NATIONAL NUCLEAR 

SECURITY 

ADMINISTRATION

Laboratories’ Indirect 

Cost Management Has 

Improved, but 

Additional 

Opportunities Exist

Report to the Subcommittee on Energy 

and Water Development, Committee on 

Appropriations, U.S. Senate 

June 2013

GAO-13-534

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-534, a report to the 

Subcommittee on Energy and Water 

Development, Committee on Appropriations, 

U.S. Senate 

June 2013

NATIONAL NUCLEAR SECURITY 

ADMINISTRATION 

Laboratories’ Indirect Cost Management Has 

Improved, but Additional Opportunities Exist

Why GAO Did This Study

NNSA, a semiautonomous agency 

within DOE, oversees the nation’s 

nuclear security programs. M&O 

contractors manage NNSA’s facilities, 

including its national security 

laboratories––Lawrence Livermore, 

Los Alamos, and Sandia. Each year, 

M&O contractors spend billions of 

dollars to manage and operate these

laboratories. Costs include both direct 

costs—which can be identified with a 

specific objective or program—and 

indirect costs, such as management, 

administrative, and facility costs. 

Federal Cost Accounting Standards 

give M&O contractors flexibility in how 

costs are classified as direct or indirect 

and allocated to programs. 

GAO was asked to review M&O 

contractor indirect cost management.

GAO examined (1) whether laboratory 

M&O contractors' practices differ for 

allocating indirect costs and, if so, how; 

(2) the extent to which NNSA ensures 

that laboratory M&O contractors’ 

allocated indirect costs are accurate; 

and (3) the extent to which NNSA 

ensures that laboratory M&O 

contractors’ indirect costs are 

reasonable. GAO reviewed NNSA and 

laboratory M&O contractor data and 

documents and spoke with DOE and

NNSA officials and M&O contractors. 

What GAO Recommends

GAO recommends DOE clarify the 

uses of the data gathered through the 

Institutional Cost Reporting initiative, 

conduct periodic risk assessments, 

and incorporate more specific 

requirements for benchmarking in its 

laboratory M&O contracts. DOE 

generally agreed with GAO’s 

recommendations. 

What GAO Found

The National Nuclear Security Administration’s (NNSA) management and 

operating (M&O) contractors differ in how they classify and allocate 

indirect costs at NNSA laboratories. Although different approaches are

allowed by Cost Accounting Standards, these differences limit the ability 

to compare program costs across the laboratories. Recognizing the 

limitations of its current cost data, the Department of Energy (DOE) and 

NNSA are implementing the Institutional Cost Reporting initiative intended 

to create a standardized report of certain costs, including many indirect 

costs. However, DOE is uncertain how it will use the data gathered by this 

initiative, and these efforts may provide only limited improvements 

because the data will continue to only be reported at an aggregate level.

NNSA examines M&O contractors’ models for allocating indirect costs for 

compliance with Cost Accounting Standards’ requirements at least 

annually, which helps ensure accuracy. NNSA has identified instances 

when these models did not comply with these requirements, but NNSA 

has worked with M&O contractors to address these issues. NNSA 

generally relies on the M&O contractors’ internal audits, however, to 

assess whether M&O contractors’ day-to-day cost allocation practices 

conform to disclosed cost allocation models. NNSA reviews some 

summary data to independently assess day-to-day compliance with Cost 

Accounting Standards but does not conduct independent audits. DOE’s 

Office of Inspector General (OIG) has audit authority at NNSA 

laboratories. OIG officials stated that the frequency and scope for 

conducting audits to assess contractors’ compliance with Cost Accounting 

Standards should be based on the level of risk. However, NNSA and OIG 

officials and M&O contractors hold varying opinions regarding the level of 

risk that inaccurate indirect cost allocation practices at the laboratories

pose. In the absence of formal, periodic risk assessments, NNSA may not 

have a well-documented basis for its decisions regarding the type, timing, 

and extent of future monitoring or oversight.

NNSA reviews M&O contractors’ cost data and other information to 

assess the reasonableness of their costs, including indirect costs. NNSA 

also uses other means to help ensure the reasonableness of these costs. 

For example, NNSA’s contracts require M&O contractors to regularly 

benchmark their costs to other contractors and industry. These 

requirements, however, do not specify the areas that should be 

examined, how frequently benchmarking should occur, and what process 

should be used for implementing any needed corrective actions. As a 

result, M&O contractor efforts to benchmark costs varied across 

laboratories. View GAO-13-534. For more information, 

contact David C. Trimble at (202) 512-3841 or 

trimbled@gao.gov. 
Page i GAO-13-534 Indirect Costs at NNSA Laboratories 

Letter 1 

Background 4

M&O Contractors Differ in How They Allocate Indirect Costs, and 

Efforts to Standardize Cost Reporting May Provide Limited 

Improvements 7

NNSA Takes Some Steps to Assess the Accuracy of M&O 

Contractors’ Indirect Cost Allocations 14

NNSA Reviews M&O Contractor Information and Uses Other 

Means to Help Ensure the Reasonableness of Indirect Costs 20

Conclusions 24

Recommendations for Executive Action 25

Agency Comments and Our Evaluation 26

Appendix I Objectives, Scope, and Methodology 28

Appendix II Federal Cost Accounting Standards 31

Appendix III Comments from the National Nuclear Security 

Administration 33

Appendix IV GAO Contact and Staff Acknowledgments 38

Table

Table 1: Cost Accounting Standards 6

Figure

Figure 1: Overview of Management and Operating (M&O) 

Contractor Process for Identifying Costs as Direct or 

Indirect and Allocating to Programs 9

Contents 
Page ii GAO-13-534 Indirect Costs at NNSA Laboratories 

Abbreviations

CAPE Cost Assessment and Program Evaluation

DOD Department of Defense

DOE Department of Energy

M&O Management and Operating 

NNSA National Nuclear Security Administration

OFFM Office of Field Financial Management

OIG Office of Inspector General

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Page 1 GAO-13-534 Indirect Costs at NNSA Laboratories 

441 G St. N.W.

Washington, DC 20548

June 28, 2013

The Honorable Dianne Feinstein

Chairman

The Honorable Lamar Alexander

Ranking Member

Subcommittee on Energy and Water Development

Committee on Appropriations

United States Senate

The National Nuclear Security Administration (NNSA)—a 

semiautonomous agency within the Department of Energy (DOE)—

manages the nation’s nuclear security programs.1

To manage and operate its laboratories, NNSA relies on management 

and operating contractors, known as M&O contractors, and reimburses 

them for the costs incurred in carrying out NNSA’s missions. These M&O 

contractor costs include both direct costs—costs that can be directly 

identified with specific cost objectives such as a program or project—and 

indirect costs—costs of activities that cannot be specifically identified with 

a specific cost objective but which indirectly support a program, such as 

management, administrative, and facility costs. M&O contractors are 

required to follow federal requirements governing NNSA indirect cost 

management. These include Cost Accounting Standards, which contain 

The primary missions 

of these programs are to maintain the safety, security, and effectiveness 

of the U.S. nuclear weapons stockpile; reduce the global threat posed by 

nuclear proliferation and terrorism; and provide nuclear propulsion 

systems for the U.S. Navy. NNSA undertakes these responsibilities 

through eight sites. Three of these sites—Lawrence Livermore National 

Laboratory, Los Alamos National Laboratory, and Sandia National 

Laboratories—are national security laboratories. These three laboratories 

are critical to carrying out NNSA’s mission to provide management and 

security of the nation’s nuclear weapons programs. The laboratories also 

support additional missions, including nuclear nonproliferation activities 

and work for other federal agencies such as the Departments of Defense 

and Homeland Security. In fiscal year 2012, NNSA’s annual appropriation 

was $11 billion, $4.64 billion of which funded these three laboratories. 

 

1

Congress created NNSA as a semiautonomous agency within the Department of Energy 

in 1999 (Title 32 of the National Defense Authorization Act for Fiscal Year 2000, Pub. L. 

No. 106-65, § 3201 et seq.). 

 
Page 2 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

requirements for the measurement, assignment, and allocation of costs to 

government contracts and provide criteria for the classification and 

allocation of indirect costs. These standards also provide contractors with 

some flexibility in how they classify and allocate indirect costs.2 In 

addition, the Federal Acquisition Regulation requires that these costs be 

reasonable, among other things. In recent years, according to NNSA 

officials, indirect costs have accounted for about half of these three 

laboratories’ budgets. 

We have reported on NNSA’s indirect costs in the past. In 2005, we 

reported that indirect costs at NNSA’s laboratories could not be readily 

compared because of differences in how indirect costs are identified and 

allocated to programs, and because of differences in the facilities’ 

missions, corporate structures, and accounting systems.3 In 2010, we 

reported that NNSA does not collect reliable and timely information on 

indirect costs at the NNSA sites, including the laboratories, which is 

crucial for effective management of government operations and for 

oversight.4 In 2012, we identified opportunities for the laboratories to 

streamline their support functions, which include many indirect costs.5

Further, NNSA’s and the DOE Office of Environmental Management’s 

contract and project management for major projects—$750 million or 

greater—remain on our list of programs at high risk of fraud, waste, 

abuse, and mismanagement or are in most need of transformation.6 In 

addition to our concerns, the Department of Defense (DOD), which 

depends on NNSA to assess and maintain the reliability and safety of the 

nuclear weapons stockpile and helps fund these efforts, has expressed 

concerns about NNSA’s ability to accurately understand and assess its 

major program costs. The National Defense Authorization Act for 2013,7

 

2

See appendix II for description of Cost Accounting Standards applicable to laboratory 

M&O contractors. 

3

GAO, Department of Energy: Additional Opportunities Exist for Reducing Laboratory 

Contractors’ Support Costs, GAO-05-897 (Washington, D.C.: Sept. 9, 2005). 

4

GAO, Nuclear Weapons: Actions Needed to Identify Total Costs of Weapons Complex 

Infrastructure and Research and Production Capabilities, GAO-10-582 (Washington, D.C.: 

June 21, 2010).

5

GAO, Department of Energy: Additional Opportunities Exist to Streamline Support 

Functions at NNSA and Office of Science Sites, GAO-12-255 (Washington, D.C.: 

Jan. 31, 2012).

6

GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: Feb. 14, 2013). 

7

Pub. L. No. 112-239, 126 Stat. 1632 (2013).
Page 3 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

as well as the Nuclear Weapons Council,8

You asked us to review M&O contractor indirect cost management at 

NNSA’s national security laboratories. Our report examines: (1) whether 

laboratory M&O contractors' practices differ for allocating indirect costs 

and if so, how; (2) the extent to which NNSA ensures that laboratory M&O 

contractors’ allocated indirect costs are accurate; and (3) the extent to 

which NNSA ensures that laboratory M&O contractors’ indirect costs are 

reasonable.

tasked the Office of the 

Secretary of Defense’s Cost Assessment and Program Evaluation 

(CAPE) to work with NNSA to develop more accurate cost estimates for 

its weapons programs.

To determine whether laboratory M&O contractors’ practices differ for 

allocating indirect costs, and if so, how, we reviewed federal Cost 

Accounting Standards, which in part guide M&O contractor allocation 

practices, and NNSA and M&O contractor documentation associated with 

complying with these standards. We met with officials from NNSA’s Office 

of Field Financial Management (OFFM) in Albuquerque, New Mexico. We 

also visited Lawrence Livermore, Los Alamos, and Sandia national 

laboratories and interviewed NNSA field office officials and M&O 

contractors. We reviewed NNSA and contractor documents showing the 

actions taken by NNSA and the M&O contractors to manage indirect 

costs at the three laboratories, as well as data on these costs. We 

reviewed indirect cost data used by M&O contractors to document 

compliance with Cost Accounting Standards and manage indirect costs 

and met with knowledgeable NNSA officials and M&O contractors to 

assess the reliability of these data. We found them to be sufficiently 

reliable for the purposes of this report. To gather additional perspectives 

on how differences in cost allocation practices affect stakeholders, we 

met with officials from DOD’s CAPE to discuss their review of the 

laboratories’ costs and possible ways to improve the data collected that is 

needed to support cost analysis informed decision making across the 

NNSA laboratories and sites. 

To examine the extent to which NNSA ensures that laboratory M&O 

contractors’ reported indirect costs are accurate, we reviewed reports 

prepared by each contractor’s internal audit function. We also interviewed 

 

8

The Nuclear Weapons Council coordinates activities jointly managed by DOD and DOE 

to support the nuclear stockpile. 
Page 4 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

NNSA officials and M&O contractors to discuss steps taken to ensure 

compliance with federal Cost Accounting Standards and interviewed 

officials from the DOE Office of Inspector General (OIG) to determine 

their role in assessing M&O contractors’ compliance. 

To examine the extent to which NNSA ensures that laboratory M&O 

contractors’ indirect costs are reasonable, we reviewed pertinent 

documents and interviewed NNSA officials and M&O contractors about 

steps taken to assess the reasonableness of indirect costs. We also 

reviewed the M&O contracts in place in fiscal year 2012 and fiscal year 

2012 performance evaluations of the laboratory M&O contractors to 

identify the financial incentives, if any, provided to M&O contractors to 

manage costs, including indirect costs. We reviewed studies completed 

during the period from 2008 to 2012 to assess the reasonableness of 

laboratories’ costs. Additional details on our objectives, scope, and 

methodology can be found in appendix I.

We conducted this performance audit from April 2012 to June 2013 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 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. 

M&O contractors operate and maintain NNSA’s three national security 

laboratories, as well as the infrastructure necessary to support the 

nuclear weapons stockpile and the capabilities to conduct the scientific, 

technical, engineering, and production activities that ensure the continued 

safety and reliability of the stockpile. These laboratories perform various 

forms of weapons research and development activities as follows:

• Los Alamos National Laboratory in Los Alamos, New Mexico, 

operated by Los Alamos National Security, LLC,9

 

9

Los Alamos National Security, LLC, is an organization managed by the University of 

California; Bechtel National, Inc.; The Babcock & Wilcox Company; and URS Corporation. 

is responsible for 

nuclear components and providing unique capabilities such as 

neutron scattering and radiography. Los Alamos also manufactures 

plutonium components and weapons detonators.

Background
Page 5 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

• Lawrence Livermore National Laboratory in Livermore, California, 

operated by Lawrence Livermore National Security, LLC,10

• Sandia National Laboratories in Albuquerque, New Mexico, and 

Livermore, California, operated by Lockheed Martin Corporation, is 

primarily responsible for nonnuclear components, including 

environmental testing of nuclear weapons systems, nonnuclear 

component engineering, and some nonnuclear component production.

is 

responsible for nuclear components and providing unique capabilities 

in high-energy density physics; high explosives research, 

development, and assessment; and environmental containment of 

high-hazard experiments.

NNSA and DOE officials are responsible for a variety of oversight 

functions at the laboratories. For example, NNSA oversees and conducts 

annual performance reviews of its M&O contractors at each laboratory. 

OFFM, which includes the field Chief Financial Officer, is primarily 

responsible for ensuring the integrity of the laboratories’ financial 

management systems, including the proper allocation of direct and 

indirect costs. In addition, NNSA maintains an on-site presence at each of 

the laboratories through field offices that assist in the daily management 

of the M&O contractor. The DOE OIG, which has audit authority at NNSA 

laboratories, assists NNSA in carrying out its oversight responsibilities by 

conducting independent audits as necessary.11

In general, federal contractors such as NNSA’s M&O contractors are 

subject to federal Cost Accounting Standards. These standards provide 

direction for the consistent and equitable distribution of contractors’ costs 

to help federal agencies more accurately determine the actual costs of its 

contracts. Table 1 briefly describes Cost Accounting Standards. Appendix 

II describes these standards in more detail. 

 

 

10Lawrence Livermore National Security, LLC, is an organization managed by Bechtel 

National, University of California, Babcock and Wilcox, Washington Division of URS 

Corporation, and Battelle. 

11NNSA relies on the combined efforts of the DOE OIG, OFFM, M&O contractor internal 

audit management, and others, as outlined in the Cooperative Audit Strategy published in 

1992, as well as other audit and assessment processes, to monitor indirect and direct 

costs on an ongoing basis. 
Page 6 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

Table 1: Cost Accounting Standards 

Cost 

accounting 

standard Brief description

401 Requires consistency in estimating, accumulating, and reporting costs

402 Requires consistency in allocating cost incurred for the same purpose

403 Addresses allocation of home office expenses

404 Addresses capitalization of tangible assets

405 Addresses accounting for unallowable costs

406 Addresses cost accounting period

407 Addresses use of standard costs for direct material and direct labor

408 Addresses accounting for costs of compensated personal absences

409 Addresses depreciation of tangible capital assets

410 Addresses allocation of business unit general and administrative 

expense to cost objectives

411 Addresses accounting for acquisition costs of material

412 Addresses composition and measurement of pension costs

413 Addresses adjustment and allocation of pension costs

414 Addresses cost of money as an element of the cost of facilities capital

415 Addresses accounting for the cost of deferred compensation

416 Addresses accounting for insurance costs

417 Addresses cost of money as an element of the cost of capital assets 

under construction

418 Addresses allocation of direct and indirect costs

420 Addresses accounting for independent research and development costs 

and bid and proposal costs

Sources: GAO analysis based on information provided by NNSA officials and general Cost Accounting Standards information. 

Note: Cost Accounting Standard 419 was consolidated with Cost Accounting Standard 418 and 

therefore no longer exists.

In addition to Cost Accounting Standards, M&O contractors, DOE, and 

NNSA must comply with other federal requirements, including the Federal 

Acquisition Regulation and DOE financial management and accounting 

orders. In particular, the Federal Acquisition Regulation applies to federal 

agencies to help regulate the policies and procedures for acquisitions for 

the government. A requirement of this regulation is that a contractor’s 

costs must be reasonable.
Page 7 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

We previously reported that indirect costs could not be readily compared 

across laboratories and discussed steps DOE has taken to try to provide 

more comparability of its costs.12 Specifically, in 2005, we reported that 

differences in how indirect costs are identified and allocated to programs 

and differences in the facilities’ missions, corporate structures, and 

accounting systems affected the comparability of costs across 

laboratories.13 In that report, we noted that while DOE required its M&O 

contractors to separately report data on costs to support missions, such 

as administrative support, these costs could not be readily compared. 

These include costs that are classified as both direct and indirect. Further, 

in 2012, in response to limitations in these data, we reported that DOE 

was trying to improve its ability to oversee its M&O contractors’ costs 

through the implementation of the Institutional Cost Reporting initiative.14

Specifically, this initiative is a multiyear effort that aims to collect certain 

cost data and report them at an aggregate level across broad cost 

categories such as maintenance and central administrative support. 

M&O contractors differ in how they classify and allocate indirect costs, 

which continues to make it difficult for NNSA, Congress, and others to 

compare program costs across laboratories. Recognizing the limitations 

of its cost data, DOE and NNSA are implementing the Institutional Cost 

Reporting initiative, but this initiative may only provide limited 

improvements over existing data. 

 

12GAO-05-897 and GAO-12-255. 

13GAO-05-897. 

14GAO-12-255. 

M&O Contractors 

Differ in How They 

Allocate Indirect 

Costs, and Efforts to 

Standardize Cost 

Reporting May 

Provide Limited 

Improvements 
Page 8 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

M&O contractors’ differ in how they allocate indirect costs to specific 

programs, as allowed by Cost Accounting Standards. To allocate costs to 

programs, M&O contractors classify costs as either direct or indirect. 

Direct costs, such as labor and materials, are assigned to the benefitting 

program or programs. Indirect costs—those costs that cannot be 

assigned to a particular program such as costs for administration and site 

support—are accumulated, or grouped, into indirect costs pools. The 

M&O contractor estimates the amount of indirect costs (accumulated into 

indirect cost pools) that will need to be distributed to each program and 

adjusts the costs to actual costs by the end of the fiscal year. The 

contractor then distributes these costs based on a rate in accordance with 

the cost allocation model. Typically, labor costs receive a higher 

allocation of indirect costs than do costs such as direct material 

expenditures. The final program cost is the sum of the total direct costs 

plus the indirect costs distributed to the program (see fig. 1). 

Differences in How M&O 

Contractors Allocate 

Indirect Costs Limit the 

Comparability of Program 

Costs across Laboratories
Page 9 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

Figure 1: Overview of Management and Operating (M&O) Contractor Process for Identifying Costs as Direct or Indirect and 

Allocating to Programs 

Note: We use the term programs in this report to mean efforts managed by M&O 

contractors.

In implementing this allocation process, however, similar costs can be 

allocated differently because M&O contractors’ cost allocation models, 

which outline the M&O contractor’s structure for identifying and allocating 

indirect costs, differ. Officials in NNSA’s OFFM said that because of the 

flexibility the Cost Accounting Standards provide, NNSA does not have 

the authority to require M&O contractors to classify and allocate costs in a 

uniform manner. Specifically, M&O contractor cost allocation models 
Page 10 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

differ in how they (1) classify costs as either direct or indirect, (2) 

accumulate these costs into indirect cost pools, and (3) distribute indirect 

costs to specific programs. For example:

• Classification. M&O contractors differ in how they classify costs as 

direct or indirect. For example, M&O contractors at Los Alamos told 

us they make significant use of service centers—departments which 

perform specific technical or administrative services for programs 

such as for telecommunications and computing and separately assign 

these costs directly to the benefitting laboratory department 

overheads or programs. In total, service center costs for fiscal year 

2012 totaled around $180 million at Los Alamos. In contrast, M&O 

contractors at Lawrence Livermore reported making limited use of 

service centers—their costs totaling around $20 million for fiscal year 

2012—and instead classified these costs as indirect. Lawrence 

Livermore officials said that they conducted a business process 

analysis, which found that it was more efficient and cost-effective for 

their laboratory to allocate these costs through an indirect-cost pool 

than to try to develop and administer service centers that would then 

charge each program directly. 

• Accumulation. M&O contractors differ in how they accumulate indirect 

costs into indirect-cost pools. For example, the M&O contractor at 

Sandia used both program management and division support indirectcost pools to accumulate certain indirect support costs that could not 

be charged to specific projects. The M&O contractors at Los Alamos 

and Lawrence Livermore recovered these costs through different 

indirect-cost pools such as program office overhead and site support. 

For fiscal year 2011, we found that M&O contractors accumulated 

costs into differing numbers of indirect-cost pools, with one site using 

as few as 4 pools and another using as many as 11.

• Distribution. M&O contractors differ in how they distribute indirect 

costs accumulated into indirect-cost pools to programs. For example, 

in fiscal year 2013, the M&O contractor at Lawrence Livermore 

distributed General and Administrative costs—costs incurred for the 

administration of the lab such as executive management and human 

resources—to total costs excluding materials and subcontract costs 

incurred by programs, while the M&O contractor at Los Alamos 

distributed these costs to total program costs including those for labor, 

materials, and subcontract costs. 
Page 11 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

M&O contractors’ cost allocation models have also substantially changed 

over time. For example, according to M&O contractor documentation for 

Los Alamos, the M&O contractor substantially changed and simplified its 

cost allocation model in fiscal year 2013 to improve compliance with Cost 

Accounting Standards and increase the transparency of these costs. 

M&O contractor documentation outlining the major changes indicated that 

these changes increased administrative efficiency at the laboratory. While 

the change in the cost allocation model did not change the total amount of 

indirect costs allocated at the laboratory, the changes did affect the 

amount of indirect costs allocated to certain program costs, such as the 

cost of subcontractors employed at the laboratory and construction 

projects, which now received a greater distribution of indirect costs. The 

M&O contractor at Lawrence Livermore also substantially changed its 

cost allocation model in recent years. For example, for fiscal years 2005 

to 2013, the M&O contractor decreased the number of different rates 

used to allocate indirect costs to its programs from 184 to 12. The M&O 

contractor at Sandia has also substantially changed its cost allocation 

model since fiscal year 2010. For example, the M&O contractor combined 

certain indirect pools and changed the amount of indirect costs allocated 

to some program costs, such as those for subcontractor labor.

Because of the differences in how M&O contractors allocate indirect costs 

and changes in allocation practices over time, it remains difficult to 

compare program costs either across laboratories or at an individual 

laboratory over time. In particular, it is unclear whether the allocation 

differences or other factors, such as more effective program 

management, were the primary cause for the difference in program costs. 

Specifically, differences in how costs are classified as either indirect or 

direct, accumulated into indirect-cost pools, and distributed to specific 

programs can impact the ratio of indirect to total program costs at the 

laboratories. This ratio is, in part, used by Congress to compare M&O 

contractor performance. However, as we have previously reported, this 

ratio alone should not be used as a tool to compare performance as it 

does not account for the myriad factors that can affect the ratio of indirect 

to total program costs.15

 

15

Specifically, data on these costs do not account 

for differences in M&O contractor allocation practices or differences in 

laboratories’ mission, size, age, or condition, which affects costs. For 

example, the maintenance costs for a 50-year-old manufacturing facility 

will likely be higher than those of a modern research facility. 

GAO-05-897. 
Page 12 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

DOE officials noted that Cost Accounting Standards do not require all 

contractors to use the same methodology to allocate indirect costs and 

that project management and cost estimation can be conducted through a 

variety of project management tools. However, GAO has previously noted 

shortcomings with data collected, as well as its use by DOE and NNSA to 

manage projects and estimate costs. For example, in 2010, we reported 

that NNSA cannot accurately identify the total costs to operate and 

maintain weapons facilities and infrastructure. In 2011, we reported that 

NNSA needs more comprehensive infrastructure and workforce data to 

improve its enterprisewide decision making. Further, in 2012, we 

reported that NNSA lacked the analytical capability needed to review 

proposals for program activities and verify cost estimates. Additionally,

according to a senior CAPE official responsible for working with NNSA to 

develop more accurate cost estimates for its weapons programs, the cost 

data collected by NNSA’s M&O contractors has shortcomings. According 

to the official, M&O contractors organize their cost data to meet two 

primary goals. First, contractors want to ensure that they are fully 

reimbursed for their costs. Second, contractors want to ensure that they 

fairly allocate indirect costs to programs and projects. However, the 

CAPE official stated that these data are of limited use to support decision 

making for programs, projects, and activities including weapons life 

extension programs, facility construction projects, and facility operations. 

The official stated that, during his team’s review, they found that the M&O 

contractors’ cost data for the laboratories was rarely in a form that would 

be useful for decision-making analysis. In addition, the official stated that 

the quality of data varied widely across M&O contractors and substantial 

effort by the CAPE team and the M&O contractor was required to 

understand and explain trends in the data. The CAPE official added that 

NNSA does not currently have the data needed to accurately identify the 

total costs to operate and maintain its weapons facilities and structures. 

The official stated that NNSA’s needs are changing rapidly as officials 

deal with difficult choices in a budget-constrained environment. He added 

that the need for better cost data collection to support decision making is 

both immediate and imperative. The official stated that CAPE is actively 

working with NNSA to guide and improve its ability to gather, analyze, 

and present more useful M&O contractor cost data to decision makers. In 

May 2013, NNSA announced the creation of the Office of Program 

Review and Analysis, to provide independent analytical advice to help 

improve NNSA’s ability to budget, plan, and oversee programs. 
Page 13 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

DOE and NNSA are taking steps to standardize the reporting of certain 

costs; however, these efforts may provide only limited improvements 

because the data will continue to only be reported at an aggregate level. 

As noted previously, in 2010, DOE began implementation of Institutional 

Cost Reporting—a DOE-wide initiative to create a standardized report of 

certain costs, including many indirect costs—to improve its ability to 

oversee its sites’ costs. Specifically, Institutional Cost Reporting is a 

system to collect and report costs at an aggregate level across 28 broad 

cost categories. DOE officials and documentation noted several 

anticipated improvements that are expected from implementing 

Institutional Cost Reporting, including improved data reliability as 

compared with previous method for collecting and reporting support 

costs. In January 2012, we recommended that DOE take steps to ensure 

that the data resulting from the Institutional Cost Reporting are complete 

and comparable for monitoring sites’ support costs, and DOE concurred 

with our recommendation.16

According to DOE documents, the Institutional Cost Reporting initiative 

established general goals to develop more timely, accurate, and 

meaningful data on M&O contractor’s costs. However, DOE officials 

responsible for helping implement the initiative stated that they are 

uncertain how or if the data will actually be used. This is because this 

initiative replaced an earlier system used by DOE to collect and report 

support costs and, like this earlier system, the Institutional Cost Reporting 

data will only provide data at an aggregate level across cost categories, 

such as maintenance. In addition, DOE officials told us that since the 

Institutional Cost Reporting data appear at an aggregate level, further 

analyses will be needed to assess the causes for any differences in 

Institutional Cost Reporting cost categories across the laboratories and 

other sites. For example, if costs for an activity such as maintenance are 

significantly higher at one laboratory than another, further research would 

be needed to determine if the difference is due to efficiency or differences 

in mission, condition of infrastructure, location, or other reasons. A senior 

DOE official said that Institutional Cost Reporting is in its early stages and 

DOE established joint DOE and contractor

teams to perform peer reviews intended in part to standardize the data 

collected through Institutional Cost Reporting. In May 2013, DOE officials 

said that they had completed the reviews for several sites, including 

Lawrence Livermore, Los Alamos, and Sandia. Officials stated that they 

were uncertain when the remaining reviews would be completed. 

 

16GAO-12-255. 

DOE and NNSA Are Taking 

Additional Steps to 

Standardize the Reporting 

of Certain Indirect Costs, 

but These Efforts May 

Provide Only Limited 

Improvements
Page 14 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

that DOE does not currently know how the data will be used. Further, 

DOE officials said they were uncertain about the extent to which 

Institutional Cost Reporting data can be used to improve the transparency 

and management of laboratory costs, especially indirect costs. To better 

understand the Institutional Cost Reporting data and help identify 

potential management uses, DOE officials said that they had initiated 

several analyses to review specific cost items in the Institutional Cost 

Reporting data. However, a DOE official helping oversee these efforts 

noted that the data gathered through Institutional Cost Reporting may 

ultimately not prove to be useful, as it may not provide meaningful data 

that can be used to aid management and oversight. Officials with DOD’s 

CAPE office have also expressed concerns over the usefulness of these 

aggregated data to improve transparency, aid management, and identify 

opportunities for cost savings. Moreover, in commenting on a draft of this 

report, DOE noted that it has determined that the Institutional Cost 

Reporting initiative data are aggregated at such a high level that they 

cannot be used to compare detailed contractor costs.

OFFM officials also stated that their use of the Institutional Cost Reporting 

data to assess costs and potentially identify cost savings is still largely in 

the planning stages. Specifically, OFFM officials stated that, while the 

Institutional Cost Reporting data is more useful and comparable than 

other data, such as indirect cost rates, additional analyses are still 

needed to determine if the cost differences identified in Institutional Cost 

Reporting data are due to efficiency differences or other differences 

among the laboratories. To date, OFFM officials have taken some steps 

to use Institutional Cost Reporting data to compare costs across its 

laboratories and help identify cost savings. For example, NNSA officials 

said they used Institutional Cost Reporting data to help compare M&O 

contractor costs. Following this comparison, OFFM is now planning an 

effort to reduce the amount of state taxes paid by its M&O contractors. 

NNSA has taken steps to examine the accuracy of M&O contractors’ cost 

allocation models, but actions to independently assess day-to-day cost 

allocation practices have been more limited. Specifically, NNSA’s OFFM 

examines laboratory M&O contractors’ cost allocation models for 

compliance with Cost Accounting Standards requirements, which helps 

ensure accuracy. NNSA generally relies on M&O contractors’ internal 

audits to assess whether day-to-day cost allocation practices conform to 

disclosed M&O contractor models. NNSA’s efforts to independently 

assess M&O contractors’ day-to-day cost allocation practices to ensure 

compliance with Cost Accounting Standards are more limited.

NNSA Takes Some 

Steps to Assess the 

Accuracy of M&O 

Contractors’ Indirect 

Cost Allocations 
Page 15 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

NNSA’s OFFM examines laboratory M&O contractors’ detailed cost 

allocation models for compliance with Cost Accounting Standards each 

time a contractor changes its model, which typically occurs upon initiation 

of the contract and at least annually thereafter. Specifically, within 60 

days before a contractor implements changes in a new cost allocation 

model, the contractor must submit the proposed changes—in a document 

called a disclosure statement—to OFFM for a compliance review. These 

disclosure statements include a summary and justification of proposed 

changes, a reference to the Cost Accounting Standards that apply to 

each change, and information on the anticipated impact of the proposed 

changes on a program area’s costs. OFFM reviews the disclosure 

statement to determine whether the proposed change is adequately 

described and complies with applicable Cost Accounting Standards. In 

doing so, OFFM typically follows a detailed review plan or checklist 

adapted as necessary for the review, including conducting on-site visits or 

follow-up with the contractor to ensure the disclosed changes to the 

model are in compliance with Cost Accounting Standards. Based on this 

review, OFFM sends its recommendation for approval of the disclosure 

statement to the contracting officer, who then makes the determination to 

approve.

OFFM works with laboratory M&O contractors to try to bring cost 

allocation models into compliance with Cost Accounting Standards and 

has identified instances when a laboratory’s cost allocation model did not 

comply with Cost Accounting Standards. Some of these instances 

affected the accurate allocation of indirect costs. OFFM officials stated 

that instances of noncompliance have been resolved or are in the process 

of being resolved. Examples are as follows: 

• In March 2009, OFFM and NNSA site officials determined that the 

M&O contractor’s indirect cost allocation model for Lawrence 

Livermore did not fully comply with Cost Accounting Standards. 

Specifically, activities such as science and technology strategic 

planning and laboratory outreach were included in a strategic mission 

support indirect-cost pool. These costs were viewed by Lawrence 

Livermore as broadly institutional in the same manner as General and 

Administrative costs. According to NNSA officials, the M&O contractor 

allowed this practice to occur because it believed that these programs 

did not equitably benefit from the activities covered by these indirect 

costs. OFFM officials disagreed, and the M&O contractor changed its 

cost allocation model in fiscal year 2013 to include these indirect costs 

in the General and Administrative indirect-cost pool.

NNSA Examines 

Laboratory M&O 

Contractors’ Cost 

Allocation Models for 

Compliance with Cost 

Accounting Standards
Page 16 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

• In October 2009, OFFM reviewed M&O contractor indirect cost 

allocations at Lawrence Livermore being applied to the National 

Ignition Facility—a research facility intended to demonstrate nuclear 

fusion reactions using lasers—and determined that the M&O 

contractor’s cost allocation model did not comply with certain aspects 

of the Cost Accounting Standards. Specifically, the M&O contractor’s 

model did not equitably distribute indirect costs during the 

construction of the facility, as the Cost Accounting Standards require. 

NNSA’s contracting officer concurred but permitted the M&O 

contractor to continue using this model through October 2012 to 

minimize disruption to the program. As a result, 18 other programs at 

the site continued to assume a greater share of these indirect costs, 

which totaled about $134 million for fiscal year 2013, according to our 

analysis of M&O contractor documents. For example, according to 

M&O contractor documents, the Departments of Defense and 

Homeland Security, which conduct research at Lawrence Livermore, 

paid more each year to cover indirect costs that would have otherwise 

been collected from the National Ignition Facility project. 

• In July 2010 and January 2011, OFFM determined that the M&O 

contractor’s indirect cost allocation model for Los Alamos did not fully 

comply with Cost Accounting Standards because construction 

projects and certain other types of labor were fully or partially exempt 

from having to contribute the standard cost allocation amounts for 

General and Administrative indirect costs at the laboratory. According 

to OFFM officials, other programs at the site needed to contribute 

more money to the General and Administrative cost pool to 

compensate for this shortfall, resulting in the inequitable sharing of 

these indirect costs across all programs. Los Alamos changed its 

allocation model in fiscal year 2013 to eliminate these exemptions and 

more equitably share these indirect costs across all programs. 
Page 17 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

Officials with NNSA’s OFFM told us that they generally rely on the M&O 

contractors’ internal audit efforts to assess whether M&O contractors’ 

day-to-day cost allocation practices conform to their disclosed cost 

allocation models. OFFM officials told us that they perform some limited 

testing to verify that M&O contractors’ practices conform to their cost 

allocation models but that they largely rely on the M&O contractors’ 

internal audit groups to perform this verification.17

• Los Alamos. In 2009, Los Alamos’ M&O contractor conducted an 

internal audit to determine whether its laboratory’s day-to-day labor 

allocation practices conformed to its disclosed cost allocation model. 

The audit determined that labor hours reported by M&O contractor 

employees did not always reflect the actual work performed, and labor 

costs may not have been allocated equitably among all benefitting 

programs and therefore was not consistent with their cost allocation 

model. For example, one employee interviewed during the 

contractor’s internal audit noted an instance where labor hours were 

transferred from one program to another to prevent a cost overrun. 

The M&O contractor identified and implemented corrective actions to 

address the problem, including providing training and guidance to 

laboratory employees about proper time and labor reporting practices. 

In April 2011, the M&O contractor’s internal audit office conducted a 

follow-up audit and found that three of four corrective actions 

identified in the prior report were completed but that there was still 

need for further improvement regarding the allocation of labor costs. 

Specifically, the follow-up report concluded that the allocation of 

indirect labor costs posed a high risk and significant concern. 

According to the M&O contractor documentation, M&O contractor 

managers later determined that the problem was not significant 

M&O contractors’ 

internal audits have found that some contractor allocation practices do not 

conform to their models. Internal audits at all three of the laboratories 

identified some problems—particularly with how labor hours are charged 

to projects, but NNSA officials stated that these problems are not 

significant in relation to the costs incurred by M&O contractors. According 

to OFFM officials, M&O contractors, and documents, the laboratories 

have corrected or are in the process of correcting these problems, and 

follow-up audits are also being conducted at some sites to verify that 

problems are adequately addressed. Following are examples: 

 

17These internal audits are conducted by the M&O contractors’ internal audit group or at 

times performed by external audit firms under contract with the M&O contractor. 

NNSA Generally Relies on 

M&O Contractors’ Internal 

Audits to Assess Whether 

Day-to-day Cost Allocation 

Practices Conform to 

Disclosed M&O Contractor 

Models
Page 18 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

enough to warrant further corrective action. However, the M&O 

contractor’s internal audit management and OFFM officials told us 

that they are continuing to work to resolve the issue. 

• Lawrence Livermore. Lawrence Livermore’s M&O contractor internal 

auditors reported similar problems in September 2010, including some 

instances where indirect labor hours were inaccurately allocated to 

direct projects, inconsistent with its disclosed cost allocation model. 

To correct these problems, M&O contractor managers agreed to 

update policies, procedures, and guidance on proper cost allocation 

practices at the laboratory, and develop training for employees. The 

M&O contractor’s internal audit office plan for fiscal year 2013 states 

that it expects to review the results of prior internal audits to determine 

the need for additional audits in specific areas. 

• Sandia. Based on the problems found at the other two laboratories, an 

NNSA Sandia Field Office official recently asked its M&O contractor’s 

internal audit office at Sandia to verify Sandia’s labor hour allocations. 

Sandia’s internal audit office reported in October 2012 that M&O 

contractor employees were not always accurately allocating their time 

in accordance with actual work performed. Corrective actions in 

response to this audit are still being implemented. Specifically, the 

M&O contractor agreed to improve guidance and training provided to 

all employees about proper time charging practices and policies, 

and to conduct periodic self-assessments to ensure compliance 

with these practices and policies. 

Although NNSA’s OFFM has responsibility for supporting contracting 

officers in the day-to-day oversight of M&O contractors’ management of 

indirect costs, its role does not include conducting independent audits to 

assess compliance with Cost Accounting Standards, according to OFFM 

officials. On a limited basis, however, OFFM reviews some summary 

M&O contractor data to determine whether actual cost allocation 

practices are consistent with disclosed practices and complies with 

applicable federal requirements, and conducts expanded reviews, as 

needed. Specifically, M&O contractors must annually submit a formal 

statement documenting the total size of their indirect-cost pools and 

allocations, as well as the indirect rates used during the previous fiscal 

year. In addition to these steps, OFFM can request audit assistance from 

the OIG—which has audit authority at NNSA laboratories.

OIG officials stated that the frequency and scope for conducting audits for 

contractors’ compliance with Cost Accounting Standards should be based 

NNSA’s Efforts to 

Independently Assess 

M&O Contractors’ Day-today Cost Allocation 

Practices for Compliance 

With Cost Accounting 

Standards Are Limited
Page 19 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

on the level of risk. However, OFFM and OIG officials and M&O 

contractors hold varying opinions regarding the level of risk of inaccurate 

indirect cost allocation practices at the laboratories. For example, some 

OFFM and OIG officials and M&O contractors told us that they believe the 

risk is generally low compared with other federal agencies. Specifically, 

because NNSA M&O contractor operations are federally funded, and the 

operations are not mixed with private activities, the risk is low that federal 

funds are being used to pay an inequitable and higher share of indirect 

costs for private, nonfederal activities. In contrast, senior NNSA field 

office official told us that he is concerned about the ongoing possibility 

that indirect costs could be manipulated—that is, allocated to other 

programs—to avoid exceeding program budgets and, therefore, believes 

the risk is high. This concern was echoed by an M&O contractor’s internal 

audit office, which reported in April 2011 that, based on its audit findings 

the allocation of indirect costs posed a high risk. This contractor’s internal 

audit office also confirmed that M&O contractor labor hours in at least one 

instance were transferred to another program to prevent a cost overrun. 

Despite the uncertainty of the risk of noncompliance, NNSA’s Chief 

Financial Officer in OFFM does not conduct formal periodic risk 

assessments. One of the federal standards for internal control—risk 

assessment—states that management should assess the risks faced 

entity-wide,18

Recently, the OIG has taken some steps to improve its understanding of 

the risks associated with M&O contractors’ noncompliance with Cost 

Accounting Standards. First, the OIG contracted a private auditing firm to 

perform a limited audit at Lawrence Livermore in 2012 to test compliance 

with one Cost Accounting Standard that addresses the allocation of direct 

and at the activity level, from both external and internal 

sources. The standard also states that if risks have been identified, 

management should decide what actions should be taken to mitigate 

them. The identification and prioritization of these risks can then influence 

decisions regarding the type, timing, and extent of future monitoring or 

oversight. Risk identification methods may include, among other things, 

forecasting and strategic planning, and consideration of findings from 

audits and other assessments. Without a formal, periodic risk assessment 

regarding the level of risk posed by noncompliance, NNSA may not have 

a well-documented basis for its decisions regarding the type, timing, and 

extent of future monitoring or oversight. 

 

18GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 

(Washington, D.C.: November 1999).
Page 20 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

and indirect costs.19 In April 2013, the OIG reported that no compliance 

problems or potential issues or challenges were identified. Second, in 

January 2013, OIG officials stated that they were developing additional 

guidance to ensure that field staff document their consideration of these 

risks in their annual assessments, as necessary. 

NNSA reviews M&O contractor information to assess the reasonableness 

of M&O contractor costs, including indirect costs, at the laboratories. 

NNSA also uses other means to help ensure the reasonableness of 

costs, such as requiring M&O contractors to compare costs with other 

laboratories and industry, but these efforts vary across laboratories. 

NNSA reviews M&O contractor information and cost data to assess the 

reasonableness of M&O contractor costs at the laboratories. In order for a 

contractor’s costs to be reimbursed, they must be reasonable. The 

Federal Acquisition Regulation provides that a cost is reasonable based 

on a number of considerations and circumstances, including whether the 

type of cost is generally recognized as ordinary and necessary for the 

conduct of the contractor’s business or the contract performance.20

 

19The OIG also contracted with an audit firm to perform audits of compliance with Cost 

Accounting Standards at the Savannah River Site. An audit report is still in the process of 

being developed. 

To

demonstrate compliance with the Federal Acquisition Regulation, M&O 

contractors submit summary and some detailed information and data on 

their costs to NNSA and the OIG for review and approval. For example, 

according to DOE guidance, M&O contractors are required to annually 

prepare and submit summary information identifying costs incurred during 

the year. This information is then reviewed by NNSA’s field office Chief 

Financial Officer, contracting officers located at the laboratories, and the 

OIG, among others. Further, NNSA contracting officers told us that they 

20Federal Acquisition Regulation, 48 C.F.R. § 31.201-3.

NNSA Reviews M&O 

Contractor 

Information and Uses 

Other Means to Help 

Ensure the 

Reasonableness of 

Indirect Costs

NNSA Reviews M&O 

Contractor Information to 

Assess Whether Indirect 

Costs Are Reasonable 
Page 21 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

review the M&O contractors’ own system of internal controls for ensuring 

that incurred indirect costs comply with contract provisions, such as by 

reviewing the M&O contractors’ internal audits assessing the 

reasonableness of their costs. Contracting officers serve a principal role 

in ensuring the reasonableness of M&O contractor costs, as required in 

the Federal Acquisition Regulation. Decisions to approve M&O contractor 

costs are documented in contracting officers’ approval memos, however, 

the specific steps taken in these reviews to determine reasonableness 

are not documented. In addition to the contracting officers’ review efforts, 

OFFM officials stated that they review M&O contractors’ high-level 

summary indirect cost information to help ensure the reasonableness of 

M&O contractor costs. OFFM officials stated that they act in a supporting 

role to the review efforts of the contracting officers in helping to ensure 

the reasonableness of M&O contractors’ costs.

NNSA also uses other means to encourage M&O contractors to manage 

the laboratories in a cost-efficient and effective manner. In particular, 

NNSA includes provisions in its contracts to encourage or require 

laboratories to take steps to manage costs. For example, NNSA’s 

contracts require M&O contractors to regularly benchmark costs to 

standards for high performing external businesses and other contractors. 

Laboratory M&O contractors take some steps to benchmark costs and 

practices to industry and take corrective actions as needed, but these 

efforts have varied from laboratory to laboratory. For example, the M&O 

contractor at one laboratory stated that they undertook a benchmarking 

study to compare the costs of servicing the laboratory’s fleet of vehicles 

in-house as compared with using an outside vendor. The M&O contractor, 

concluding that an outside provider would be more cost-effective, 

contracted with an outside provider and estimated an annual savings of 

approximately $775,000. In addition to M&O contractor-led efforts, NNSA 

has also taken steps to benchmark costs at its laboratories and sites. 

Specifically, NNSA hired external consulting groups to conduct 

benchmarking studies in the areas of finance, information technology, and 

human resources management across multiple NNSA sites, which 

NNSA Uses Other Means 

to Help Ensure the 

Reasonableness of Costs, 

but These Efforts Vary 

Across Laboratories 
Page 22 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

provided their reports to NNSA in March 2009.21 These studies identified 

areas for improvement and, while M&O contractors noted that they 

consider the information from these studies in decision-making 

processes, they were unable to provide documentation showing what 

steps were taken specifically in response to findings or recommendations 

in these studies.

Although contracts for the three laboratories do require that 

benchmarking be performed, the contract provisions do not specify the 

areas that should be examined, how frequently benchmarking should 

occur, and what process should be used for implementing any needed 

corrective actions. In contrast, DOE provides more specific requirements 

for benchmarking pension and post-retirement benefit costs.22

Specifically, DOE guidance requires contractors to benchmark certain 

employee benefits every 2 to 3 years and implement corrective action 

plans if benchmarking efforts show that the value of certain employee 

benefits are 5 percent or higher than industry averages. 

In addition to benchmarking, OFFM is involved in other activities to help 

identify cost savings, improve efficiency, and help ensure the 

reasonableness of costs. We previously reported on efforts taken by DOE 

and NNSA to reduce M&O contractors’ costs at its laboratories such as 

through streamlining and centralizing certain support functions, such as 

for human resources.23

 

21Hackett Group, Achieving World Class Performance: Finance and HR Benchmark 

Results Executive Briefing, March 2009. Grant Thornton, Department of Energy National 

Nuclear Security Administration Enterprise Optimization Consulting Services Initial 

Assessment, March 16, 2009. Aon Consulting, National Nuclear Security Administration 

Acquisition Strategy Team (AST); Part I: Analysis of Retirement Income Benefit Issues by 

Acquisition Option, and Part II: Analysis of Health Care Benefit Issues by Acquisition 

Option, March 19, 2009.

In addition to those efforts, the OIG also conducts 

audits to help reduce costs, including indirect costs. OFFM officials said 

that they also participate in NNSA’s Business Management Advisory 

Council, which includes NNSA’s Chief Operating Officer, chief operating 

officers from each M&O contractor, field office representatives, and the 

NNSA Senior Procurement Executive. The Business Management 

Advisory Council meets quarterly to discuss proposals and initiatives to 

improve efficiency and identify cost savings. For example, we previously 

22DOE Order 350.1, Chg 3, Contractor Human Resource Management Programs

23GAO-12-255. 
Page 23 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

reported that, in 2011, the Business Management Advisory Council 

considered consolidating human resource and other services at all of 

NNSA’s sites to achieve cost savings.24

To further encourage M&O contractors to manage the laboratories in an 

effective and efficient manner, NNSA also includes performance-based 

fees in its contracts. Specifically, field office contracting officials rate the 

M&O contractors’ efforts to identify and implement cost-savings 

measures, while also achieving mission goals, through annual 

performance evaluation plans. These cost management efforts also 

include efforts to identify and implement cost-savings measures. 

However, according to NNSA officials, the amount of performance-based 

fee tied to cost management efforts is relatively small—$1 million or less 

at each laboratory annually—and may not provide a meaningful incentive 

to the contractors. In contrast, the overall incentive fees for laboratory 

M&O contractor work can be up to $60 million annually. NNSA officials 

stated that, because financial incentive amounts are limited, mission work 

could be negatively impacted if financial incentives were redirected to 

improving cost management at the laboratories. 

NNSA is exploring ways to improve the use of incentives in its contracts 

to encourage M&O contractors to manage the laboratories in an efficient 

and effective manner. Specifically, according to NNSA officials, NNSA 

added requirements in the proposed combined contract for its Y-12 and

Pantex sites in fiscal year 2013, which would link future contract 

extensions to cost-savings goals to improve cost management.25 For 

example, these new provisions would have required the M&O contractors 

to achieve at least 80 percent of the proposed cost-savings measures, as 

outlined in their contractual language, in order to receive a contract 

extension. However, we have questioned these anticipated cost savings 

because of the limited details available about the actual work that will be 

consolidated, and the adequacy of data used to estimate cost savings.26

 

24GAO-12-255. 

25The Y-12 National Security Complex in Oak Ridge, Tennessee, manufactures 

components for nuclear weapons, including uranium components, evaluates, tests, 

assembles, and disassembles these components; supplies highly enriched uranium for 

use in naval reactors. The Pantex Plant in Amarillo, Texas, evaluates, repairs, and 

dismantles nuclear weapons; conducts high explosive research and development.

26GAO, Modernizing The Nuclear Security Enterprise: The National Nuclear Security 

Administration’s Proposed Acquisition Strategy Needs Further Clarification and 

Assessment, GAO-11-848 (Washington, D.C.: Sept. 20, 2012).
Page 24 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

As of June 2013, the status of NNSA’s combined contract award for the 

Y-12 and Pantex sites is uncertain. On April 29, 2013, we sustained 

portions of bid protests regarding this combined contract. Specifically, we 

concluded that NNSA failed to meaningfully assess the majority of each 

offeror’s proposed cost savings, and based its source selection decision 

on the unsupported assumption that all cost savings proposed by every 

offeror would be achieved. The protest decision recommended that NNSA 

reopen the procurement for this contract and request additional 

information from the offerors about their proposed cost savings.27

Following this decision, in May 2013, NNSA announced that it would 

reopen competition for the combined contract. Because the contract has 

not yet been implemented, it is too soon to evaluate the effectiveness of 

these new contract provisions, but NNSA officials stated they anticipate

incorporating similar provisions into future contracts for the laboratories. 

It is critical that NNSA and its M&O contractors ensure that the billions of 

dollars spent each year at the laboratories are used effectively. Because 

Cost Accounting Standards allow flexibility in how M&O contractors 

classify and allocate direct and indirect costs to programs, however, it can 

be difficult to assess cost data and meaningfully compare cost 

management performance across laboratories. Recognizing these 

challenges, DOE has been developing the Institutional Cost Reporting 

initiative to separately collect data on certain costs, including many 

indirect costs, in an effort to improve its ability to oversee M&O 

contractors’ costs, including, indirect costs, at the NNSA laboratories. The 

initiative is still under development, however, and the uses for the data 

collected have not been determined. Without a clearer understanding of 

how Institutional Cost Reporting data can be used to manage costs and 

what data are needed, it is unclear if this initiative will provide meaningful 

improvement over existing data. 

NNSA has made progress in improving M&O contractors’ cost allocation 

models to better comply with Cost Accounting Standards. However, key 

officials hold differing views about the level of risk of inaccurate indirect 

cost allocation practices at the laboratories. OIG officials stated that the 

frequency and scope for conducting audits for contractors’ compliance 

 

27Nuclear Production Partners, LLC, and Integrated Nuclear Production Solutions, LLC., 

B-407948, April 29, 2013.

Conclusions 
Page 25 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

with Cost Accounting Standards should be based on the level of risk.

However, OFFM does not conduct periodic, formal risk assessments of 

contractor compliance to determine the level of risk. Without such 

assessments, NNSA does not have important information needed to 

make decisions about the type, timing, and extent of future monitoring or 

oversight. 

In addition to efforts to assess the accuracy of indirect costs, NNSA and 

M&O contractors also use benchmarking as a means to assess the 

reasonableness of costs. Although DOE orders and M&O contracts define 

specific benchmarking requirements for pension costs, contracts are less 

specific in terms of what types of indirect costs should be benchmarked, 

how frequently benchmarking should take place, and the process for 

ensuring corrective actions are taken, as needed. Without more 

consistent and comparable benchmarking, NNSA will likely lack useful 

data about costs across the laboratories, as well as in the private sector, 

that could inform cost management decisions at the laboratories and 

identify areas for cost savings. 

To help improve its ability to oversee M&O contractor costs, including 

indirect costs, for its laboratories and make more effective use of DOE 

and contractor resources, we recommend the Secretary of Energy take—

or, as appropriate, direct the Administrator of NNSA to take—the following 

three actions:

• Clarify how data collected by the Institutional Cost Reporting initiative 

will be used. 

• Direct OFFM to conduct formal, periodic risk assessments of M&O 

contractors’ compliance with Cost Accounting Standards by using (1) 

laboratory M&O contractor internal audit results, (2) OIG audit results, 

and (3) other relevant information obtained through ongoing 

monitoring and oversight to provide a well-documented basis for its 

future monitoring and oversight, including determining the appropriate 

level of OIG audit assistance needed. 

• Incorporate more specific benchmarking requirements into future 

laboratory contracts—similar to the benchmarking requirements used 

by DOE to assess and manage pension and post-retirement benefit 

costs—including which costs should be benchmarked, how frequently 

benchmarking should occur, and what process should be used to 

ensure corrective actions are taken, as needed.

Recommendations for 

Executive Action
Page 26 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

We provided a draft of this report to DOE for its review and comment. In 

written comments, NNSA’s Associate Administrator for Management and 

Budget, responding on behalf of DOE and NNSA, wrote that DOE agreed 

with our report’s three recommendations. DOE’s written comments on our 

draft report are included in appendix III. DOE also provided technical 

comments, which we incorporated into the report as appropriate.

In response to our first recommendation that DOE clarify how data 

collected by the Institutional Cost Reporting initiative will be used, DOE 

stated in its written comments that it will clarify the uses of the data, and 

that its estimated completion for this action is September 30, 2013. 

However, DOE stated that it has determined that the data are aggregated 

at such a high level that they cannot be used to compare detailed 

contractor costs. We remain concerned that, without better cost data, 

DOE and NNSA may continue to be limited in their abilities to effectively 

oversee M&O contractor costs. DOE agreed with our second 

recommendation that it conduct formal, periodic risk assessments of M&O 

compliance with Cost Accounting Standards. In its comments, DOE 

stated that OFFM will conduct such assessments and that its estimated 

completion date for this action is September 30, 2013. The agency also 

agreed in principle to our third recommendation that it incorporate more 

specific benchmarking requirements into future laboratory contracts, 

similar to its benchmarking requirements used to assess and manage 

pension and postretirement benefit costs, stating that it would evaluate 

options to determine appropriate benchmarking requirements for inclusion 

in future M&O contracts. DOE stated that the estimated completion for 

this action is December 31, 2013. 

DOE also provided a general comment referencing our draft report’s 

discussion of the flexibility afforded NNSA’s eight integrated contractors 

by Cost Accounting Standards and the cost data collected by NNSA. In 

particular, DOE stated that the Cost Accounting Standards intentionally 

afford flexibility for all government contractors and that our report leaves 

the false impression that NNSA is somehow required to create 

consistency, when current practices are intentionally designed for 

flexibility. As stated in our report, we agree that Cost Accounting 

Standards provide flexibility for contractors and provided additional 

clarification in the report. DOE stated that the repeated statements about 

"flexibility" and how the current data do not address CAPE-identified 

requirements are misleading to the average reader who may not 

distinguish between the appropriateness of accounting practices and the 

separate issue of collecting data from accounting and other project 

management systems. DOE noted that project management and cost 

estimation are done through a variety of project management tools and 

Agency Comments 

and Our Evaluation
Page 27 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

that, as presented, the report would give the impression that NNSA is 

somehow not "accounting" for costs appropriately, and it is factually 

incorrect to suggest that accounting practices that adhere to applicable 

law are somehow askew. We recognize that there are various methods to 

gather data, however, as our previous work and CAPE’s work have 

noted, these data have shortcomings for supporting decision making for 

programs, projects, and activities. NNSA also stated that it agreed that 

efforts to produce information to better support decision making from 

existing data could be improved. We continue to believe that improved 

data could aid DOE and NNSA in their efforts to oversee and manage 

sites’ costs.

We are sending copies of this report to the Secretary of Energy, the 

NNSA Administrator, the appropriate congressional committees, and

other interested parties. In addition, the report is available at no charge on 

the GAO website at http://www.gao.gov. 

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

contact me at (202) 512-3841 or trimbled@gao.gov. 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 major contributions to 

this report are listed in appendix IV.

David C. Trimble

Director, Natural Resources and Environment
Page 28 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

This report examines (1) whether laboratory Management and Operating 

(M&O) contractors' practices differ for allocating indirect costs and, if so, 

how; (2) the extent to which National Nuclear Security Administration 

(NNSA) ensures that laboratory M&O contractors’ allocated indirect costs 

are accurate; and (3) the extent to which NNSA ensures that laboratory 

M&O contractors’ indirect costs are reasonable.

To determine whether laboratory M&O contractors’ practices differ for 

allocating indirect costs, and, if so, how, we reviewed federal Cost 

Accounting Standards, which, in part, guide M&O contractor allocation 

practices, and NNSA and M&O contractor documentation associated with 

complying with these standards. We met with officials from NNSA’s Office 

of Field Financial Management (OFFM) in Albuquerque, New Mexico. We 

also visited Lawrence Livermore, Los Alamos, and Sandia National 

Laboratories and interviewed M&O contractors and NNSA field office 

officials. We reviewed NNSA and contractor documents showing the

actions taken by NNSA and the M&O contractors to manage indirect 

costs at the three laboratories, as well as data on these costs. We 

reviewed indirect cost data used by M&O contractors to document 

compliance with Cost Accounting Standards and manage indirect costs 

and met with knowledgeable NNSA officials and M&O contractors to 

assess the reliability of these data. We found them to be sufficiently 

reliable for the purposes of this report. To gather additional perspectives 

on how differences in cost allocation practices affect stakeholders, we 

met with the Office of the Secretary of Defense’s Cost Assessment and 

Program Evaluation (CAPE) office to discuss their review of the 

laboratories’ cost accounting systems to improve cost estimation for 

weapons stockpile programs. To describe DOE and NNSA’s Institutional 

Cost Reporting initiative, we spoke with DOE officials in its headquarters 

and Germantown, Maryland, offices for financial management and 

accounting and NNSA officials in OFFM. We also reviewed DOE and 

NNSA internal guidance, as well as documents describing this initiative. 

To examine the extent to which NNSA ensures that laboratory M&O 

contractors’ reported indirect costs are accurate, we reviewed relevant 

federal requirements, in particular, federal Cost Accounting Standards. 

We also interviewed OFFM officials and M&O contractors to discuss 

whether and how these standards apply to laboratory M&O contractors 

and the steps taken to ensure that M&O contractor cost allocation models 

comply with applicable standards. In addition, we obtained specific 

information regarding OFFM’s identification of key instances where the 

M&O contractors’ cost allocation models did not comply with these 

standards, how they did not comply, and the general status of actions to 

correct any significant problems. To determine the extent to which NNSA 

Appendix I: Objectives, Scope, and 

Methodology 
Page 29 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

ensures that laboratory M&O contractor’s day-to-day cost allocation 

practices conform to their disclosed cost allocation models, we 

interviewed OFFM, M&O contractor internal audit, and DOE Office of 

Inspector General (OIG) officials. As appropriate, we reviewed relevant 

past audits at each of the laboratories, the associated corrective actions 

taken and planned, and general plans for future audits. To understand the 

OIG’s historical involvement in conducting independent audits of Cost 

Accounting Standards at NNSA laboratories, we reviewed relevant 

correspondence between NNSA and the OIG, and met with OIG officials 

to clarify their role in conducting past and future audits. 

To examine the extent to which NNSA ensures that laboratory M&O 

contractors’ indirect costs are reasonable, we reviewed pertinent 

documents and interviewed NNSA officials and M&O contractors about 

steps taken to assess the reasonableness of indirect costs. We reviewed 

requirements relating ensuring the reasonableness of costs, including the 

Federal Acquisition Regulation, DOE’s accounting handbook, and DOE 

orders. We reviewed the M&O laboratory contracts in place in fiscal year 

2012 to identify requirements for managing costs, including indirect costs. 

We also identified any requirements in the contracts for benchmarking 

efforts and financial incentives, if any, to encourage cost management. 

We reviewed performance evaluations of the laboratory M&O contractors 

to identify any information related to the reasonableness of costs or the 

effectiveness of cost-savings initiatives. We also reviewed pertinent 

NNSA and contractor documents related to the review and approval of 

M&O contractor costs, including reasonableness. We reviewed pertinent 

studies performed by NNSA, M&O contractors, or outside consulting firms 

that were completed between 2008 and 2013 related to assessing or 

addressing the reasonableness of laboratories’ costs. We reviewed 

NNSA requirements linking M&O contract extensions to cost-savings 

initiatives to help ensure the reasonableness of costs, including the 

proposed combined contract for the Y-12 and Pantex sites. We met with 

officials from OFFM in Albuquerque and also visited Lawrence Livermore, 

Los Alamos, and Sandia National Laboratories to interview M&O 

contractors and NNSA field office officials on their efforts to ensure cost 

reasonableness at the laboratories, and to discuss any opportunities for 

improvement in this area. 

We conducted this performance audit from April 2012 to June 2013 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 for our 
Page 30 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

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.
Page 31 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

Cost Accounting 

Standard Description

401: Consistency in 

Estimating, 

Accumulating, and 

Reporting Costs

The cost accounting practices used in accumulating and reporting 

of actual cost must be consistent with the practices used in 

estimating costs in pricing proposals. The purpose of the standard 

is to enhance the likelihood that comparable transactions are 

treated alike and to obtain improved reliability of estimates and 

comparisons with performance.

402: Consistency in 

Allocating Cost 

Incurred for the 

Same Purpose

The same type of cost must be consistently classified as direct or 

indirect with respect to all work performed. The purpose of this 

standard is to require that each type of cost is allocated only once 

and on only one basis to any contract or other cost objective in 

order to prevent overcharging of some contracts and to eliminate 

double counting.

403: Allocation of 

Home Office 

Expenses to 

Segments

Establishes the criteria for allocation of home office expenses to 

segments and minimizes the amount of such expenses classified 

as residual. 

404: Capitalization 

of Tangible Assets

Facilitates the consistent measurement of costs based on a 

capitalization policy that adheres to the criteria of the standard.

405: Accounting for 

Unallowable Costs

The purpose of this standard is to facilitate the negotiation, audit, 

and settlement of unallowable costs.

406: Cost 

Accounting Period

Provides criteria for the periods to be used as cost accounting 

periods for contract estimating, accumulating, and reporting of cost.

407: Use of 

Standard Costs for 

Direct Material and 

Direct Labor

Provides criteria for using standard costs for estimating, 

accumulating, and reporting costs of direct material and direct 

labor. The standard also provides criteria regarding the

establishment of standards, accumulation of standard costs, and 

disposition of variances from standard costs.

408: Accounting for 

Costs of 

Compensated 

Personal Absences

Provides criterion for assigning these compensated personal costs 

to the cost accounting period in which the related entitlement is 

earned.

409: Depreciation 

of Tangible Capital 

Assets

Provides criteria for assigning costs of tangible assets to cost 

accounting periods and for consistent allocation of those costs to 

cost objectives.

410: Allocation of 

Business Unit 

General and 

Administrative 

Expense to Cost 

Objectives

Provides criteria for the allocation of the cost of general and 

administrative expenses based on their beneficial or causal 

relationships.

411: Accounting for 

Acquisition Costs of 

Material

This standard requires the contractor to have written statements of 

accounting policies and practices for accumulating the costs of 

material and for allocating costs of material to cost objectives.

Appendix II: Federal Cost Accounting 

Standards 
Page 32 GAO-13-534 Indirect Costs at NNSA Laboratories 

 

Cost Accounting 

Standard Description

412: Composition 

and Measurement 

of Pension Costs

Establishes the components of pension costs and the bases for 

measuring such costs. It also provides criteria for determining the 

amount of pension costs to be assigned to cost accounting periods.

413: Adjustment 

and Allocation of 

Pension Costs

Provides for adjustment of pension cost for actuarial gains and 

losses, their assignment to cost accounting periods, and bases for 

allocation of pension costs to business segments.

414: Cost of Money 

as an Element of 

the Cost of 

Facilities Capital

Provides for the explicit recognition of the cost of money for 

facilities capital as an element of contract costs.

415: Accounting for 

the Cost of 

Deferred 

Compensation

Provides criteria for the measurement and assignment of deferred 

compensation costs to cost accounting periods. The cost of 

deferred compensation is to be assigned to the cost accounting 

period in which the contractor incurs an obligation to compensate 

the employee.

416: Accounting for 

Insurance Costs

Provides criteria for the measurement of insurance costs, the 

assignment of such costs to cost accounting periods, and their 

allocation to cost objectives.

417: Cost of Money 

as an Element of 

the Cost of Capital 

Assets Under 

Construction

Establishes criteria for the measurement of the cost of money 

attributable to capital assets under construction, fabrication, or 

development as an element of the cost of those assets.

418: Allocation of 

Direct and Indirect 

Costs

Provides for consistent determination of direct and indirect costs, 

provides criteria for the accumulation of indirect costs, including 

service center and overhead costs in indirect-cost pools, and 

provides guidance relating to the selection of allocation measures 

based on the beneficial or causal relationship between an indirectcost pool and cost objectives.

420: Accounting for 

Independent 

Research and 

Development Costs 

and Bid and 

Proposal Costs

Provides criteria for the accumulation of independent research and 

development costs and bid and proposal costs. It also provides 

criteria for the allocation of such costs to cost objectives based on 

the beneficial or causal relationship between such costs and cost 

objectives.

Sources: GAO analysis based on information provided by NNSA and the Department of Defense. 

Note: Cost Accounting Standard 419 was consolidated with Cost Accounting Standard 418 and 

therefore no longer exists.
Page 33 GAO-13-534 Indirect Costs at NNSA Laboratories

Appendix III: Comments from the National 

Nuclear Security Administration
Page 34 GAO-13-534 Indirect Costs at NNSA Laboratories

 
Page 35 GAO-13-534 Indirect Costs at NNSA Laboratories

 
Page 36 GAO-13-534 Indirect Costs at NNSA Laboratories

 
Page 37 GAO-13-534 Indirect Costs at NNSA Laboratories

 
Page 38 GAO-13-534 Indirect Costs at NNSA Laboratories 

David C. Trimble, (202) 512-3841 or trimbled@gao.gov 

In addition to the contact named above, Janet Frisch, Assistant Director; 

Paul Kinney; Mehrzad Nadji; Alison O’Neill; Christopher Pacheco; Sophia 

Payind; Cheryl Peterson; Steven Putansu; Kiki Theodoropoulos; Nick

Weeks; and William Woods made key contributions to this report. 

(361402)

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 
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