Hanford Waste Treatment Plant: Department of Energy Needs to Strengthen Controls over Contractor Payments and Project Assets
Published: 2007-07-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In December 2000, the Department of Energy (DOE) awarded Bechtel National, Inc. (Bechtel) a contract to design and construct the Waste Treatment Plant (WTP), one of the largest nuclear waste cleanup projects in the nation. Originally expected to cost $4.3 billion and be completed in 2011, DOE now estimates that WTP will cost over $12.2 billion and be completed in late 2019. Weaknesses in DOE's management and oversight of contractors led GAO to designate DOE contract management as a high-risk area since 1990. GAO was asked to determine whether (1) DOE's internal controls are designed to provide reasonable assurance against improper WTP payments and (2) DOE's controls reasonably ensure proper accountability for WTP assets. GAO reviewed fiscal year 2005 and 2006 internal controls by analyzing data and documents, interviewing DOE and contractor staff, and physically observing property items.
section_title: What GAO Found
paragraphs: DOE's internal controls over payments to contractors on its WTP project did not provide reasonable assurance against the risk of improper contractor payments, particularly given the project's substantial inherent risks. Several factors combined to pose a risk of improper payments on this project, including the size and complexity of this one-of-a-kind nuclear construction project, escalating cost and schedule estimates, and the thousands of charges Bechtel billed to DOE on each invoice. Despite the risks, in fiscal years 2005 and 2006 DOE performed little or no review of contractor invoices or supporting documents for the $40 million to $60 million in charges that Bechtel billed to DOE each month to help ensure the validity of these charges. Instead, DOE officials relied primarily on the Defense Contract Audit Agency's reviews of Bechtel's corporate-wide financial systems and on Bechtel's reviews of subcontractor charges for assurance that the charges were proper. DOE's heavy reliance on others, with little oversight of its own, exposed the hundreds of millions of dollars it spent annually on the project to an unnecessarily high risk of improper payments. DOE also did not adequately oversee the contractor to ensure accountability for assets purchased with WTP contract funds, relying primarily on the contractor to manage such government property without ensuring the adequacy of the contractor's controls. We found numerous internal control weaknesses with Bechtel's property management program, including poor segregation of duties, property system errors, and inadequate property procedures. For example, Bechtel did not timely prepare and submit required reports of lost or damaged property, taking up to 2 years in some instances to report missing assets, such as computers, to DOE. Bechtel also did not always review subcontractors' property management policies and procedures as required or follow up on subcontractor weaknesses it identified to help ensure that its subcontractors adequately managed and safeguarded WTP property in their possession. These property control weaknesses coupled with the lack of DOE oversight created an environment in which property could be lost or stolen without detection.

section_title: Letter
paragraphs: The Department of Energy (DOE) is currently constructing one of the  largest and most complex nuclear waste cleanup projects in the nation— the Waste Treatment and Immobilization Plant (WTP) at the Hanford site  in southeastern Washington state. DOE awarded Bechtel National, Inc.  (Bechtel) an 11-year cost-plus-incentive-fee contract in December 2000 to  design, construct, and commission this one-of-a-kind nuclear waste  treatment complex. Although DOE originally projected the plant would  cost $4.3 billion and be completed in 2011, it now estimates that the  project will cost over $12.2 billion and be completed in late 2019. Sound  financial management of projects, particularly as large and complex as the  WTP project, requires effective design of and compliance with internal  controls. However, work we have done in the past has found that DOE’s  controls over these types of contracts are not always effective, largely  because of DOE’s inadequate management and oversight of contractors.  As a result, since 1990 we have designated DOE contract management as a  high-risk area.
Given that over $3 billion has been spent on this project to date with  billions more expected to be spent in the future, this report examines  whether (1) DOE’s internal controls are designed to provide reasonable  assurance that improper payments to WTP contractors will not occur or  will be detected in the normal course of business and (2) DOE’s oversight  controls reasonably ensure proper accountability for assets purchased  with WTP project funds.
To address these objectives, we considered the internal controls relevant  to contractor costs and property (assets) that DOE had in place in fiscal  years 2005 and 2006. We reviewed applicable DOE directives, policies, and  procedures; WTP contract requirements; the Federal Acquisition  Regulation (FAR); the Department of Energy Acquisition Regulation; and  GAO’s Standards for Internal Control in the Federal Government to gain  an understanding of the applicable internal control requirements. We  visited DOE’s Office of River Protection, which has oversight  responsibility for the WTP project, in Richland, Washington, and  performed walk-throughs and observations of DOE’s oversight processes,  interviewed agency officials, and reviewed related supporting  documentation and compared DOE’s controls against applicable  requirements. Because the Defense Contract Audit Agency (DCAA) and  the Defense Contract Management Agency (DCMA) perform reviews and  oversight of Bechtel, we met with DCAA and DCMA auditors and with the  DCMA corporate administrative contracting officer and reviewed relevant  audit reports they prepared to better understand their work related to  Bechtel. We also met with contractor staff in Richland, reviewed data  extracts from selected Bechtel financial and property systems, performed  limited data mining procedures where possible on the data extracts and  reviewed supporting documentation, reviewed the contractor’s and  selected subcontractors’ property management policies and procedures,  and performed walk-throughs and observations of the contractor’s  property management processes. We also performed physical observations  of selected property items at the WTP site and selected subcontractor sites  in Richland and at Bechtel offices in San Francisco, California to test the  existence, accuracy, and completeness of a nongeneralizable selection of  property items recorded in the contractor’s property system. From the  procurement system, we selected a nongeneralizable selection of property  purchases to observe and to test whether these purchases had been  recorded in the property system. The results of our review of these  nongeneralizable selections cannot be used to make inferences about the  population. Our work was not designed to determine or to project the  allowability of all contractor costs or the accountability of all property  items. Our scope and methodology are discussed in greater detail in  appendix I. We performed our work from June 2006 through May 2007 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: DOE’s Hanford site in southeastern Washington State was established in  1943 to produce nuclear materials for the nation’s defense. Although DOE  stopped producing nuclear material at Hanford in 1989, millions of gallons  of high-level radioactive waste from production still remain in aging,  underground waste tanks, most of which are beyond their design life and  many of which have reportedly leaked waste into the soil. Since  production ended, DOE has attempted and abandoned several different  approaches to treat and dispose of Hanford’s tank wastes. DOE’s current  approach, the WTP project, is intended to separate the waste into high- level and low-activity fractions, and immobilize all of the high-level  fraction and about half of the low-activity fraction of Hanford’s  approximately 56 million gallons of radioactive waste for permanent  disposal. To achieve this goal, DOE contracted with Bechtel in 2000 to  construct a complex of 3 waste processing facilities, an analytical  laboratory, and over 20 smaller, supporting facilities to treat and package  the waste. The original contract was for $4.3 billion, with a completion  date of 2011. However, since then numerous problems with the design and  construction of the facilities have resulted in several cost and schedule  overruns. DOE currently estimates that the WTP project will cost          $12.2 billion, with a completion date of late 2019. (See fig. 1 for an aerial  view of WTP as of March 2007.)
DOE relies almost entirely on contractors to carry out its production,  research, and cleanup missions. DOE’s history of inadequate management  and oversight of contractors and of failure to hold its contractors  accountable led us in 1990 to designate DOE’s contract management,  including both contract administration and project management, as a high- risk area vulnerable to fraud, waste, abuse, and mismanagement. Similarly,  both DOE and DOE’s Office of Inspector General have reported contract  and project management as significant DOE management challenges since  the 1990s. Over the years, we have also reported on project management  weaknesses at WTP. Because of both contractor and DOE management  problems with the project, DOE directed Bechtel to slow down or stop  construction activities on two of the major facilities—the pretreatment  facility and the high-level waste facility. The construction slowdown  caused Bechtel to lay off several hundred construction workers in 2005,  and caused Bechtel’s total annual WTP expenditures to drop from         $751 million in fiscal year 2005 to $498 million in fiscal year 2006.  However, Bechtel is preparing to restart construction on the two facilities  and hire several hundred more workers in 2007 and 2008. While the  majority of Bechtel’s WTP employees are located at or near the WTP  construction site in Richland, Washington, some are also located off-site,  primarily at Bechtel corporate offices in California and Maryland. DOE  officials stated that because of the difficulty of hiring engineers willing to  relocate to Richland, Bechtel plans to hire many more off-site employees  in the future and is in the process of establishing a satellite office in  Oakland, California, and expanding a satellite office in Frederick,  Maryland, exclusively for the WTP project.
While our previous reports on WTP primarily discussed DOE’s project  management practices, this report addresses aspects of its contract  administration practices. Contract administration involves those activities  performed by government officials, such as the program office staff,  contracting officer and representatives, property administrator, and  financial staff, after a contract has been awarded to help ensure that the  contractor complies with the terms of the contract and that the  government gets what it paid for at an appropriate cost. DOE and the  contractor must also comply with applicable provisions of the FAR, which  is the primary regulation that federal agencies must follow when acquiring  supplies and services with appropriated funds. The Department of Energy  Acquisition Regulation establishes uniform acquisition policies that  implement and supplement the FAR and is applicable to DOE acquisitions.  The contract also specifies the DOE orders and directives that are  applicable to the project. These orders and directives may impose  requirements on DOE, the contractor, or both.
subsections: section_title: Contract Requirements
paragraphs: Under the WTP contract, Bechtel must submit an invoice to DOE twice a  month for reimbursement of all allowable costs incurred to complete the  contract. Excluding incentive fees, each semimonthly invoice averaged  more than $30 million in costs during fiscal year 2005, and more than      $20 million during fiscal year 2006. DOE’s WTP contracting officer was  responsible for approving each invoice within a few days so that DOE  could pay the contractor within 7 days of receiving the invoice as required  under the contract. However, if DOE discovers an overpayment or  underpayment after approval, it can make a subsequent adjustment at any  time prior to contract closeout.
Under the terms of the contract, the FAR, and the cost accounting  standards, reimbursable costs include supplies and services purchased  directly for the contract, payments to subcontractors, direct labor, direct  travel, other direct costs, and properly allocable and allowable indirect  costs. The FAR and the cost accounting standards provide the cost  principles and procedures for determining the allowability, allocability,  and reasonableness of such costs. Bechtel calculates the indirect costs in  each invoice based on the various indirect cost billing rates that Bechtel  and the government’s corporate administrative contracting officer  negotiate and agree to each year. Once agreed upon, the same set of rates  applies to all of Bechtel’s government contracts. The corporate  administrative contracting officer assigned to oversee Bechtel is an official  of DCMA, a component of the Department of Defense. DCAA and, to a  lesser extent, DCMA, perform various reviews and audits of Bechtel’s  corporate-wide billing, purchasing, and accounting systems as well as  various reviews of direct and indirect costs.
The WTP contract provides that title to property purchased by the  contractor for which the contractor is reimbursed by the government  passes to the government, and that the contractor is responsible and  accountable for all such property. It further requires the contractor to  establish and maintain a program for the use, maintenance, repair,  protection, and preservation of government property in accordance with  sound business practice and with FAR 45.5. The FAR provides additional  requirements for the contractor’s property control program, such as  requirements for the contractor to investigate and report to the DOE  property administrator all cases of loss, damage, or destruction of  government property and to require and ensure that subcontractors  provided government property under the prime contract comply with the  FAR requirements. The FAR requires DOE to review and approve the  contractor’s property control system and to perform reviews to ensure  compliance with the government property clauses of the contract. In  addition, DOE Order 580.1, Department of Energy Personal Property  Management Program, sets forth the standards, practices, and  performance expectations for the management of personal property  owned by DOE, including requirements for DOE property administrators  to develop and apply an oversight program, resolve property  administration issues, and make recommendations concerning the  acceptability of contractor personal property management systems.
section_title: Internal Control
paragraphs: Internal control is the first line of defense in safeguarding assets and  preventing and detecting fraud and errors. Internal control is not one  event or activity but a series of actions and activities that occur  throughout an entity’s operations on an ongoing basis. It comprises the  plans, methods, and procedures used to effectively and efficiently meet  missions, goals, and objectives. As required by 31 U.S.C. § 3512(c),(d),  commonly referred to as the Federal Managers’ Financial Integrity Act of  1982, GAO issues standards for internal control in the federal  government. These standards provide the overall framework for  establishing and maintaining internal control and for identifying and  addressing major performance and management challenges and areas at  greatest risk of fraud, waste, abuse, and mismanagement. The  accompanying internal control standards tool provides additional  guidance to assist agencies in maintaining or implementing effective  internal control and in determining what, where, and how improvements  can be implemented. The standards include establishment of a positive  control environment that provides discipline and structure as well as a  climate that influences the quality of internal control. As we reported in  our Executive Guide, Strategies to Manage Improper Payments:  Learning from Public and Private Sector Organizations (improper  payments guide), a lack of or breakdown in internal control may result in  improper payments. Improper payments are a widespread and significant  problem in government and include inadvertent errors, such as duplicate  payments and miscalculations; payments for unsupported or inadequately  supported claims or invoices; payments for services not rendered; and  payments resulting from outright fraud and abuse.
section_title: Inadequate DOE Controls Heightened Risk of Improper WTP Contractor Payments
paragraphs: DOE’s controls over payments to contractors were not effectively  designed to adequately reduce the risk of improper payments, particularly  given the inherent financial risks of the WTP project. Specifically, several  factors combine to pose a significant inherent risk of improper payments  to the government on this project, including the size and complexity of the  project, escalating cost and schedule estimates, and the significant volume  of transactions Bechtel bills to DOE each invoice. However, despite these  risks, DOE performed little or no review of the contractor’s invoices in  fiscal years 2005 and 2006 or of supporting documents for the almost    $1.25 billion Bechtel billed to DOE on these invoices. Instead, DOE relied  primarily on DCAA’s review and approval of Bechtel’s financial systems  and on Bechtel’s review and approval of subcontractor charges. DOE’s  heavy reliance on others, with little oversight of its own, exposed the  hundreds of millions of dollars it spent annually on the project to an  unnecessarily high risk of improper payments.
subsections: section_title: WTP Project Has Significant Inherent Risks
paragraphs: The WTP is a long-term project that DOE currently estimates will cost over  $12 billion and take almost 20 years to complete. The size and complexity  of the project and the escalating cost and schedule estimates pose a  significant inherent risk to the government of improper payments that  warrants a commensurate level of internal controls and oversight to help  mitigate such risk. Table 1 illustrates the major categories of expenditures  billed by Bechtel and reimbursed by DOE for the project in fiscal years  2005 and 2006.
As discussed in GAO’s improper payments guide, the risk of improper  payments increases in programs with a significant volume of transactions  or emphasis on expediting payments. Bechtel bills DOE for thousands of  transactions totaling tens of millions of dollars on every semimonthly  invoice. In addition, the WTP contract specifies that DOE pay the  contractor within 7 days of receipt of a proper invoice rather than the 30  days normally allowed under the Prompt Payment Act before it becomes  liable for a late payment interest penalty. This large volume of  transactions combined with the expedited payment terms increases the  risk of improper payments.
In addition, as a cost-plus-incentive-fee contract, the WTP contract type  has its own inherent risks. Specifically, cost-reimbursement contracts      (1) place maximum risk with the government and minimum risk with the  contractor and (2) provide the contractor with little financial incentive to  control costs. In some cases, the government may incorporate incentives  within the fee structure to encourage the contractor to control costs,  which DOE did in Bechtel’s contract by providing the potential for Bechtel  to earn incentive fees based on the relationship of total allowable costs to  certain cost targets. In this case, however, the current contract incentives  are no longer meaningful because the current cost and schedule goals are  no longer achievable due to the cost overruns and schedule delays that  have already occurred. The FAR specifies that a cost-reimbursement  contract may be used only when appropriate government surveillance  during contract performance will provide reasonable assurance that  efficient methods and effective cost controls are used. Further, GAO’s  Standards for Internal Control in the Federal Government states that  internal control should provide for an assessment of the risks the agency  faces from both external and internal sources. It also states that once risks  have been identified, they should be analyzed for their possible effect,  including estimating the risk’s significance, assessing the likelihood of its  occurrence, and deciding how to manage the risk and what actions should  be taken. Despite these requirements, DOE did not perform or document  any type of formal risk assessment as a basis for determining the level of  surveillance and internal controls it would use to manage the substantial  risks associated with this project. Consequently, the low level of  contractor oversight carried out by DOE was not commensurate with the  high level of risk, thereby increasing the vulnerability of the contract  payments to waste, fraud, and abuse.
section_title: DOE Performed Little or No Review of Contractor Invoices
paragraphs: Despite the project’s risks, in fiscal years 2005 and 2006 DOE performed  little review of contractor invoices or supporting documents for the  millions of dollars in charges that Bechtel billed to DOE twice a month.  GAO’s Standards for Internal Control in the Federal Government states  that internal control activities—such as approvals, authorizations,  verifications, reconciliations, and reviews—should help ensure that  actions are taken to address risks. It further states that control activities  are an integral part of an entity’s planning, implementing, reviewing, and  accountability for stewardship of government resources and achieving  effective results.
In fiscal years 2005 and 2006, Bechtel invoiced DOE twice a month for  WTP expenses, averaging $20 million to $30 million and thousands of  transactions per invoice. According to DOE officials, because of the size  and volume of transactions in each invoice, the contractor did not provide  supporting documents for the individual charges with each invoice but  instead agreed to make them available to DOE upon request. DOE officials  stated that prior to fiscal year 2005, a DOE accountant would judgmentally  select from each invoice a few of the individual charges listed and request  the contractor to provide the supporting documents for them. However,  after a reorganization in fiscal year 2005 placed the contracting officer and  the accounting staff that performed the invoice reviews in separate  branches, DOE discontinued the reviews and instead conducted only an  annual review of a few dozen transactions selected from two or three  invoices. The contracting officer who was responsible for approving the  invoices for payment said that DOE reduced the frequency of its invoice  reviews in fiscal years 2005 and 2006 based on the results of the prior  reviews. Consequently, he stated that his review of the invoice was limited  primarily to ensuring that the contractor used the correct overhead and  indirect cost billing rates; did not make any large, obvious mistakes; and  properly treated any specific, unusual transactions he was expecting  based on the project’s progress.
However, we found the lack of detail on the invoices for direct costs other  than labor hindered DOE’s ability to identify potentially improper charges,  obvious mistakes, or unusual transactions based on the invoice alone.  For example, a standard invoice review procedure would include looking  for items with descriptions of potentially unallowable charges. However,  this type of review was impossible to perform on WTP billings because  neither the contractor’s invoices nor the billing system that generated  them provided adequate descriptions of the charges. The FAR and the  WTP contract require a proper contractor’s invoice to include the  description, quantity, unit price, and extended price of supplies delivered  or services performed. However, the contractor’s invoice does not  provide, and DOE has not required, purchase descriptions. Instead,  Bechtel’s invoices list most transactions under broad cost categories such  as “construction material & supplies” or “subcontracts, consultants, &  outside services” with vendor or subcontractor names, dates, and  amounts. Thus, the lack of transaction descriptions would make it difficult  for the contracting officer to identify obvious mistakes or unusual  transactions, as well as potentially improper charges. Fig. 2 illustrates the  level of detail provided, taken from an actual page of an invoice billed to  DOE.
DOE’s WTP project directors, who were responsible for overseeing the  design and construction of designated WTP facilities and thus had more  knowledge of daily work activities, received an abbreviated version of the  invoice twice a month for review. However, we found that the abbreviated  invoice provided only summary totals for labor, other direct costs, and  indirect costs and did not provide even the limited transaction detail that  was included in the full invoice. Thus, the project directors’ reviews were  limited primarily to assessing whether the total costs billed for their  respective projects appeared reasonable given their projects’ annual  budgets and progress. Although these project directors had project  knowledge, the lack of invoice detail prevented them from performing any  meaningful review of specific costs. For example, one report the project  directors received for project management purposes was a biweekly  report showing the construction materials Bechtel used during that period.  However, the abbreviated invoice did not show the type and amount of  materials purchased or used, or even a summary total of construction  materials billed. Thus, the information on the two documents could not be  compared and neither could be meaningfully used to confirm or question  individual costs being billed to DOE.
According to DOE officials, there was no requirement specifying how  frequently invoices should be reviewed or how such reviews should be  performed. DOE had previously issued a local directive, dated     September 23, 2002, specific to the WTP project that provided DOE staff  with instructions for reviewing Bechtel’s semimonthly invoices. However,  DOE officials stated the directive is inactive because it supplemented the  WTP contract management plan that was undergoing revision, even  though the plan had not been updated since July 11, 2002. According to  DOE’s acquisition guide, voucher (invoice) processing and review is an  important aspect of contract management, and thus the guide  recommends that the contract management plan discuss the process for  reviewing and approving invoices and discuss the roles and  responsibilities of individuals who are directly involved in the process.   The lack of a current contract management plan and corresponding  requirements for invoice review—specifying an appropriate level, extent,  and responsibilities—further impedes the effective administration of the  WTP contract.
section_title: DOE Placed Undue Reliance on DCAA and Other Entities
paragraphs: The manager of the DOE staff that previously performed the invoice  reviews stated that he did not believe that the FAR required DOE to review  the invoiced charges because DCAA had already audited and considered  Bechtel’s accounting system to be adequate. Specifically, he stated that  FAR 32.503-4 allowed DOE to rely on the internal controls of Bechtel’s  accounting system because DCAA had certified Bechtel’s system; thus the  invoice reviews DOE performed in the past were beyond what the FAR  required. However, FAR 32.500 explicitly states that that section of the  FAR does not apply to payments under cost-reimbursement contracts and,  therefore, FAR 32.503-4 does not apply to the WTP contract. Instead, the  FAR recognizes that cost-reimbursement contracts carry a greater degree  of risk to the government, and specifies that cost-reimbursement contracts  should have appropriate government surveillance during performance to  provide reasonable assurance that efficient methods and effective cost  controls are used.
GAO’s Standards for Internal Control in the Federal Government states  that internal control should be designed to ensure that ongoing monitoring  occurs in the course of normal operations, is performed continually, and is  ingrained in the agency’s operations. While the standards acknowledge  that separate evaluations can also be useful by focusing directly on the  controls’ effectiveness at a specific time, both ongoing monitoring  activities and separate evaluations of the internal control system should be  considered in assessing the continued effectiveness of internal control.  Consequently, while external reviews such as DCAA’s can supplement an  overall system of internal control, they are not a substitute for them.  Although DCAA conducts several types of audits of Bechtel, it generally  conducts its reviews at the corporate-wide level and not at the level  specific to a particular contract. Bechtel maintains one overall accounting  system that includes various feeder and subsystems—such as the  timekeeping and billing systems—for the entire corporation. DCAA  audits these systems on a cyclical basis, such that each system is reviewed  only once every 3 to 4 years, and these systems audits are not intended to  determine the allowability of specific costs. Although DCAA performs  annual incurred cost audits that do examine the allowability of the  contractor’s direct and indirect costs, there is a significant time lag  between when a calendar year closes and when the audit takes place. For  example, as of the end of fiscal year 2006 the most recent audit DCAA  completed of Bechtel’s incurred costs covered calendar year 2003. This  delay was caused in part by the typical 8 months that it may take for the  contractor to submit its final indirect cost rate proposal for the year  reviewed and in part by a backlog of incurred cost audits at DCAA. In  addition, DCAA’s incurred cost audits of Bechtel express an opinion on  the allowability of both direct and indirect costs for all of Bechtel’s  government contracts and subcontracts. Although the WTP project  accounts for a substantial portion of Bechtel’s total federal contract  dollars, the 2003 incurred cost audit report listed over 50 applicable  Bechtel contracts. Consequently, WTP was just one of many contracts  included in the audit’s scope of review.
In addition, DOE relied primarily on Bechtel to review and validate  subcontractor charges without having an adequate process in place to  assess whether Bechtel was properly carrying out this responsibility.  While we recognize that under the FAR the government does not have  privity of contract, that is, a direct contracting relationship, with the prime  contractor’s subcontractors, the government should have a process in  place to ensure that the prime contractor is providing adequate oversight  and effective cost control of its subcontractors’ expenditures. This need is  even more pronounced when both the prime contract and the subcontract  are cost-reimbursable contracts. In fiscal years 2005 and 2006, Bechtel had  over 150 subcontracts open, of which 7 were cost-reimbursable  subcontracts with a total contract value of $495 million. DOE’s internal  controls for ensuring the propriety of subcontractor costs were limited  primarily to including selected subcontractor purchases during its periodic  reviews of Bechtel’s invoices. However, as noted previously, during the  period of our review DOE performed little review of the contractor’s  invoices. DOE officials stated they also rely on DCMA’s contractor  purchasing system review of Bechtel, which includes reviewing the  contractor’s controls for subcontracting. However, similar to the DCAA  system reviews described above, DCMA’s contractor purchasing system  review of Bechtel is a corporate-wide review performed only about once  every 3 years, and the review is not intended to determine the allowability  of specific costs. Because a substantial portion of Bechtel’s WTP  expenditures goes to subcontractors, for which DOE ultimately pays, DOE  should have a process in place to provide reasonable assurance that it can  rely upon Bechtel’s controls to ensure subcontractors’ expenditures are  allowable and necessary.
The use of cost-reimbursement contracts places special responsibilities on  the contracting agency to monitor and control costs by using good  contract management and administration practices, including proper  internal controls. By not adequately monitoring charges, DOE may not be  identifying errors or the weaknesses that allowed them to occur and thus  is providing no deterrent to future errors or improprieties. Although DOE  officials stated that they were comfortable with the current level of review  because they had not found a significant number of errors in the past, as  noted in the Strategies to Manage Improper Payments guide, most  improper payments associated with federal programs go unidentified  typically because of factors such as insufficient oversight or monitoring.
DOE recently took some steps to begin strengthening its oversight of  contractor payments. Based on weaknesses identified in its limited fiscal  year 2006 annual review of transactions selected from two invoices, DOE  began performing monthly invoice reviews in fiscal year 2007. While this is  a step in the right direction, it is no substitute for a comprehensive  approach that includes an appropriate assessment of risk that could then  be used as a basis to design a system of internal control that would be  effective in reducing the risk of improper payments. In addition, without  sufficient detail in the invoices from which the transactions are selected,  such reviews are minimally effective in identifying potential improper  payments.
section_title: DOE’s Oversight Controls for Project Assets Were Inadequate
paragraphs: DOE did not perform adequate oversight to reasonably ensure that Bechtel  had established proper accountability for assets purchased with WTP  project funds. The FAR and the contract require the contractor to  establish a property management program to safeguard and account for  such assets. The FAR also requires DOE to review the contractor’s  property program to ensure compliance with the property clauses of the  contract. However, we found that DOE relied primarily on the contractor  to manage WTP property without adequate oversight to help ensure that  the contractor complied with these requirements. As a result, until  recently DOE management was largely unaware of numerous internal  control weaknesses in the contractor’s property management system,  which exposed WTP assets to loss or misuse. While new property  managers for DOE and Bechtel have begun addressing the internal control  weaknesses we identified, both DOE and the contractor will need  continued vigilance in their oversight and management of WTP property to  help ensure that it is adequately safeguarded and tracked.
subsections: section_title: DOE Did Not Ensure the Contractor Maintained Adequate Accountability over Property
paragraphs: DOE reimbursed Bechtel more than $100 million and $200 million in fiscal  years 2006 and 2005, respectively, for property purchased for the direct  construction of the WTP facilities or to support the construction activities.  Such property varies by type and value and includes (1) construction  materials, which may be consumed during construction and incorporated  into an end product (e.g., cement and pipes); (2) plant equipment, which is  personal property of a capital nature and used for administrative or  general plant purposes (e.g., cranes and vehicles); (3) sensitive items,  which are personal property susceptible to theft and misappropriation  (e.g., computers and audiovisual equipment); and (4) tools, which include  both inexpensive handheld tools as well as power tools costing thousands  of dollars.
Despite the hundreds of millions of dollars in WTP funds expended to  acquire property over the years, DOE performed little oversight of  Bechtel’s property management program, relying primarily on the  contractor to meet property requirements and self-report its compliance.  Although the contractor was responsible for the day-to-day management  of the property, the FAR required DOE to (1) review and approve the  contractor’s property management system and (2) ensure compliance with  the government property clauses of the contract. In addition, DOE’s own  policies required DOE to maintain records of approvals and reviews of  contractors’ property management systems. Nonetheless, besides issuing  a letter dated November 21, 2002, approving Bechtel’s property control  system, DOE did not document its review of the system and could not  provide any supporting documentation demonstrating what it reviewed as  the basis for approving the system. The DOE official responsible for the  approval told us that he reviewed the contractor’s policies and procedures  and spot-checked implementation of procedures on site but did not  formally document his assessment or corrective actions he required of the  contractor. Consequently, there was no documentary evidence available  from which we or DOE could evaluate the adequacy of the original  assessment and any corrective actions.
Moreover, DOE did not perform sufficient reviews after its 2002 approval  of Bechtel’s property management system to help ensure that Bechtel  followed property procedures and complied with FAR and contract  requirements. GAO’s Standards for Internal Control in the Federal  Government states that internal control should be designed to provide  reasonable assurance regarding prevention of or prompt detection of  unauthorized acquisition, use, or disposition of an agency’s assets.  However, the DOE official responsible for the oversight of WTP assets  from May 2005 to May 2006 stated that he never went out to the WTP site  to review procedures, observe property management operations, or  conduct spot checks of property because he did not have the time to  perform such reviews. While DOE received some reports from the  contractor related to property—such as periodic reports of lost, damaged,  or destroyed government property and Bechtel’s annual performance  measures report that included limited summary-level data, such as  percentage of items located during physical inventories—it accepted these  reports without performing on-site observations or reviewing any  supporting documentation to validate the information. In addition, DOE  relied solely on Bechtel to ensure that subcontractors maintained  adequate accountability for government property they possessed without  having a process in place to assess whether Bechtel was properly carrying  out this responsibility.
DOE officials acknowledged that DOE oversight of WTP property  management has been inadequate and attributed this control weakness to  a staffing shortage. According to DOE’s personal property director at DOE  headquarters and the WTP contracting officer, a dedicated DOE property  administrator should have been assigned to the WTP project, but DOE had  difficulty filling the position. As a result, DOE did not assign a property  administrator dedicated to the WTP project until June 2006, over 5 years  after it awarded the contract. In the meantime, DOE assigned to the DOE  Richland Office’s property management officer the oversight responsibility  for all government property at Hanford—including WTP property—held by  DOE and several contractors. Although DOE’s written responsibilities for  such property officers identify them as the leader of an appraisal team  responsible for ensuring that DOE contractors established and maintained  effective property management programs, a former property officer stated  that he was never assigned staff to assist him with his oversight  responsibilities. The lack of dedicated DOE staff to oversee management  of WTP property was further exacerbated by the high turnover rate of  property officers assigned to Hanford. DOE officials stated that there have  been four property officers at Hanford within the past 5-½ years, and that  they were assigned other collateral duties in addition to their property  oversight responsibilities.
Ongoing monitoring of the contractor’s program to safeguard and account  for WTP assets located both on- and off-site is critical for preventing and  detecting the loss and misuse of such assets. Had DOE implemented  effective oversight controls, it may have identified the numerous  weaknesses in the contractor’s property management program described  below and could have directed the contractor to take corrective actions  sooner.
section_title: Contractor Did Not Have Adequate Controls for Maintaining Property Accountability
paragraphs: We identified several weaknesses with Bechtel’s property management  program that increased the risk of theft, loss, or misuse of government  assets. The WTP contract provides that title to property purchased by the  contractor for which the contractor is reimbursed by the government  passes to the government, and that the contractor is responsible and  accountable for all such property in accordance with sound business  practice and with applicable provisions of FAR 45.5. As part of these  responsibilities, the FAR requires the contractor to establish and maintain  a program to control, protect, preserve, and maintain all government  property. As of September 30, 2006, Bechtel reported that it had about  $65 million in its inventory of capital equipment and sensitive property and  $16 million in its tools inventory related to the WTP project. Bechtel had  about $100 million in its construction materials inventory as of May 2007.   (See fig. 3 for a sample of equipment and tools used at WTP.)
Our review of Bechtel’s property management program disclosed  numerous internal control weaknesses that exposed government assets to  an increased risk of theft, loss, or misuse and decreased the likelihood of  detecting such incidents in a timely manner:    Inadequate segregation of duties. GAO’s Standards for Internal  Control in the Federal Government state that key duties and  responsibilities should be divided among different people to reduce the  risk of error or fraud. The FAR and Bechtel’s own policies require that  personnel who perform the physical inventory not be the same  individuals who maintain the property records. However, during our  review, one Bechtel employee was primarily responsible for reviewing  the procurement system to identify accountable property purchased,  bar coding property when received, entering new property items into  Bechtel’s government property system, performing annual physical  inventories, and updating the government property system for the  results of the inventory. In addition, no one reviewed the data she  entered into the property system. Bechtel management attributed this  control weakness to reduced staffing caused by the construction  slowdown.
Inaccurate property system data. Bechtel used its government  property system to track its inventory of capital equipment and  sensitive items. Thus, Bechtel’s property procedures required it to  maintain the government property system in a manner sufficient to  keep database records current and accurate. For example, the  procedures state that property management staff are responsible for  updating the property records with current locations and custodians.  However, during our physical observations of selected property items,  we identified items recorded in Bechtel’s government property system  with the wrong custodian or location and items recorded in the system  that were actually missing. We also identified property that Bechtel had  purchased and received but not recorded in the government property  system, such as personal digital assistants, copiers, and computer  equipment. Bechtel’s property management staff explained that the  failure to record the items was caused in part by property staff errors  in determining whether to record certain items and to receiving staff’s  failure to promptly notify property staff of newly acquired property.  Bechtel property staff recorded the assets in their property system  after we brought them to their attention.
Inadequate inventory procedures. The FAR requires the contractor  to conduct periodic physical inventories of all government property in  its possession or control. It also requires the contractor, with the  approval of the government property administrator, to establish the  type, frequency, and procedures for such inventories. However, we  found that Bechtel’s procedures did not specify the frequency or type  of inventory required for construction materials, and DOE approved  Bechtel’s inventory procedures for materials without an established  time frame. Consequently, Bechtel’s property manager stated that while  it had performed some spot inventories of selected materials at various  times, Bechtel had not performed a complete inventory of materials in  fiscal years 2005 or 2006 because of staffing shortages. Bechtel  property management staff also stated that they inventory all assets  recorded in Bechtel’s government property system annually, yet we  identified about 900 items recorded as of September 30, 2006, that the  system showed had not been inventoried within the prior year.  Bechtel staff claimed that the information in the property system was  wrong and that the items had been inventoried, but could not provide  adequate documentation to support their claim. We selected 32 of these  items for observation and could not locate 4 of them. Records in the  government property system as of September 30, 2006, for these 4  missing items—3 computers and 1 projector that are considered  sensitive assets—showed that they had not been inventoried in over      2 years.
Inadequate policies and procedures for the accountability of  tools. Bechtel acquires a large number of tools at substantial cost for  the WTP construction project, billing the government $2.3 million for  tools in fiscal year 2005 alone. Tools are easily pilferable, and while  many tools may be considered nominal in cost, some cost thousands of  dollars and thus warrant commensurate controls to safeguard them  effectively. However, we identified several weaknesses with Bechtel’s  management of tools. For example, because Bechtel lacked adequate  inventory procedures for tools, workers could check out tools from the  main tool crib indefinitely without the tools ever being inventoried to  ensure that they still existed and were being utilized. Additionally,  employee exit procedures were not consistently followed to ensure  that terminated employees returned their tools before leaving. We  selected for observation five tools that property records showed were  assigned to former employees, and found that all five were missing.  Furthermore, our review of the tools database and human resource  records showed that some workers checked out tools the day before or  the day of their termination dates. Bechtel also lacked adequate  guidelines for the disposal of tools damaged through normal wear and  tear. Specifically, until recently there was no requirement to obtain  Bechtel or DOE property management approval to dispose of worn  tools. As a result, warehouse staff independently designated over  $90,000 of tools as “worn” and disposed of them without any  management concurrence required.
Lack of compliance with property checkout procedures. Bechtel’s  property procedures required employees to obtain a property pass for  items removed from project-controlled areas, and to renew the pass  annually if the asset was still needed off-site by presenting the item to  the property staff for inspection. We reviewed Bechtel’s government  property system and found that about 100 of the 300 items checked  out—primarily computers—had expired property passes, some of  which had expired as far back as March 2005. We selected 10 assets  with expired property passes to observe, and could only locate 9 of  them. The missing item, whose property pass had expired in           March 2006, was also one of the computers discussed previously that  had not been recently inventoried. Bechtel property staff stated they  query the government property system monthly to identify and alert  custodians of property passes that are about to expire, but could not  explain how they missed the expired passes we identified.
Lost, damaged, or destroyed property items not promptly  reported. Although the FAR requires the contractor to investigate and  report to DOE all cases of loss, damage, or destruction of government  property, Bechtel did not always submit such reports to DOE timely.  For example, Bechtel did not report to DOE the loss of 3 laptop  computers and 2 projectors until 2 years after it first identified them as  missing. In April 2007, Bechtel reported to DOE another 15 computers,  a printer, and a projector as missing. Bechtel’s government property  system indicated and Bechtel’s property staff confirmed that Bechtel  first identified at least 2 of these items as missing as far back as 2002.  Part of the cause for these delays was that until August 2006 neither  Bechtel nor DOE had policies requiring specific time frames for  investigating and reporting such incidents. Bechtel officials  acknowledged that they should have reported these missing assets  more promptly but stated that the delays were caused by Bechtel staff  not always promptly reporting lost or damaged government property to  Bechtel property staff, and by property staff delaying submitting the  reports in hopes that the missing assets would eventually be found.  These delays in reporting missing assets, particularly computers that  may contain sensitive or proprietary information, decreased the  opportunity for DOE to require a timely and thorough investigation into  the losses and to require Bechtel to promptly implement controls to  help avert future losses of a similar nature.
Inadequate oversight of subcontractors with WTP assets. Bechtel  works with numerous subcontractors that supply materials and  services to help construct WTP facilities, some of which possess WTP  property. The FAR requires the prime contractor to ensure that its  subcontractors adequately care for and maintain government property  and ensure that it is used only for authorized purposes. This is  particularly important since the subcontractors generally maintain the  property records for government property they purchase and use,  rather than Bechtel. Consequently, Bechtel’s property procedures  require its property manager to review and approve its subcontractors’  government property programs. However, Bechtel did not adequately  perform such reviews or follow up on subcontractors’ property  management issues. For example:    Although Bechtel policy required it to audit its subcontractors’  government property programs, one subcontractor refused to be  audited by Bechtel because the subcontractor claimed that it  already had a property program approved and audited by the  government. Even though that program had no relevance to the  WTP contract, Bechtel never audited the subcontractor. In addition,  this subcontractor refused to provide Bechtel a copy of its property  policies and procedures, citing proprietary concerns. Thus, Bechtel  had no basis for and never assessed the adequacy of this  subcontractor’s property management program.
The subcontractors’ property management policies were not always  complete or consistent with Bechtel’s property policies. For  example, one subcontractor’s policy lacked formal procedures for  reporting lost, damaged, or destroyed government property and  thus did not have any requirements for reporting such items  promptly. Another subcontractor’s policy for tracking sensitive  items was inconsistent with Bechtel’s own policy. Specifically, the  subcontractor’s dollar threshold for tracking sensitive items, such  as cameras and video equipment, was higher than Bechtel’s  threshold. As a result, WTP assets susceptible to theft and misuse  were not being consistently tracked in the property systems for  inventory control purposes.
Bechtel did not timely follow up on subcontractor property  management issues it identified through its audit and oversight to  ensure that the subcontractors properly implemented corrective  actions. For example, during an April 2005 subcontractor audit,  Bechtel identified several government assets that were not marked  with indication of government ownership as required by the FAR.  In its audit report, Bechtel indicated that it would perform a follow- up review within 30 days to ensure that corrective actions were  implemented; however, it could not provide us any documentation  that such follow-up was performed. During our visit to that  subcontractor in February 2007, we saw several government assets  that were not marked as government property. During the same  April 2005 audit, Bechtel discovered a missing computer and  instructed the subcontractor to submit a lost property report, which  the subcontractor submitted in June 2005. Bechtel rejected the  report and requested a revision, but did not follow up with the  subcontractor to ensure that a revised report was submitted.  Consequently, Bechtel did not receive a revised report until  February 2007, which it subsequently submitted to DOE.
section_title: DOE and Bechtel Are Implementing Corrective Actions
paragraphs: DOE has recently taken steps to increase its oversight of Bechtel’s WTP  property management program. At the time we began our audit, DOE hired  a property administrator responsible solely for overseeing the WTP  property management program. This property administrator has taken on  a more active oversight role through his procedural and compliance  reviews. For example, since his arrival in mid-2006 he has issued specific  requirements to the contractor for reporting lost, damaged, or destroyed  property more timely; directed the contractor to perform a materials  inventory at least annually; issued guidelines for performing inventories of  tools checked out to workers; and performed several on-site inspections  identifying instances of noncompliance and corrective actions for Bechtel  to address. In addition, he has directed the contractor to prepare and  submit for his approval a detailed inventory plan for construction  materials specifying the inventory type, frequency, and detailed  procedures.
For its part, Bechtel has also initiated a number of corrective actions to  improve its management of government property. Bechtel also hired a new  property manager in mid-2006 who in turn hired several additional  property staff to better address the segregation-of-duties issue and to help  implement requirements. The new property manager has developed and  issued new policies, such as a policy requiring Bechtel and DOE property  management concurrence prior to disposing of worn tools. In addition, he  implemented a new property database system and tasked his staff with  correcting errors in the property system. He stated he also plans to review  Bechtel’s receiving process and tools accountability.
Because the policy and procedural changes primarily occurred after our  review period, we have not assessed the effectiveness of the changes. If  implemented properly, these should help improve the contractor’s  management of government property and DOE’s oversight of the  contractor’s program. However, additional issues remain which, if not  addressed, will continue to expose government property to an increased  risk of theft, loss, or misuse.
section_title: Conclusions
paragraphs: DOE’s oversight of contractor billings and property management on the  WTP project did not have the level of internal controls that would be  expected of a project of this magnitude and complexity. DOE’s lack of  appropriate oversight controls for contractor invoices significantly  increased its vulnerability to improper payments. Further, DOE did not  establish basic oversight controls to reasonably ensure that Bechtel and its  subcontractors appropriately tracked and safeguarded the millions of  dollars in property and equipment purchased for the project. Given that  DOE has estimated that it will likely spend at least another $9 billion on  the WTP project over the next decade or more, it is critically important  that it establish appropriate oversight and controls commensurate with the  risks involved in this costly, complex project. This is particularly  important in the near term as the project ramps back up and the  contractor begins to hire hundreds of additional workers in Hanford and at  off-site locations. The recent corrective actions taken to date, if effectively  implemented, are positive first steps to improving DOE’s oversight of  contractor payments and property management. DOE management’s  commitment and continued attention to these areas will be essential to  establishing a lasting and more effective administration of the WTP  contract.
section_title: Recommendations for Executive Action
paragraphs: To improve DOE’s oversight of and accountability for WTP expenditures,  we recommend the following 11 actions. To improve DOE’s review and  approval process for contractor billings, we recommend that the Secretary  of Energy direct the Assistant Secretary for Environmental Management or  designee to:    Perform an assessment of the risks associated with WTP contract  payments, including subcontractor payments, which should include  comprehensively identifying the risks, performing a risk analysis of  their possible effects, and identifying the actions—both preventive and  detective—to be taken to mitigate those risks.
Based on the results of the risk assessment, establish appropriate  policies and procedures for effective review and approval of the prime  contractor’s invoices. Such policies and procedures should specify the  steps to be performed for review and approval, the individuals  responsible for carrying out these steps, the level of invoice detail  needed to perform an appropriate review, and the appropriate  documentation to be maintained of that review process.
Establish a policy and procedures to periodically assess the prime  contractor’s oversight of subcontractor payments to determine if there  are any deficiencies and corrective actions needed and assess whether  the controls can be sufficiently relied on to ensure that subcontractor  payments are allowable, reasonable, and in compliance with all FAR  and contract requirements.
To strengthen DOE’s accountability for contractor-acquired government  property, we recommend that the Secretary of Energy direct the Assistant  Secretary for Environmental Management or designee to:    Follow DOE’s existing requirements to periodically document and  assess the contractor’s property management program for compliance  with the FAR and DOE policy.
Follow DOE’s existing requirements to document the adequacy of  corrective actions planned and implemented by the contractor to  address weaknesses identified in DOE’s assessments of the  contractor’s property management program.
Direct the contractor to implement control procedures to help ensure  the timeliness and accuracy of information entered into the property  systems.
Review the adequacy of Bechtel’s proposed inventory plan for  construction materials once submitted, and ensure that the approved  plan is properly implemented.
Direct the contractor to establish appropriate controls to ensure that  employee exit procedures requiring terminated employees to return  tools before they leave are followed.
Direct the contractor to establish a formal policy and procedures for  property staff to (1) periodically monitor the government property  system for assets with property passes that are due to expire soon,     (2) notify property custodians with such assets to renew their property  passes or return the items if no longer needed, and (3) ensure that such  assets are verified as required.
Direct the contractor to establish control procedures to help ensure  that Bechtel staff and subcontractors report lost or damaged  government assets to property management in a timely manner so that  they can be forwarded to DOE within recently established time frames.
Establish procedures to periodically assess the prime contractor’s  oversight of its subcontractors in possession of government property to  ensure that the prime contractor (1) audits applicable subcontractors’  property management programs as required, (2) reviews applicable  subcontractors’ property management policies and procedures for  completeness and consistency, and (3) follows up on and documents  resolution of corrective actions in a timely manner.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOE for its review and comment. In  its written comments, DOE stated it had assessed the risk of improper  payments at contract inception, but agreed with the recommendation to  perform an updated risk assessment to ensure adequate oversight and  accountability for WTP expenditures. It did not specifically comment on  the remaining recommendations. DOE stated in the letter that it would  engage with DCAA to update the assessment of the risks, revise the  current policies and procedures related to contractor billings as necessary,  and assess the adequacy of property management staff levels and  capabilities to ensure that adequate coverage is provided for oversight of  the WTP. However, while not disputing the specific facts contained in the  report, the letter states that DOE believes (1) the controls in place during  the period of review, fiscal years 2005 and 2006, met the requirements and  intent of the applicable federal acquisition regulation, DOE orders, and  contract terms; (2) the combination of the contractor’s billing systems,  DCAA’s ongoing audits, and the recurring DOE review of selected invoices  adequately prevent unallowable or improper costs, and (3) the property  management weaknesses and corrective actions reflected in our reported  findings and recommendations were self-identified by DOE and the  contractor. DOE also provided technical comments that we subsequently  discussed with DOE officials and incorporated as appropriate.
We disagree with DOE’s contention that the controls in place during the  period of review met the requirements and intent of the applicable FAR  requirements, DOE orders, and WTP contract terms. For example, as  noted in our report, the FAR and the WTP contract require that a proper  contractor’s invoice include the description, quantity, and unit price of  supplies delivered or services performed, but Bechtel’s invoice did not  include such detail and DOE did not enforce the requirement. DOE’s  policies required it to maintain records of its reviews of contractors’  property management systems, but DOE could not produce any  documentation demonstrating what it reviewed as the basis for approving  Bechtel’s property management system. The FAR requires that personnel  who perform the physical inventory not be the same individuals who  maintain the property records, but at the time of our review one property  staff member was performing both of these duties. These and other  examples in our report illustrate that DOE’s and the contractor’s controls  did not always meet FAR, DOE, or WTP contract requirements.
Further, as reflected in both the report title and objectives, the focus of  our report was not limited to DOE’s compliance with regulations, but  more broadly on the adequacy of its internal controls over contractor  payments and project assets. The Standards for Internal Control in the  Federal Government, with which DOE as a federal agency must comply,  state that internal control is an integral part of managing an organization,  and involves providing reasonable assurance that the agency not only  complies with applicable laws and regulations, but also operates  efficiently and effectively, including the use of the entity’s resources.  Internal control is to serve as the first line of defense in safeguarding  assets and preventing and detecting errors and fraud. Internal control  helps organizations achieve desired results through effective stewardship  of public resources. Our report discusses several areas in which DOE had  not developed the policies needed to effect adequate internal control. For  example, there was no requirement specifying how frequently contractor  invoices should be reviewed or how such reviews should be performed.  Similarly, until August 2006 neither Bechtel nor DOE had policies requiring  specific time frames for reporting lost, damaged, or destroyed property  items. Thus, while taking 2 years to report such property to DOE may not  have violated any specific FAR, DOE, or contract requirements up to that  point, such practices did not constitute acceptable internal control.
Regarding the contractor billing process, DOE stated that it assessed the  risk of improper payments at contract inception and believes the  combination of the contractor’s billing systems (based upon DCAA’s  assurances), DCAA’s ongoing audits, and the recurring DOE review of  selected invoices adequately prevent unallowable or improper costs. We  disagree. The WTP project has changed significantly since contract  inception. Numerous DOE and contractor problems and project  management weaknesses over the years have contributed to an almost  threefold increase in the project’s estimated cost and an almost twofold  increase in the completion schedule since the contract began in December  2000. Thus, a risk assessment performed at contract inception does not  reflect current conditions and risks and thus does not provide a proper  foundation for designing an adequate system of internal control.
Further, while we agree that a DCAA audit of contract costs can provide a  detective control to help determine whether contractor costs were proper,  reliance on an after-the-fact audit is not an acceptable replacement for the  type of real-time monitoring and oversight of contractor costs—preventive  controls—that we found to be deficient. Also, as noted in our report, while  the FAR allows contracting agencies to rely on DCAA’s certification of the  contractor’s accounting system for certain types of payments, the FAR  explicitly excludes payments under cost-reimbursement contracts from  this provision, recognizing that cost-reimbursement contracts carry a  greater degree of risk to the government and therefore must have  appropriate surveillance during performance to provide reasonable  assurance that efficient methods and effective cost controls are used. It is  important that DOE establish a control environment that includes specific  control activities to prevent questionable or improper payments to begin  with or that detects them soon after they occur so that they can be  resolved in a timely manner. Primary reliance on an audit of contractor  costs by DCAA 3 years after DOE reimbursed the contractor for such costs  is not adequate given the magnitude of the contract.
With regard to DOE’s invoice reviews, we noted in our report that DOE  began performing monthly invoice reviews in fiscal year 2007, which we  believe is a step in the right direction. However, we continue to maintain  that the effectiveness of such reviews is hindered by the lack of detail in  the invoices from which the transactions are judgmentally selected. Given  the many challenges and events that have occurred on this project since  the contract began, a proper and current assessment of the risks that is  then used as the foundation for designing an overall system of internal  control is needed to effectively reduce the risk of improper payments.  DOE has committed to updating its assessment of the risks and revising its  policies and procedures as necessary, and we will continue to monitor its  progress in addressing our recommendations in this area.
With regard to the property management issues identified, we commend  DOE and the contractor for taking a more aggressive approach in the last  year toward improving the WTP property management program, which we  recognized in our report. Throughout our fieldwork, we raised issues and  concerns regarding property management weaknesses we observed, some  of which we recognize were also being identified by DOE and the  contractor concurrent with our review. For example, during our initial site  visit in June 2006 we obtained some of the contractor’s reports of lost,  damaged, and destroyed property and noted significant delays in Bechtel’s  reporting of these assets. During the same week, DOE issued a memo to  the contractor questioning these delays, and subsequently issued a new  policy in August 2006 to improve the timeliness of such reporting.  However, we disagree with DOE’s contention that all of the weaknesses  and corrective actions reflected in our findings and recommendations  were self-identified by DOE and the contractor. Our audit work identified  many internal control weaknesses that were not identified before we  raised them or did not result in corrective action until after we brought  them to DOE’s or the contractor’s attention during the course of our audit.
For example, it was our data mining queries of the property databases that  identified the assets checked out to employees with expired property  passes, property items purchased and received that had not been recorded  in the government property system, and tools that were still assigned in  the property records to former employees. Our physical observations of  selected property items identified items recorded in Bechtel’s government  property system with the wrong custodian or location and items recorded  in the tools database that were missing. Our inquiries and walk-throughs  of operations identified still other weaknesses. For example, after Bechtel  told us on May 14, 2007, that a complete materials inventory had not been  done for 2005 or 2006, DOE issued a memo to the contractor on May 17,  2007, expressing disappointment in Bechtel’s inability to provide us with  materials inventory results, and directed the contractor to begin  conducting annual materials inventories starting in 2007. We were  encouraged by the fact that as we asked questions and raised concerns  with both DOE and contractor staff throughout our audit, they typically  took prompt action to address these issues. Continued focus on this area  with prompt, corrective actions consistent with our recommendations will  go a long way toward reducing the risk of theft, loss, or misuse of WTP  assets.
We are sending copies of this report to other interested congressional  committees and to the Secretary of Energy. We will also make copies  available to others upon request. In addition, this report will be available  at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions on this report, please contact me at  (206) 287-4809 or by email at calboml@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: For this review, we considered internal controls in place during fiscal  years 2005 and 2006 at the Department of Energy (DOE) and at Bechtel  National, Inc. (Bechtel) related to the Hanford Waste Treatment and  Immobilization Plant (WTP) project. To perform our work, we reviewed  the WTP contract; the Federal Acquisition Regulation (FAR); DOE’s  Acquisition Regulation (DEAR) and other DOE directives, policies,  procedures; and GAO’s Standards for Internal Control in the Federal  Government to gain an understanding of the applicable requirements. We  made site visits to Richland, Washington, to perform work at DOE’s Office  of River Protection, Bechtel’s WTP project office, and the WTP work site.  We also met with Defense Contract Audit Agency (DCAA) and Defense  Contract Management Agency (DCMA) auditors and with the DCMA  corporate administrative contracting officer and reviewed copies of  relevant reports they had prepared based on their reviews of Bechtel to  obtain an understanding of DCAA’s and DCMA’s reviews and oversight of  Bechtel. We also coordinated with DOE Inspector General staff to  determine whether they had performed audit work that may be relevant to  our review, and met with Bechtel internal audit staff and obtained copies  of their reports. Our work was not designed to determine or estimate the  allowability of all contractor costs or the accountability of all property  items.
subsections: section_title: Data Reliability
paragraphs: To assess the reliability of data we used for this report, we performed the  following steps:    Because Bechtel maintains the billing system that generates the hard  copy invoices it provides to DOE, we requested data extracts from its  billing system representing charges that Bechtel billed to DOE in fiscal  years 2005 through 2006. These extracts contained the amounts billed  to DOE for labor and other direct costs. To assess the reliability of the  billing data extracts for purposes of our review, we (1) compared total  WTP disbursements to Bechtel per DOE’s accounting records to the  total amount of invoices Bechtel billed to DOE for the period,              (2) compared the invoiced total to Bechtel’s schedule of amounts billed  to DOE, (3) compared the amounts shown for labor and other direct  costs on Bechtel’s schedule to the billing data extracts we received for  the period of review, and (4) reviewed other documents to verify the  amount of adjustments and other items billed. We also performed  electronic testing of selected data elements, reviewed existing  information about the data and the system that produced them, and  interviewed Bechtel officials knowledgeable about the system. We  determined that the billing data extracts were sufficiently reliable for  the purposes of this report.
Because the billing system did not contain detailed information—such  as purchase descriptions—for other direct costs that would enable us  to sufficiently perform data mining, we worked with Bechtel staff to  identify an alternative system. Bechtel’s procurement system was the  primary system that contained detailed purchase descriptions;  however, it did not directly feed or otherwise interface with the billing  system. In addition, Bechtel officials stated that the procurement  system was not designed with commensurate controls to be a source  system. We worked with Bechtel staff to attempt to identify a potential  work-around to link the billing system charges to the corresponding  purchases in the procurement system using data from the accounts  payable system; however, results of our electronic testing showed that  the linkages between the data were not sufficiently reliable to perform  data mining.
The billing data extracts contained detailed information on nonmanual  labor costs, such as the amount of straight time and overtime paid per  employee per pay period. However, because Bechtel pays its manual,  or craft, labor costs directly to the unions in aggregate weekly totals,  the billing data only reflect these aggregate payments. Thus, we  requested a data extract of the craft labor payroll system. We assessed  the reliability of the payroll data by comparing the payroll system totals  to the related billing system totals for manual labor, reviewed existing  information about the data and the system that produced them, and  interviewed Bechtel officials knowledgeable about the data. We  determined that the data were sufficiently reliable for the purposes of  this report.
We assessed the reliability of extracts from Bechtel’s human resource  system for nonmanual labor by performing electronic testing of  required data elements, reviewing existing information about the data  and the systems that produced them, and interviewing Bechtel officials  knowledgeable about the systems. We determined that the data were  sufficiently reliable for the purposes of this report.
Based on our property walk-throughs, we determined that controls  over property were weak and that the two property databases used to  track these items were incomplete and thus unreliable. Therefore, we  used the property system data to perform selected internal control  tests to illustrate the effects of their weak property controls, as  discussed further below.
section_title: Payment Controls
paragraphs: To determine whether DOE’s internal controls were adequately designed  to prevent and detect improper payments, we used GAO’s Standards for  Internal Control in the Federal Government as a basis to assess the  internal control structure—control environment, risk assessment  procedures, control activities, information and communications, and  monitoring efforts of DOE over contractor payments. Further, we  reviewed the contract requirements, the FAR, the DEAR, and other  relevant DOE policies, procedures, and guidance. We interviewed program  oversight and financial management personnel regarding policies and  procedures that were in place over contractor payments, performed walk- throughs of key processes, and reviewed supporting documentation to  gain an understanding of DOE’s controls over contractor payments. We  interviewed Bechtel staff to gain an understanding of their billing process  and controls. We performed data mining on billing system nonmanual  labor data, manual labor payroll data extracts, and human resource data  extracts to query for records with certain characteristics, such as  payments made to employees after termination dates and employees with  high numbers of hours paid during a pay period; followed up on query  results with Bechtel staff; and obtained and reviewed supporting data to  corroborate explanations.
section_title: Property Controls
paragraphs: To determine whether DOE’s oversight controls reasonably ensured  proper accountability over WTP property, we used our Standards for  Internal Control in the Federal Government as a basis to assess the  internal control structure—control environment, risk assessment  procedures, control activities, information and communications, and  monitoring efforts of DOE over contractor payments. Further, we  reviewed the contract requirements, the FAR, the DEAR, and other  relevant DOE policies, procedures, and guidance. We also reviewed  contractor and selected subcontractor property management policies and  procedures. We interviewed the DOE headquarters personal property  management division director as well as former and current DOE officials  responsible for the oversight of Bechtel’s management of WTP property to  understand the level and extent of DOE oversight controls over the  contractor’s property management system. Additionally, we interviewed  Bechtel property management staff, requested and reviewed relevant  documentation, and performed walk-throughs to gain an understanding of  Bechtel’s internal controls and procedures over property management. We  also performed the following tests.
Data queries. We performed data mining queries on data extracts  from Bechtel’s government property system and its Toolhound system  to identify records with certain characteristics, such as property not  recently inventoried or items with expired property passes. We  followed up on selected results with Bechtel property staff and  reviewed related documentation. We also selected a nongeneralizable  sample of items from our query results with different attributes to  physically observe as described further below.
Physical observations. We selected assets using three different  methods to perform physical observations. First, based on our query  results, we selected a limited number of assets from Bechtel’s  government property system and Toolhound database to observe at the  WTP project site, selected WTP subcontractors in Richland, and  Bechtel offices in San Francisco in order to test for existence of the  assets and accuracy of recording. Second, to test for completeness of  Bechtel’s and the subcontractors’ government property systems, we  selected a limited number of assets we observed at WTP and  subcontractor sites and determined whether they had been properly  tagged as government property and recorded in the respective property  systems. Third, we selected a limited number of transactions from  Bechtel’s procurement, accounts payable, and purchase card databases  that appeared to be potential property purchases; reviewed the  supporting documents to determine whether they were in fact property  purchases; traced the items to the government property system where  possible to determine if they had been recorded; and physically  observed some of the items. For all items observed, we reviewed  supporting documentation, such as invoices, packing slips, and  material receiving reports; verified the assets’ serial numbers,  custodians, locations, and other key identifying information; and  compared this information to the applicable property systems. Because  we only selected a limited number of transactions from each method in  order to test for different attributes, the results of our review cannot be  used to make inferences about the population.
Contractor compliance with reporting requirements. We  reviewed reports on lost, damaged, and destroyed property that  Bechtel provided to DOE to assess the timeliness of the reports. We  also queried the property databases and reviewed subcontractor  inventory records for items indicated as lost or missing, and compared  them against copies of the lost property reports to determine whether  Bechtel had reported them to DOE. We requested and reviewed copies  of the contractor’s audits and reviews of applicable subcontractors’  property management programs.
We provided DOE with a draft of this report for review and comment.  DOE’s Assistant Secretary for Environmental Management provided  written comments, which are reprinted in appendix II. We also had  subsequent oral discussions with DOE officials to clarify the written  comments. We also provided key DCAA and DCMA officials with draft  excerpts of the report relating to their respective agencies, and  incorporated as appropriate oral and written comments we received from  them. Our work was performed from June 2006 through May 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Department of Energy
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Doreen Eng, Assistant Director;  Jessica Gray; R. Ryan Guthrie; Mary Ann Hardy; Delores Lee; Jenny Li; and  Ting-Ting Wu made significant contributions to this report. Others who  made important contributions included Richard Cambosos; Tim DiNapoli;  and Wil Holloway.