a

GAO

United States Government Accountability Office

Report to the Subcommittee on Energy 

and Water Development, Committee on 

Appropriations, House of 

Representatives

September 2005 DEPARTMENT OF 

ENERGY

Additional 

Opportunities Exist 

for Reducing 

Laboratory 

Contractors’ Support 

Costs

GAO-05-897
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-897.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim Wells at 

(202) 512-3841 or wellsj@gao.gov. 

Highlights of GAO-05-897, a report to the

Subcommittee on Energy and Water 

Development, Committee on 

Appropriations, House of Representatives 

September 2005

DEPARTMENT OF ENERGY 

Additional Opportunities Exist for 

Reducing Laboratory Contractors’ 

Support Costs 

For fiscal years 2000 through 2004, laboratory-reported rates for indirect 

costs—those not charged directly to a specific program—increased at two 

laboratories and decreased at three. However, indirect cost rates cannot be 

compared across laboratories because contractors classify different portions 

of support costs as indirect. To facilitate analysis, DOE requires the 

laboratories to report what it called “functional support costs,” or costs that 

support missions, regardless of whether they are classified as direct or 

indirect costs. Using this measure, three laboratories’ rates—that is, 

functional support costs divided by total costs—increased and two 

laboratories’ rates decreased over the 5-year period. While functional 

support cost rates improved comparability, several DOE and contractor 

officials said that the definitions for some categories of support costs, such 

as “facilities management,” are unclear, leading to confusion and 

inconsistent reporting. 

DOE and its contractors have initiated several steps to reduce indirect and 

other support costs but can take additional actions to improve their 

implementation. First, DOE’s laboratory contracts have increasingly 

included incentives to encourage cost reductions. In fiscal year 2004, for 

example, the National Nuclear Security Administration began an “awardterm” pilot program that allows a contractor to earn extra contract years 

based on performance and cost-saving achievements. However, DOE is 

expanding use of this incentive without evaluating it. Second, DOE requires 

its contractors to benchmark employee benefits and to reduce benefits if 

they exceed the benchmark, but DOE did not promptly enforce these 

requirements at one laboratory and exempted two others. Third, DOE has 

begun to address a $1.9 billion backlog of deferred maintenance to reduce 

long-term costs. However, without a more rigorous approach, the backlog 

will persist well into future decades. Lastly, while some laboratories have 

used process improvement programs to streamline business processes and 

reduce costs, others do not have such programs, nor are they required to 

have them. 

Functional Support Costs for Five DOE Laboratories Reviewed, Fiscal Year 2004 

Dollars in millions 

National laboratory Contractor 

Functional

support costs

Idaho Battelle Energy Alliance $377.5

Lawrence Livermore University of California 573.2

Los Alamos University of California 889.1

Oak Ridge UT–Battelle, LLC 292.9

Sandia Lockheed Martin Corporation 718.0

Source: DOE. 

In fiscal year 2004, about two-thirds 

of the Department of Energy’s 

(DOE) $26.9 billion in spending 

went to 28 major facilities—

laboratories, production and test 

facilities, and nuclear waste 

cleanup and storage facilities. DOE 

spent about $2.9 billion in fiscal 

year 2004 to support the mission of 

its five largest laboratories (see 

table). GAO was asked to examine 

(1) recent trends in indirect and 

functional support cost rates for 

these five laboratories, noting key 

differences in how contractors 

classify costs, and (2) the efforts of 

DOE and its contractors to reduce 

indirect and other support costs 

and identify additional 

opportunities for savings. 

What GAO Recommends

GAO is recommending that DOE 

take several actions to improve the 

comparability of functional support 

cost data among laboratories and 

reduce support costs by assessing 

the overall effectiveness of 

initiatives and ensuring that DOE 

laboratories adopt important costsaving initiatives. 

In commenting on the draft report, 

DOE generally concurred with 

GAO’s recommendations. 
Page i GAO-05-897 DOE Laboratory Contractors’ Support Costs

Contents

Letter 1

Results in Brief 4

Background 6

Some Laboratories’ Cost Rates Have Increased While Others Have 

Decreased, but Not All Rates Are Comparable 7

DOE and Its Contractors Have Taken Actions to Reduce Indirect and 

Other Support Costs, but Opportunities Exist for Further 

Reductions 13

Conclusions 25

Recommendations for Executive Action 26

Agency Comments 26

Scope and Methodology 27

Appendixes

Appendix I: Award-Term Provisions at Four DOE Sites 30

Appendix II: Comments from the Department of Energy 32

Appendix III: GAO Contact and Staff Acknowledgments 33

Tables Table 1: Functional Support Cost Rates for Five Laboratories, 

Fiscal Years 2000-04 10

Table 2: Results of the DOE-Funded Employee Benefit Value 

Studies for Each of the Five Laboratories 16

Table 3: Award-Term Provisions for Four DOE Facilities 30

Abbreviations

CFO chief financial officer

DOE Department of Energy

NNSA National Nuclear Security Administration

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Page 1 GAO-05-897 DOE Laboratory Contractors’ Support Costs

United States Government Accountability Office

Washington, D.C. 20548

A

September 9, 2005 Letr

The Honorable David L. Hobson

Chairman

The Honorable Peter J. Visclosky

Ranking Minority Member

Subcommittee on Energy and Water Development

Committee on Appropriations

House of Representatives

In fiscal year 2004, about two-thirds of the Department of Energy’s (DOE) 

$26.9 billion in spending went to 28 major facilities, including laboratories, 

nuclear weapons test and production facilities, and nuclear waste cleanup 

and storage facilities. DOE primarily uses contractors—industrial firms 

and nonprofit organizations, including educational institutions—to manage 

and operate these facilities. DOE oversees these contractors’ activities 

through its headquarters program offices—primarily the National Nuclear 

Security Administration (NNSA), the Office of Environmental Management, 

and the Office of Science—and site offices located at each facility. 

DOE reimburses its contractors for the costs incurred in carrying out the 

department’s missions. These include costs that can be directly identified 

with a specific DOE program (known as direct costs) and costs of activities 

that indirectly support a program (known as indirect costs), such as 

administrative activities, utilities, and building maintenance. To ensure that 

DOE programs are appropriately charged for incurred costs, contractors’ 

accounting systems assign the direct costs associated with each program 

and collect similar types of indirect costs into pools and allocate them 

proportionately among the programs. 

Historically, DOE obtained information on contractors’ overall indirect cost 

rates—the ratio of indirect costs to total operating costs—as a basis for 

assessing contractors’ efficiency in performing their missions. However, 

the indirect cost rates of different facilities cannot readily be compared (1) 

because cost accounting standards and federal regulations provide 

contractors with flexibility regarding the extent to which they identify 

incurred costs directly with a specific program and how they collect similar 

costs into indirect cost pools and allocate them among programs and (2) 

because of differences in the facilities’ missions, corporate structures, and 
Page 2 GAO-05-897 DOE Laboratory Contractors’ Support Costs

accounting systems.1 As a result, contractors’ methods for accumulating 

and allocating indirect costs vary—that is, a cost classified as an indirect 

cost at one laboratory may be classified as a direct cost at another. For 

example, electricity and other utility costs are usually classified as indirect 

because they are not associated with a single program; however, electricity 

costs could be charged directly if, for example, a laboratory installs a meter 

to track the electricity consumption in a building used solely by one 

program. 

In the mid-1990s, DOE’s chief financial officer (CFO) created 22 standard 

categories of “functional support costs” to obtain more consistent 

information about the support costs at DOE’s major contractor-operated 

facilities. These categories include, for example, executive direction, 

information services, procurement, maintenance, and facilities 

management. Each of the 22 categories is defined to cover all related costs, 

irrespective of whether contractors classify them as direct or indirect. 

Beginning in fiscal year 1997, the CFO and the Financial Management 

Systems Improvement Council, composed of DOE and contractor financial 

officials, have required the department’s primary contractors to annually 

report these costs. To oversee the quality of these data, contractors’ 

financial personnel generally peer review the data for each facility once 

every few years. In fiscal year 2004, functional support costs accounted for 

$7.2 billion, or nearly 40 percent, of the contractors’ $18.1 billion total 

costs. The functional support costs for the five largest DOE laboratories 

were $2.9 billion.

You asked us to examine (1) recent trends in reported indirect and 

functional support cost rates at the largest DOE contractor-operated 

laboratories, noting any key differences in how the contractors determine 

which costs are indirect and how these rates compare with those of similar 

laboratories in other federal agencies, and (2) the efforts of DOE and its 

laboratory contractors to reduce indirect and other support costs, 

identifying additional opportunities for potential savings. In response, we 

reviewed DOE’s five laboratories with the greatest total operating costs—

NNSA’s Lawrence Livermore National Laboratory, Los Alamos National 

Laboratory, and Sandia National Laboratories; the Office of Science’s Oak 

Ridge National Laboratory; and the Office of Nuclear Energy’s Idaho 

1

See the Cost Accounting Standards (48 C.F.R. Part 9904) for detailed cost accounting 

requirements. 
Page 3 GAO-05-897 DOE Laboratory Contractors’ Support Costs

National Laboratory.2 The total costs of these five laboratories, $7.5 billion, 

accounted for more than a quarter of DOE’s total fiscal year 2004 budget. 

For purposes of comparison with other federal laboratories, we identified 

two similar large, contractor-operated laboratories—the Jet Propulsion 

Laboratory, located in Pasadena, California, and operated by the California 

Institute of Technology for the National Aeronautics and Space 

Administration; and Lincoln Laboratory, located in Lexington, 

Massachusetts, and operated by the Massachusetts Institute of Technology 

for the Department of the Air Force. We determined that the selection of 

these seven laboratories was appropriate for our design and objectives and 

would generate valid and reliable evidence to support our work.

To examine recent trends in the indirect cost rates of the five DOE 

laboratories, we obtained indirect cost rates from each laboratory for fiscal 

years 2000 through 2004 and identified cost-rate trends, reviewed 

differences in what types of costs the laboratories included in their indirect 

cost pools and how they allocated these costs, and reviewed the 

laboratories’ indirect cost rates and those of the Jet Propulsion Laboratory 

and Lincoln Laboratory. We did not include indirect cost rates in this report 

because some of these data are proprietary. We also examined the fiscal 

years 2000 through 2004 data that DOE’s CFO published in its Fiscal Year 

2004 Support Cost by Functional Activity Report to compare these costs 

for the five DOE laboratories. To examine the efforts of DOE and its 

laboratory contractors to reduce indirect and other support costs, we 

reviewed contractual provisions, key cost-saving initiatives, and audits. 

Specifically, we reviewed the management and operating contracts for each 

of the five laboratories, including clauses focused on reducing functional 

support costs; analyzed several key initiatives that DOE and its contractors 

have undertaken to reduce costs and the initiatives’ applicability to other 

DOE facilities; and examined reports of DOE’s Office of Inspector General 

and the contractors’ internal audit teams. We performed our work between 

January 2005 and August 2005, in accordance with generally accepted 

government auditing standards. 

2

Prior to February 2005, Idaho National Laboratory was known as Idaho National 

Engineering and Environmental Laboratory. DOE’s Office of Nuclear Energy is responsible 

for the laboratory, while DOE’s Office of Environmental Management is responsible for the 

environmental cleanup of the site. 
Page 4 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Results in Brief For fiscal years 2000 through 2004, reported indirect cost rates increased at 

two laboratories operated by DOE contractors and decreased at three of 

them. Los Alamos had the largest reported increase, 10.4 percent, which it 

attributes to its July 2004 suspension of almost all of the laboratory’s 

operations in response to safety and security concerns. Idaho had the 

largest decrease, 32.1 percent, primarily because of changes in its 

accounting for indirect costs. Although a contractor’s overall indirect cost 

rates are generally comparable over time, some rates, such as Idaho’s fiscal 

year 2004 rate, are not comparable. Specifically, in fiscal year 2004, the 

contractor at Idaho reclassified a large portion of its indirect costs as direct 

to prepare for a new environmental cleanup contract that is separate from 

its laboratory operations contract. In addition, indirect costs cannot be 

compared across laboratories because one contractor may classify a 

greater portion of a particular support cost as an indirect cost than another 

contractor. For example, from fiscal years 2000 through 2003, Idaho 

classified all of its administrative support as indirect costs, while other 

laboratories, such as Oak Ridge, classified administrative support as both 

direct and indirect costs. In addition, Lawrence Livermore and Oak Ridge 

treat maintenance for roads and grounds as indirect expenses, while Idaho 

treats them as direct expenses. 

Regarding functional support costs, three laboratories’ rates increased and 

two laboratories’ rates decreased over the 5-year period we examined. 

Again, Los Alamos had the largest increase, and Idaho had the largest 

decrease. While functional support cost rates facilitate greater 

comparability across laboratories, several DOE and contractor officials 

told us that the definitions for some categories are unclear, leading to 

confusion among categories. Notably, the “facilities management” and 

“maintenance” categories are ambiguous and, hence, are not fully 

comparable across laboratories. Because of the differences in how DOE 

contractors categorize direct and indirect costs, and because only DOE 

contractors report functional support costs, the rates at DOE’s laboratories 

cannot be compared with those of the Jet Propulsion Laboratory or Lincoln 

Laboratory. For example, Jet Propulsion Laboratory officials told us that 

they categorize all their costs as direct in accordance with their contract 

with the National Aeronautics and Space Administration.

DOE and its contractors have taken several actions to reduce indirect and 

other support costs, but improved implementation could also produce 

savings—particularly in the following areas of contract incentives, 
Page 5 GAO-05-897 DOE Laboratory Contractors’ Support Costs

contractors’ employee benefits, deferred maintenance, and process 

improvements: 

• DOE’s management and operating contracts have increasingly included 

incentives to encourage cost reductions. For example, beginning in 

fiscal year 2003, DOE contracts have placed greater emphasis on 

performance objectives and fees based on the efficiency of laboratories’ 

business operations. In addition, in fiscal year 2004, NNSA began a pilot 

“award-term” program that allows the contractor at Sandia to earn up to 

5 additional years on its 5-year contract if it receives an overall rating of 

“outstanding” each year and achieves cost savings sufficient to fund 

completion of projects that were approved but did not receive full 

funding. In the first year of the pilot program, Sandia’s contractor earned 

a 1-year extension on its contract. DOE has proposed to expand this 

pilot program to the Los Alamos contract—and to allow contract 

extensions of up to 13 years beyond the proposed 7-year contract 

term—even though the award-term program is less than 2 years old and 

DOE has not yet evaluated its effectiveness. For example, DOE has not 

evaluated whether the cost savings achieved impaired the quality of 

work. 

• DOE requires its contractors to benchmark the value of pension and 

other benefit programs with those of industry and to reduce the value of 

benefits if they exceed the overall benchmarked average by 5 percent or 

more. However, DOE has exempted the University of California, which 

manages Lawrence Livermore and Los Alamos, from benchmarking the 

value of its benefits because those laboratories use the university’s 

benefit program. Of the three remaining laboratories, Idaho and Oak 

Ridge have benefits whose values fall within the allowable range, while 

Sandia’s benefits have substantially exceeded the overall benchmarked 

average since 2002, with current pension benefits being 68 percent 

higher. DOE did not request that Sandia’s contractor propose corrective 

actions until May 2005, 3 years after discovering the benefits were too 

high. While enforcing the limits on benefit values is a step in the right 

direction, DOE has not set any limits on benefit costs. Because the value 

of the benefits does not necessarily correlate with their costs, 

controlling the benefits’ value alone may not be the most effective 

means to manage costs. Although DOE proposed in November 2003 to 

require contractors to evaluate both the value and cost of their benefits, 

it has not yet finalized this requirement, over 2 years later.
Page 6 GAO-05-897 DOE Laboratory Contractors’ Support Costs

• After decades of neglect, DOE has begun to address a backlog of 

deferred maintenance at its facilities to reduce support costs in the long 

term. As required by DOE, the five laboratories have 10-year plans to 

reduce their maintenance backlog, which was valued at $1.9 billion in 

fiscal year 2004. However, without a more rigorous approach, the 

backlog will persist well beyond 10 years. To speed the backlog 

reduction for NNSA facilities—including Lawrence Livermore, Los 

Alamos, and Sandia—the Congress has funded the first 3 years of a 

10-year effort to “buy down” the backlog. However, only Lawrence 

Livermore and Sandia have demonstrated success with long-term 

approaches to further reduce their maintenance backlogs and minimize 

reaccumulation. For example, Lawrence Livermore charges DOE and 

other agency programs that use the laboratory about $8 per square foot 

for maintenance in an effort to reduce the backlog.

• Idaho, Lawrence Livermore, and Sandia have used process 

improvement programs to assess their operations and reduce costs. For 

example, Idaho used process improvement methods to reduce the 

average cost of each of 16 safety assessment reports, for a total 2-year 

savings of $907,000. While it is generally recognized that using a process 

improvement program is a good business practice, neither Los Alamos 

nor Oak Ridge has one. 

We are making several recommendations to the Secretary of Energy to 

improve the comparability of functional support cost data among 

laboratories and to reduce these costs by assessing the overall 

effectiveness of initiatives and ensuring that other DOE laboratories adopt 

important cost-saving initiatives. In commenting on a draft of this report, 

DOE generally concurred with all of the recommendations.

Background The Federal Acquisition Regulation and Cost Accounting Standards 

provide overall requirements for allocating incurred costs either directly to 

a program or indirectly to pools of similar types of costs that are allocated 

proportionately among the programs. For example, to avoid double 

counting and ensure that DOE programs and other federal agencies pay an 

appropriate share of indirect costs, the standards require that a contractor 

use consistent methods for estimating costs for each project or activity. 

That is, if the laboratory charges one project $8 per square foot for 

maintenance, it must charge other projects in the same manner. 

Contractors submit for DOE approval accounting policy statements 

describing how they will classify costs as direct or indirect. 
Page 7 GAO-05-897 DOE Laboratory Contractors’ Support Costs

DOE improved its ability to compare laboratories’ costs in fiscal year 1997, 

when it began requiring contractors to report all functional support costs, 

regardless of how they were classified. Functional support cost data 

facilitate comparisons of laboratories’ costs because they are intended to 

include all costs that support laboratory missions, regardless of whether a 

particular laboratory has classified the support costs as direct or indirect. 

However, functional support costs have limitations in that they cannot 

account for differences in the mission, size, age, or location of DOE 

facilities. Facility comparisons need to factor in the differences, for 

example, in (1) maintenance costs for a 50-year-old manufacturing facility 

as compared with those of a modern research facility or (2) safety and 

health costs at a facility that uses nuclear materials as compared with a 

facility with no nuclear materials. 

Some Laboratories’ 

Cost Rates Have 

Increased While Others 

Have Decreased, but 

Not All Rates Are 

Comparable

From fiscal years 2000 through 2004, indirect cost rates increased at two of 

the five DOE laboratories we examined and decreased at the other three 

laboratories. A laboratory’s indirect cost rates are generally comparable 

over time, but the indirect cost rates of different laboratories are not 

comparable because contractors often categorize costs differently. 

Regarding functional support costs, three of the five laboratories’ rates 

increased, while rates of two laboratories decreased during the same 5-year 

period. While functional support cost data help DOE to compare rates 

across laboratories, several DOE and contractor officials told us that the 

definitions for some categories are unclear, leading to confusion among 

categories. Finally, because of the differences in how DOE contractors 

categorize direct and indirect costs, and because other federal, non-DOE 

contractors do not collect and report functional support costs, the rates at 

DOE’s laboratories cannot be compared with those of the Jet Propulsion 

Laboratory or Lincoln Laboratory. 
Page 8 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Two DOE Laboratories’ 

Indirect Cost Rates Have 

Increased and Three Have 

Decreased, but These Rates 

Are Not Comparable across 

Laboratories

From fiscal years 2000 through 2004, indirect cost rates increased at two 

laboratories operated by DOE contractors and decreased at three.3 Los 

Alamos had the largest increase—10.4 percent. Nearly all of this increase 

occurred during the 4th quarter of fiscal year 2004 and, according to Los 

Alamos officials, was attributable to the “stand down” of activities that the 

laboratory director ordered in July 2004 in response to a series of safety 

and security incidents. In particular, the Los Alamos officials told us that 

the stand down resulted in lower program costs without similarly lower 

indirect costs. For example, $8 million in staff costs for the stand down’s 

first 2 days was treated as indirect costs as laboratory managers developed 

plans for assessing and resolving the safety and security issues. Once risk 

assessment and mitigation activities began, stand-down costs were charged 

directly to benefiting programs. Los Alamos officials stated that general 

and administrative costs, especially costs in the “executive direction” 

category, were higher than expected, while direct program costs were 

lower. The indirect cost rate for Lawrence Livermore increased as well by 

2.9 percent from fiscal years 2000 through 2004 because of additional costs, 

such as those related to facilities safety, maintenance, environmental 

protection, and hazard control.

In contrast, Idaho National Laboratory’s indirect cost rate decreased by 

32.1 percent during the 5-year period, mainly because the contractor 

reclassified a large portion of its costs associated with environmental 

cleanup operations from indirect to direct in fiscal year 2004. According to 

contractor officials, these costs were reclassified in response to DOE’s 

decision to split the management and operating contract, which expired 

during fiscal year 2005, into two parts by awarding separate contracts for 

laboratory operations and the environmental restoration of the site. 

Laboratories can make changes in how they account for indirect costs, and, 

when they do, they are required to document these changes in their 

disclosure statement for DOE approval. The indirect cost rates for Oak 

Ridge and Sandia decreased by 7.3 percent and 2.2 percent, respectively, 

between fiscal years 2000 and 2004. According to Oak Ridge contractor 

officials, the decrease resulted from several factors, including 

management’s decision to limit the growth of indirect costs while the 

laboratory’s total spending grew—when total costs increase at a higher rate 

3

Because the Congress began providing funding specifically for security in fiscal year 2001, 

we asked the laboratories to exclude security from their prior indirect rates to provide 

consistent trend data.
Page 9 GAO-05-897 DOE Laboratory Contractors’ Support Costs

than indirect costs, the indirect cost rate will decrease because the rate 

equals the indirect costs divided by total costs. 

Indirect cost rates cannot be meaningfully compared across laboratories 

because one contractor may track costs more closely, allowing the 

contractor to classify a higher proportion of the cost of a support activity, 

such as administration, as a direct cost than another contractor does. For 

example, from fiscal years 2000 through 2003, Oak Ridge and Sandia 

classified administrative support costs as both indirect and direct costs, 

while Idaho classified all administrative support costs as indirect. Similarly, 

Idaho classified road and ground maintenance as direct costs, while 

Lawrence Livermore and Oak Ridge treated them as indirect costs. Two 

contractor officials provided other examples of costs that laboratories are 

likely to classify differently: subcontract administration, any type of fringe 

benefit, program management, organizational management and 

administration, facility management and maintenance, and information 

technology functions. A Lawrence Livermore official noted, for example, 

that one contractor may treat desktop software used by many programs as 

a direct cost, while another contractor may bundle these software 

purchases into a common site license that is paid from an indirect account. 

The indirect cost rate may be higher in the latter case, but the goods may be 

obtained at a lower cost. Thus, higher indirect costs do not necessarily 

equate with less efficiency.

Further, the five DOE contractors use different methods to classify support 

activities—that is, they differed in how indirect costs are collected and 

distributed. For example, one contractor used 4 major indirect cost pools 

while another contractor used 12 indirect cost pools for distribution among 

programs. Similarly, the number of major service centers at the five DOE 

laboratories ranged from 6 to 14. Service centers are accounts where costs 

of specific services are accumulated and charged on the basis of services 

rendered, either to a program or to other indirect cost pools. Common 

service centers are telecommunications and computing centers. 
Page 10 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Functional Support Cost 

Rates Provide More 

Comparability than Indirect 

Costs, Although the 

Definitions for Some 

Categories Are Unclear

Table 1 shows that for fiscal years 2000 through 2004, three laboratories’ 

functional support cost rates increased and two laboratories’ decreased. 

These rates are the functional support costs as a percentage of total costs 

without capital construction. Again, Los Alamos had the largest increase, 

8.1 percent, and Idaho had the largest decrease, 11.8 percent.4

Table 1: Functional Support Cost Rates for Five Laboratories, Fiscal Years 2000-04

Source: DOE’s CFO, Fiscal Year 2004 Support Cost by Functional Activity Report (Washington, D.C.).

Note: This table excludes the “safeguards and security” category from the functional support costs 

because DOE and the laboratories have treated them as direct costs after they began receiving lineitem funding. We also excluded “capital construction” from total costs. While these rates are more 

comparable than indirect cost rates, they are not entirely comparable, as discussed in this report.

Functional support costs were primarily developed to facilitate the analysis 

of each facility’s costs. While not intended for comparison purposes, they 

provide more comparability across laboratories than indirect costs because 

they are developed on the basis of standard, defined cost categories. 

However, detailed analysis is required to determine whether rate 

differences are the result of inefficiencies or other factors, such as 

differences in each facility’s mission, activities, location, or size. For 

example, costs for safety and health, maintenance, and utilities at Los 

Alamos are higher than costs at other sites because, according to DOE 

officials, the laboratory has 2,224 facilities on 27,800 acres of mesas and 

canyons. Also, Los Alamos uses plutonium and other hazardous materials, 

which require added safety procedures, and accelerator facilities, which 

consume large amounts of electricity. 

4

Functional support costs accounted for about 40 percent of the 28 contractors’ fiscal year 

2004 operating costs of $17.4 billion.

Laboratory FY 2000 FY 2001 FY 2002 FY 2003 FY 2004

Percentage

change for

FYs 2000-04

Idaho 52.5% 52.1% 51.4% 51.7% 46.3% (11.8)%

Lawrence 

Livermore 32.4 34.5 35.1 36.1 34.0 4.9

Los Alamos 39.7 41.0 40.1 39.5 42.9 8.1

Oak Ridge 36.6 34.6 34.3 36.2 35.8 (2.2)

Sandia 33.5 33.5 32.5 34.7 33.7 0.6
Page 11 GAO-05-897 DOE Laboratory Contractors’ Support Costs

While functional support cost rates facilitate improved analysis of 

laboratory costs, several DOE and contractor officials told us that the 

definitions for some categories are somewhat unclear, leading to confusion 

in how to categorize certain costs. Notably, the “facilities management” and 

“maintenance” categories are somewhat ambiguous and, hence, are not 

fully comparable across laboratories. Peer reviewers checking for accuracy 

of classification of costs have found that several laboratories have 

misclassified costs between the two categories. In July 2003, peer 

reviewers found that Sandia had classified $1.1 million of facilities 

management costs as maintenance and $8.8 million in maintenance costs 

as facilities management. In June 2004, peer reviewers found that Los 

Alamos had classified $550,000 in maintenance costs as facilities 

management. In addition, in fiscal year 2003, a Lawrence Livermore 

internal review found that the laboratory had categorized plant facility 

engineering costs as maintenance, while other laboratories had categorized 

these costs as facilities management. In 2004, after discussing the 

categories with DOE and contractor officials involved in reviewing 

functional support cost data, Lawrence Livermore moved $15 million from 

the fiscal years 2002 and 2003 maintenance category to the facilities 

management category. Most of the peer reviews for the DOE laboratories 

and other facilities found difficulties with which cost elements were placed 

in or omitted from “facilities management” and “maintenance,” according 

to our analysis. In addition, peer reviews at Los Alamos and Oak Ridge 

found over $2 million of legal or information services costs that was 

misclassified in the “executive direction” category, another example of a 

category whose definition may be unclear. Idaho officials reported that 

discrepancies in executive direction cost data between Idaho and other 

sites resulted from uncertainty about how many levels of management or 

what type of site development and strategic planning costs are to be 

included in the executive direction category. 

Differences in interpretation result from insufficiently detailed guidance 

for developing functional support costs. The guidance primarily consists of 

10 pages of 22 support category definitions. DOE’s Web site does not have 

more detailed instructions that contractors can turn to when they are 

uncertain whether a cost should be classified under one category or 

another. Contractor officials developing cost data often turn to different 

DOE or contractor officials with responsibility for these data for help, 

increasing the likelihood of getting different advice, despite the fact that 

consistency is key to data quality. Several DOE and contractor officials 

with responsibility for these data agreed that more specific guidance would 

cost little to develop and would increase consistency in reporting. For 
Page 12 GAO-05-897 DOE Laboratory Contractors’ Support Costs

example, some officials said they could post a list of common laboratory 

errors on the Financial Management Systems Improvement Council’s Web 

site, based on peer review findings of the past few years. 

DOE Laboratories’ Cost 

Rates Cannot Be Compared 

with Those of Other Federal 

Laboratories 

Because comparisons of indirect cost rates are not very meaningful and 

non-DOE contractors do not report functional support costs, the cost rates 

for DOE’s laboratories cannot be compared with those of the Jet 

Propulsion Laboratory or Lincoln Laboratory. The Jet Propulsion 

Laboratory, operated by the California Institute of Technology, is the lead 

center for robotic exploration of space. Virtually all of the work it performs 

is under a single National Aeronautics and Space Administration 

agreement, which states that all of the laboratory’s costs are direct, 

according to laboratory officials.5

 Lincoln Laboratory, located on Hanscom 

Air Force Base, conducts applied research to develop advanced technology 

in remote sensing, space surveillance, missile defense, battlefield 

surveillance and identification, communications, air traffic control, and 

biological and chemical defense for the Department of Defense and other 

federal agencies. The laboratory’s indirect cost rate cannot be compared 

with those of DOE laboratories without a detailed understanding of 

differences in (1) contract provisions and other requirements; (2) how 

contractors classify costs as direct or indirect; and (3) research missions 

and activities, such as the added costs at the DOE laboratories associated 

with safety requirements for handling radioactive and other hazardous 

materials. Lincoln Laboratory's indirect cost rate increased by 13.9 percent 

between fiscal years 2000 and 2004 because of a new enterprisewide 

accounting and management reporting system and infrastructure 

improvements for laboratory test facilities, according to laboratory 

officials.

5

The Jet Propulsion Laboratory tracks “distributive costs,” which are similar to, but not 

comparable with, the DOE laboratories’ indirect costs. These distributive costs increased by 

9.5 percent between fiscal years 2000 and 2004. 
Page 13 GAO-05-897 DOE Laboratory Contractors’ Support Costs

DOE and Its 

Contractors Have 

Taken Actions to 

Reduce Indirect and 

Other Support Costs, 

but Opportunities Exist 

for Further Reductions

DOE and its contractors have numerous efforts under way to reduce 

indirect and other support costs; however, we identified several efforts that 

could be strengthened to further reduce costs. First, DOE is including 

incentives in its contracts to encourage indirect cost reductions. DOE 

officials stated that one of these incentives, a pilot to award additional 

contract years for performance, had produced cost savings. DOE is 

expanding this incentive to additional laboratories, although it has not 

evaluated its effectiveness. Second, DOE generally requires contractors to 

offer employee benefits that are similar in value to those of comparable 

organizations, but the department has done little to enforce this 

requirement. Third, DOE has begun requiring contractors to address a 

backlog of maintenance projects while they also manage current 

maintenance needs. Although this effort will involve costs in the near term, 

it could reduce support costs in the long term. However, only Lawrence 

Livermore and Sandia have programs that have been shown to be 

sustainable over several years and appear to be promising models. Finally, 

while DOE and some contractors have reduced costs through process 

improvement programs, consolidated procurement actions, and audits by 

DOE’s Inspector General and DOE contractor audit groups, opportunities 

exist for further cost savings through these activities.

DOE Is Increasingly Using 

Contractual Incentives to 

Encourage Cost Savings but 

Is Expanding a Key Program 

without Evaluating Its 

Effectiveness 

Recently, NNSA has taken several actions to improve business operations 

and achieve support cost savings through contractual incentives. For 

example, Sandia’s management and operating contract that NNSA 

extended to the Sandia Corporation, a subsidiary of Lockheed Martin 

Corporation, in October 2003 gives higher priority to improved 

performance and greater efficiency in business operations. Specifically, 40 

percent of the contract’s annual award fee in fiscal years 2004 and 2005 is 

based on Sandia’s performance in areas such as information technology, 

procurement, human resources, and maintenance. Similarly, NNSA’s 

management and operating contracts for Lawrence Livermore and Los 

Alamos have given greater emphasis to improved performance and greater 

efficiency in business operations. For example, the Los Alamos contract’s 

performance measures that focused on business operations increased from 
Page 14 GAO-05-897 DOE Laboratory Contractors’ Support Costs

about 28 percent in fiscal year 2002 to 40 percent in fiscal year 2005. NNSA 

also has added provisions to some of its contracts to allow the laboratories 

to reinvest cost savings in other activities considered to be indirect costs.6

In addition, the Sandia contract initiated a pilot award-term program under 

which an additional year may be awarded to the life of the contract for each 

year the contractor achieves an overall outstanding performance rating. A 

key performance target is finding sufficient cost savings to be applied to 

unfunded projects.7

 In fiscal year 2004, the first year of the pilot program, 

Lockheed Martin earned a 1-year extension on its contract and documented 

$38 million in cost savings, which it spent on agreed-upon projects, such as 

the following:

• $14 million for reprogramming security and safeguards to meet the new 

design basis threat, 

• $9.8 million for investing in computer clusters for defense projects, 

• $3 million for purchasing equipment to refurbish the pulsed power 

accelerator,

• $2 million for enhancing the classified network, 

• $2 million for cleaning up beryllium contamination, and

• $0.3 million for negotiating an agreement with Russia on polymer 

research. 

6

A January 2005 NNSA policy letter expanded the use of reinvested savings to other 

approved areas. The final request for proposals for the contract at Los Alamos allows a 

percentage of savings in indirect costs to be applied to one of these approved areas—

contractor-directed research and development at universities and small technology 

companies in northern New Mexico. Until recently, DOE and NNSA used a contract 

provision that rewarded contractors for cost savings by allowing them to keep up to 25 

percent of documented cost savings that DOE or NNSA officials had reviewed and 

approved. However, NNSA officials stated that this provision was not effective because the 

claimed cost savings could not be verified.

7

Under the contract, Lockheed Martin shall apply cost efficiencies achieved during a given 

fiscal year only to unfunded priority direct mission work that NNSA and Lockheed Martin 

had agreed upon at the beginning of the fiscal year, provided that this work is within the 

same appropriation and budget and reporting category, unless NNSA approves a formal 

reprogramming action.
Page 15 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Although Sandia and NNSA officials stated that they believe the awardterm program emphasizes improved performance and cost savings better 

than provisions in prior contracts, NNSA has not evaluated the nearly 

2-year-old pilot. Such an evaluation could compare the benefits of 

redirecting funds for better mission uses with the costs of forgoing 

recompetition of the contract and examine whether the cost savings 

resulted in any negative effects on reduced work quality. The evaluation 

also could determine whether award-term incentives need to be revised in 

other contracts to improve their effectiveness and sustainability, 

particularly since the mission and level of performance among contractors 

vary. By expanding the incentive without evaluating it, DOE does not know 

if it is receiving benefits commensurate with awarding extra years to the 

contract term. Despite the lack of evaluation, DOE’s Office of Science 

extended the award-term incentive to Lawrence Berkeley National 

Laboratory, and NNSA plans to extend it to Los Alamos and the Nevada 

Test Site later this year when it awards new contracts. As a result, 

Lawrence Berkeley’s contractor, the University of California, can 

potentially earn up to 15 additional years on its recently awarded 5-year 

contract; the request for proposals for the Nevada Test Site states that the 

contractor can potentially earn up to 5 additional years on its 5-year 

contract; and the request for proposals for Los Alamos states that the 

contractor can potentially earn up to 13 additional years. (See app. I for 

more information on this topic.) 

DOE Has Not Always 

Enforced Its Requirement 

That Contractors’ Employee 

Benefits Be Comparable 

with Those of Similar 

Organizations 

To ensure that the value of each contractor’s employee benefits are 

comparable with its competitors and that costs are reasonable, DOE Order 

350.1 requires its management and operating contractors to periodically 

benchmark the value of their employee benefit packages—including 

retirement pensions, health care, death, and disability—with those of 

organizations with whom the contractors compete in hiring employees.8

The DOE order requires that if the value of a contractor’s benefits exceeds 

the average benchmarked value by more than 5 percent, the contractor will 

provide DOE with a plan to adjust the benefits so that they fall within 5 

percent of the benchmarked value. DOE must ensure that the contractor’s 

proposed adjustments are acceptable and reasonable. More specifically, 

the DOE order requires that the contractors use a professionally 

8

The value of the benefit packages varies by laboratory, and the potential liability for DOE 

may be substantial. For example, DOE estimates that, for the five laboratories, its long-term 

liabilities for postretirement medical and pension benefits are at least $2.9 billion. 
Page 16 GAO-05-897 DOE Laboratory Contractors’ Support Costs

recognized measure to compare the value of their benefits with those of 

other organizations. The contractors can use a nationally recognized 

consulting firm with expertise in benefit value studies to perform such a 

study every 3 years or perform an annual employee benefit comparison 

survey through the U.S. Chamber of Commerce. A benefit value study 

determines the average of each benefit for 15 organizations with similar 

workforces. The average value of the benefits becomes the benchmark 

against which the contractor’s benefits are assessed. 

The benefit value studies conducted for Lawrence Livermore, Los Alamos, 

and Sandia in 2004 show that the value of employee benefits for these 

laboratories exceeded the benchmark by more than 5 percent in several of 

the four primary categories of benefits. More importantly, the studies 

showed that the overall benefits for those three laboratories exceeded the 

allowable 5 percent variance for the overall benefits (see table 2). 

Lawrence Livermore and Los Alamos both had benefit values that far 

exceeded the benchmark and, in many categories, both laboratories 

exceeded all comparators. For example, pension benefits for both 

laboratories exceeded those of all 15 comparators and were nearly twice 

those of the benchmarked value. Lawrence Livermore, Los Alamos, and 

Sandia were highest or second highest in most benefit categories. Sandia’s 

defined benefit pension was second highest of all 15 comparators and 

exceeded the benchmarked value by 68 percent. In contrast, the value of 

benefits for Idaho and Oak Ridge did not exceed the 5 percent allowable 

range.

Table 2: Results of the DOE-Funded Employee Benefit Value Studies for Each of the 

Five Laboratories

Source: DOE.

Note: The health care and retirement values represent the benefits with the highest average values, 

while the death and disability values represent the benefits with the lowest values. All health care 

Benefits exceeded benchmark by more than 5 percent

Laboratory Retirement Health care Death Disability All benefits

Idaho

Lawrence 

Livermore X XX X

Los Alamos X XX X

Oak Ridge

Sandia X X XX X
Page 17 GAO-05-897 DOE Laboratory Contractors’ Support Costs

values reflect both pre- and post-retirement health care values. We did not independently verify the 

data used for the comparison studies. 

DOE did not require prompt action to adjust benefits at the three 

laboratories that exceeded the benchmarked value. Initially, DOE and, 

later, NNSA exempted Lawrence Livermore and Los Alamos from the DOE 

benchmark because the contract with the University of California, which 

manages the laboratories, allowed the university to extend its own benefits 

package to laboratory employees. When the DOE order was issued in 1996, 

the existing contract with the university took precedence, according to a 

university document. DOE did not request a benefit value study until 2004, 

after it was determined that the Los Alamos and Lawrence Livermore 

contracts were scheduled to be competed and DOE became concerned 

about long-term liabilities for employees’ postretirement costs. DOE has no 

short-term liability for the pension benefits because the pension plan is 

fully funded and is projected to remain fully funded for at least the near 

term, according to university officials. However, DOE’s liability for longterm pension benefits for these laboratories remains undetermined. In an 

effort to reduce this liability, NNSA is requiring a stand-alone pension plan 

for the winning bidder of the Los Alamos contract, which DOE plans to 

award at the end of this year.

Similarly, after a benefit value study in 2001 showed that the value of 

Sandia’s benefits exceeded the benchmarked value, NNSA did not require 

Sandia to adjust its benefits. In this case, an actuarial study showed that 

NNSA had minimal risk that it would have to contribute to Sandia’s pension 

plan for at least 5 years. However, the amount of long-term liability is again 

undetermined because the study could not reliably determine the risk of 

NNSA having to contribute beyond 5 years. When a new benefit value study 

was completed 3 years later, in May 2004, NNSA required Sandia to submit 

a corrective action plan to adjust the benefits. NNSA received Sandia’s plan 

for making adjustments in June 2005, but officials are requiring 

modifications before approving the plan. 

Finally, while benchmarking the value of benefits is a step in the right 

direction, DOE does not require contractors to benchmark the costs of 

their benefits. NNSA officials stated that cost studies are needed because 

the value of benefits may not be directly proportional to their costs. For 

example, while value and cost are generally highly correlated, it is possible 

that a contractor may negotiate high-value benefits that have a low cost, or 

low-value benefits that have a high cost. DOE has not yet finalized the 

revisions to DOE Order 350.1, which includes a draft provision to require 

benchmarking of costs, in addition to benefits. In commenting on this 
Page 18 GAO-05-897 DOE Laboratory Contractors’ Support Costs

report, DOE officials stated that, since late 2004, DOE solicitations and 

awards for management and operating contracts required contractors to 

conduct benefit value and cost studies. In addition, our April 2004 report 

(1) noted that DOE should review postretirement costs because they have a 

continuous and compounding effect as they are paid out for each year of 

retirement and (2) recommended that DOE strengthen its oversight of 

postretirement benefits by focusing more attention on long-term costs.9

DOE Has Begun to Focus on 

Deferred Maintenance, but 

Efforts at Some of the 

Laboratories Are Not 

Sustainable

For more than 2 decades, DOE orders and policies have required that 

contractors’ maintenance programs ensure the safe, reliable, and efficient 

operation of buildings and equipment. They have also required that these 

programs be adequately funded to ensure that the design requirements of 

the buildings and equipment are met or exceeded for their operating lives, 

and that industry standards for maintenance are applied.10 Industry 

standards, for example, require that maintenance budgets be developed 

using historical and other information on the resources required to 

maintain the structure or equipment in good repair. Industry standards and 

the National Academy of Sciences have recommended that day-to-day 

maintenance requires continuous annual funding of about 2 percent to 4 

percent of the replacement plant value.11

Despite requirements, for many decades, DOE and its contractors have 

neglected the routine maintenance of buildings and equipment—including 

inspection of fire alarms, upgrades to electrical systems, and testing of 

equipment critical to the nuclear weapons program. DOE and contractor 

officials stated that the mission always took priority for resource 

allocations. This practice has resulted in a maintenance backlog that will 

cost an estimated $1.9 billion for the five laboratories, excluding deferred 

9

GAO, Department of Energy: Certain Postretirement Benefits for Contractor Employees 

Are Unfunded and Program Oversight Could Be Improved, GAO-04-539 (Washington, D.C.: 

Apr. 15, 2004).

10For example, DOE Order 4330.4B, effective in 1994, specified that sufficient resources 

should be budgeted to ensure the reliability, safety, and operability of structures, systems, 

and components, and that maintenance programs should meet equivalent industry 

guidelines.

11Building Research Board, Committing to the Cost of Ownership: Maintenance and 

Repair of Public Buildings (Washington, D.C.: June 1990). NNSA determines replacement 

plant value by a formula that estimates the value of replacing structures and equipment at 

each site. 
Page 19 GAO-05-897 DOE Laboratory Contractors’ Support Costs

maintenance for unused buildings. Maintenance that continues to be 

deferred, particularly on older structures and equipment, will contribute to 

an increasing growth in deferred maintenance costs, including replacement 

costs for certain equipment parts. For example, Lawrence Livermore 

reports that its deferred maintenance costs continue to escalate each year 

because of the higher probability of failure in the operability of aging 

structures and equipment. In fiscal year 2004, Los Alamos reported that it 

had the oldest structures of the three weapons laboratories, with an 

average structure age of 33 years. Los Alamos also reported that it had the 

highest level of deferred maintenance of the five laboratories, accounting 

for about one-third, or $547 million, of the backlog for the five laboratories. 

The backlog could also jeopardize the safe, reliable, and efficient operation 

of the buildings and equipment. At Los Alamos, for example, the backlog 

put at risk the safety of some workers. Officials inspecting the fire 

protection system in early fiscal year 2004 reported that the fire sprinklers 

were not properly winterized to protect them from freezing, as required by 

fire codes and standards. The inspectors reported that at least three fire 

sprinkler pipes had frozen since November 2003, creating a safety concern 

in the event of a fire. At Idaho, the backlog has placed reliable operation of 

the Advanced Test Reactor at risk. Specifically, the deferral of maintenance 

and recapitalization for several key systems—including the waste control 

system and the digital monitoring system—has resulted in the reliance on 

an outdated computer system for which technical support is no longer 

available and replacement parts can only be found in used parts markets. 

Loss of any these key systems could require Idaho to temporarily shut 

down the Advanced Test Reactor, hindering test plans and DOE’s nuclear 

energy mission. Idaho plans to continue replacing failing parts in the 

computer system until it can fund a full system replacement.

DOE has begun to focus on deferred maintenance in an effort to reduce the 

backlog and long-term costs. DOE’s Defense Programs, the predecessor to 

NNSA, first began to address the maintenance backlog in fiscal year 2000. 

Defense Programs required the nuclear weapons facilities to develop 10-

year plans to evaluate short- and long-term maintenance needs and develop 

long-term efforts to better manage the maintenance backlog. At about the 

same time, the Congress began providing funding for certain maintenance 

programs, such as NNSA’s Readiness in Technical Base and Facilities 

Program. Some DOE laboratories also are using different types of indirect 

costs, such as space charges, to help address maintenance. Additionally, in 

fiscal year 2002, the Congress began funding the Facilities and 

Infrastructure Recapitalization Program to reduce long-term deferred 
Page 20 GAO-05-897 DOE Laboratory Contractors’ Support Costs

maintenance for NNSA facilities. The program can also be used to demolish 

certain structures. Demolishing or consolidating structures can help 

reduce maintenance and other operating costs. Between fiscal years 2002 

and 2005, the Congress provided about $1 billion for this program and, in 

fiscal year 2005, NNSA requested an additional $1.7 billion for fiscal years 

2006 through 2009. When established, the program had two key goals. First, 

contractors are to stabilize deferred maintenance by the end of fiscal year 

2005 so that there is no further growth in backlog. NNSA informed the 

Congress that contractors have met this goal of stabilizing deferred 

maintenance. The second goal is for contractors to reduce the maintenance 

backlog so that the backlog for mission-critical and nonmission-critical 

structures is less than 5 percent and less than 10 percent, respectively, of 

replacement plant value by fiscal year 2009. However, an NNSA official 

stated that most of NNSA’s contractors will not be able to meet this goal 

because the $1.7 billion budget request for fiscal years 2006 through 2009 

was reduced by $574 million. 

Furthermore, in fiscal year 2003, DOE adopted NNSA’s lead by addressing 

maintenance in 10-year plans to better manage maintenance overall, 

including deferred maintenance. As with NNSA’s long-term planning 

requirements, DOE Order 430.1B requires that all DOE facilities develop 

10-year plans to assess, among other things, their short-term and long-term 

maintenance needs. Although the order does not have specific time lines 

associated with reducing deferred maintenance, DOE’s headquarters 

program offices are responsible for approving the 10-year plans and for 

tracking the performance of the facilities against the plans. DOE’s Office of 

Engineering and Construction Management has general oversight over 

DOE Order 430.1B, including the review of the 10-year plans and the 

tracking of program office performance.

Despite all of these efforts, DOE contractors report that deferred 

maintenance will continue to be a significant problem in the short term and 

long term. Of the five laboratories, Lawrence Livermore has demonstrated 

the most sophisticated and sustainable approach that fully funds 

maintenance needs and reduces deferred maintenance over the long term. 

Lawrence Livermore’s plan, first implemented in 1998, relies on a 

combination of funding, including two directly funded NNSA programs—

the Readiness in Technical Base and Facilities Program and the Facilities 

and Infrastructure Recapitalization Program—and an indirect cost pool 

established for its Maintenance Management Program. The Maintenance 

Management Program collects funds ($8 per square foot) from all users of 

its buildings—including NNSA and other DOE and non-DOE programs. 
Page 21 GAO-05-897 DOE Laboratory Contractors’ Support Costs

About 20 percent of the collected funds are spent on deferred maintenance 

at the laboratory, in accordance with the program. The program identifies 

the most critical needs for maintenance on the basis of a matrix balancing 

“mission-essential” and “probability of failure” criteria. In addition, the 

charge itself encourages more efficient use of space and the return of 

unneeded space for use for other purposes or demolition. Also, other 

Lawrence Livermore cost pools, such as the Institutional General Plant 

Project, help fund capital improvements that can help address maintenance 

by upgrading structures and equipment. By managing the various elements 

of its maintenance effort, Lawrence Livermore stopped the growth of its 

maintenance backlog by fiscal year 2002. Despite the anticipated 

reductions in the Facilities and Infrastructure Recapitalization Program, 

Lawrence Livermore projects that it can reduce its deferred maintenance to 

within NNSA’s industry standards by 2011. 

Sandia has an approach similar to Lawrence Livermore’s, relying on a 

combination of funds for addressing its maintenance and deferred 

maintenance costs. Using an established methodology, a committee sets 

maintenance priorities and determines how to spend funds collected from 

an internal cost recovery pool. Sandia charges building users $12 per 

square foot and expects to initiate increases to space charges over the next 

4 years to compensate for expected cuts in maintenance funding. As a 

result, despite the anticipated reductions in the Facilities and 

Infrastructure Recapitalization Program, Sandia projected in March 2005 

that it would reduce its deferred maintenance to within NNSA’s industry 

standards by 2011.

Los Alamos officials acknowledge that they cannot achieve NNSA’s goals 

for reductions in deferred maintenance given the expected cuts in the 

Facilities and Infrastructure Recapitalization Program in the foreseeable 

future. Contractor and NNSA officials acknowledge that Los Alamos’ 

maintenance program is not sustainable, particularly given its current level 

of funding for maintenance. Any reductions in backlog as a result of the 

Facilities and Infrastructure Recapitalization Program would reaccumulate 

when that funding ended. Similarly, even though Oak Ridge provides 

additional support for maintenance by charging for space used, officials 

report that without additional infrastructure renewal or recapitalization 

funds to address aging facilities, the charge is insufficient to fully fund its 

maintenance needs. Without this additional funding, Oak Ridge reports that 

its maintenance backlog will continue to grow. Finally, Idaho has passed 

many of its deferred maintenance liabilities on to another contractor 

responsible for cleaning up part of the laboratory site; nevertheless, Idaho 
Page 22 GAO-05-897 DOE Laboratory Contractors’ Support Costs

reports that without additional funding, its maintenance backlog will 

continue to grow. 

DOE and Some Contractors 

Have Reduced Support 

Costs through Process 

Improvement Programs, 

Audits, and Procurement 

Consolidation

Idaho, Lawrence Livermore, and Sandia have reduced support costs 

through programs to improve business and other processes, while Los 

Alamos and Oak Ridge do not have such programs. In addition, DOE and 

some of the laboratories we reviewed have some efforts under way to 

consolidate procurement actions. Finally, DOE’s Inspector General and 

contractors’ internal audit groups have contributed to some cost savings by 

auditing support functions. 

Three Laboratories Have 

Reduced Costs through Process 

Improvement Programs, While 

Two Laboratories Do Not Have 

Such Programs

Process improvement is the practice of taking an analytical look at 

different steps that go into developing a product or delivering a service and 

assessing how those processes could be conducted better. In a process 

improvement initiative, participants may define the process and metrics, 

measure performance, analyze root causes of problems, improve areas of 

low performance, and develop controls for the process. Typically, the 

process improvement initiative involves iterative cycles of identification 

and improvement, fueled by employee participation in identifying problem 

areas and recommending steps to improve them. It is generally recognized 

that process improvement is a good business practice. Process 

improvement programs can increase product or service quality, while 

decreasing costs. Public and private organizations have reported 

significant returns on investment through process improvement programs. 

Several DOE laboratories and production facilities, including Idaho, 

Sandia, and Lawrence Livermore, have used process improvement 

methods, such as Six Sigma and Lean Six Sigma, to reduce costs.12 Six 

Sigma and Lean Six Sigma are rigorous and disciplined methodologies that 

use data and statistical analyses to measure and improve the performance 

of a company’s operations by identifying and eliminating defects in 

manufacturing and service-related processes. Idaho used Six Sigma to 

reduce the average cost of 16 Safety Assessment Reports for a total savings 

of $907,000 from fiscal years 2002 through 2003. Sandia used Lean Six 

Sigma to streamline its accounts payable purchase order process, 

potentially leading to savings of more than $1 million over a 5-year period. 

12Other commonly used process improvement methods include Total Quality Management 

and ISO 9000.
Page 23 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Finally, Lawrence Livermore used Six Sigma and other methods to improve 

processes in the areas of safety, security, resource management, and 

property management. For example, the laboratory reduced security staff 

overtime by increasing the workday to 12 hours and reported a $2.3 million 

annual savings. The laboratory also standardized the hours of the perimeter 

security gates and closure of redundant gates in an effort to save $300,000 

annually. Lawrence Livermore plans to train 400 managers by the fall of 

2006 in a new process improvement method based on a combination of 

Lean Six Sigma and a method used at the United Kingdom’s Atomic 

Weapons Establishment, which provides warheads for nuclear deterrence. 

Neither Oak Ridge nor Los Alamos have process improvement programs, 

although some DOE and laboratory officials agreed that such programs can 

help reduce costs. When laboratories do not have some type of process 

improvement program, DOE has little assurance that managers are 

identifying and addressing inefficient or ineffective processes. 

Many of the DOE Inspector 

General’s Reports Have 

Reviewed Support Activities

Many of the DOE Inspector General’s reports have examined support 

activities at DOE laboratories and other facilities, including security, 

procurement, property management, information resources, financial 

management, and financial controls. The Inspector General has found 

opportunities for reducing indirect and other support costs. For example, 

in 2003, the Inspector General’s audit of central office expenses for the 

Thomas Jefferson National Accelerator Facility questioned $4.6 million in 

costs claimed by and paid to the contractor for central office expenses 

from November 1999 to September 2002. These questioned expenses 

included costs that were not allowable, such as alcoholic beverages, and 

costs that were not adequately supported or documented. The audit 

resulted in $3.5 million in savings to DOE. In 2003, an audit of Los Alamos 

reported support and other costs of $14.6 million that were potentially 

unallowable, including meals, excessive travel costs, and an internal audit 

function that did not meet DOE requirements. DOE officials are in the 

process of determining allowability of the questioned amount. In addition 

to the Inspector General audits, contractors’ internal auditors annually 

perform an audit of the allowability of costs as claimed by contractors.13

This audit addresses both indirect and direct costs, identifying whether or 

not costs are allowable under the terms of the contract. For example, one 

such audit, conducted at Sandia in fiscal year 2003, projected $112,000 in 

13The Inspector General, the cognizant auditor for DOE’s management and operating 

contractors, supplements its audit program with each contractor’s internal audit activities.
Page 24 GAO-05-897 DOE Laboratory Contractors’ Support Costs

unallowable costs—DOE is in the process of determining the precise 

amount. 

DOE Has Consolidated Some 

Procurement Actions

DOE and its management and operating contractors have reduced support 

and other costs by consolidating their procurements of computer 

equipment, office supplies, and other bulk items into single contracts that 

result in volume discounts and the need for fewer purchasing resources. In 

particular, DOE established an Integrated Contractor Procurement Team 

that pursues buying opportunities and has negotiated over 40 purchasing 

agreements with vendors to reduce procurement staff time and obtain 

favorable prices, according to a DOE official. The team, composed of 

contractor purchasing agents, surveys sites to determine what contractors 

are paying for a product and whether they can negotiate a better price. A 

contractor that wants to purchase goods (e.g., paper) can review a list of 

agreements and supplier contact information on the Integrated Contractor 

Procurement Team’s Web site and use its Basic Order Agreement. This 

saves contractors and suppliers time because they do not need to 

renegotiate all the terms of the contract. Contractors do not track savings 

resulting from the use of Integrated Contractor Procurement Team, but 

they have collected some examples of savings that total about $12 million 

to $15 million, annually. 

Other efforts to save time and money through consolidation of 

procurement actions include the following:

• NNSA has required Lawrence Livermore, Los Alamos, and Sandia to 

begin analyzing their spending using similar software so that 

opportunities for consolidated purchases among the three laboratories 

can be identified. 

• Lawrence Livermore has hired a specialist who is focused full-time on 

analyzing the laboratories’ spending patterns and identifying 

opportunities for consolidation. As a result of opportunities being 

identified, the procurement office expects to reduce the number of 

subcontracts by 10 percent, saving procurement staff time. The 

laboratory also has developed 13 Electronic Ordering System 

agreements through which suppliers provide electronic catalogs with 

over 2 million commercial items (e.g., computers, electrical and 

plumbing supplies, and chemicals) that laboratory employees can 

purchase online. The purchases are automatically routed through an 

approval system. 
Page 25 GAO-05-897 DOE Laboratory Contractors’ Support Costs

• Oak Ridge consolidated its new radio system, which is used by security 

and maintenance staff, with other DOE facilities in the area, reportedly 

saving $900,000 on purchase prices plus $475,000 in annual costs. 

Laboratory officials told us that opportunities exist for further cost savings 

through reduced staff time and better prices by consolidating 

procurements with each contractor’s parent organization, other DOE 

facilities, or other federal agencies’ facilities in the same region. Idaho 

officials cited the potential for reducing costs for using consolidated 

procurements with nearby military bases and other facilities. An NNSA 

procurement official noted that laboratories could save through increased 

use of Integrated Contractor Procurement Team agreements, noting that 

some procurement officials may not be aware of available opportunities.

Conclusions In an era of federal budget constraints, it is crucial to efficiently manage 

support costs at DOE laboratories, thereby maximizing funds available for 

laboratory missions. DOE and its contractors have taken steps to reduce 

support costs, but additional opportunities exist. To help decision makers 

analyze support costs across the laboratories, several years ago DOE began 

to require laboratories to report functional support costs. However, peer 

reviews have revealed some problems with these data and challenges 

remain in comparing costs, in part because of ambiguity in the definitions 

for some categories of support costs. To encourage contractors to reduce 

support costs, DOE also piloted a program to award contract years for 

performance improvement and cost savings. However, by expanding the 

pilot incentive program without evaluating it, DOE does not know if it is 

receiving benefits commensurate with awarding extra years to the contract 

term. In another effort to save money, DOE developed requirements to 

ensure that contractors’ employee benefits are comparable with those of 

similar organizations with whom they compete for critically skilled staff. 

However, DOE has not always required its contractors to reduce employee 

benefits that substantially exceed the value of their competitors’ benefits 

and has not required contractors to benchmark the costs of their benefits, 

potentially adding billions of dollars in long-term costs. Furthermore, while 

DOE has begun to address the $1.9 billion backlog of deferred maintenance 

to reduce long-term costs and improve the safe, efficient, and reliable 

operation of equipment and buildings, only Lawrence Livermore and 

Sandia have demonstrated sustainable approaches that successfully 

reduced their backlogs. Lastly, process improvement programs are 

generally considered a good business practice, and three laboratories have 

reduced costs through their own programs. DOE, however, does not 
Page 26 GAO-05-897 DOE Laboratory Contractors’ Support Costs

require laboratories to have such programs, and some laboratories have 

not instituted one. Overall, while DOE has made progress, without 

additional attention to these initiatives, the department may miss the 

opportunity to produce significant savings. 

Recommendations for 

Executive Action

To improve the quality and comparability of DOE facilities’ support cost 

data, we recommend that the Secretary of Energy direct the CFO to work 

with the Financial Management Systems Improvement Council to clarify 

definitions of functional support cost categories.

To determine whether the department receives benefits commensurate 

with awarding 1 or more extra years to the contract term, we recommend 

that the Secretary of Energy direct NNSA to evaluate the effectiveness of 

its pilot award-term program at Sandia National Laboratories, particularly 

the nature and extent of work quality improvements, prior to extending the 

program to other laboratories.

To provide competitive but economical employee benefits, we recommend 

that the Secretary of Energy complete the revision of DOE Order 350.1 and 

ensure that the order (1) extends the requirement to benchmark the value 

of employee benefits to all contractors; (2) requires prompt corrective 

action if the value of benefits exceeds the allowable range; and (3) extends 

the benchmarking requirements to include the costs, as well as the values, 

of the benefits.

To reduce long-term maintenance costs at contractor-operated facilities, 

we recommend that the Secretary of Energy develop a long-term 

sustainable approach that meets day-to-day maintenance requirements, 

reduces the maintenance backlog, and minimizes its reaccumulation. 

To facilitate the further reduction of support costs, we recommend that the 

Secretary of Energy require that each DOE management and operating 

contractor implement a process improvement program that routinely 

assesses the efficiency and effectiveness of business practices and other 

operations.

Agency Comments We provided DOE with a draft of this report for its review and comment. In 

written comments, DOE generally concurred with our recommendations. 
Page 27 GAO-05-897 DOE Laboratory Contractors’ Support Costs

(See app. II.) DOE also provided a number of technical comments, which 

we incorporated in this report as appropriate.

Scope and 

Methodology

To examine indirect cost-rate trends at each of the five largest DOE 

laboratories, we analyzed each laboratory’s indirect cost-rate data for fiscal 

years 2000 through 2004. Specifically, we interviewed laboratory financial 

officials and analyzed documents to determine how each laboratory 

calculated its overall indirect costs rate by (1) classifying costs as direct or 

indirect and (2) collecting indirect costs into pools and distributing them 

among other cost pools or directly to program sponsors. Furthermore, 

because DOE and its management and operating contractors use functional 

support cost data to help assess certain activities, we analyzed these rates 

for the five laboratories for fiscal years 2000 through 2004, along with the 

results of peer reviews performed at each laboratory. 

We surveyed laboratory financial officials on the reliability of the indirect 

and functional support cost data, covering issues such as data entry access, 

quality control procedures, and the accuracy and completeness of these 

data. Follow-up questions were added whenever necessary. In addition, we 

reviewed all data provided by the laboratories, investigated instances 

where we had questions regarding issues such as categories or amounts, 

and made corrections as needed. On the basis of this work, we determined 

that the financial data provided were sufficiently reliable for the purposes 

of our report. We presented percentage changes in the overall indirect cost 

rates for fiscal years 2000 through 2004 that the five laboratories reported. 

However, because of limitations discussed in this report, analyses of 

increases or decreases in these rates mean little without a careful analysis 

of how a contractor classifies costs, and one contractor’s rates cannot be 

compared with those of others. Moreover, we analyzed changes in 

classification of costs or changes in mission over time to determine if these 

data were comparable over several years at a single laboratory. We noted in 

our report when we found changes in classification that affected the 

comparability of data at a single location over time.

To assess the efforts of DOE and its laboratory contractors to reduce 

support costs and identify additional opportunities for savings, we visited 

each of the five laboratories to interview senior managers and obtain 

supporting documentation, interviewed DOE officials, and examined prior 

GAO and DOE Inspector General reports. In the course of this work, we 

identified opportunities for further potential cost savings. We then 

interviewed cognizant laboratory and DOE officials about actions taken to 
Page 28 GAO-05-897 DOE Laboratory Contractors’ Support Costs

address each opportunity and reviewed supporting documentation. 

Specifically, to review DOE’s contract provisions, we interviewed DOE 

contracting officers and obtained information about recent contractual 

provisions that emphasized potential cost savings or improved efficiency. 

To address DOE’s liabilities related to employee benefits, we analyzed 

benefit value studies for each of the laboratories and compared the results 

of our analysis with the department’s requirements. We also interviewed 

DOE, NNSA, and contractor officials to clarify the results of the studies and 

to provide us with documentation on proposed resolutions, as appropriate. 

It was not our intent to verify, nor would we have been able to 

independently verify, the accuracy of actuarial calculations, assumptions, 

or data used in the comparison studies due to the proprietary nature of 

benefits that consulting firm databases used to conduct the studies. 

To address the maintenance backlog, we analyzed data from DOE’s Office 

of Engineering and Construction Management, which collects information 

on deferred maintenance. We also analyzed each laboratory’s 10-year plan 

and related documents and compared the results of our analysis with 

NNSA’s and the department’s requirements. We spoke with cognizant 

officials at DOE headquarters and its site offices and with laboratory 

managers to verify the results of our analysis and to determine the actions 

being taken to address the backlog. To examine the laboratories’ use of 

process improvement programs, we reviewed examples that the three 

laboratories provided of improved effectiveness and of reduced costs for 

their business operations and interviewed senior managers at the other two 

laboratories regarding what they had done to improve business operations.

As agreed with your offices, unless you publicly announce the contents of 

this report, we plan no further distribution of it until 30 days from the date 

of this letter. At that time, we will send copies to the Secretary of Energy; 

the Director, Office of Management and Budget; and other interested 

parties. We will also make copies available to others on request. In 

addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov.
Page 29 GAO-05-897 DOE Laboratory Contractors’ Support Costs

If you or your staffs have any questions about the report, please contact me 

at (202) 512-3841. Contact points for our Offices of Congressional Relations 

and Public Affairs may be found on the last page of this report. GAO staff 

who made key contributions to this report are listed in appendix III. 

Jim Wells

Director, Natural Resources

and Environment
Page 30 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Appendix I

Award-Term Provisions at Four DOE Sites ApApenednxidexiIs

The Department of Energy (DOE) introduced award-term incentives as a 

pilot program to Sandia in fiscal year 2004, and then expanded the use of 

the incentives to the Lawrence Berkeley contract and to the final request 

for proposals for Los Alamos and the Nevada Test Site, as shown in table 3. 

The language in the final request for proposals for Los Alamos, if placed in 

the contract, would award additional years to the contract term if the 

contractor (1) achieves a certain level of performance to be determined by 

the DOE contracting officer and (2) meets other conditions, such as finding 

cost savings and using these savings to adequately perform approved work. 

As shown in table 3, Los Alamos can earn 13 additional years on its 7-year 

contract. 

Table 3: Award-Term Provisions for Four DOE Facilities

Source: DOE.

Key differences between the Los Alamos final request for proposals and the 

Sandia contract are as follows:

• The level of performance required to receive additional contract years 

can be determined by the contracting officer for Los Alamos, but 

Sandia’s contract requires outstanding performance. NNSA officials 

stated that the recent history of performance at Los Alamos may take 

several years to reverse, and the contractor may not be able to achieve 

Final request for proposals Existing contracts

Provisions Los Alamos

Nevada Test 

Site

Lawrence 

Berkeley Sandia

Duration of contract (years) 7 5 5 5

Total number of years that 

can be added to contract

13 5 15 5

Possible total number of 

years of contract with 

award term

20 10 20 10

Level of performance 

needed to be assessed at 

to earn award term

Annual 

determination 

by NNSA 

Based on 

incentive fee 

earned

First 3 

years: 

satisfactory

Subsequent 

years:

Outstanding

Outstanding 

each year

Requires cost savings to 

earn award term

Yes No No Yes
Appendix I

Award-Term Provisions at Four DOE Sites

Page 31 GAO-05-897 DOE Laboratory Contractors’ Support Costs

overall “outstanding” ratings in the initial years of the contract. The 

officials also noted that the flexibility may allow the contracting officer 

to focus on certain areas for improvement, such as business operations.

• The contract term for Los Alamos could be 20 years, rather than the 

10 years allotted to Sandia. The 20-year term for Los Alamos requires a 

deviation from DOE Acquisition Regulation 970.1706-1, which limits 

DOE contracts to 10 years.
Page 32 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Appendix II

Comments from the Department of Energy ApendxiI
Page 33 GAO-05-897 DOE Laboratory Contractors’ Support Costs

Appendix III

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Jim Wells (202) 512-3841

Staff 

Acknowledgments

In addition to the contact named above, Richard Cheston, Beverly 

Peterson, Robert Sanchez, James Espinoza, and Cynthia Norris made key 

contributions to this report. Also contributing to this report were Chuck 

Bausell, Virginia Chanley, Nancy Crothers, Alison O’Neill, and Omari 

Norman.

(360536)
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