U.S. Department of Energy 

Office of Inspector General 

Office of Audit Services 

Audit Report 

The Department of Energy's 

Management of Contractor Fines, 

Penalties and Legal Costs

DOE/IG-0825 September 2009 
Department of Energy 

Washington, DC 20585 

September 30, 2009 

MEMORANDUM FOR THE SECRETARY 

FROM: Gregory H. Friedman 

 Inspector General 

SUBJECT: INFORMATION: Audit Report on "The Department of 

 Energy's Management of Contractor Fines, Penalties and Legal 

 Costs" 

BACKGROUND

The Department of Energy reimburses its facility contractors for millions of dollars in 

settlement costs and for fees paid to outside law firms for legal research, litigation and 

consulting activities. Because of contract reform initiatives, the Department increased 

contractor financial responsibility for certain legal costs. For example, fines and 

penalties for violations of laws and regulations, which totaled almost $12 million over the 

five-year period of our review, were found to be unallowable and were not reimbursed by 

the Department. The Department specifically considers certain other costs to be 

unallowable, such as those for punitive damages or in cases where contractor 

management officials are found to have engaged in willful misconduct or have failed to 

exercise prudent business judgment. Legal costs may also be disallowed if they are not 

properly coordinated with Department officials. 

A 1994 Office of Inspector General review, Inspection of Administrative Management 

Procedures for Legal Services Acquired by Selected Management and Operating 

Contractors (DOE/IG-0363), found weaknesses in the management of certain 

contractors' legal costs. The inspection concluded that sites did not have adequate written 

agreements with outside law firms and that one site was reimbursing costs that should not 

have been allowed. The Department has since strengthened its management of legal 

costs by adopting Legal Management Plans that outline Department requirements for 

hiring outside counsel and Engagement Letters that define and limit the types of costs 

that can be reimbursed when outside legal firms are used. The Department's contractors 

incur and are reimbursed for significant legal expenses each year. Thus, we initiated this 

audit to determine whether the Department's process for managing contractor fines, 

penalties and other legal costs was effective. 

RESULTS OF AUDIT

Our audit testing revealed that the Department did not fully implement processes for 

managing the cost of legal services and settlements. We identified instances where 

payments were made for costs that, in certain cases, were potentially unallowable. 

Specifically, two of the four facility contractors we reviewed were permitted to claim 

almost $300,000 in legal costs directly associated with unallowable fines and penalties. 

We also identified other instances where facility contractors incurred questionable costs
2 

paid to outside legal firms. For example, some contractors paid law firms for expenses 

that had not been reviewed and approved as required, including first class airfare, travel 

expenses where no receipts were provided, and other costs normally treated as 

unallowable. 

The Department also allowed payment to contractors for a number of unauthorized 

settlements and for settlements that were made without a review of the facts and 

circumstances surrounding alleged contractor "managerial personnel" misconduct. The 

term "managerial personnel" generally describes a very limited group of specifically 

identified senior level contractor managers. The Department of Energy Acquisition 

Regulation and the Department's Legal Management Requirements at 10 CFR 719, 

permit the Department to review these cases for cost allowability. Such action was not 

taken in these cases. Several responsible officials, in discussing this issue, argued that, as 

an alternative, the government has the option of questioning costs based on the results of 

subsequent audits or reviews. We concluded, however, that controls designed to prevent 

or detect payments that may not be allowable on a real time basis are a more effective 

means of reducing or eliminating such payments. 

We concluded that these activities occurred because of weaknesses in controls at certain 

contractor locations. In particular, Federal officials at some sites had not always 

considered applicable regulations that prohibit payment of certain costs that are directly 

associated with otherwise unallowable costs. Additionally, Department officials had not: 

(1) required facility contractors to enforce the terms and conditions of legal Engagement 

Letters; (2) fully considered the circumstances of legal actions before agreeing to 

settlements; and, (3) conducted reviews to identify instances of "defined" senior 

contractor management personnel misconduct or analyze recurring lawsuits and ensure 

corrective actions were being taken to prevent future lawsuits for systemic problems. 

While this audit was initiated prior to enactment of the American Recovery and 

Reinvestment Act of 2009, it identifies yet another important risk factor that the 

Department should consider as it moves to satisfy its statutory responsibilities. With the 

large influx of funds at the contractor level, claims for similar settlements and outside 

legal costs are likely to increase substantially. Given the significance of these costs, and 

the potential for inappropriate reimbursement, we made a series of recommendations 

designed to improve the effectiveness of controls over fines, penalties and other legal 

costs. 

MANAGEMENT REACTION

Management did not agree with the need to implement all corrective actions we 

proposed, but did agree that some actions were necessary and proposed alternative 

actions in each case. Management also did not completely concur with a number of the 

conclusions presented in the report. We believe, however, that management's suggested 

alternative actions are generally responsive to our recommendations. Management's 

comments and our responses to each of its concerns are summarized in the body of our 

report. The full text of those comments have been included as Appendix 3. 
3 

Attachment 

cc: Deputy Secretary 

 Under Secretary for Nuclear Security 

 Under Secretary of Energy 

 Under Secretary for Science 

 Chief of Staff 
REPORT ON THE DEPARTMENT OF ENERGY'S MANAGEMENT OF 

CONTRACTOR FINES, PENALTIES AND LEGAL COSTS 

 

TABLE OF 

CONTENTS 

The Department's Processes for Managing Contractor Fines, Penalties and Other

Legal Costs

Details of Finding ................................................................................................................1 

Recommendations and Comments.......................................................................................9

Appendices 

1. Objective, Scope, and Methodology............................................................................16

2. Prior Reports ................................................................................................................18 

3. Management Comments ..............................................................................................20 
The Department's Processes for Managing Contractor Fines, 

Penalties, and Other Legal Costs 

________________________________________________________________ 

Page 1 Details of Finding 

Government Our review identified a number of instances where the 

Reimbursement of Department of Energy's (Department) reimbursements of its 

Questionable Costs facility contractors were inappropriate. Specifically, we found 

that facility contractors were being reimbursed for legal costs 

that were potentially unallowable. Certain of these costs 

should not have been paid because they had a direct association 

with an unallowable cost while others were generally 

prohibited under existing legal agreements, absent specific 

authorization. In addition to these questionable outside legal 

costs, we found that the Department reimbursed contractors for 

settlements that were either not approved or had not been 

reviewed to determine whether allegations of contractor 

management misconduct has merit. Department regulations 

specify that contractors shall not be reimbursed if the cause of 

the action was due to contractor management personnel1

willful misconduct or failure to exercise prudent business 

judgment. 

Directly Associated Outside Legal Costs

The Department reimbursed facility contractors for costs that 

were questionable because of their direct association with other 

unallowable costs. The costs of fines and penalties are, with 

certain limited exceptions, unallowable according to the 

Federal Acquisition Regulation (FAR) Part 31.205-15. Over 

the period of our review, one contractor was assessed six 

environmental fines and/or penalties totaling over $780,000. 

Because fines and penalties are unallowable under the FAR 

and the terms and conditions of the contract, the contractor did 

not seek reimbursement for those costs. The contractor did, 

however, seek and obtain reimbursement of $120,000 for 

outside legal costs that were directly associated with two of the 

fines and penalties even though provisions in FAR 31.205-

47(b) specifically prohibit such reimbursements. The FAR 

requires that "Costs2

 incurred in connection with any 

proceeding brought by a Federal, State, local or foreign 

government for violation of, or a failure to comply with, law or 

regulation by the contractor . . . are unallowable if the result is 

 

1

 A contractor's managerial personnel is defined in Department of Energy Acquisition Regulation 970.5245-1 as 

directors, officers, and managers that have supervision or direction of substantially all the business or operations 

of the contractor, either on the whole or all the activities at a major facility or operation. 

2

 According to FAR 31.205-47(a), "Costs" include, but are not limited to, administrative and clerical expenses; 

the costs of legal services, whether performed by in-house or private counsel; the costs of the services of 

accountants, consultants, or others retained by the contractor to assist it; costs of employees, officers, and 

directors; and any similar costs incurred before, during, and after commencement of a judicial or administrative 

proceeding which bears a direct relationship to the proceeding. 
 

. . . imposition of a monetary penalty." According to contractor 

attorneys, additional and unspecified costs for in-house support 

and processing were also reimbursed. Based on our review of 

the FAR requirement, we also consider these costs to be 

questionable. 

Similarly, another contractor was reimbursed by the 

Department for over $170,000 for the same type of outside 

legal fees directly associated with some of the unallowable 

fines and penalties it incurred for environmental violations. By 

contrast, two other contractors in our review were 

implementing the "directly associated" requirements in 

compliance with the FAR and did not seek Departmental 

reimbursement for their costs associated with individual fines 

and penalties. We believe the practice of disallowing outside 

legal and contractor internal costs associated with fines and 

penalties as demonstrated by the latter two contractors is 

consistent with applicable FAR terms. 

Outside Legal Costs

The Department also permitted certain facility contractors to 

incur costs for outside legal firms that should not have been 

paid based on the terms of the Engagement Letters between the 

contractors and outside legal firms. When facility contractors 

obtain outside legal services, they use Engagement Letters to 

define the types of costs that are allowed or specifically 

prohibited. Engagement Letters are required by 10 Code of 

Federal Regulations (CFR) Part 719.20 for retained legal 

counsel expected to provide $25,000 or more in legal services 

for a particular matter. We reviewed a number of litigation and 

consulting cases at four contractors, many containing invoices 

for several years of outside legal counsel support for an 

individual case. We selected a small judgmental sample of 

these invoices and noted numerous examples where certain 

facility contractors reimbursed consultants and outside law 

firms for specifically prohibited costs despite contrary 

provisions in their Engagement Letters. 

For example, consultants and outside legal firms were required 

to follow the Federal Travel Regulation, which does not permit 

reimbursement for first class travel and includes maximum per 

diem amounts for hotels, meals, and incidentals unless these 

expenses have been justified and specifically approved. There 

are also additional cost limitations set forth in 10 CFR 719 that 

include, for example, limitations for the cost of photocopying 

________________________________________________________________ 

Page 2 Details of Finding 
 

and reduced billing rates for time spent traveling. However, 

facility contractors paid outside law firms and consultants for 

many expenses that were not permitted in their Engagement 

Letters. Examples of these costs included: 

• One contractor reimbursed three round trip first class 

air tickets for consultants totaling about $4,800; 

• Another contractor paid almost $100 in excess of the 

per diem hotel allowance for one overnight trip taken 

by an outside attorney; 

• One contractor reimbursed a consulting firm more than 

$6,800 in travel expenses with no receipts at all; and, 

• A third contractor paid attorneys their full billing rates 

for time spent traveling. In one case alone, an attorney 

billed full rates for 14 separate driving trips. While we 

could not determine the exact amount of time spent 

traveling versus conducting case work, by our estimates 

these 14 trips included at least $950 in overcharges. 

The same contractor reimbursed another attorney more 

than $2,000 in similar overcharges for several trips. 

While we were unable to select a statistical sample of invoices 

because of record keeping methods and complexities related to 

outside legal counsel invoicing, it is likely, based on the 

internal control problems we identified in invoices we 

randomly selected for review, that the same or similar errors 

are distributed throughout the population of reimbursed legal 

costs. All of the questioned costs we identified were 

reimbursed by the Department. 

Settlement Costs

The Department also permitted two facility contractors to incur 

costs for cases that were settled without a determination of the 

appropriateness of the expenditures. Nine of these cases were 

settled absent a documented review by the Department to 

ensure that each settlement was appropriate. While another 

five were approved, Department officials authorized the 

payments without conducting a required post settlement review 

to ensure that the actions surrounding the settlement did not 

stem from misconduct on the part of the facility contractor. 

The Department also did not object to the payment by one 

contractor for the costs of nine settlements that Department 

Counsel had not approved to be settled. The 10 CFR 719 

________________________________________________________________ 

Page 3 Details of Finding 
 

requires the establishment of a Legal Management Plan that, 

among other things, can be used to establish dollar thresholds 

for settlements that should be reviewed by the Department. 

Although 10 CFR 719 established this requirement in 2001, the 

contractor and Department had not yet finalized the Legal 

Management Plan for the contractor in question at the time of 

our review. These nine settlements were internal personnel 

cases that totaled over $460,000, however, the settlements were 

not submitted to Department Counsel for review. The 

exclusion from review denied the Department the opportunity 

to consider the matters that gave rise to the settlements to 

determine whether the settlements were a prudent expenditure 

of public funds. One of these cases alone was settled for 

$180,000. Subsequent to our review, the contractor and the 

Department finalized a Legal Management Plan requiring that 

all settlements be reviewed and approved by the Department, 

regardless of dollar value. 

In response to our preliminary draft report, officials at the 

location referred to above advised that those cases were 

severance allowances or other internal human resources 

matters. However, these cases were specifically designated as 

legal costs by the contractor. For example, in one case, a 

contractor attorney explicitly wrote that the action was a 

settlement agreement and not a layoff. Also documented were 

the facts that the contractor did not follow their traditional 

layoff process, the amount of the settlement was more than the 

contractor would have calculated for a layoff, and in return the 

contractor had secured a signed release from any possible suit. 

Another case specifically designated the payment as a legal 

settlement. 

 

Two contractors also incurred costs for and settled five cases 

that were not reviewed for allowability. According to 

Department of Energy Acquisition Regulation (DEAR) 

970.5228-1(h), contractors shall not be reimbursed if the cause 

of action was due to contractor managerial willful misconduct, 

lack of good faith, or failure to exercise prudent business 

judgment. According to 10 CFR 719, Appendix, Section 5.1, 

underlying causes for incurrence of costs such as those 

described in the DEAR or other findings of liability, fault, or 

avoidability are a separate consideration and may be 

determinative of the allowability of the legal costs. We 

discovered several cases where field office officials should 

have reviewed the facts of the case to determine whether costs 

should have been disallowed based on the above factors. 

________________________________________________________________ 

Page 4 Details of Finding 
 

For example, one facility contractor incurred costs for a 

settlement and associated legal costs of well over $1 million 

without a fully documented review by the Department of the 

terms and circumstances of the case. In this particular case, 

fraud and breach of contract on the part of a defined contractor 

management official were alleged. The case was settled at the 

direction of the court, and, despite Departmental coordination 

on many aspects of the case, an allowability determination was 

not documented by officials at the field location. At another 

site, the contractor expended funds for potentially unallowable 

costs of defending itself against allegations of management 

retaliation that named defined contractor management 

personnel. The contractor at this location had a series of legal 

cases in our sample that alleged management retaliation for 

certain actions, such as making protected disclosures. Four of 

these cases were settled without a separate analysis by field 

officials to determine the causes of the separate but similar 

cases and whether there was management misconduct. 

To illustrate the importance of reviewing the circumstances 

surrounding various types of settlements, we noted that the 

Department did review the factual basis for a recent wrongful 

termination case and found that approximately 90 percent of 

the multi-million settlement was punitive in nature and 

therefore unallowable. This approach protected the 

Government's rights because the settlement was based on a jury 

decision that found that the contractor acted in a fraudulent, 

willful and reckless manner, making the majority of costs 

unallowable because they were punitive in nature. In the 

interest of protecting taxpayer funds, Government field office 

officials should examine the factual basis behind all prior 

settlements made by contractors to determine whether their 

costs are allowable. 

Implementation of Excessive and potentially unallowable costs were 

of Regulations incurred by the Department because of cost control weaknesses 

at certain sites. The Department incurred legal costs directly 

associated with fines and penalties because neither field site 

office officials nor facility contractor personnel considered 

applicable acquisition standards that prohibit such expenses. 

Other potentially unallowable costs were paid because neither 

the facility contractors nor Department reviewers enforced the 

terms of Engagement Letters and identified and removed nonconforming charges from outside legal contractor invoices 

prior to payment. Facility contractors also paid questionable 

________________________________________________________________ 

Page 5 Details of Finding 
 

settlements because the Department had not established 

required Legal Management Plans to, among other things, 

establish settlement authority amounts. Additionally, certain 

Federal field site officials, in some instances, were not 

conducting reviews of cases to make a determination, as 

required in DEAR 970.5228-1(h) and 10 CFR 719, Appendix, 

Section 5.1, whether contractor management acted with 

potentially questionable business judgment or was displaying a 

pattern of impropriety that might require corrective actions to 

prevent them from recurring. 

Payment of Directly Associated Costs

The Department contractors paid potentially unallowable, 

directly associated costs at two of the four sites we visited 

because the Contracting Officers were not fully considering 

provisions in the FAR applicable to directly associated legal 

costs. One of the Contracting Officers believed that these 

types of costs for outside legal fees were allowable based on 

general provisions in FAR 31.205-47. However, while the 

FAR states that outside legal costs are generally allowable, it 

also specifies at FAR 31.205-47(b) that such costs are 

unallowable if in connection with any violation of a law or 

regulation, i.e. a fine or penalty, that results in a monetary 

penalty. As a matter of clarification, Department headquarters 

officials pointed out that associated costs may be allowable to 

the extent the proceeding is resolved by consent or compromise 

by the Government, but this was not the case with the fines and 

penalties discussed earlier. 

We solicited an opinion from the Department's Office of the 

General Counsel on this topic. The response was an evaluation 

of the FAR 31.205-47 provisions, including a conclusion that 

costs related to imposition of a monetary penalty should be 

disallowed. Additionally, outside legal costs associated with 

fines and penalties were disallowed at the two other locations 

we visited. At these other locations, the Department went one 

step further and also disallowed all of the contractor's internal 

costs associated with the fines and penalties – including 

(in-house) Counsel costs. 

Reimbursement of Other Potentially Unallowable Costs

Questionable costs were also paid because Department and 

contractor invoice reviews were not sufficient to ensure that all 

potentially unallowable costs were discovered and omitted 

________________________________________________________________ 

Page 6 Details of Finding 
 

from payment in accordance with Engagement Letters. The 

Department is responsible for reviewing invoices for outside 

legal services submitted to the Department for reimbursement 

by a facilities contractor. These reviews include all invoices 

unless Streamlined Litigation Management procedures have 

been approved, in which case they are done annually on a 

sample of invoices. The implementation of Streamlined 

Litigation Management procedures at two locations had 

resulted in reduced Federal review because not all invoices are 

included and, in one case, the review had not been conducted 

in several years. Facility contractors must review outside legal 

counsel invoices, which were required to be submitted monthly 

according to the terms and conditions of engagement letters for 

the cases we reviewed. 

At three of the four locations we visited, despite the availability 

of Engagement Letters to identify the terms and conditions of 

the outside attorney's work, and detailed checklists to identify 

prohibited costs, Department and facility contractor officials 

did not identify many costs that, based on our review, should 

have been disallowed. Under procedures established by the 

Department's Office of the General Counsel, both facility 

management contractor Legal Counsel and Department 

Counsel must separately review invoices from outside legal 

firms. At one location, we found that contractor Counsel was 

approving outside legal costs that would normally be 

unallowable without justification or explanation for the 

charges, even after an administrative review of the invoice 

identified the unallowable cost for non-payment. 

Even in cases where either the Department or the facility 

contractors identified and disallowed certain costs such as copy 

expenses that exceed prescribed limits, law firms would 

continue to invoice higher rates month after month afterwards. 

In some cases, our review identified that costs were reimbursed 

by contractors because reviewers failed to identify and disallow 

the costs. Outside legal firms are required to include 

certifications with every invoice stating that "under penalty of 

law" the bill is truthful and accurate, and services and charges 

comply with the terms of engagement. However, we did not 

find any cases where penalties were invoked against outside 

law firms for continuously submitting invoices that did not 

meet these conditions. 

Also, while one of the locations was approved to conduct its 

oversight using Streamlined Litigation Management 

procedures, the required annual review had been performed 

________________________________________________________________ 

Page 7 Details of Finding 
 

only once since 2001. Specifically, the site Counsel's Office 

performed a review of litigation files for Fiscal Year (FY) 2004 

during April and May, 2005. This review noted many 

nonconforming charges including, for example, billings for 

multiple attorneys attending a single meeting, and a law firm 

billing for meals when they were not in travel status. Both of 

these types of costs are not permitted under Department 

regulations without specific justification or advance written 

approval from Department Counsel. However, the report was 

never finalized, so it does not appear that any corrective actions 

were taken. Prior to this, a review had not been conducted 

since April 2001 because there was a two-year delay in filling 

the vacant Counsel position at the site. While the site office 

Counsel attempted to schedule a review in FY 2007, the review 

never occurred. 

Approval of Settlements

One contractor was permitted to incur unapproved settlements 

because the site office had not yet finalized the contractor's 

Legal Management Plan. The purpose of such plans is to 

define, among other things, the interaction between the 

Department and the contractor, the contractor's corporate legal 

approach, and a description of the legal matters that may 

necessitate handling by retained legal counsel. While 10 CFR 

719 required that such a plan be developed in 2001, the plan 

for the particular contractor we reviewed had not been finalized 

and approved by the time we began our review in 2008. As 

evidenced by various memoranda, the lack of a finalized plan 

resulted in a number of instances where the contractor and 

Department field office Counsels were in disagreement with 

legal approaches and other legal issues. For example, the draft 

Plan set forth the requirements for when the contractor must 

obtain Department field office approval to settle contractor 

litigation and claims. Since this Plan was not finally approved, 

however, several settlements were approved by the contractor 

without the knowledge of the Site Office Counsel or the 

Contracting Officer. Subsequent to completion of our audit 

field work we learned that the Plan had been agreed to and had 

been finalized. 

Even now that a Legal Management Plan is in place that, based 

on our reading, requires that all settlements be reviewed, 

contractor counsel asserts that certain personnel related 

settlements are excluded from the Plan's requirements. As 

________________________________________________________________ 

Page 8 Details of Finding 
 

indicated earlier, the contractor reimbursed nine settlements 

without Department approval. However, the contractor 

contends that the settlements were limited to personnel matters. 

As we noted earlier, these settlements were claimed as legal 

costs and specifically designated as settlements in the 

applicable case files. Since these settlements aggregated in the 

hundreds-of-thousands of dollars, we believe clarification of 

how to handle these matters should be a component of the 

Legal Management Plan. 

The Department also allowed payment to two contractors for 

the cases that were settled but not reviewed for allowability 

because it did not conduct and document analyses of whether 

liabilities were caused by "defined" contractor managerial 

personnel's willful misconduct, lack of good faith, or failure to 

exercise prudent business judgment. While such a 

determination would not be warranted in most cases, we did 

find certain cases such as those described earlier that alleged 

fraud, breach of contract, and retaliation against employees that 

made protected disclosures by facility contractor "defined" 

management personnel. 

Funds Better As a result of not fully monitoring costs and finalizing legal 

Spent management plans, the Department is using funds to pay for 

legal costs that could be better spent on activities benefiting the 

Department's mission. In total, the four facility contractors we 

reviewed spent more than $105 million in settlements and 

outside legal costs during the five-year period of our review. 

While a majority of these costs were allowable under the 

Department's regulations, our audit work shows that the total 

amount could be reduced through disallowance of certain costs 

associated with fines and penalties. This amount could also be 

reduced through more diligent cost reviews and consideration 

of the types and similarities of legal cases at the Department's 

facility contractors. 

RECOMMENDATIONS To address the weaknesses associated with the payment of 

unallowable costs and the review and approval of settlements, 

we recommend that: 

1. The Senior Procurement Executive, National Nuclear 

 Security Administration (NNSA): 

a. Issue guidance to ensure that site offices follow 

provisions of the FAR with respect to 

disallowing costs directly associated with 

________________________________________________________________ 

Page 9 Recommendations and Comments 
 

otherwise unallowable costs, including costs for 

facility contractor staff time and efforts; and, 

b. Direct Contracting Officers at two locations to 

review the directly associated costs identified in 

our audit and make allowability determinations, 

and recover unallowable costs as appropriate. 

2. The Senior Procurement Executives for both the 

Department and the NNSA direct Contracting Officers 

to ensure, in conjunction with field site Counsels as 

deemed appropriate, the following actions are taken: 

a. Define amounts for and review high-value 

outside law firm invoices from April 1, 2003, 

through March 31, 2008, identify and make 

allowability decisions on costs that are not in 

accordance with Engagement Letters, and 

recover unallowable costs from facility 

contractors as appropriate; 

b. Require facility contractors to either terminate 

the agreement or impose available remedies in 

cases where outside law firms continue to bill 

for the same unallowable fees that do not adhere 

to the terms and conditions of legal agreements; 

and, 

c. Review the reasons for incurrence of fines 

and/or penalties for certain legal cases, such as 

instances where there is an indication of a 

"defined" contractor management personnel 

failure to exercise prudent business judgment, 

and document an allowability determination 

before agreeing to reimburse such costs. 

3. The Department's Office of the General Counsel (OGC) 

and the NNSA OGC: 

a. Work with field sites to ensure that all locations 

have appropriate Legal Management Plans in 

place; and, 

b. Determine the need to revise regulations to 

require that Legal Management Plans define the 

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Page 10 Recommendations and Comments 
 

types of settlements that would require the 

contractor to obtain the Department's approval. 

MANAGEMENT We received comments from the Associate Administrator

REACTION for Management and Administration, NNSA, including 

technical comments from the NNSA Office of the General 

Counsel. Also, we received comments from the Department’s 

Director, Office of Procurement and Assistance Management 

(OPAM) including technical comments from the Department’s 

Office of the General Counsel (OGC). 

Each of the responding elements expressed some level of 

concurrence with the need to implement actions in the 

recommendations, but suggested alternate actions in many 

cases. Additionally, each responding element questioned the 

applicability of some of the cited regulations, such as 

allowability determinations in cases of potential management 

misconduct and the imposition of financial penalties for outside 

legal firms that submit invoices with unallowable costs. 

NNSA concurred with recommendation 1 and provided 

corrective actions as well as expected implementation dates. 

For recommendations 2 and 3, NNSA either provided alternate 

actions or advised that actions were already in place to address 

the recommendations. For recommendation 2a., NNSA stated 

that most Site Offices conduct a 100 percent review, but 

suggested that the Contracting Officer at each site conduct a 

review of high value invoices to ascertain whether further 

reviews are warranted. For recommendation 2b., NNSA 

suggested that the Department does not have authority to 

require facilities contractors to impose penalties on outside 

legal firms, but did suggest that consideration be given to 

terminating engagements with firms that continue to bill for 

unallowable expenses, and advised that a new Performance 

Evaluation Plan objective will be put in place to evaluate 

contractors' abilities to successfully manage litigation. For 

recommendation 2c., NNSA contends that it currently reviews 

the reasons for incurrence of certain legal cases as a matter of 

course. For recommendation 3, NNSA advises that all Site 

Offices currently have Legal Management Plans in place. 

OPAM offered alternatives to recommendation 2. For 

recommendation 2a., OPAM suggested that the OGC review 

the procedures at each site to ensure they are properly 

implemented and conduct a more in depth review where they 

are not. For recommendation 2b., OPAM suggested the OGC 

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Page 11 Recommendations and Comments 
 

should ensure each contractor consider terminating a law firm's 

service and consider not employing the firm in the future for 

those that continue to bill for unallowable costs. For 

recommendation 2c., OPAM suggested that, rather than 

requiring the Contracting Officer to make a determination 

separate from the OGC, the recommendation should state that 

the OGC ensure it takes extra care in reviewing the underlying 

facts leading to the lawsuit when it sees a pattern of cases 

involving the same issue. 

The OGC made several comments on recommendations 2 and 

3. For recommendation 2a., OGC stated that a review of every 

outside invoice from 2003 to 2008 would be extremely 

resource intensive and may cost more than any return it might 

provide. Also, OGC states that Department counsels already 

review all invoices prior to payment. Further, OGC attempts to 

put the facts of the review into perspective by stating that the 

report identified approximately $300,000 in potentially 

unallowable costs out of about $105 million in settlements and 

outside legal costs, which equates to 0.3 percent of the amount 

approved for reimbursement. 

For recommendation 2b., OGC's comments echo those of 

NNSA and OPAM with regard to considering termination of a 

legal firm and possible refusal to re-hire the firm in the future. 

For recommendation 2c., OGC advises that there is not a 

requirement for a Contracting Officer to make a separate 

determination of cost allowability, and points out that the 

designation of Department counsel as a Contracting Officer 

Representative is meant to provide coordination and a better 

understanding of cost issues. Additionally, OGC points out 

that Department counsel reviews the circumstances of each 

case prior to approving outside counsel costs for 

reimbursement, and in some instances, has resulted in a 

Departmental decision to not approve all or part of the outside 

legal costs. Finally with regard to this recommendation, OGC 

refers to the 48 CFR 952.231-71 clause which states that the 

willful misconduct, lack of good faith, etc. must have been 

committed by one of the managerial personnel listed in the 

facilities contract. 

For recommendation 3, OGC agrees that it should ensure Legal 

Management Plans are in place at all locations, but states that 

the provisions of 10 CFR 719 do not require the plans have a 

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Page 12 Recommendations and Comments 
 

specific citation on settlement authority, although such a 

citation could exist and it would be a good idea to encourage 

inclusion of such authority. 

AUDITORS Management's comments and alternatively proposed 

COMMENTS actions, in most cases, are largely responsive to our 

recommendations and should, when fully implemented, result 

in improvements to the Department's management of outside 

legal costs. As appropriate, we made revisions to our report 

and recommendations in response to management comments. 

Recommendation 2 is not meant to suggest that Contracting 

Officers bear the full burden of managing outside legal costs or 

that they should be required to conduct independent 

evaluations and analyses. We agree it is logical that the 

Department's Counsel be heavily involved in these actions, and 

have added clarifying language to the recommendation. 

However, only the Contracting Officers have the ultimate 

authority to direct facilities contractors to take actions or 

disallow certain costs. 

With regard to recommendation 2a., we believe NNSA's 

suggestion to review high-dollar invoices and expand the 

review if it is deemed necessary is responsive and addresses the 

perception that the costs of a review of all invoices could 

outweigh its benefit. To that end, we revised the 

recommendation from the Draft report to include identification 

of high-value invoices for review. We do not believe that a 

review limited to procedures at each site would be fully 

beneficial because our audit demonstrated that existing 

procedures were not completely effective. For example, 

procedures existed to review outside costs, including detailed 

checklists, but some unallowable costs were still reimbursed. 

As another example, a procedure existed for one field site to 

conduct annual audits of outside costs, however, that review 

had been conducted one time since 2001. 

For recommendation 2b., we agree that consideration of 

terminating an agreement with an outside firm for continuing 

to submit unallowable costs, and potentially refusing to hire the 

firm again, would be penalties that could improve the 

management of outside legal costs. However, we did not 

identify any instances where field sites were considering such 

penalties and believe some proactive actions are necessary to 

ensure these options are considered in the future. Specifically, 

there were no written records to indicate field sites were 

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Page 13 Recommendations and Comments 
 

considering these or any other penalties. For recommendation 

2c., we are not asserting that a Contracting Officer be forced to 

make an allowability determination separate from Department 

Counsel, nor are we suggesting that there is requirement to 

make such a determination in every legal case. As discussed 

earlier, the Contracting Officer should "ensure" this action is 

taken. We agree with management's assertion that the 

Contracting Officer should be relying on the expertise of 

Department Counsel, and changed the wording of our 

recommendation to make this more clear. However, any 

actions to disallow costs as a result of Counsel's determination 

are ultimately the responsibility of the Contracting Officer. 

Further, our report states that an allowability determination 

should have been made in five specific cases in which there 

was at least the appearance that defined contractor management 

acted with willful misconduct, lack of good faith, or failure to 

exercise prudent business judgment. We recognize this where 

we note that such a determination would not be warranted in 

most cases, however these five cases alleged fraud, breach of 

contract, and retaliation against employees that made protected 

disclosures by defined facility contractor management 

personnel. Each of these five cases alleged such actions 

against management personnel specifically named in the 

facilities management contract. Given these circumstances, we 

believe it is prudent for officials at the field site to exercise 

their option under 10 CFR 719, Appendix 5.1, to make such a 

determination. Also, although not specifically a requirement of 

the CFR, we believe it would be prudent to document such an 

analysis since these types of considerations were not 

transparent in the files we reviewed. Such an analysis was 

created for one of the cases we reviewed. 

For recommendation 3, we agree with OGC that the CFR does 

not specifically require settlement authority to be included in a 

Legal Management Plan. During our exit conference, OGC 

management stated that the CFR had been in its current form 

for approximately eight years and that it may be time for a 

review and revision of this regulation in light of the findings in 

our report. We believe this is a positive step toward improving 

the management of contractor fines, penalties and legal costs. 

Accordingly, we modified our report to recommend that 

management determine the need to revise the regulation to add 

direction on the types of settlements that require Department 

review and approval. 

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Page 14 Recommendations and Comments 
 

Finally, we believe OGC did not give sufficient consideration 

to a number of facts set forth throughout the audit report in its 

assessment that the audit identified approximately $300,000 in 

potentially unallowable costs of about $105 million in 

settlements and outside legal costs, which equates to 0.3 

percent. While we cited only specific examples, unless the 

control weaknesses identified in our report are corrected, it is 

likely that additional problems will recur. 

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Page 15 Recommendations and Comments 
Appendix 1 

OBJECTIVE To determine whether the Department of Energy (Department) 

has effective processes for managing contractor fines, penalties 

and other legal costs. 

SCOPE We conducted the audit from April 2008 to May 2009 at 

Department of Energy Headquarters in Washington, D.C., and 

four facility contractors. We did not disclose the identity of the 

contractors chosen because of our concerns related to 

confidentiality requirements for legal settlements and details of 

ongoing legal cases. 

In addition, we collected information from all facility 

contractors in the Department to determine the total amount of 

fines and penalties, and outside legal costs. Our review 

included fines, penalties and legal costs, including settlements, 

incurred from April 1, 2003, through March 31, 2008. 

METHODOLOGY To accomplish the audit objective, we: 

• Reviewed applicable Federal laws and regulations 

related to the management of contractor fines, penalties 

and other legal costs; 

• Reviewed policies and procedures for administration of 

Engagement Letters, Legal Management Plans, and 

other requirements for outside legal costs at local field 

sites; 

• Held discussions with Department and facility 

contractor officials regarding management of fines, 

penalties and other legal costs; 

• Conducted a data request to obtain information on all 

fines and penalties, and outside legal costs at each of 

the Department's facility contractors; and, 

• Selected a statistical sample of outside legal costs for 

sites visited, and examined a judgmental number of 

invoices from legal firms to identify whether costs were 

in accordance with Engagement Letters. 

We conducted this performance audit in accordance with 

generally accepted Government auditing standards. Those 

standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis 

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Page 16 Objective, Scope, and Methodology 
Appendix 1 (continued) 

for our findings and conclusions based on our audit objectives. 

We believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our audit 

objectives. Accordingly, the audit included reviews of 

Department and regulatory policies, procedures, and 

performance measures related to the Department's facility 

contractor fines, penalties and other legal costs. We assessed 

performance measures in accordance with the Government 

Performance and Results Act of 1993 and concluded that the 

Department had not established performance measures related 

to contractor fines, penalties and other legal costs. 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. We did not conduct a full reliability assessment 

of computer-processed data. However, we deemed the data to 

be sufficiently reliable to achieve our audit objective. 

The exit conference was held with management on 

September 10, 2009. 

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Page 17 Objective, Scope, and Methodology 
Appendix 2 

PRIOR REPORTS

Office of Inspector General

• Inspection of Administrative Management Procedures for Legal Services Acquired by 

Selected Management and Operating Contractors, (DOE/IG-0363, December 1994). 

The inspection found that additional management attention was needed by the 

Department of Energy (Department) to improve the controls over the acquisition of 

outside legal services, including litigation, by Management and Operating (M&O) 

contractors. The inspection found that acquisitions of legal services by M&O 

contractors did not always go through approved procurement systems; that payments 

were being made to outside law firms without any written agreement to support the 

scope or nature of the services being provided; and that reviews of the costs for 

outside legal services were being reviewed without regard to the Federal and 

Department Acquisition Regulations cost principles, and without the benefit of any 

written agreement which outlined the basis for incurring costs. Several 

recommendations were made to improve the controls over acquisition of outside 

litigation services obtained by M&O contractors, and to improve the review of 

charges for these services. 

U.S. Government Accountability Office

• Department of Energy: Reimbursement of Contractor Litigation Costs, (GAO-04-

148R, November 2003). This study was performed in response to an information 

request to determine the extent to which the Department reimbursed its contractors' 

litigation costs and the processes for doing so. The Government Accountability 

Office (GAO) found that the Department reimbursed its contractors for $330.5 

million in litigation costs from Fiscal Year 1998 through March 2003, including 

$259.4 million for litigation costs and $81.1 million for judgments and settlements. 

The GAO also determined that the criteria the Department used to reimburse 

contractors depended on the nature of the case, but that the Department paid all 

reasonable costs in most cases with several exceptions. Among others, this included 

instances of when the contractor's actions involved either willful misconduct, lack of 

good faith; or failure to exercise prudent business judgment by the contractor's 

managerial personnel. 

• Department of Energy: Contractor Litigation Costs (GAO-02-418R, March 2002). 

This study was performed in response to an information request to determine what 

laws and regulations provide for the Department to reimburse its contractors for the 

litigation, settlement and judgment costs in cases brought against them, and provide 

information as to the number of cases and the costs that the Department reimbursed 

its contractors and that contractor's paid themselves. The report stated that the 

Federal and Department acquisition regulations provide for the Department to 

reimburse contractors reasonable costs. Such costs are not reimbursable if the 

liability is related to the contractor's willful misconduct, lack of good faith, or failure 

to exercise prudent business judgment.

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Page 18 Prior Reports 
Appendix 2 (continued) 

• Managing DOE: The Department of Energy is Making Efforts to Control Litigation 

Costs (GAO/RCED-95-36, November 1994). GAO found that the Department had 

not kept centralized data on costs reimbursed to contractors for outside litigation, and 

lacked effective criteria spelling out what costs it would reimburse. As a result, the 

Department was being billed at higher rates than other federal agencies for legal fees, 

travel, word processing and photocopying and legal bills were being reimbursed with 

little or no Departmental oversight. The audit found that the Department had begun 

to strengthen its controls over legal costs. In particular, the Department issued 

specific cost guidelines and instituted procedures for periodically reporting all 

litigation costs. In addition, the Department was also establishing an audit function to 

enable it to conduct detailed reviews of the bills it receives for legal services, and 

consolidating cases involving multiple contractors and law firms to improve 

management and reduce costs.

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Page 19 Prior Reports 
Appendix 3 

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Page 20 Management Comments 
Appendix 3 (continued) 

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Page 21 Management Comments 
Appendix 3 (continued) 

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Page 22 Management Comments 
Appendix 3 (continued) 

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Page 23 Management Comments 
Appendix 3 (continued) 

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Page 24 Management Comments 
IG Report No. DOE/IG-0825

CUSTOMER RESPONSE FORM 

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