, INEL's costs were 62 percent higher than the
state's.  Therefore, establishing benchmarks based primarily on
the Department's cost experience merely institutionalizes
historic management practices.
   
   The fire station and medical facility project demonstrates
how the historical practice of keeping construction projects "in-
house" at Livermore can lead to higher costs.  In its response to
the draft report, Oakland correctly pointed out that most of the
difference between estimates prepared by Livermore and the Corps
involved indirect, contingency, and escalation.  Because
Livermore was keeping the project in-house, it had to use its
indirect rates, which were higher than the Corps'.  Livermore
also used its contingency and escalation rates, which were more
than twice the Corps' rates, because the project was being kept
in-house.
   
   Oakland, and the Department as a whole, need to implement the
commitment in the April 1994 Strategic Plan to pursue new
approaches that challenge the status quo.  Oakland should
consider alternatives, such as outsourcing, that may in the long
term help the Department achieve reduced budgetary outlays for
renovation and construction projects.  If the Corps' cost
estimate for the fire station and medical facility is indicative
of savings to be achieved through outsourcing, Livermore's total
costs should decline over time as projects are outsourced and the
amount of indirect costs attributable to Livermore's construction
activity declines.  The OIG is not advocating that Oakland use
the Corps to design, construct, and manage the fire station and
medical facility project.  The Corps is presented as one
alternative source that Oakland should have explored in
determining how much the Department should reasonably budget and
pay for the project.
   
POTENTIAL BENEFIT OF ANALYZING ALTERNATIVES
 
    We concluded that Oakland has an opportunity to realize
savings in its renovation and new construction projects.
Analyses of costs and benefits of all alternatives could result
in savings to the Department through cancellation or rescoping of
planned and proposed projects.  Given Livermore's $1.5 billion of
planned and proposed renovation and new construction projects,
the savings could be substantial.  While our benchmarking was
limited to one project, that of the fire station and medical
facility, the results indicated that alternatives to keeping
construction projects in-house at Livermore may have to be
pursued if costs are to be reduced in the long term.
                            
                            
                            PART III
                                
                 MANAGEMENT AND AUDITOR COMMENTS
 
 
   Oakland agreed with the recommendations and will implement
them starting with the FY 1999 project submission and validation.
Management and auditor comments on specific recommendations
follow.
   
   Recommendation 1.  Require Livermore to perform cost and
benefit analyses of alternatives.
     
   Management Comments.  Concur.  Oakland required Livermore to
perform cost and benefit analyses on all reasonable alternatives
in response to direction from Departmental headquarters for the
FY 1999 project validations and submissions.  These validations
and submissions took place during the audit.  Livermore performed
the cost and benefit analyses based on a graded approach.
   
   Auditor Comments.  Management's comments are responsive to
the recommendation.
     
   Recommendation 2.  Evaluate the adequacy of Livermore's cost
and benefit analyses of alternatives.
   
   Management Comments.  Concur.  To evaluate the adequacy of
Livermore's cost and benefit analyses, Oakland required Livermore
to perform cost and benefit analyses.  Livermore is  using the
National Institute of Standards and Technology computer program,
"Building Life-Cycle Cost."  This is the standard program used by
the Department of Defense and recommended for use by the
Department's Committee on Cost Methods Development.
   
   Auditor Comments.  Management's comments are responsive to
the recommendation.
   
   Recommendation 3.  Establish benchmarks based on industry
cost standards or other government agency cost data to assess the
reasonableness of Livermorems total budgeted costs to design,
construct, and manage renovation and new construction projects.
   
   Management Comments.  Concur.  Oakland will work with the
Office of Project and Fixed Asset Management, Office for Field
Management, in Departmental Headquarters in establishing proposed
benchmarks for construction projects based on other government
agencies' and private industry's experience.  Oakland would
prefer to use Departmental related benchmarks.  However, Oakland
will likely use the benchmarks established by the Office of
Project and Fixed Asset Management because the Office's
benchmarks presumably will become the Department's standard.
   
   Auditor Comments.  Management's comments are responsive to
the recommendation.
     
   Recommendation 4.  Select the best alternative for meeting
mission needs at the least cost.
   
   Management Comments.  Concur.  In response to recommendation
1, Oakland will select the best alternative for meeting mission
needs at the least cost based on Livermore's cost and benefit
analyses.
   
   Auditor Comments.  Management's comments are responsive to
the recommendation.
   
ADDITIONAL MANAGEMENT COMMENTS
 
    Management Comments.  In responding to drafts of this
report, Oakland stated that the Corps' estimate to design,
construct, and manage the fire station and medical facility
project did not include traditional indirect costs, escalation
costs, and contingency allocations, all of which are mandated by
the Department.  After comparing the Corps' estimate of direct
construction costs against the Livermore's estimate for the
project, Oakland believed the direct construction costs were
similar.  The additional cost required to pay for the indirect
costs, escalation rates, and "zero-risk" based contingency costs
account for the difference between the Corps' estimate and
Livermore's estimate.
    
    Oakland disagreed with the implication that, if cost
reductions could be rationalized for the fire station and medical
facility project and the costs and benefits of alternatives for
other projects had not been analyzed, the entire Livermore out-
year capital program was subject to suspicion.  Oakland disagreed
particularly with applying this implication to Livermore's $1.5
billion of planned and proposed projects because there was only
about $300 million of out-year proposed new projects once ongoing
construction projects, including the National Ignition Facility,
were removed.
    
    Management did agree with the OIG's assertion that Oakland
should continue to look for new ways to design and build
facilities to reduce initial construction costs as well as life-
cycle facility costs.  Prior to the initial meeting with the OIG,
Oakland's engineering and procurement staffs started to explore
state-of-the-art private sector processes for facility design and
construction procurement.  Oakland and Livermore had jointly
developed a new "best qualified" construction contract process to
competitively select the best qualified builder.  Oakland
anticipated this process would help create a design and
construction team dedicated to building a project on time and
within budget by improving communications, reducing construction
changes, and eliminating claims.  Oakland is currently using this
process to construct the contained-firing facility project.
   
   Auditor Comments.  Oakland's and Livermore's actions to
implement the "best qualified" construction contract process to
competitively select the best qualified builder should have a
positive impact on costs.  However, the results of the auditorsm
benchmarking of the fire station and medical facility showed that
other approaches to renovation and construction, such as
outsourcing, offer the potential for reducing expenditures.
Although the amount and timing of savings cannot be predicted
with precision, opportunities for reducing expenditures will be
lost if these other approaches are not considered objectively.
   
   Management Comments.  Oakland stated that the OIG identified
only three examples out of 43 projects reviewed where Livermore
was pursuing projects that it had not demonstrated to be the best
alternatives for meeting the Department's mission needs at the
least cost.  Oakland further noted that the OIG did not assert
that any of the projects were not the best alternatives, only
that this was not demonstrated, that is, alternatives defined,
cost-benefit analyses performed and the determination documented.
In addition, the OIG acknowledged that the projects met mission
needs.
   
   Auditor Comments.  We did not review all 43 projects.
Rather, we judgmentally selected eight projects, totaling $161
million, out of the 43 projects for review.  The costs associated
with the three projects reported on total over $78 million, or 49
percent of the projects dollars reviewed.  Although we
acknowledged that the mission needs existed, we questioned
whether Livermore had demonstrated that the questioned projects
were the best alternatives for meeting the Department's mission
needs at the least cost.  Therefore, the audit results caused us
to question whether there was adequate assurance that Livermore
was pursuing the best alternative.
   
                                 IG Report No.  WR-B-97-06
                                                            
                                
                                
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