Modernizing the Nuclear Security Enterprise: The National Nuclear Security Administration's Proposed Acquisition Strategy Needs Further Clarification and Assessment
Published: 2011-09-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The National Nuclear Security Administration (NNSA)--a semiautonomous agency within the Department of Energy (DOE)-- proposed in March 2010 a new acquisition strategy that includes consolidating the management and operating (M&O) contracts for two of its eight sites--the Y-12 National Security Complex (Y-12) in Tennessee and the Pantex Plant in Texas--and consolidating all construction projects for all of its sites under a single, enterprise-wide contract. NNSA anticipates that this strategy will reduce costs, enhance mission performance, and improve construction management. NNSA's sites are overseen by colocated federal site offices. GAO was asked to assess NNSA's preliminary proposals for (1) a consolidated M&O contract for Y-12 and Pantex and (2) an enterprise-wide construction contract. GAO reviewed analyses supporting NNSA's acquisition strategy; examined agency directives and guidance; and interviewed DOE, NNSA, and contractor officials.
section_title: What GAO Found
paragraphs: Based on the analysis supporting its proposed acquisition strategy, NNSA expects that the proposed consolidation of the M&O work at its Y-12 and Pantex Plants will increase efficiencies and save $895 million in nominal dollars, primarily through efficiency gains and other improvements in support services (i.e., integrated budget and finance systems, more uniform training and human resources practices), that could result in the potential elimination of about 1,000 support service jobs over the next 10 years. NNSA selected these sites because both have M&O contracts with terms that expire in 2012, as well as similar nuclear production operations. Anticipated savings from this proposed consolidation, however, are uncertain because of the assumptions NNSA used when calculating these savings, the limited details available about the actual work that will be consolidated, and the adequacy of historical data used in the analysis. NNSA officials said that savings will be more accurately determined as industry provides feedback on the recently released draft request for proposal. In addition to cost savings, a number of NNSA and contractor officials have raised other issues with a consolidated M&O contract proposal, including uncertainty about the number of actual staff reductions that can be achieved and the need for a federal oversight plan for the new consolidated contract. In addition, NNSA's analysis suggests that efficiencies may also be achieved under its existing contracts through improved management practices. However, NNSA has not developed a plan for implementing these improved management practices at all of its sites. NNSA also anticipates several potential benefits, including cost savings, associated with awarding a single, enterprise-wide construction contract. It is uncertain, however, whether these benefits will be realized because of a number of issues. For example, NNSA's projected savings from a consolidated construction contract--approximately $120 million in nominal dollars over a 5- year period--are uncertain because NNSA lacks an accurate total cost baseline of its ongoing and planned construction projects and because it is likely that the construction contract will exclude major projects, such as the Uranium Processing Facility and Chemistry and Metallurgy Research Replacement facility, out of concern that this consolidated contract would disrupt ongoing design and construction efforts. Collectively, these two facilities represent about 85 percent of NNSA's total planned construction projects through fiscal year 2016. In addition, NNSA has not conducted, consistent with federal standards of internal control and cost-estimating best practices, an assessment of risks associated with awarding an enterprise-wide construction contract, such as costs and benefits expected enterprise-wide and at each site for both proposed consolidated contracts. NNSA officials and contractors said that NNSA may need increased federal oversight to integrate the work of existing M&O and consolidated construction contractors.
section_title: What GAO Recommends
paragraphs: GAO recommends, among other things, that NNSA develop a plan for implementing the improved management practices identified by its analysis and assess the costs, risks, and benefits of the consolidated construction contract to better define and inform its acquisition strategy and to take appropriate future actions. NNSA generally agreed with GAO's findings and recommendations.

section_title: Letter
paragraphs: The National Nuclear Security Administration (NNSA), a separately  organized agency within the Department of Energy (DOE), is responsible  for the management and security of the nation’s nuclear weapons  programs. In March 2010, NNSA proposed a new acquisition strategy  that includes consolidating the management and operating (M&O)  contracts for two or more of its production sites and consolidating its  nuclear weapons infrastructure construction under a single contract. This  strategy is an important and explicit part of NNSA’s annually updated  Stockpile Stewardship and Management Plan, which includes plans to  improve project and contract management, areas where we have noted  long-standing problems. More specifically, because of issues we  identified with contract and project management at NNSA and its  predecessor organizations, including cost overruns in the billions of  dollars, we designated NNSA’s contract and project management as a  high-risk area that has left it vulnerable to fraud, waste, abuse, and  mismanagement.
To execute the activities to maintain and refurbish the nation’s existing  nuclear weapons stockpile, NNSA oversees eight sites that comprise its  nuclear security enterprise—formerly known as the nuclear weapons  complex—which includes three national weapons laboratories, four  production plants, and a test site, all of which carry out missions to  support NNSA’s programs. These sites execute, among other things, the  Stockpile Stewardship Program, which ensures a credible U.S. nuclear  deterrent without full-scale nuclear testing. This program also includes  nuclear warhead bomb dismantlement and disposition, as well as long- range plans to modernize NNSA’s nuclear security enterprise. Since their  inception, the sites in the nuclear security enterprise have been managed  and operated by private M&O contractors. These contractors operate and  maintain the government-owned facilities and infrastructure deemed  necessary to support the nuclear weapons stockpile and to support the  capabilities to conduct scientific, technical, engineering, and production  activities that ensure the continued safety and reliability of the stockpile.  Colocated federal site offices oversee the day-to-day activities of these  contractors.
For the past several years, NNSA has envisioned an integrated,  interdependent nuclear security enterprise characterized by, among other  things, fewer, more uniform contracts with multisite incentives and more  uniform business practices, technical processes, information  management, and program and project management. As part of this  enterprise concept, in 2008, NNSA created an acquisition strategy team  that performed quantitative and qualitative analysis of various contracting  options. Several consulting firms, including one with expertise in mergers  and acquisitions in the commercial nuclear industry, supported NNSA’s  acquisition strategy team effort. The team’s research, findings, and  recommendations were compiled into a series of reports issued in 2009  that have not been publicly released, are considered procurement  sensitive, and, hence remain for official use only. As a result of this  analysis, NNSA has proposed an acquisition strategy.
Under this proposed acquisition strategy, NNSA plans to seek separate  proposals from companies for (1) a single M&O contract for the Y-12  National Security Complex (Y-12) in Tennessee and the Pantex Plant  (Pantex) in Texas and (2) a single nuclear security enterprise-wide  construction contract. Currently, construction projects are carried out by  the M&O contractors at each of NNSA’s eight sites. In the future, NNSA  may conduct additional contract competitions for consolidated contracts  to manage and operate other nuclear security enterprise sites. According  to the procurement announcement released by NNSA, the agency  anticipates that one part of this strategy—a single M&O contract for Y-12  and Pantex—will allow the contractor to provide greater focus on nuclear  weapons production and also result in more efficient operations and cost  savings, as both sites have complementary operations. In addition, the  current M&O contracts for both sites expire in 2012. NNSA anticipates  that the second part of this strategy—a single, nuclear security enterprise- wide construction contract—will attract top U.S. design, engineering, and  construction contractors and result in improved project planning and  execution. Together, NNSA officials said the agency anticipates that  implementation of its proposed strategy will lead to reduced costs to  manage, operate, and oversee nuclear security enterprise facilities;  enhance mission performance; improve construction management; and  reduce construction costs.
After announcing its intentions to adopt this acquisition strategy, NNSA  faced a number of questions from members of Congress, contractors,  concerned communities, and citizens. Among the key questions were  concerns about the impact of this strategy on workers at the sites and  how the strategy would affect two of NNSA’s largest construction projects.  NNSA issued a draft request for proposal (RFP) for the M&O of Y-12 and  Pantex on July 21, 2011. It has not yet released a draft RFP for a single,  nuclear security enterprise-wide construction proposal.
In this context, you asked us to examine NNSA’s proposed acquisition  strategy. Specifically, our objectives were to assess NNSA’s preliminary  proposals for (1) a consolidated M&O contract for Y-12 and Pantex and  (2) an enterprise-wide construction contract.
To address both objectives, we examined key NNSA strategy,  management, and planning documents. These documents included  NNSA’s Report on the Plan for Transformation of the NNSA Nuclear  Weapons Complex and the accompanying Final Complex Transformation  Supplemental Programmatic Environmental Impact Statement and  associated Records of Decisions. In addition, we examined NNSA’s  Acquisition Strategy Team Report (analysis), which included subteam  reports on the impact to the NNSA mission, cost analysis, and estimates  for cost savings; federal workforce reports and communications; and  consolidated contracts analysis, including contract competition and  construction management alternatives analysis. We also compared  NNSA’s acquisition strategy team charter and mission statement and the  work carried out by its team to the practices in GAO’s Cost Estimating  and Assessment Guide, which identifies characteristics of a high- quality—that is, reliable—cost estimate, and relevant provisions from the  Federal Acquisition Regulation and the DOE Acquisition Regulation.
We also examined the reports completed by several firms covering  projected cost savings and other effects of potential consolidated  contracts at NNSA nuclear security enterprise sites. These reports were  important in helping inform NNSA’s proposed acquisition strategy. In  addition, we examined DOE’s Office of Cost Analysis (OCA) review,  NNSA’s Contracting Request for Information reports, and NNSA’s  analysis and summary report on requests for information. Our review also  included visits to a nonprobability sample of the nuclear security  enterprise sites, Y-12 and Pantex, which will likely be the first sites  affected by the proposed strategy, and included interviews with NNSA  site office officials and discussions with current facilities contractors.  Because we used a nonprobability sample of sites to visit, the information  we obtained from these visits cannot be generalized to other sites, but the  visits provided us with information on the perspectives of various federal  officials and contactors about the sites. To gain further insights and  perspectives into NNSA’s proposed contracting strategy, we interviewed  a wide range of NNSA officials; contractors; and experts, including NNSA  Senior Management, NNSA Contracting Strategy Team, and OCA  officials; potential future contractors; and nuclear security enterprise  subject matter experts. We conducted this performance audit from August  2010 to September 2011 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.
subsections: section_title: Background
paragraphs: Nuclear weapons have been and continue to be an essential part of the  nation’s defense strategy. The end of the cold war resulted in a dramatic  shift in how the nation maintains such weapons. Instead of designing,  testing, and producing new nuclear weapons, the strategy has shifted to  maintaining the existing nuclear weapons stockpile indefinitely and  extending the operational lives of these weapons through refurbishment,  without nuclear testing.
Established by Congress in 2000 as a separately organized agency within  DOE, NNSA has the primary mission of providing the United States with  safe, secure, and reliable nuclear weapons in the absence of  underground nuclear testing and maintaining core competencies in  nuclear weapons science, technology, and engineering. To support this  highly technical mission, NNSA relies on capabilities in several thousand  facilities located at eight nuclear security enterprise sites that support  weapons activities. These sites are owned by the government but  managed and operated by private M&O contractors. Each site has  specific responsibilities within the nuclear security enterprise, with six of  them having important production missions (see fig. 1).
NNSA reimburses its M&O contractors for the allowable costs incurred in  carrying out NNSA’s missions. These include costs that can be directly  identified with a specific NNSA program (known as direct costs)—for  example, the costs for dismantling a retired weapon—and costs of  activities that indirectly support a program (known as indirect costs), such  as administrative activities. To ensure that NNSA programs are  appropriately charged for incurred costs, M&O contractors’ accounting  systems assign the direct costs associated with each program and collect  similar types of indirect costs into pools and allocate them among the  programs. Consistent with Cost Accounting Standards (CAS), M&O  contractors must classify their costs as either direct or indirect and, once  costs are classified, must consistently charge their costs to these  classifications. M&O contractors are required to disclose their cost  accounting practices in formal disclosure statements, which are updated  annually and approved by NNSA officials. M&O contractors’ cost  accounting practices cannot be readily compared with one another  because contractors’ methods for accumulating and allocating indirect  costs vary—that is, a cost classified as an indirect cost at one site may be  classified as a direct cost at another.
To obtain more consistent information about the support costs at DOE’s  major contractor-operated facilities, in the mid-1990s, DOE’s Chief  Financial Officer (CFO) created 22 standard categories of “functional  support costs.” These categories include, for example, executive  direction, information services, procurement, maintenance, and facilities  management. Each of the 22 categories is defined to cover all related  costs, regardless of whether contractors classify them as direct or  indirect. From fiscal years 1997 through 2010, the CFO required the  department’s primary contractors to annually report these costs. To  oversee the quality of these data, contractors’ financial personnel peer  reviewed the data for each facility once every few years. According to the  CFO, functional cost data are derived, to the extent possible, from  contractors’ existing accounting systems and overlaying financial  structure, but contractors do not budget, accumulate, or distribute costs in  their formal accounting systems in the same manner. Because of this,  and because numerous site specific factors (missions, size, age, location  of facilities) influence support costs, the CFO refers to functional costs as  sufficient for trending costs at a given site over time but not necessarily  for comparison across sites. NNSA officials and contractors have told us  in the past that the collection of historical functional support cost data has  also been marked by different definitions and interpretation of functional  cost categories, as well as different data gathering methods. Because of  these limitations, in 2011 DOE significantly revised its guidelines for the  collection of contractor cost data. These guidelines now de-emphasize  functional support cost reporting.
NNSA’s Office of Defense Programs is responsible for NNSA’s weapons  activities and oversees the sites’ M&O contractors. Federal site offices  are located at each NNSA site to perform day-to-day oversight of these  contractors’ activities. Federal site office managers serve important roles,  in conjunction with the Office of Defense Programs, such as determining  contract award fees and managing and accepting safety and security  risks at their sites.
The administration, through the legislatively mandated 2010 Nuclear  Posture Review, established the nation’s nuclear weapons policy and  strategy. This strategy seeks to maintain a safe and reliable but smaller  nuclear deterrent than in the past. More specifically, the United States  has agreed to reduce the size of its strategic nuclear weapon stockpile  from a maximum of 2,200 to 1,550 weapons. This stockpile is composed  of seven different weapons types, including air-delivered bombs, ballistic  missile warheads, and cruise missile warheads. As the stockpile is being  reduced, the administration pledged additional funds to modernize and  operate the nuclear security enterprise, to include the refurbishment of  weapons currently in the stockpile and the construction of important new  production facilities to support these refurbishments. NNSA’s fiscal year  2012 Stockpile Stewardship and Management Plan provides details of  nuclear security enterprise modernization and operations plans over the  next two decades. During this period, NNSA estimates it will have funding  needs of about $180 billion. In 2010, the administration pledged over $88  billion to fund the first decade of this plan.
NNSA’s efforts to improve its operations and business practices predate  the 2010 Nuclear Posture Review but are now an important component of  NNSA’s modernization efforts. In 2008, NNSA established an acquisition  strategy team that examined 11 different contracting options to reduce  costs and improve operations. Eight of these options involved combining  various production missions under a single M&O contract. Another three  options looked at combining functional areas, such as safeguards and  security, construction management, and information technology, at  multiple sites under a single contract. To conduct its analysis of these  options, the team did the following: (1) compiled and analyzed available  historical functional support cost data for six of NNSA’s eight sites (see  fig. 1); (2) attempted to normalize these data to account for discrepancies  and anomalies in them, compared these normalized data across sites in  an attempt to create a “common financial language,” and benchmarked  this information against information from commercial nuclear industry  mergers and acquisitions; (3) developed a set of major assumptions to  frame the analysis; (4) compared the expected effects of the proposed  consolidation with a status quo or baseline scenario where no M&O  consolidation occurs; and (5) developed estimates for potential cost  savings resulting for each option. The team completed its analysis in  2009 and, in March 2010, NNSA in large part adopted the acquisition  strategy team’s primary recommendations and announced plans to  undertake a two-part acquisition strategy. According to NNSA officials,  NNSA rejected the team’s proposal to include the Los Alamos National  Laboratory’s (LANL) production mission as a future option in the  consolidated M&O contract on the grounds that LANL’s research and  development mission were too diverse and complex to separate. The  agency also decided not to pursue for, the time being, a proposal to  consolidate the nonnuclear production carried out by the Kansas City  Plant (KCP) and the Sandia National Laboratory (SNL). KCP expects to  transition to a new facility by the end of 2012, which we reported on in  October 2009.
section_title: Benefits of NNSA’s Move to a Single M&O Contract for Y-12 and Pantex Will Remain Uncertain until NNSA Further Develops Its Proposal
paragraphs: NNSA’s anticipated benefits as a result of its proposal to award a single  contract for the management of Y-12 and Pantex will remain uncertain  until NNSA makes decisions about the details of the contract and  addresses several issues raised by NNSA officials, contractors, and  members of Congress. Among these benefits, NNSA anticipates that  increased efficiencies at those sites could save an estimated $895 million  in nominal dollars over the next 10 years. Some cost savings seem  likely under a single contract, but NNSA’s analysis suggests that  efficiencies also could be achieved under existing contracts. In addition,  NNSA’s estimated cost savings are uncertain due to issues relating to the  methodology NNSA used to support its estimate and the adequacy of the  cost data used. In addition, NNSA, contractor officials, and members of  Congress have also raised a number of concerns that a single M&O  contract could disrupt work at the sites, which if unaddressed, could  ultimately affect the safety and reliability of the nuclear weapons  stockpile.
subsections: section_title: NNSA Expects Increased Efficiency and Savings of $895 Million Over 10 Years
paragraphs: According to its analysis on the proposed acquisition strategy, NNSA  expects that the proposed consolidation of the M&O work at its Y-12 and  Pantex sites will increase efficiencies at those sites. These expected  efficiencies are based on a combination of assumptions made by NNSA  in its analysis of the proposal, input from private consultants with  experience involving mergers and operations at commercial nuclear  facilities, and discussions with staff at the sites. According to the analysis,  these efficiencies are expected to result primarily from (1) more  streamlined and uniform operations and (2) improved performance by the  contractor.
First, NNSA’s analysis indicates that consolidating the contracts will  streamline and make more uniform training; human resources practices;  and information systems, such as payroll, budget, and finance systems;  and improve the comparability of management data at both sites. For  example, there are over 100 different information technology systems and  applications at the Y-12 and Pantex sites, and NNSA concluded in its  analysis that merging some of those systems would lead to improved  effectiveness, data integrity, and security. In addition, NNSA’s analysis  concluded that a consolidation could have similar benefits in interactions  with external parties, such as regulators and vendors, as those entities  would need to coordinate with only one contractor instead of two or three.
Second, NNSA’s analysis concluded that the one contractor overseeing  the consolidated M&O work at these sites would improve performance as  a single contractor would be able to implement best practices across its  sites more easily. For example, a single M&O contract would allow the  contractor to more readily share its processes and approaches to reduce  costs, and efficiencies and commercial production practices could be  more easily transferred among sites.
NNSA’s analysis estimated that these efficiency gains and other  improvements could eliminate about 1,000 full-time equivalent (FTE)  support service jobs over the next 10 years at the Y-12 and Pantex sites.  NNSA estimated that the elimination of these FTEs could lead to a  savings of $895 million in nominal dollars over the same period. To  calculate these estimates, NNSA’s projected baseline cost for operations  over the next 10 years was $23 billion. NNSA and its private consultants  then estimated the potential staff reductions that could occur by  consolidating contracts at certain sites based on a comparison of current  NNSA staffing levels with those in the commercial nuclear industry. This  comparison did not involve identifying specific jobs at the particular NNSA  site that would be eliminated, but rather it involved estimating how certain  general job functions—such as management, security, and human  resources—might be adjusted to more closely align with commercial  nuclear industry levels. For example, an NNSA consultant estimated that  FTEs associated with the CFO and human resources would be reduced  by about 45 percent, and FTEs associated with information technology  and procurement reduced by about 30 percent if the contracts were  consolidated. NNSA’s analysis concluded that more than 1,000 of the  nearly 10,000 contractor FTEs at the Y-12 and Pantex sites would no  longer be needed after the consolidation and that these positions would  be eliminated over a 5-year period. NNSA estimated that, over the next  10 years, these FTE reductions would reduce costs at these affected  sites from $23 billion to about $22 billion, or about 4 percent of the total  cost of operations at these sites, and about 1 percent of NNSA’s funding  at all of its sites during that period.
section_title: NNSA’s Analysis Suggests That Efficiencies Could Be Achieved under Existing Contracts
paragraphs: According to NNSA’s analysis, although efficiencies are expected as a  result of consolidating contracts, NNSA could also achieve efficiencies  through its existing M&O contracts. Specifically, the analysis included 18  recommended improved management practices that would make  changes to the current management of all eight of its sites that could lead  to process improvements and cost savings. These recommendations  included substituting commercial best practices and industrial standards  for DOE directives, standardizing security force equipment, improving  enterprise-wide collection and analysis of costs, and streamlining  contractor pension and health benefits plans. NNSA contractors we spoke  with also said that many of the efficiencies expected under this strategy  could be realized by NNSA under its existing contracting approach  without a contract consolidation. For example, officials representing the  contractors at Pantex and Y-12 both said their companies had begun  implementing some of these changes at their respective sites and had  seen efficiencies and savings already. We view these actions on the part  of contractors as positive and a step in the right direction toward more  effectively and efficiently managing NNSA contracts. However, NNSA has  not identified in a systematic manner, how it plans to implement these 18  improved management practices at all of its sites. Without that  implementation information, it is unclear whether NNSA is taking every  opportunity to improve its contract management practices.
section_title: NNSA’s Estimated Cost Savings Are Uncertain Due to Issues Relating to NNSA’s Methodology and Poor Historical Cost Data
paragraphs: In a 2010 testimony before the Senate Armed Services Committee,  NNSA’s Administrator stated that, while many of the details still need to  be worked out, the consolidated M&O contracting strategy can save  taxpayers more than $895 million over the next decade. However, the  sensitivity of NNSA’s key assumptions formulated in 2008 to 2009; the  lack of details surrounding the scope of work of the contract; and the  recognized problems in comparative, historical DOE and NNSA cost data,  make realizing these savings uncertain.
A key assumption used in NNSA’s cost savings calculation––estimating  future costs under both status quo and contract consolidation scenarios–– relied on assumptions that may no longer be valid. For example,  according to NNSA officials and documents we reviewed:    NNSA’s analysis assumed that its baseline future funding and staffing  levels at the sites would remain flat. This assumption is in sharp  contrast to the commitment made by the administration in 2010 to  request increased funding to modernize the nuclear security  enterprise and the funding needs identified in the fiscal year 2012  Stockpile Stewardship and Management Plan.   NNSA’s analysis assumed that commercial nuclear industry data  would serve as a valid basis for comparison when forecasting staffing  and funding levels at its sites under a consolidated contract. However,  several NNSA and contractor officials questioned the use of these  commercial data as a benchmark because they may not accurately  reflect the work that occurs at NNSA sites. For example, in the case of  security costs, an NNSA official said that the security needs and  activities at Y-12 and Pantex, which handle nuclear weapons  components and nuclear weapons, respectively, differ significantly  from security needs at commercial nuclear facilities.   NNSA’s analysis assumed that the contracts at the Y-12 and Pantex  sites would not be extended upon the expiration of their terms at the  end of 2010 and would instead be either recompeted or consolidated.  However, because of delays in issuing an RFP for the consolidated  M&O contract, NNSA was forced to extend the terms of the contracts  for both of these sites for an additional 18 months in 2010, which will  likely affect estimates of both the expected future costs and  anticipated savings at those sites.
In addition, since announcing its intention in March 2010 to consolidate  M&O contracts at Y-12 and Pantex, NNSA did not announce the  preliminary scope of work (through a draft RFP) to be included in its  consolidated M&O contract until July 21, 2011—at the same time we  were concluding our work. This timing limited our ability to review the  calculation of estimated savings since it was unclear if NNSA’s draft RFP  would align with the assumptions used in its analysis. According to NNSA  officials, the recently released draft RFP for the consolidated M&O  contract outlines more complete details about NNSA’s proposed  contracting strategy. NNSA officials told us that the agency anticipates  that industry feedback on the draft RFP, due by September 19, 2011, will  be important in structuring the final RFP. Final RFPs include information  such as the government’s requirement, anticipated terms and conditions  of the contract, information required to be in the offeror’s proposal, and  factors that will be used to evaluate the proposal and their relative  importance. Unlike a draft RFP, which is one way the government  promotes early exchanges of information with industry, a final RFP is  intended to result in a contracting action.
Furthermore, historic cost data were not readily available for NNSA to use  in its cost analysis, requiring NNSA to create its own historical “financial  common language” for its sites. More specifically, a key step in NNSA’s  process to estimate savings—developing a comparative baseline of  historical site costs––was a difficult and inexact process because DOE  and NNSA contractors use different methods for tracking costs, and  DOE’s functional support cost data are of limited use in comparing sites.  NNSA sought to develop a clearer picture of potential cost savings across  its sites, working with NNSA and contractor officials at its sites trying to  resolve discrepancies and anomalies in the historical cost data. Using  these “normalized” data, and other assumptions, NNSA arrived at its cost  savings estimate of $895 million in nominal dollars, which it called “most  likely.” DOE’s OCA, which was established within the CFO Office in  2008, also examined historical functional support costs but excluded  some of the most questionable data and arrived at a cost savings  estimate of $750 million over 10 years. Any cost savings estimate  should be viewed as illustrative rather than precise because of the quality  of the data. This is consistent with our Cost Estimating and Assessment  Guide, which notes that specific “point” estimates are more uncertain at  the beginning of a program because less is known about its detailed  requirements and opportunity for change is greater. In discussions with  GAO, NNSA officials agreed that actual savings will be more accurately  determined with the release of a draft RFP, which will better define the  scope of the work and, ultimately, by the execution of the contract.
section_title: Proposed Consolidated M&O Strategy Raises Additional Issues
paragraphs: In addition to concerns over cost savings, a number of NNSA and  contractor officials have raised issues about a consolidated M&O contract  potentially disrupting the work at sites. These issues include: (1)  uncertainty about actual staff reductions, (2) opposition from local  constituents, (3) security force issues, (4) need for a federal oversight  plan, and (5) potential for reducing the number of contractors willing and  able to participate in the competition.
A number of NNSA site officials that we spoke with said that they were  skeptical that such large staff reductions were possible in a consolidated  M&O contract. In fact, NNSA reported in its 2012 Stockpile Stewardship  and Management Plan (an annual report to Congress on the status of  NNSA’s efforts to manage and modernize the nuclear weapons  enterprise) that the contractor staffing levels at the sites are currently too  low and that further reductions are not plausible. The plan characterizes  current contractor workforce levels as lacking robustness and depth and  states that there is little or no redundancy in the contractor workforce. The  plan noted, for example, that the production activities at the sites were  already operating at minimum staff levels—some having recently  eliminated some staff. Any further reductions would threaten the success  of the mission of the sites. Some site officials also said that other indirect  functions, such as security and oversight, would not experience any  efficiency under a consolidated contract because those functions would  still require the same number of staff at each specific site regardless of  the management structure. For other indirect services, such as  information technology and human resources, which make up a small  portion of the total FTEs, the opinions of site officials were mixed, with  some acknowledging the possibility of some reductions, while others were  skeptical of any reductions in FTEs.
NNSA announced in 2010 that the incoming contractor of the  consolidated M&O contract would have the flexibility to restructure the  workforce, which has led to employee concerns at both sites that may  present challenges to NNSA. According to one NNSA official, although  included in other DOE contracts, NNSA typically has not included such a  provision of workforce flexibility in past contract restructuring; instead it  has traditionally accepted the same terms as the previous contractor with  regard to human resources issues. Restructuring the workforce now may  be difficult because advocates representing current employees, including  unions, have voiced opposition to any actions that negatively impact  workers. As a result, opposition from some constituents and their  representatives could complicate any attempts to consolidate the  contracts if that consolidation includes staff reductions. For example, in  response to these concerns, two members of Tennessee’s congressional  delegation recently sent a letter to the Secretary of Energy asking him not  to consolidate the contracts at these sites citing, among other reasons,  concerns about the need to maintain a focused and skilled workforce.  Even the prospect of a consolidation may already be having negative  impacts on staffing. According to contractor officials at one site, some  currently vacant support positions that could be eliminated under a  consolidated M&O contract, such as a general counsel position, have  been difficult to fill. NNSA’s analysis notes that employee concerns such  as these could affect important site operations, though, according to site  office officials, currently none have been reported.
In addition, federal site office officials noted two concerns about how a  single M&O contract will affect contractor guard forces, which at NNSA  and DOE sites are known as protective forces. These forces are a key  component of security at sites with special nuclear material, which is a  high security risk. Y-12 and Pantex have over 1,000 protective forces  combined. First, as we recently reported, these protective forces each  operate under different contracts and contractors, have different pay and  benefit structures, and are represented by different collective bargaining  agreements. As such, site office officials told us combining these two  protective forces under a single contract could be difficult. Second, the  current M&O contractor at Pantex employs protective forces, and  protective forces are employed at Y-12 under a direct protective force  contract (i.e., a non-M&O contract). In addition to the Y-12 site, the same  contractor provides, under a separate contract, protective forces for other  important, nearby operations in DOE’s Oak Ridge Reservation, such as a  major environmental cleanup of hazardous materials. It is unclear how  protective forces will be provided for DOE’s Oak Ridge Reservation under  a consolidated M&O contract.
Furthermore, because of increased complexity under a consolidated  contract, some NNSA officials said that federal oversight of a  consolidated contract may need to be enhanced. NNSA’s analysis  showed that effective federal oversight is crucial to realizing cost savings  and performance in both current and future contracts and that its  employees must be better equipped to manage the contractors under any  type of contract. The analysis also recommended that NNSA better train  its federal site officials to ensure accountability of its contractors. Federal  officials NNSA interviewed as part of conducting its analysis also  expressed the need to have federal oversight changes in place before the  new contracts go into effect. However, NNSA’s plans to improve federal  oversight of these contracts are still in the early stages of development.  NNSA recently awarded a contract to study the structure, roles, and  responsibilities of federal site office oversight that will include oversight of  the proposed M&O contract consolidation; this study is expected to be  completed in December 2012. Until NNSA has the results of its federal  site office study, including information on federal workforce needs, it  cannot finalize plans and begin to prepare the federal site offices for the  transition to the new contracts. In its response to our draft report, NNSA  said that it will develop a site office structure prior to contract award.
According to NNSA’s analysis, and some NNSA officials and contractors,  it is likely that the number of contractors willing and able to participate in  the competition will decrease (compared with competition for separate  contracts) due to the large scope of diverse and complicated work being  consolidated, resulting in fewer contractors that may have the interest or  capability to execute the contract successfully. As part of this review, we  found that previous NNSA contract competitions during the last 10 years  attracted an average of three contractors or contracting teams. According  to some NNSA officials and contractors, it is quite possible that there will  only be a single offeror for a consolidated contract, although this offeror  will likely consist of a consortium of companies with specialized technical,  management, and administrative expertise to perform the work required  by the large contract scope. An NNSA official suggested that such a  consortium could preserve the benefits of competition by involving the  strongest firms. After reviewing NNSA’s proposal, DOE’s OCA reported,  however, that a decrease in the number of competitors interested in  competing for this contract could cause costs to actually increase over the  long-term because NNSA may be forced to choose from only one or two  contractors. Recently, the Office of Management and Budget also warned  that competitions that yield only one offer deprive agencies of the ability  to consider alternative solutions in a reasoned and structured manner.
section_title: Benefits of a Single Enterprise-wide Construction Contract Will Remain Uncertain Until NNSA Further Develops Its Proposal
paragraphs: NNSA has identified several potential benefits associated with awarding a  single, enterprise-wide construction contract, but a number of issues have  also been raised by NNSA and others. NNSA’s analysis identified some  potential benefits, including a new dedicated nuclear security enterprise- wide focus on management of major construction projects to meet  schedules, cost savings, and the implementation of uniform business  practices in executing major projects. However, NNSA’s projected  savings from a consolidated construction contract—approximately $24  million per year or $120 million in nominal dollars over a 5-year period—is  uncertain, especially since it appears unlikely that some of NNSA’s major  construction projects will be part of the contract. In addition, NNSA’s  analysis did not include a formal assessment of the risks involved in this  effort, as is recommended by federal standards for internal control. NNSA  and others have also identified two potential concerns associated with the  new contracting strategy, including (1) the need to closely integrate the  work of the existing M&O and new construction contractor could  necessitate increased federal oversight and (2) reduced industry interest  in the contract if major projects are not included.
subsections: section_title: NNSA Has Identified Potential Benefits of a Consolidated Construction Contract
paragraphs: NNSA’s analysis identified several potential benefits that could result from  awarding a single construction contract. The potential benefits include the  following:    Allowing the M&O contractor to focus its resources on its core mission  of managing and operating sites and having U.S. engineering and  construction management contractors focus on construction.   Having a dedicated nuclear security enterprise-wide focus on  management of major construction projects to control costs and meet  schedules.
Implementing uniform business practices in executing major projects  across the nuclear security enterprise.   Realizing cost savings of about $120 million over a 5-year period,  primarily because the eight M&O contactors will be able to reduce  construction personnel.
section_title: The Estimated Cost Savings Resulting from a Consolidated Construction Contract Are Uncertain
paragraphs: NNSA’s projected savings from a consolidated construction contract are  uncertain. NNSA estimates the projected savings resulting from awarding  such a contract at approximately $120 million in nominal dollars over a 5- year period, which is approximately 2 to 3 percent of the projected total  construction costs. The cost savings are primarily achieved through the  assumption that future M&O contractors will have less need to maintain a  large cadre of construction personnel. However, actual cost savings  resulting from implementing a consolidated construction contract strategy  that NNSA developed are uncertain for three primary reasons.  Specifically:    NNSA does not have an accurate total cost baseline of its ongoing  and planned construction projects. For example, we reported in  February 2011 that NNSA had identified 15 ongoing capital  improvement projects as necessary to ensure future viability of the  Stockpile Stewardship Program but did not have estimated total costs  or completion dates for all projects. As we also reported in  November 2010, NNSA has a history of inaccurately estimating the  cost of major construction projects, including recent inaccurate  estimates for facilities included in the estimate for potential cost  saving. For example, as we reported in November 2010, NNSA’s  2007 estimate for its Uranium Processing Facility (UPF) at Y-12  indicated the facility would cost from $1.4 to $3.5 billion in nominal  dollars to construct—more than double its 2004 estimate of $600  million to $1.1 billion. In 2010, NNSA again adjusted its estimate for  the UPF, estimating the facility will cost from $4.2 to $6.5 billion in  nominal dollars to construct—double its 2007 estimate. Without an  accurate total cost baseline of its ongoing and planned construction  projects, it will be difficult for NNSA to accurately estimate savings.   The consolidated construction contract may not include some of  NNSA’s major construction projects. According to one NNSA official,  NNSA’s projected savings from a consolidated construction contract  assumes that all construction projects costing over $10 million dollars,  excluding the Mixed Oxide Fuel Fabrication Facility, which is well  under way at SRS, will be included in the contract. NNSA’s analysis  assumed that, once the consolidated construction project is in place,  about half of the M&O contractors’ construction personnel will no  longer be needed. As with the draft RFP for the consolidated M&O  contract, NNSA has delayed the release of the draft RFP for the  consolidated construction contract, but, according to agency officials,  plans to release it later in 2011. These officials told us that the agency  anticipates that industry feedback on that RFP will be important in  structuring the final RFP. However, an NNSA official associated with  the contracting effort recently stated that the contract probably will not  include the most expensive and significant construction projects  planned for the next 10 years. More specifically, senior NNSA officials  told us that it is unlikely that the construction contract will include UPF  and the Chemistry and Metallurgy Research Replacement facility  (CMRR) at LANL or some other major facilities because including  them would disrupt ongoing design and construction carried out by  M&O contractors. Collectively, these two facilities represent about  85 percent of NNSA’s total planned construction projects through  fiscal year 2016. Other NNSA construction projects are also unlikely  to be included in the consolidated contract. For example, the Pit  Disassembly and Conversion Facility planned for SRS, may not be  included in the scope of the consolidated contract, according to NNSA  officials, because of this facility’s high cost and lack of a stable cost  estimate.   NNSA’s cost savings’ estimate was, according to an agency official,  relatively cursory, given the lack of an accurate total cost baseline of  its ongoing and planned construction projects and since the focus of  the proposal is to improve project management. We found that NNSA,  in this part of its acquisition strategy, did not employ best practices  such as conducting a sensitivity analysis, identified in our Cost  Estimating and Assessment Guide for developing reliable cost  estimates.
section_title: NNSA’s Analysis Neither Fully Assessed Risks Nor Identified Risk Mitigation Strategies
paragraphs: In addition, we note that NNSA’s analysis of a consolidated construction  contract was far less extensive than its analysis of the consolidated M&O  contracts, even though a consolidated construction contract could be  worth over $8 billion over the next decade and represents a fundamental  change for the nuclear security enterprise. As part of the contract analysis  process, in April 2009, NNSA completed a review of construction  management alternatives and developed a recommendation to issue an  RFP for a consolidated construction contract to include all major  construction projects, general projects, and facility infrastructure and  revitalization projects. However, this review was largely based on expert  judgment and did not include an in-depth analysis of potential risks  resulting from awarding a single construction contract to one company for  construction across the nuclear security enterprise. More specifically,  NNSA did not conduct a formal assessment of the risks involved in this  effort, such as risk analysis regarding the different roles and  responsibilities between the M&O contractor and the construction  contractor. One of the federal standards for internal control—risk  assessment—states that management should assess the risks faced  entity-wide, and at the activity level, from both external and internal  sources, and that once risks have been identified, management should  decide what actions should be taken to mitigate them. Risk identification  methods may include, among other things, forecasting and strategic  planning, and consideration of findings from audits and other  assessments. NNSA did not develop potential mitigation strategies,  according to one NNSA official, even though awarding a single M&O  contract for its multiple sites and a single construction contract worth  billions of dollars for construction projects across the nuclear security  enterprise represents a fundamental change in the way NNSA conducts  and manages projects. This is inconsistent with NNSA’s much more  detailed analysis of its consolidated M&O contracting proposal and with  best practices identified in our Cost Estimating and Assessment Guide,  which is a compilation of cost-estimating best practices drawn from  across industry and government.
section_title: A Consolidated Construction Contract Raises Other Potential Issues
paragraphs: NNSA officials and contractors have also identified two issues associated  with the new contracting strategy. First, according to NNSA officials and  contractors, a chief potential challenge with a consolidated contract is the  need to closely integrate the work of the M&O and construction  contractors. NNSA will have to develop ways to ensure that current M&O  contractors and the winning construction contractor(s) successfully  coordinate their respective missions to prevent the disruption of important  activities, such as weapons refurbishments, and to allow construction  projects, some of which will be located near or in sensitive ongoing site  operations, to be completed on schedule and at cost. For example,  LANL plans to undertake a number of construction projects near or within  its major plutonium operations in the next decade. As a result, both NNSA  officials and contractors told us there will be a need for increased federal  oversight and coordination to manage and integrate the M&O and  construction contractors’ activities associated with these projects. To this  end, NNSA is developing a course for its site offices on how to conduct  oversight under the new contracting strategy. To facilitate coordination,  NNSA management has also committed to requesting budget increases  to hire temporary employees at the site offices to help integrate and  manage the M&O and construction contractors’ activities. However, as  discussed earlier, NNSA will not complete a study of federal site office  structure and roles and responsibilities until December 2012. Until NNSA  has the results of its federal site office study, including needs under the  new contracting strategy for the federal workforce, it cannot finalize plans  and begin to prepare the federal site offices for the transition to the new  strategy.
Second, NNSA’s analysis concluded that excluding major construction  projects may reduce the number and quality of competitors willing and  able to bid because the contract would be less profitable. A recent NNSA  report on the contractor perspectives of a consolidated construction  contract found that inclusion of the UPF in the consolidated construction  contract is key to drawing strong interest from the best construction firms  and that the scope of the contract would determine the level of  competition for it. This is because the top U.S. engineering and  construction companies may only be interested in the contract if it  includes the higher profit large construction projects. This NNSA report,  which captures the feedback from the construction contractors concerning  the contract strategy for UPF, noted that the competitive landscape for a  contract competition for a construction contract that does not include UPF  could be impacted with the top engineering and constructions firms  possibly not participating. The report further notes that excluding UPF in  the consolidated construction contract would send the signal to the  contracting community of “business as usual” and would not represent a  significant commitment by NNSA of a commitment to improve the  management of large construction projects.
section_title: Conclusions
paragraphs: As the U.S. nuclear stockpile is being reduced, NNSA is to receive  additional funds to modernize and operate the nuclear security enterprise.  The funds will be used, in part, to refurbish most of the weapon types  currently in the stockpile and to construct important new production  facilities to support these refurbishments. NNSA envisions an integrated,  interdependent nuclear security enterprise characterized by, among other  things, fewer, more uniform contracts with multisite incentives and more  uniform business practices. Since contractors execute the vast majority of  the agency’s mission, it is reasonable for NNSA to focus its attention on  the types, structure, and management of its contracts. Thus, to improve  its operations and business practices, NNSA proposed, in 2010,  consolidating the M&O contracts for two significant nuclear production  sites—Y-12 and Pantex—and awarding a single contract for complex- wide construction. NNSA’s analysis that supported these proposals noted  that simply changing contract types and structures will produce little effect  unless NNSA better manages its contracts. NNSA’s analysis also  identified 18 improved management practices—some of which could be  accomplished now through existing contracts—such as improving  enterprise-wide collection and analysis of costs that could lead to greater  efficiencies regardless of the contracting strategy employed. In fact,  officials representing the contractors at Pantex and Y-12 both said their  companies had begun implementing some of these changes at their  respective sites and had seen efficiencies and savings. In our view, these  actions on the part of contractors are positive and a step in the right  direction toward more effectively and efficiently managing NNSA  contracts. However, NNSA has not identified in a systematic manner how  it plans to implement these 18 improved management practices at all of  its sites. Without such an approach or plan, it is unclear whether NNSA is  taking every opportunity to improve management practices.
NNSA has committed to pursuing its two-part acquisition strategy, but  until NNSA undertakes certain actions, the strategy will not be completely  defined, and its benefits will remain uncertain. These actions include  incorporating industry feedback on its recently released draft RFP for the  proposed Y-12 and Pantex M&O contract; releasing a draft RFP for the  enterprise-wide construction proposal; updating its analysis using industry  feedback, current budget projections, and project cost estimates; and  developing an integrated federal site office structure applicable to both  proposals to effectively manage and oversee their implementation with  clearly identified roles and responsibilities. For example, until NNSA  releases a draft RFP for the enterprise-wide construction proposal, NNSA  cannot assess industry interest and will not begin to prepare the final  RFP. Furthermore, NNSA did not conduct a formal assessment of the  risks involved in the consolidation of its construction contracts consistent  with federal standards of internal control, such as potential conflicts  between the M&O contractor and the construction contractor. It will  remain difficult to accurately assess whether NNSA will realize its goals of  more efficient and effective operations through the implementation of the  proposed acquisition strategy without more information. Consistent with  cost-estimating best practices, such information should specify the costs,  risks, and benefits expected enterprise-wide and at each site for both  proposed consolidated contracts. In addition, NNSA will not complete a  study of federal site office structure and roles and responsibilities until  December 2012. Without the results of this study, NNSA cannot finalize  plans and begin to prepare the federal site offices for the transition to the  new contracts.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Energy take the following four  actions:  In order to manage NNSA’s contracts as effectively and efficiently as  possible the Secretary of Energy should direct the Administrator of NNSA  to take the following action:    Develop a plan for implementing the 18 improved management  practices identified by its analysis, as appropriate, to improve its  current contract management practices.
If NNSA continues to pursue its two-part acquisition strategy, the  Secretary of Energy should direct the Administrator of NNSA to take the  following actions to better define and inform the agency’s strategy:  Issue a draft RFP for the enterprise-wide construction proposal.   Using updated information gathered through the draft RFPs and  recent budget projections and cost estimates, analyze the  consolidated M&O proposal and the enterprise-wide construction  proposal. Consistent with federal standards for internal control and  cost-estimating best practices, this analysis should assess the costs,  risks, and benefits expected enterprise wide and at each site. This  analysis should be used by NNSA as it prepares its final RFPs for  each proposal.   Using the results of the federal site office study, develop an integrated  federal site office structure applicable to both proposals to prepare the  site offices before the transition to the new contracts.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided NNSA with a draft of this report for its review and comment.  NNSA provided written comments to the draft report—in which it generally  agreed with our findings and recommendations—and technical  comments, which we have incorporated as appropriate. NNSA’s  commented that it “does not agree that similar cost efficiencies could be  obtained without a contract consolidation” and that we should adjust  statements in the report related to these efficiencies. In response, we  removed the word “similar.” However, consistent with our  recommendation in this report, NNSA agreed to develop a plan for  implementing the 18 recommendations outlined in its analysis to improve  current contract management practices. This, in our view, indicates  NNSA’s agreement that the efficiencies gained in doing so would  enhance its ability to carry out the mission at NNSA’s various sites,  regardless of a contract consolidation. This is also consistent with  NNSA’s own analysis, which stated that actions can be taken under the  current contracts to improve the effectiveness and efficiency of operations  at the individual sites.
In its comments, NNSA also stated that it may not issue a draft RFP for  the enterprise-wide construction proposal but may, instead, issue another  form of solicitation, such as a final RFP, or sealed bid, by the end of  September 2011. However, given the delays associated with the issuance  of its draft RFP for the consolidated M&O contract and given the benefits  outlined in our report of issuing a draft RFP, we continue to recommend, if  NNSA pursues this part of its acquisition strategy, that the agency issue a  draft RFP for the enterprise-wide construction contract. Consistent with  the Federal Acquisition Regulation, a draft RFP will help provide  information on NNSA’s requirements and industry capabilities and may  enhance NNSA’s ability to obtain quality supplies and services, at  reasonable prices, and increase efficiency in proposal preparation,  proposal evaluation, negotiation, and contract award. As we also  recommended, information gathered through the draft RFP, when  combined with recent budget projections and cost estimates, should be  used by NNSA to assess, in ways consistent with federal standards for  internal control and cost-estimating best practices the costs, risks, and  benefits of NNSA’s proposal expected enterprise-wide and at each NNSA  site.
The full text of NNSA’s comments is reproduced as appendix I in this  report.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Energy, the Administrator of NNSA, the  Director of the Office of Management and Budget, and other interested  parties. The report also is available at no charge on the GAO Web site 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 aloisee@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 II.
section_title: Appendix I: Comments from the National Nuclear Security Administration
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Jonathan Gill, Assistant  Director; Jonathan Kucskar; Jeff Larson; Mehrzad Nadji; Alison O’Neill;  Tim Persons; Peter Ruedel; Ron Schwenn; Vasiliki Theodoropoulos; and  Alyssa Weir made key contributions to this report.