Department of Energy: Opportunity to Improve Management of Major System Acquisitions
Published: 1996-11-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO reviewed the Department of Energy's (DOE) ability to complete its major system acquisitions within originally estimated cost and time schedules, focusing on: (1) DOE's performance in completing its major system acquisitions; (2) key factors that hinder the timely, cost-effective completion of the acquisitions; and (3) DOE efforts to improve its performance.
section_title: What GAO Found
paragraphs: GAO found that: (1) from 1980 through 1996, DOE conducted 80 projects that it designated as major system acquisitions; (2) DOE has completed 15 of these projects, and most of them were finished behind schedule and with cost overruns; (3) 31 other projects were terminated prior to completion after expenditures of over $10 billion; (4) cost overruns and schedule slippages continue to occur on many of the ongoing projects; (5) the four key factors underlying the cost overruns, schedule slippages, and terminations include unclear or changing missions, incremental project funding, a flawed incentive system for DOE employees and contractors, and lack of sufficient DOE personnel with the appropriate skills to effectively oversee contractor operations; and (6) DOE has implemented several initiatives that are helping to improve its overall management, but all of these initiatives may not improve DOE's management of its major system acquisitions.

section_title: Letter
paragraphs: As requested by the former Chairman, this report addresses key factors affecting the Department of Energy’s ability to complete its major system acquisitions within originally estimated cost and time schedules.
As arranged, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will provide copies of the report to the Secretary of Energy; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request.
Please contact me on (202) 512-3841 if you or your staff have any questions. Major contributors to this report are listed in appendix V.
subsections: section_title: Introduction
paragraphs: The Department of Energy (DOE) is one of the most complex, multifaceted departments within the federal government. Established in 1977 in response to the global energy crisis that disrupted U.S. and world markets and economies, DOE is an amalgam of various federal agencies that had energy and science responsibilities. The roots of the Department came from the Atomic Energy Commission that was established in 1947 to assume the responsibilities of the Manhattan Engineer District, which had developed the first atomic bombs. The Commission was responsible for developing and producing nuclear weapons; operating nuclear reactors, uranium enrichment plants and plutonium production plants; performing research and development on both military and civilian uses of nuclear energy; and promoting and funding nuclear and other sciences. DOE assumed these as well as other responsibilities, including energy technology research, development, and demonstration; fostering energy conservation and efficiency; managing federal petroleum reserves; and, more recently, cleaning up environmental contamination resulting from its past operations.
To carry out these responsibilities, DOE continues a highly decentralized structure that began under the Atomic Energy Commission. This structure relies heavily on private contractors, either corporations or universities, to manage most of its operations and activities. DOE owns the facilities needed to conduct the work, but the private contractors manage and operate the facilities. DOE’s work force is composed primarily of contractors. As of mid-1996, DOE had about 12,500 federal employees and about 120,000 contract workers located at its headquarters and field facilities throughout the country. To support these facilities and workers, DOE receives substantial funding, which ranged from $19.0 billion in 1986 to $23.7 billion in 1990. For fiscal year 1996, DOE was authorized to spend $19.7 billion.
subsections: section_title: DOE Conducts Many Large-Scale, High-Risk Projects
paragraphs: More than most federal agencies, DOE’s activities involve projects that are usually long term and high cost. In many cases, the projects are first-of-a-kind and thus involve substantial risk. These projects generally involve substantial funding for construction, are conducted to address a specific mission need, and are often separate line items in DOE’s budget. For example:
DOE’s science programs in high-energy physics and nuclear physics require the construction of accelerators, which are large machines that propel atomic particles near the speed of light. The collisions of these particles are studied to explore the properties of matter. These accelerators can range in cost from several hundred million dollars to several billion dollars, or more. For example, the Continuous Electron Beam Accelerator Facility in Virginia (recently renamed the Thomas Jefferson National Accelerator Facility), shown in figure 1.1, cost over $500 million.
DOE’s nuclear weapons programs required the construction of nuclear reactors to produce the materials needed for nuclear weapons. Additionally, other large and specialized facilities are needed to process the materials and manufacture, assemble, and test nuclear weapons components. Any of these facilities can easily cost over a billion dollars. For example, just the design work and close-out costs for a nuclear reactor to produce tritium, a key component of nuclear weapons, were more than $1.2 billion.
DOE’s environmental management programs require facilities and technologies to process nuclear waste into forms suitable for longer-term or permanent disposal. These programs also need technologies and equipment to remove nuclear and hazardous material contamination from existing facilities and sites. Some facilities at major DOE field sites will cost many billions of dollars. For example, the Defense Waste Processing Facility in South Carolina (to process high-level radioactive waste into a stable form for long-term storage), and the support facilities to prepare the waste for processing, shown in figure 1.2, cost over $4 billion.
These large-scale projects account for a significant portion of DOE’s budget. Funds for many of the projects are requested by DOE as specific construction line items, and funding for such projects is identified in congressional committee reports. However, from a total budget standpoint, considerably more operating funds than construction funds are provided for DOE projects, and the operating funds provided for some projects cannot be as easily determined, particularly for older projects. Funds needed for conceptual design, management, start up, and other nonconstruction activities—which can be as much as 40 percent of a project’s total cost—are included as part of DOE’s operating funds. Furthermore, some projects are funded entirely with operating funds. For example, over $1 billion of the operating funds appropriated annually for DOE’s environmental restoration activities are used for large-scale clean-up projects.
section_title: Major System Acquisitions
paragraphs: Office of Management and Budget (OMB) Circular A-109, dated April 5, 1976, recognized that certain projects and/or activities are crucial to an agency accomplishing its missions. The circular defined projects that are critical to fulfilling an agency mission, entail the allocation of relatively large amounts of resources, and warrant special management attention as major system acquisitions (MSA). The circular (1) required early communication with the Congress that relates MSAs to agency mission needs and goals, (2) focuses top-level management attention on the determination of these mission needs and goals, and (3) requires an integrated approach to budgeting, contracting, and managing these projects. However, the specific criteria and dollar thresholds for determining which activities will be considered MSAs were left to the discretion of the individual agencies.
In response to the OMB circular, DOE initially defined MSAs as systems or projects that had a total project cost in excess of $250 million and were specifically identified as mission critical. In 1990, DOE changed the cost threshold to $100 million. During the period 1980 through 1996, DOE conducted 80 different MSAs. These projects addressed many different program areas and activities, including the Superconducting Super Collider; nuclear reactors; uranium enrichment processes and facilities; fossil fuel demonstration plants; nuclear waste disposal facilities; and environmental cleanup efforts. According to current cost estimates, DOE has spent or plans to spend over $65 billion on these 80 MSAs.
Successfully completing MSAs on time and within estimated dollar targets has proven difficult. Over the past few years, we have issued a number of reports that have discussed overall acquisition issues and problems in other federal agencies, as well as problems with individual projects. In a December 1992 report, we discussed problems with the Department of Defense’s major weapons acquisitions resulting in substantial cost overruns, delays in completing and fielding these acquisitions, and performance problems. Similarly, in an August 1996 report, we discussed the Federal Aviation Administration’s problems in acquiring new air traffic control system equipment within cost, schedule, and performance parameters. Both reports identified fundamental problems that inhibit the successful completion of these agencies’ major acquisitions. For example, we reported that Federal Aviation Administration officials acted in ways that did not reflect a strong commitment to the agency’s acquisition mission. They performed little or no mission needs analysis, set unrealistic cost and schedule estimates, and started production on the systems before having completed their development.
Furthermore, in July 1995, we reported on governmentwide federal information technology acquisitions that cost more than anticipated, did not meet schedules, and did not meet mission needs. All of these acquisitions have suffered from a lack of advance planning and ineffective management oversight that has led to cost overruns and schedule slippages. Currently, 11 federal agencies have problems with information management or systems development that are serious enough that they have been listed by GAO, OMB, and/or the General Services Administration as high-risk programs.
We have also discussed problems with specific DOE MSAs in many reports over the years. These reports address MSAs that range from the multibillion dollar Yucca Mountain Site Characterization Project in Nevada (a proposed repository for high-level radioactive waste), shown in figure 1.3, to the approximately $140 million Central Receiver Solar Thermal Power Plant in California, shown in figure 1.4. We have also reported on generic MSA management problems facing DOE, such as the agency’s frequent failure to ensure that critical management control documents for MSAs are prepared before projects are allowed to proceed beyond the conceptual design phase.
section_title: Objectives, Scope, and Methodology
paragraphs: The Chairman, Senate Committee on Governmental Affairs, asked us to review DOE’s acquisition management program and the past problems that have occurred. As agreed with the Chairman’s office, this report (1) assesses DOE’s performance in completing its MSAs, (2) identifies key factors that hinder the timely, cost-effective completion of the acquisitions; and (3) determines what DOE is doing to improve its performance.
To respond to the Chairman’s request, we interviewed and obtained documents from DOE officials responsible for the Department’s overall MSA program and from DOE officials responsible for managing specific MSAs. We also obtained documents from officials of the National Academy of Sciences and the Defense Nuclear Facilities Board, which had experience reviewing DOE’s management of its MSAs. We also surveyed our managers who had prior experience in auditing specific DOE MSAs and reviewed the reports and other documents resulting from those audits. (See “Related GAO Products.”)
We obtained listings identifying 80 MSAs conducted during the period 1980 through 1996 from DOE’s Office of Project and Fixed Asset Management under the Deputy Associate Secretary for Field Management. DOE has not retained a comprehensive cost and schedule history of its MSAs. As a result, the data used in this report had to be reconstructed from budget submissions, internal documents, and from officials of DOE’s Office of Project and Fixed Asset Management. We did not verify the data obtained from DOE. However, we did examine the reasonableness of these data based on information in prior GAO reports and audits. For this report, we used, wherever possible, the MSA’s “Total Project Cost,” which includes construction and operating funds. Where these costs were not available, we used the “Total Estimated Cost,” which includes construction costs. We have footnoted the latter. (See app. I, II, and III.)
We provided a draft of this report to DOE for its review and comment. DOE’s comments and our response are included as appendix IV and are discussed in the chapters where appropriate. We conducted our work from August 1995 through October 1996. Our work was conducted in accordance with generally accepted government auditing standards.
section_title: DOE’s Limited Success With Its MSAs
paragraphs: Since 1980, DOE has conducted 80 projects that it designated as MSAs. As of June 1996, 34 were ongoing. Our analysis of DOE’s success in completing its MSAs shows that during the period 1980 through 1996:
DOE completed 15 of 80 MSAs, while more than twice as many projects (31) were terminated prior to completion.
Cost overruns occurred on most completed projects and at least half of the ongoing projects, in some cases more than doubling the original estimates.
Most of the completed projects were not finished on schedule, and many of the ongoing MSAs were behind schedule.
Three of the completed projects either have not achieved their expected results or have not yet been used for their intended purposes.
subsections: section_title: High Rate of Project Terminations
paragraphs: Since 1980, 31 MSAs were terminated prior to completion. These projects had incurred substantial expenditures when they were terminated, totaling more than $10 billion. These terminated projects include:
The New Production Reactor program to produce tritium, a key ingredient in nuclear weapons, was canceled in 1992 after the expenditure of over $1.2 billion, primarily for design work and close-out costs. No final technology or site was selected.
The Clinch River Breeder Reactor Project in Tennessee was intended to demonstrate a reactor that could create more fuel than it used. Authorized in 1970 at an estimated total cost of $700 million, the project was terminated in 1983 after an expenditure of about $1.6 billion.
The Gas Centrifuge Enrichment Plant in Ohio, shown in figure 2.1, authorized in 1975 at an estimated total cost of $5.1 billion, was terminated in 1985 after an expenditure of $2.8 billion.
The Superconducting Super Collider in Texas, shown in figure 2.2, was designed to conduct high-energy physics experiments. The collider would have required an oval tunnel 54 miles in circumference at an average depth of 150 feet below ground level. Originally funded as a construction project in fiscal year 1990 at an estimated total cost of $5.9 billion, the project was terminated in 1993 after an expenditure of over $2 billion.
The Fuel Processing Restoration Project in Idaho (to increase naval nuclear propulsion fuel processing capacity) was begun in 1985. About $306 million had been spent for construction when the project was terminated in 1992.
The Uranium Solidification Facility in South Carolina (to recycle enriched uranium and provide material for reactor fuel), begun in the late 1980s, had an original construction cost estimate of $85 million. When the project was terminated in 1994, about $116 million had been spent for construction.
There are many reasons for these terminations, some of which were outside of DOE’s control. In some cases, changing circumstances and/or world events simply caught up with the projects, and they were no longer needed. In others, the necessary technologies to make the projects work could not be perfected in time. Some were canceled due to changes in administration policy. However, in other cases, as pointed out in DOE Inspector General and our reports, management problems and/or ineffective oversight by DOE led to enormous schedule slippages and cost overruns, and the Congress eventually cut off funding. Appendix I lists the terminated projects, their original cost estimates, and the amount spent on each prior to termination.
section_title: Cost Overruns
paragraphs: Increases in projects’ costs beyond original cost estimates, or cost overruns, can result in program disruption and a lack of confidence in project management, and can divert funds needed by other programs. Cost overruns on DOE projects were common occurrences during the 1980 through 1996 period. Complete original cost estimates and final/current cost estimates were available for 35 of the 49 completed or ongoing projects. Of these 35 projects, 4 were completed and 4 were expected to be completed at or below their originally budgeted cost. The remaining 27 projects had or were projected to have cost overruns averaging over 70 percent. Table 2.1 provides examples of projects that were experiencing substantial cost overruns.
A list of the original and final/current cost estimates for all completed and ongoing projects are contained in appendixes II and III, respectively.
Cost overruns also occurred in terminated projects and, in some cases, were the contributing factor to their termination. For example, DOE’s estimate of the total cost to build the Superconducting Super Collider grew from $5.9 billion in 1990 to $8.25 billion in 1991. In May 1993, we reported that additional known costs showed that the project’s total costs would exceed $11 billion and could go higher. The project was terminated by the Congress in October 1993, because of concerns over the escalating costs and the federal budget deficit.
Over the years, we and DOE’s Inspector General have reported that cost overruns on DOE’s MSAs have occurred for a number of reasons, including technical problems, some of which were beyond the agency’s control; poor initial cost estimates; and ineffective oversight of contractor operations. For example, in 1992, we reported that technical problems were important factors causing the cost of the Defense Waste Processing Facility to increase. This facility, at DOE’s Savannah River Plant in South Carolina, was designed to turn high-level radioactive waste into a glass-like form for long-term storage. The technical problems included the generation of benzene during the pretreatment process and the buildup of highly explosive gases during the vitrification process.
In 1993, we reported that poor estimating of project costs contributed to cost overruns with DOE’s environmental projects. In 1995, the Inspector General reported on problems with the High Level Waste Evaporator at Savannah River. The evaporator is designed to evaporate water added to the high-level radioactive waste processing stream, thereby reducing the total volume of waste. The estimated cost of the project had more than doubled, and the estimated completion date had slipped by more than 4 years. The Inspector General found that many of the cost increases and schedule delays could have been avoided if DOE had adequately planned, contracted, funded, and maintained management continuity. A major factor was DOE’s failure to ensure that the contractor followed the project management guidance in DOE’s orders.
Project cost overruns have occurred for other reasons. On some projects, according to DOE officials, changing legal and regulatory requirements have increased the scope of the projects resulting in higher costs than were originally estimated. For example, DOE officials point out that the number of sites to be cleaned up under DOE’s Formerly Utilized Site Remedial Action Program increased, due in part to legislation. Furthermore, DOE officials told us that some program offices were not consistently following guidance on which costs are to be included as part of Total Project Cost, and this resulted in understating those costs. Consequently, the Total Project Cost for some MSAs increased when these program offices began to adhere to the cost guidance.
section_title: Schedule Slippages
paragraphs: Schedule slippages can have serious implications for DOE projects. Slippages can adversely impact DOE’s ability to produce or maintain nuclear weapons components, achieve timely cleanup of contaminated sites, or be the first to make new scientific breakthroughs. Schedule slippages also generally equate to additional project costs. Many administrative or overhead costs—such as security, heat, water, etc.—will be incurred throughout the life of the project and increase as the length of the project increases. Contractors’ costs, which are passed on to DOE, will also rise as the schedule slips.
Schedule delays and slippages were prevalent on DOE projects during the period 1980 through 1996. Most of the 15 completed MSAs did not meet their originally scheduled completion dates. Of the 34 ongoing projects, only a few originally scheduled for completion in this century are on time. Examples of projects that experienced some large schedule slippages are shown in table 2.2.
The reasons for schedule slippage are similar to those for cost overruns, and they are very much intertwined. Any event that causes schedule slippage is likely to cause cost increases. For example, the schedule for the West Valley Demonstration Project in New York State (to solidify high-level radioactive waste for long-term storage), shown in figure 2.3, slipped by over 7 years and costs more than doubled.
section_title: Some Completed Projects Have Not Operated as Intended
paragraphs: Once completed, an MSA must operate as intended in order to fulfill a program need. Of the 15 MSAs that DOE considered to be completed as of June 1996, 3 have not performed as expected or otherwise have not achieved their expected results.
The Mirror Fusion Test Facility in California, shown in figure 2.4, was to perform experiments to provide an alternative approach for achieving fusion energy. The project is listed by DOE as being completed at a final cost of $364 million; however, the facility never became operational because programmatic funding was reduced by the Congress, and the remaining funds were used by DOE for higher priority projects. The facility has remained shut down since 1986.
The Waste Isolation Pilot Plant in New Mexico, shown in figure 2.5, was to demonstrate the feasibility of underground storage of certain types of government-generated radioactive waste. DOE declared the plant operational in 1991. However, due to additional environmental, regulatory, and technical requirements that were imposed by legislation, the facility has not yet received the necessary certificates and permits to operate and has not yet received any radioactive waste. DOE currently expects this facility to begin operations in fiscal year 1998. To date, DOE has spent $710 million on this project.
The Fuels and Materials Examination Facility at DOE’s Hanford Plant in Washington State, shown in figure 2.6, was to fabricate and examine a full range of breeder reactor fuels. This project, although listed by DOE as being completed, has never operated for its intended purpose because DOE’s breeder reactor program was terminated in the early 1980s when the Congress cut off funding. The facility is now being used for storage and office space. DOE spent $234 million on this project.
section_title: Key Factors Inhibiting the Successful Completion of MSAs
paragraphs: Our work over the years and that of others, including DOE’s Inspector General, has identified a wide variety of specific problems leading to schedule slippages and cost overruns for MSAs. When looked at individually, there appears to be logical explanations of why specific MSAs experienced delays and cost increases. However, when looked at collectively over an extended time (e.g., 80 MSAs from 1980 through 1996), other more fundamental reasons or factors can be seen. We believe that there are four key factors underlying the increasing project costs, schedule slippages, and high number of terminations. The factors include constantly changing missions for DOE that often make it difficult to maintain departmental and congressional support for these long-term, high-cost projects; the funding of projects incrementally, from year to year rather than up front, which subjects those projects to potential delays or terminations in funding each year; a flawed system of incentives that does not always reward individuals and organizations for doing the right thing and has often rewarded contractors despite poor contract performance; and difficulty in hiring, training, and retaining enough people with the requisite skills to provide effective oversight and/or management of contractor operations.
subsections: section_title: Changing DOE Missions and Inconsistent Support
paragraphs: Since its creation, DOE’s missions have continued to change, and the DOE of today bears little resemblance to the agency created in 1977. The relative priority of DOE’s responsibilities has also changed greatly over the years. As a result, DOE no longer has major efforts underway or has substantially cut back its efforts to develop alternative sources of energy to help promote energy independence (a key activity in the late 1970s); further develop commercial nuclear power (a major DOE activity in the late 1970s); build new nuclear weapons (a major buildup in the 1980s); rebuild the nuclear weapons complex (a principal agency concern in the late 1980s); or provide commercial uranium enrichment services (which the Congress transferred out of DOE in 1993 to a government corporation, the U.S. Uranium Enrichment Corporation).
At the same time, other missions have become a greater focus of the agency’s efforts. These include cleaning up years of contamination resulting from DOE’s nuclear and other activities, improving the nation’s scientific and industrial competitiveness, and providing stewardship for the nation’s nuclear weapons stockpile. Accordingly, many projects have been terminated, either by DOE or the Congress, because they were no longer considered critical or important to DOE’s mission. Examples include the following.
The Clinch River Breeder Reactor project was begun in 1970 as a high-priority project to demonstrate a nuclear reactor that could “breed” or produce more fuel than it consumed. However, the fuel that it would produce is plutonium, a key material for nuclear weapons, and this raised concerns about the proliferation of nuclear weapons. Coupled with reduced expectations for the future use of nuclear energy, the development of a breeder reactor was no longer a priority. The project was terminated by the Congress in 1983 after the expenditure of about $1.6 billion.
The Atomic Vapor Laser Isotope Separation Project in California, shown in figure 3.1, was begun in 1973 to develop a more efficient process to enrich uranium for use as fuel in commercial nuclear power plants. In the early 1990s, however, DOE’s mission of providing uranium enrichment services to public utilities and other non-DOE customers ended. Consequently, DOE terminated its efforts on this project in 1993 after a total expenditure of $1.3 billion.
The Fuel Processing Restoration Project was begun in 1985 to build improved facilities to process naval nuclear propulsion fuels for reuse in DOE’s production reactors. With the end of the cold war, however, this mission changed and the production reactors closed, thereby negating the need for this project. The project was terminated by DOE in 1992 after a total expenditure of $306 million for construction.
Projects have also been terminated when a change in administration policy occurred. In the early 1980s, DOE terminated five coal demonstration plants, on which it had spent $459 million. These projects were looking at more efficient and/or environmentally safe ways to burn coal. The projects were canceled because the new administration did not believe that funding demonstration projects was an appropriate mission for DOE. Other terminations resulted from changing world conditions. For example, after spending over $1.2 billion, DOE terminated plans to develop the New Production Reactor to produce tritium, a vital material for nuclear weapons. The project was terminated because of anticipated reductions in the nuclear weapons arsenal resulting from arms reduction agreements and the end of the Cold War. Also, because of reductions in nuclear weapons, DOE terminated upgrades on its existing production reactor at its Savannah River Plant after spending about $1.7 billion. Finally, DOE terminated the Uranium Solidification Facility when it was 90 percent complete, because the products from the facility—materials for nuclear fuel—were no longer needed with the shut down of the Savannah River reactors.
section_title: Incremental Funding of Projects
paragraphs: Having funds available to keep a project on schedule is critical to achieving project objectives. DOE has historically received incremental funding for its projects. With incremental funding, the Congress provides funds for one fiscal year for a project based on the obligations estimated to be incurred within that fiscal year. Funds to continue the project must be requested from the Congress each year. DOE, in its annual budget submissions, develops and provides the Congress with a profile or schedule of the funding it will need each year to complete each project.
However, when funds are provided incrementally, they often do not keep pace with the agency’s estimated needs. For many projects, particularly in their first years of development and construction, the funding received is considerably below the amount requested. This causes project schedules to slip and costs to rise. Contractors continue to charge, and certain administrative costs (e.g., heat, water, electricity, security, etc.) are incurred each month no matter what the progress. For example, the Continuous Electron Beam Accelerator Facility was designed to conduct nuclear physics experiments. The project’s funding request called for it to receive a total of $236 million for construction during fiscal years 1987 through 1991. However, in its first 3 years the project received only $94 million, or about 60 percent, of the $155 million scheduled. According to DOE officials, largely because of this funding delay, the project’s construction schedule was extended 3 years, and the construction costs increased by $77 million to $313 million.
Similarly, the Fermilab Main Injector Project in Illinois (to construct a new particle accelerator for use in high-energy physics experiments) received only 40 percent of its first 3 years planned funding and the Security Enhancements at the Pantex Plant in Texas (where nuclear weapons components are assembled into final weapons), shown in figures 3.2 and 3.3, were funded at only 43 percent of the first 3 years schedule. According to DOE officials, both of these projects are now over cost and years behind schedule as a result of the reduced funding levels.
On the other hand, DOE has had better results with projects when year-to-year funding was not a concern. In May 1994, we reported that under DOE’s clean coal technology program, the Congress appropriated $2.75 billion to fully fund the federal share of this joint federal/nonfederal program. Nonfederal contributions eventually reached more than $4.5 billion. According to DOE, this advance commitment of federal funds was an important reason for the industry’s significant response to the program, in terms of both the quantity and quality of the proposals received as well as the nonfederal cost-sharing achieved. Virtually all of the DOE officials, project sponsors, and other program participants we spoke with perceived the government’s advance financial commitment as a very big advantage for multiyear projects, because it indicated that the government would be involved in cost-sharing throughout the life of the projects. The industry participants told us that they would not want to commit significant funds in the early years of projects if they perceived that the government might stop sharing costs before the projects were completed.
An additional problem with incremental funding is that it may allow some projects to be started that would not be funded if the Congress had to provide budget authority for their full estimated costs at the time the project was approved. (This concept of full funding is discussed in ch. 4.) In this regard, it is easier for DOE to start a project by requesting $100 million for 1 year, rather than to request the full cost of the project, which may be over a billion dollars.
section_title: Lack of Effective Incentives
paragraphs: Most organizations have available to them incentives that can be used to affect the performance of their employees and contractors. These incentives normally consist of rewards for good performance and penalties for performance that does not meet agreed-to standards. To the extent that these incentives are properly applied, they can be effective in helping achieve agency goals. On the other hand, if not properly applied, incentives can impede successful completion of projects such as MSAs. DOE has incentives for its own employees and for its contractors.
subsections: section_title: DOE Employees
paragraphs: Incentives for DOE employees include salaries, promotions, and bonuses. Other incentives include job satisfaction, recognition for good work, working for a prestigious agency or organization within an agency, being part of a highly effective team, etc. To the extent that an organization uses these incentives to keep its employees focused on the organizations goals, it will more likely achieve those goals.
However, goals can sometimes become unclear. Parochial interests can take over, and the real goal can become simply keeping the project going.
Many DOE managers view themselves as advocates for their projects, which provides an incentive to not surface problems that could result in the project being terminated. For example:
DOE and its contractors maintained efforts to build the $5.1 billion Gas Centrifuge Enrichment Plant for 3 years after it was pointed out that the demand for enrichment services was declining and that the costs of the plant would not be recovered. DOE eventually agreed that the project was no longer needed and terminated it after spending $2.8 billion. The delay in stopping this project occurred largely because of DOE’s desire to maintain its historical mission of being the major world supplier of enrichment services.
Participants in DOE’s Superconducting Super Collider saw this project as allowing the United States to maintain preeminence in high-energy physics. Project managers originally expected that it would cost $5.9 billion and that large amounts of foreign contributions to the project would be forthcoming. However, the foreign contributions never reached expected levels, and project costs escalated greatly. Project participants and other supporters continued to try to keep the project going despite evidence that the total cost would exceed $11 billion. The Congress finally cut off funding for the project in 1993 after a total expenditure of over $2 billion.
Upon taking office in 1989, the Secretary of Energy addressed this concern and called for a changed “culture” within the Department. The Secretary indicated that an atmosphere, or culture, had been created whereby the incentive for employees and contractors was to push ahead and complete whatever project they were working on—there was no incentive for anyone to question whether a project should be continued.
section_title: DOE’s Contractors
paragraphs: DOE builds incentives into its contracts that can include bonuses for work that meets or exceeds expectations or penalties for poor performance. As we have previously reported, however, DOE contract managers seemed reluctant to use the penalties and sometimes used the financial rewards inappropriately. In some cases, DOE rewarded contractors with award fees, or bonuses, even though their performance was poor. In October 1989, we reported that during fiscal years 1986 through 1988, many safety and health deficiencies at DOE’s Rocky Flats Plant in Colorado had been repeatedly raised by DOE safety staff, including problems in the plant’s radiological protection program and a lack of commitment by plant management to improve overall safety and health conditions. Despite this poor performance, the contractor received over $26 million in bonuses during this period. In late 1989, the plant was shut down for, among other things, safety problems. About 2 years later, we reported that bonuses were again paid at Rocky Flats despite evidence of poor performance.
These DOE practices run counter to those in private industry. A recent study of projects under DOE’s environmental management program pointed out that among the best industry practices for successful projects is to have incentives that reward participants based on their performance. The study pointed out that DOE lacked such incentives.
section_title: Inadequate Technical and Managerial Expertise to Oversee MSAs
paragraphs: DOE’s lack of adequate technical expertise to oversee the design, construction, and operation of these large, complex projects is a long-standing problem. A 1981 DOE internal task force and a 1987 report by the National Research Council noted DOE’s lack of technical capabilities and expertise. We have issued several reports that pointed out the difficulties that DOE had in addressing technical problems on DOE construction projects that led to large schedule slippages and cost overruns. The Defense Nuclear Facilities Safety Board, in its annual reports to the Congress, has repeatedly stated that the lack of appropriate technical expertise in DOE is a significant problem. Through a series of management reviews of DOE that we began in 1991, managers throughout DOE have told us that the lack of skilled staff in program, project, and contracting oversight positions is one of the most fundamental problems in the Department.
In a June 1992 report, we pointed out that an internal DOE assessment of its Defense Waste Processing Facility in South Carolina faulted project managers for their lack of experience with large-scale, first-of-a-kind technology projects. DOE’s assessment also criticized the project’s management for not focusing sufficient attention on technical, institutional, or management issues. This project is for a large, first-of-a-kind plant using a process called vitrification to convert high-level radioactive waste into a glass-like form for permanent underground storage. The facility itself has experienced more than $900 million in cost increases, and the Total Project Cost—including other buildings and processes needed to prepare waste for vitrification—is over $4 billion. When it began operations in March 1996, the project was about 6 years behind schedule. Technical problems such as equipment failures, design deficiencies, poor component integration, and problems in obtaining permits were important causes of the cost increases and schedule slippage.
There have also been dramatic cost increases in DOE’s overall environmental restoration program. A 1993 study of the causes of these cost increases found that the reasons included (1) inexperienced project teams unfamiliar with environmental regulations, such as permitting requirements; (2) design errors and resulting changes; (3) poor project definition, for example little knowledge of essential geotechnical information; (4) project team turnover; and (5) contracting issues.
section_title: Actions That May Help Improve DOE’s Acquisition Process
paragraphs: The need for reform of the federal acquisition process has led to several governmental actions. Legislative changes have been enacted to, among other things, streamline the acquisition process and open the system to more participation from the commercial market. Furthermore, OMB requires that agencies now request full funding for their acquisitions rather than the incremental annual funding previously requested. Also, DOE has begun new management initiatives to improve the way it does business. These actions could help DOE address some of the key factors leading to major cost overruns and schedule slippages for its MSAs.
subsections: section_title: Changes in Federal Procurement Law
paragraphs: Over the past several years, there have been several changes to procurement law and regulations. In 1994, the Congress passed the Federal Acquisition Streamlining Act of 1994. The act contains more than 200 sections changing the laws that govern how federal agencies acquire almost $200 billion of goods and services annually. In 1996, the Congress passed the National Defense Authorization Act for Fiscal Year 1996.Division D of this act, referred to as the Federal Acquisition Reform Act of 1996, also contains provisions for improving federal acquisitions.
Included in this major contracting reform legislation are provisions that could help DOE improve its management of its MSAs. Title V of the Federal Acquisition Streamlining Act of 1994 is designed to foster the development of (1) measurable cost, schedule, and performance goals, and (2) incentives for acquisition personnel to reach these goals. Subtitle B, which applies to civilian agencies, provides that agency heads are to establish cost, schedule, and performance goals for acquisition programs and annually report on the progress in meeting those goals. These goals are to include achieving, on average, 90 percent of the established cost and schedule goals without reducing the performance or capabilities of the items being acquired. Subtitle B also requires that agency heads are to manage employees in acquisition positions (including their education, training, and career development) by relating employees’ evaluations, pay, and promotions to their performance in helping achieve cost, schedule, and performance goals.
The Federal Acquisition Reform Act of 1996 provides for the establishment of policies and procedures for the management, education, and training of the civilian acquisition work force. Career development of the work force is to include the identification of appropriate career paths, mandatory education and training in the critical duties and tasks of these career paths, and an enhanced system of performance incentives to encourage excellence in the acquisition work force. In addition, the act requires agencies to specify in their budget justification documents the funding levels requested for educating and training the acquisition work force and provides that funds appropriated for this purpose may not be used for any other purpose. We believe that these changes in procurement law could help the Department in recruiting additional contracting staff and in improving the technical capabilities of existing staff, and thus address a long-standing departmental problem.
section_title: Agencies Must Request Full Funding for Major Acquisitions
paragraphs: Recent OMB actions concerning federal agency acquisition of fixed assets could impact on how DOE manages its MSAs. Revisions to OMB guidancenow require that federal agencies (1) report by September 9, 1996, on the cost of full funding of fixed assets previously funded incrementally and (2) provide a fixed asset plan and justification for major system acquisitions. Full funding means that when an asset or any programmatically or economically separable segment of an asset is approved by the Congress, the requesting agency is given budget authority for the full estimated cost of that asset or segment. For example, if an agency was undertaking a project that required the construction of a building first, and then the subsequent installation of equipment to perform a task, the agency would request the full cost of constructing the building in one fiscal year. If approved, the agency would be given budget authority for the full amount and would not have to return to the Congress each year for additional budget authority for the building.
The full-funding provision could have significant impact on DOE’s management of its MSAs. The agency and other stakeholders, such as the Congress, would need to reach a consensus on which of DOE’s MSAs are most mission-critical. Also, having full funding could help improve DOE’s management of its MSAs. By knowing that the funding would be available when needed, DOE and its contractors should be better able to stay within cost estimates and keep the projects on schedule.
section_title: DOE Management Initiatives
paragraphs: We believe that DOE’s difficulties in completing MSA projects, or of completing them on time and within original cost estimates, are a result of the key factors that we discuss in chapter 3—constantly changing missions, incremental funding of MSAs, lack of effective incentives, and shortages of employees with contracting and oversight skills. The problems resulting from these factors—cost overruns, schedule slippages, and project terminations—continue to exist despite many attempts at reform, and this underscores the difficulty facing DOE. As a practical matter, it is unlikely that schedule slippages and cost overruns can ever be completely eliminated given the inherent risk associated with many of DOE’s projects. However, the slippages and overruns can be reduced with continual effort. DOE currently has undertaken several initiatives to improve the management of its operations. Some of these initiatives can affect the agency’s management of its MSAs, and DOE can use them to begin addressing the key factors.
subsections: section_title: Contract Reform
paragraphs: Typically, most of DOE’s budget goes to contractors, including those who manage and operate its sites and facilities. For example, in fiscal year 1995, more than 91 percent of DOE’s obligations went to contractors. In recent years, both we and DOE’s Inspector General have reported on many problems with DOE’s contracting. These problems include poor administration of contracts, inadequate monitoring of contractor performance, and weak financial and accounting controls.
In February 1994, DOE issued a report containing initiatives to reform its contracting practices. The report details plans to encourage competition wherever possible and develop specific contract performance measurements and incentives. The reform initiatives will require DOE to develop definitive work scopes and objective performance measurement criteria to replace the requirements now contained in most traditional cost-reimbursement contracts used by the Department. Once specific performance criteria are established, the contracts must provide incentives and/or disincentives to motivate the contractors to meet expectations. To accomplish this, DOE should have a central role in overseeing and evaluating contractor performance. The contract reform report recommended more than 40 specific actions that DOE began implementing in early 1994.
We believe that the contract reform initiatives could improve many aspects of DOE’s contracting. More competition and better control over the contractors should lead to cost savings and quality improvements. These initiatives could also benefit DOE’s MSAs. Some of the key factors we previously identified, such as lack of effective incentives, could be addressed by contract reform, depending on how performance objectives are established. If these objectives focus on successful outcomes, cost control, and timeliness, they could improve the MSA process. Nevertheless, as we concluded in a 1989 report, contracting deficiencies generally resulted from people failing to carry out their responsibilities, rather than from a need for more rules and regulations. Realizing this, the full benefits of contract reform will require that DOE have enough properly trained staff to oversee the implementation of the reforms.
Furthermore, recent DOE actions raise questions about the agency’s commitment to fully implementing the contract reforms. Two basic tenets of DOE’s philosophy of contract reform are that contracts will be competed except in unusual circumstances, and, if current contracts are to be extended, the terms of the extended contracts will be negotiated before DOE makes its decision to extend them. However, in May 1996, DOE extended the University of California’s three laboratory contracts (currently valued at about $3 billion) rather than compete them. These large contracts have been held by the university continuously for 50 years. DOE justified its decision on the basis of its long-term relationship with the university. This decision was made despite DOE’s Contract Reform Team’s conclusion that the agency’s contracting suffered from a lack of competition, which was caused, in part, by several long-term relationships with particular contractors. Our primary concern was that both the President and the Secretary of Energy publicly announced that the contracts would be extended before any negotiations had taken place on the terms of the contract extensions.
section_title: Strategic Systems and Life-Cycle Asset Management
paragraphs: In November 1994, DOE announced its intention to improve existing policies and procedures for MSAs. DOE decided to decentralize decision making and empower lower levels of management and integrate the decision process with the strategic and annual budget planning process. DOE also decided to designate selected MSAs as “Strategic Systems,” based on the criteria of national urgency, risk factors, international implications, estimated costs totaling over $400 million, or visibility. As of July 1996, 12 of the ongoing MSAs had been designated as Strategic Systems, and they will come under the oversight of the Secretary of Energy. The remaining MSAs will receive management oversight from cognizant DOE officers, such as the Assistant Secretary for Defense Programs, Assistant Secretary for Environmental Management, etc.
To implement these changes, DOE issued a directive, “Life-Cycle Asset Management” (DOE Order 430.1, Aug. 4, 1995), which provides minimum performance requirements for building and managing its assets—including MSAs. Under the order, DOE headquarters’ oversight offices and program offices, along with DOE field offices, will develop specific objectives, criteria, and measures governing the conduct of operations at specific DOE sites. The field offices are to be assessed each year on the extent to which they meet their objectives.
DOE’s Office of Project and Fixed Asset Management is responsible for developing objectives and criteria for life-cycle asset management implementation. One overall objective is to assist DOE project managers in completing more projects on schedule and within budget. More specific objectives can include how best industry practices are used, the quality of cost and schedule estimates, and the completion of safety and environmental documents. The performance objectives are to be adjusted annually.
This initiative could improve performance by DOE’s field offices in managing MSAs or Strategic Systems. As pointed out in chapter 3, lack of effective incentives has been a problem associated with DOE’s performance in completing its MSAs. Setting specific objectives and criteria and holding managers accountable to those criteria will put DOE in a more business-like situation. DOE has only just begun a pilot of this initiative, and it is too early to gauge its effectiveness.
section_title: Other DOE Management Initiatives
paragraphs: DOE has implemented several other management improvement initiatives that may indirectly help it to better manage its MSAs. These initiatives include strategic planning, information resources management planning, and financial planning. As with the Strategic Systems Initiative, most of these initiatives are just being implemented, and it is too early to assess their impact.
A strategic plan can be useful in setting forth an agency’s overall goals, strategies to meet those goals, and guidance for its employees as to what the agency’s priorities are. In April 1994, DOE issued its Strategic Plan that recognized the many changes taking place in the World, such as the end of the Cold War, and set forth a restructuring of DOE’s missions. The plan sets goals, strategies, and success indicators for each mission. The plan also recognizes the importance of meeting the needs of DOE’s numerous customers, from the taxpayer to the Congress, and recognizes many of their concerns. The specific details of how the agency will achieve its goals are not described in the plan but rather in the budget and operational plans of individual offices. DOE has revised its strategic plan to address four core missions: (1) protecting national security and reducing the nuclear danger; (2) weapons site cleanup and environmental management; (3) science and technology; and (4) enhancing energy security. The key to the successful implementation of DOE’s Strategic Plan, and also what the plan is now missing, is how a consensus will be reached to carry out these missions. Such a consensus should involve departmental leadership, the Congress, and other stakeholders and will be crucial in the successful completion of these long-term, high-cost MSAs.
DOE is also revising its management information systems. Over the years, DOE has implemented numerous management information systems and has been criticized by us and others because (1) different contractors were allowed to operate different systems that were not compatible, (2) there was considerable overlap among the systems, and (3) many of the systems produced incorrect data. In July 1994, DOE issued an information management plan to support the objectives in its Strategic Plan. Lack of reliable information has been a long-standing problem with DOE’s MSAs. We recently found that DOE lacks comprehensive historical data on many of the MSAs. To the extent that DOE’s information management initiative can improve its ability to develop and deliver accurate management information, the initiative could also help improve the management of MSAs.
DOE has also been criticized over the years for its inability to develop uniform, accurate, cost and budget data. In a May 1995 report, DOE’s Financial Information Team recommended a number of actions to address the agency’s financial and business information needs. For example, the report pointed out that DOE’s budget information came from a myriad of budget documents and in various formats. Because of this, the budget process did not provide the accurate and timely data managers needed. Among other things, the report recommended that DOE adopt a consistent budget format for the agency; adopt standard, electronically integrated budget software; and centralize budget preparation with the Chief Financial Officer. Better identification and reporting of cost data is a necessary step toward better DOE oversight and management of all of its activities, including MSAs. Having accurate and timely cost data is critical to management for early identification of problems and the prevention of cost overruns.
section_title: Observations
paragraphs: There are no quick, easy solutions for DOE to keep its major system acquisitions on schedule and within budget. However, a number of recent federal and DOE initiatives could help. Recent changes to federal procurement laws could help contracting officers, including DOE’s, do their jobs better. In addition, the new requirement that all federal agencies request full funding for major projects could force DOE to reduce the number of MSAs it has ongoing and could improve project management by ensuring that project funds are available when needed. DOE’s management initiatives in the areas of contract reform, strategic systems and life-cycle asset management, strategic planning, information resources management planning, and financial planning could improve the management of its MSAs. To attain meaningful change through its initiatives, DOE will need to carry them through to completion. Another current issue that could impact DOE’s MSAs is the need, in our opinion and that of others, to reassess DOE’s missions. As we have pointed out in testimonies before the Congress, such reassessment would require the involvement of the Congress and would necessitate examining which MSAs really are key to the agency’s missions.Nevertheless, we believe that the management initiatives that DOE currently has under way offer an excellent opportunity for the agency to begin addressing some of the key factors affecting the management of its MSAs.