Contract Reform: DOE's Policies and Practices in Competing Research Laboratory Contracts
Published: 2003-07-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOE is the largest civilian-contracting agency in the federal government, and relies primarily on contractors to operate its sites and carry out its diverse missions. For fiscal year 2003, DOE will spend about 90 percent of its total annual budget, or $19.8 billion, on contracts, including $9.4 billion to operate 16 of its research laboratories (called federally funded research and development centers). Since 1990, GAO has identified DOE's contract management as high-risk for fraud, waste, abuse, and mismanagement. In 1994, DOE began reforming its contracting practices to, among other things, improve contractor performance and accountability. As part of that effort, DOE has at times used competition in awarding contracts to manage and operate its research laboratories. In September 2002, GAO reported on the status of contract reform efforts in DOE. (Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure Initiatives Have Improved Results) (Sep. 2002, GAO-02-798) This testimony discusses some of the findings in that report. GAO was asked to testify on DOE's rationale for deciding whether to compete a laboratory research contract, the extent to which DOE has competed these contracts, and the role of competition and other mechanisms in improving contractor performance.
section_title: What GAO Found
paragraphs: DOE has competed its research laboratory contracts in three main situations--when the contractor operating the laboratory is a for-profit entity, when mission changes warrant a review of the capabilities of other potential contractors, or when the incumbent contractor's performance is unsatisfactory. DOE guidance requires that to extend a contract noncompetitively, the department must present a convincing case for doing so to the Secretary of Energy. Among other things, DOE must certify that competing the contract is not in the best interests of the government and must describe the incumbent contractor's past successful performance. Of the 16 research laboratory contracts currently in place, DOE has competed 6. The remaining 10 contracts have not been competed since the contractors began operating the sites--in some cases, since the 1940s. DOE recently decided to compete 2 of the 10 contracts that had never before been competed--contracts to operate the Los Alamos National Laboratory in New Mexico and the Argonne West Laboratory, located at the Idaho National Laboratory. DOE decided to compete the Los Alamos contract because of concerns about the contractor's performance, and to compete the Argonne West contract as part of an overall effort to separate the Idaho National Laboratory's nuclear energy research mission from the environmental cleanup mission at the Idaho site. Competing contracts is one of several mechanisms DOE can use to address contractor performance problems or strengthen contract management. However, just competing a contract does not ensure that contractor performance will improve. Other aspects of DOE's contract reform initiative intended to improve contractor performance included greater use of fixed-price contracts instead of cost-reimbursement contracts and establishing or strengthening performance-based incentives in existing contracts. In addition, GAO has reported that DOE must (1) effectively oversee its contractors' activities in carrying out projects and (2) use appropriate outcome measures to assess overall results and apply lessons learned to continually improve its contracting practices. GAO's recent evaluation of DOE's contract reform efforts indicates that DOE is still working to put these management practices and outcome measures in place.

section_title: Letter
paragraphs: We are pleased to be here today to discuss the Department of Energy’s  (DOE) use of competition and other mechanisms to help ensure effective  contractor performance in managing and operating its research  laboratories. DOE is the largest civilian-contracting agency in the federal  government, relying primarily on contractors to operate its sites and carry  out its diverse missions. These missions include not only conducting  research but also maintaining the nuclear weapons stockpile, and cleaning  up radioactive and hazardous waste. For fiscal year 2003, DOE will spend  about 90 percent of its total annual budget, or $19.8 billion, on contracts,  including $9.4 billion to operate 16 of its research laboratories.
For over a decade, we, DOE’s Office of Inspector General, and others have  criticized DOE’s contracting practices, including its failure to hold its  contractors accountable for results. DOE’s longstanding approach had  been to develop a broadly defined statement of work, provide  considerable direction to the contractor, and reimburse virtually all costs.  This approach placed limited emphasis on cost control or accountability  for results. Furthermore, poor contractor performance led to schedule  delays and cost increases on many of the department’s major projects.  Since 1990, such problems have led us to designate DOE contract  management—defined broadly to include both contract administration  and management of projects—as a high-risk area for fraud, waste, abuse,  and mismanagement.
In 1994, DOE began its contract reform initiative to improve contractors’  performance. Through this initiative DOE intended, among other things, to  strengthen contracting practices, hold contractors more accountable for  their performance, and demonstrate progress in achieving the agency’s  missions. DOE implemented numerous changes, such as performance  based-contracts with results-oriented measures and a greater use of  competition in awarding contracts, including contracts to manage and  operate its research laboratories known as Federally Funded Research  and Development Centers (FFRDC). According to the Federal Acquisition  Regulation, FFRDCs are entities that engage in activities sponsored by a  government agency or agencies to conduct or manage basic or applied  research and development. Contracts to operate such facilities differ from  other contracts because the government contemplates a long-term  relationship with the FFRDC contractor and the contractor has access to  government data, employees, and facilities beyond that common in a  normal contractual relationship.
My testimony today will discuss (1) DOE’s rationale for deciding whether  to compete a FFRDC contract, (2) the extent to which DOE has competed  these contracts, and (3) the role of competition and other mechanisms in  improving contractor performance. Although we have not conducted a  review solely related to FFRDC contracts, our past work on DOE’s  contract reform initiative, especially our September 2002 report, focused  in part on DOE’s use of competition as a tool to improve contractor  performance, including the contractors that manage and operate DOE’s  laboratories. My testimony today is based on the findings in that report as  well as related information we have developed as part of our ongoing  oversight of DOE’s contracting activities.
In summary we found the following:    DOE has competed its FFRDC contracts in three main situations: when the  contractor operating the laboratory is a for-profit entity, when mission  changes warrant a review of the capabilities of other potential contractors,  or when the incumbent contractor’s performance is unsatisfactory. DOE  guidance on contracting reflects a strong emphasis on competition that  exists, in part, as a result of its contract reform initiative. Statutes and  regulations give DOE considerable flexibility in deciding whether to  compete or noncompetitively extend a FFRDC contract. However, for  noncompetitive extensions, DOE guidance requires the department to  present a convincing case to the Secretary. Among other things, DOE must  certify that competing the contract is not in the best interests of the  government and must describe the incumbent contractor’s past successful  performance.
Of the 16 FFRDC contracts in place, DOE has competed 6. It has not  competed the remaining 10 contracts since the contractors began  operating the sites—in some cases, since the 1940s. DOE recently decided  to compete 2 of the 10 contracts that had never before been competed— contracts to operate the Los Alamos National Laboratory in New Mexico  and the Argonne West Laboratory, located at the Idaho National  Laboratory. DOE decided to compete the (1) Los Alamos contract because  of concerns about the contractor’s performance and (2) Argonne West  contract as part of an overall effort to separate the Idaho National  Laboratory’s ongoing research mission from the environmental cleanup  mission at the Idaho site.
Competing contracts is one of several mechanisms DOE can use to  address contractor performance problems or strengthen contract  management. However, just competing a contract does not ensure that  contractor performance will improve. Other aspects of DOE’s contract  reform initiative intended to improve contractor performance included  greater use of fixed-price contracts instead of cost-reimbursement  contracts and establishing or strengthening performance-based incentives  in existing contracts. In addition, we have reported that DOE must (1)  effectively oversee its contractors’ activities in carrying out projects and  (2) use appropriate outcome measures to assess overall results and apply  lessons learned to continually improve its contracting practices. Our  recent evaluation of DOE’s contract reform efforts indicates that DOE is  still working to put these management practices and outcome measures in  place.
subsections: section_title: Background
paragraphs: DOE has a large complex of sites around the country dedicated to  supporting its missions: sites that were used to produce or process  materials and components for nuclear weapons and laboratories that  conduct research on nuclear weapons, defense issues, basic science, and  other topics. These sites and laboratories are often located on  government-owned property and facilities, but are usually operated by  organizations under contract to DOE, including universities or university  groups, non-profit organizations, or other commercial entities.
DOE contracting activities are governed by federal laws and regulations.  Although federal laws generally require federal agencies to use  competition in selecting a contractor, until the mid-1990s, DOE contracts  for the management and operation of its sites generally fit within an  exception that allowed for the use of noncompetitive procedures. Those  contracts were subject to regulation that established noncompetitive  extensions of contracts with incumbent contractors as the norm and  permitted competition only when it appeared likely that the competition  would result in improved cost or contractor performance and would not  be contrary to the government’s best interests. In the mid-1990s, DOE  began a series of contracting reforms to improve its contractors’  performance. A key factor of that initiative has been the increasing use of  competition as a way to select management and operating contractors for  DOE sites. Although DOE initially focused the increased use of  competition on its contracts with for-profit organizations, the laboratories  operated by universities and other nonprofit organizations have not been  completely insulated from these changes.
Contract administration in DOE is carried out by the program offices, with  guidance and direction from DOE’s Office of Procurement and Assistance  Management. The management and operating contracts at DOE’s FFRDC  laboratories are administered primarily by the National Nuclear Security  Administration, a semi-autonomous agency within DOE; or DOE’s Offices  of Science, Environmental Management, or Nuclear Energy, Science, and  Technology.
section_title: DOE Has Competed FFRDC Contracts for Three Main Reasons
paragraphs: DOE has had three main reasons for competing its FFRDC contracts  instead of extending the contracts noncompetitively: when the contractor  operating the laboratory is a for-profit entity, when mission changes  warrant a review of the capabilities of other potential contractors, or when  the incumbent contractor’s performance is unsatisfactory. Without one of  these conditions, DOE has generally extended these contracts without  competition.
DOE has considerable flexibility in deciding whether to compete a  management and operating contract for one of its FFRDC laboratories.  Although federal procurement law specifies a clear preference for  competition in awarding government contracts, the Competition in  Contracting Act of 1984 provided for certain conditions under which full  and open competition is not required. One of these noncompetitive  conditions occurs when awarding the contract to a particular source is  necessary to establish or maintain an essential engineering, research, or  development capability to be provided by an educational or other  nonprofit institution or a FFRDC.
The Federal Acquisition Regulation, which implements federal law,  defines government-wide policy and requirements for FFRDCs, including  the establishment, use, review, and termination of the FFRDC relationship.  Under this regulation (1) there must be a written agreement of  sponsorship between the government and the FFRDC; (2) the sponsoring  governmental agency must justify its use of the FFRDC; (3) before  extending the agreement or contract with the FFRDC, the government  agency must conduct a comprehensive review of the use and need for the  FFRDC; and (4) when the need for the FFRDC no longer exists, the agency  may transfer sponsorship to another government agency or phase out the  FFRDC.
DOE’s 1996 acquisition guidance describes the procedures DOE program  offices must follow to support any recommendation for a non-competitive  extension of any major site contract, including a FFRDC contract. This  guidance indicates a clear preference for competition and requires DOE  program offices to make a convincing case to the Secretary before a  noncompetitive contract extension is allowed. This preference for  competition is an outcome of DOE’s contract reform initiative, which  concluded that DOE needed to expand the use of competition in awarding  or renewing contracts. Among other things, the 1996 guidance specifies  that, before a noncompetitive contract extension can occur, DOE must  provide    a certification that full and open competition is not in the best interest of    a detailed description of the incumbent contractor’s past performance,    an outline of the principal issues and/or significant changes to be  negotiated in the contract extension, and in the case of FFRDCs, a showing of the continued need for the research  and development center in accordance with criteria established in the  Federal Acquisition Regulation.
In November 2000, DOE’s Office of Procurement and Assistance  Management issued additional guidance on how to evaluate an incumbent  contractor’s past performance when deciding whether to extend or  compete an existing contract. The guidance states that DOE contracting  officers must review an incumbent contractor’s overall performance  including technical, administrative, and cost factors, and it outlines the  information required to support the performance review and the expected  composition of the evaluation team. When reporting the results of a  performance evaluation, the team should address all significant areas of  performance and highlight the incumbent contractor’s strengths and  weaknesses. The evaluation team’s report serves as the basis for  determining whether extending a contract is in the best interests of the  government and is subject to review and concurrence by the responsible  assistant secretary and DOE’s Procurement Executive.
section_title: DOE Has Competed or Plans to Compete Half of Its 16 FFRDC Contracts
paragraphs: In September 2002, we reported that DOE had taken several steps to  expand competition for its site management and operating FFRDC  contracts. First, DOE reassessed which sites it should continue to  designate as federally funded research and development centers. As a  result of the reassessment, DOE removed 6 of the 22 sites from the FFRDC  designation. DOE subsequently competed the contracts for two of these— the Knolls and Bettis Atomic Power Laboratories in New York and  Pennsylvania. DOE restructured the other four contracts and, because of  the more limited scope of activities, no longer regards them as major site  contracts. The six site contracts that DOE has dropped from FFRDC status  since 1992 are listed in table 1.
For the 16 remaining FFRDC contracts that DOE sponsors, DOE has  competed 6 of them and is planning to compete two additional contracts  in 2004 and 2005. The 16 current FFRDC sites and the competitive status  of the site contract are shown in table 2.
DOE’s decision to compete the six FFRDC sites shown in table 2 is  consistent with the department’s overall policy on determining when  competition is appropriate. For example, DOE competed the contract for  the Brookhaven National Laboratory in 1997, after terminating the  previous contract for unsatisfactory performance by the incumbent  contractor. DOE competed the contract for the National Renewable  Energy Laboratory in 1998 to incorporate additional private sector  expertise into the management team for the site. This competition resulted  from an expanded mission at the site to develop innovative renewable  energy and energy efficient technologies and to incorporate these  technologies into cost effective new products. For the remaining four  FFRDC contracts that DOE has competed, the operator of the laboratory  was a for-profit entity.
When DOE has decided not to compete its FFRDC contracts but to extend  them noncompetitively, its decisions have not been without controversy.  For example, in 2001, DOE extended the management and operating  contracts with the University of California for the Los Alamos and  Lawrence Livermore National Laboratories. The University of California  has operated these sites for 50 years or more and has been the sites’ only  contractor. In recent years, we and others have documented significant  problems with laboratory operations and management at these two  laboratories—particularly in the areas of safeguards, security, and project  management. Congressional committees and others have called for DOE  to compete these contracts. Until recently, however, DOE did not compete  them. Instead, DOE chose to address the performance problems using  contract mechanisms, such as specific performance measures and interim  performance assessments. In our September 2002 report, we commented  that if the University of California did not make significant improvements  in its performance, DOE may need to reconsider its decision not to  compete the contracts.
In April 2003, the Secretary of Energy decided to open the Los Alamos  National Laboratory contract to competition when the current contract  expires in September 2005. The Secretary made this decision based on  “systemic management failures” that came to light in 2002. The  management failures included inadequate controls over employees’ use of  government credit cards, inadequate property controls and apparent theft  of government property, and the firing of investigators attempting to  identify the extent of management problems at the laboratory.
DOE has also decided to restructure the FFRDC contracts supporting  work at the Idaho National Laboratory. Currently the laboratory has two  FFRDC contracts—(1) a site management contract that includes activities  ranging from waste cleanup to facility operations activities and (2) a  contract to operate Argonne National Laboratory, which includes the  Argonne West facility at the Idaho site. DOE plans to restructure the two  contracts so that one focuses on the nuclear energy research mission and  the other focuses on the cleanup mission at the site. DOE also plans to  include the activities at Argonne West in the contract competition for the  site’s research mission and to remove the Argonne West scope of work  from DOE’s existing contract with the University of Chicago to operate  Argonne National Laboratory. DOE believes this contract restructuring  will help revitalize the nuclear energy research mission at the Idaho Site  and accelerate the environmental cleanup.
DOE is continuing to examine the nature of its relationship with FFRDC  contractors and the implications of that relationship for its contracting  approach. DOE established FFRDCs in part to gain the benefits of having a  long-term association with the research community beyond that available  with a normal contractual relationship. However, more recent events are  causing DOE to rethink its approach. As discussed above, DOE has been  criticized for not competing laboratory contracts where the contractors  are performing poorly. Furthermore, annual provisions in the Energy and  Water Development Appropriations Acts since fiscal year 1998 have  required DOE to compete the award and extension of management and  operating contracts, including FFRDC contracts, unless the Secretary  waives the requirement and notifies the Subcommittees on Energy and  Water of the House Committee on Appropriations 60 days before contract  award.
Given these concerns, in 2003 the Secretary of Energy commissioned an  independent panel to determine what criteria DOE should consider when  deciding whether to extend or compete a laboratory management and  operating contract. The panel is expected to help DOE determine, among  other things, the conditions under which competition for laboratory  contracts is appropriate, the appropriate criteria for deciding to compete  or extend laboratory contracts, the benefits and disadvantages derived  from competing laboratory contracts, and whether different standards and  decision criteria should apply depending on whether the contractor is non- profit, an educational institution, an academic consortium, or a  commercial entity.
section_title: Competing Its Contracts Is One of Several Mechanisms DOE Has to Address Contractor Performance, but Effective Oversight and Improved Outcome Measures Are Also Needed
paragraphs: Competing contracts is one of several mechanisms DOE can use to  address contractor performance problems or strengthen contract  management. However, competing a contract does not ensure that  contractor performance will improve. Other steps DOE has taken as part  of its contract reform initiative to address contractor performance issues  include changing the type of contract, such as from a cost-reimbursement  to a fixed-price contract, or establishing or strengthening performance- based incentives in the contract. For example, in September 2002, we  reported that DOE now requires performance-based contracts at all of its  major sites. DOE has also increased over time the proportion of  contractors’ fees tied to achieving those performance objectives. However,  DOE has struggled to develop effective performance measures and  continues to modify and test various performance measures that more  directly link performance incentives to a site’s strategic objectives.
Even these changes to DOE’s contracts do not by themselves ensure that  contractor performance will improve. We have reported that DOE must  also (1) effectively oversee its contractors’ activities in carrying out  projects and (2) use appropriate outcome measures to assess overall  results and apply lessons learned to continually improve its contracting  practices. Effectively overseeing contractor activities involves, among  other things, ensuring that appropriate and effective project management  principles and practices are being used. Since June 1999, DOE has been  working to implement recommendations by the National Research Council  on how to improve project management at DOE. In 2003, the National  Research Council reported that DOE has made progress in improving its  management of projects but that effective management of projects was not  fully in place.
Regarding the use of outcome measures to assess overall results, in  September 2002, we reported that DOE did not have outcome measures or  data that could be used to assess the overall results of its contract reform  initiatives. We recommended that DOE develop an approach to its reform  initiatives, including its contracting and project management initiatives,  that is more consistent with the best practices of high-performing  organizations. DOE is still working to put a best-practices approach in  place.
As we reported in 2001, improving an organization’s performance can be  difficult, especially in an organization like DOE, which has three main  interrelated impediments to improvement—diverse missions, a confusing  organizational structure, and a weak culture of accountability. However,  DOE expects to spend hundreds of billions of dollars in future years on  missions important to the well-being of the American people, such as  ensuring the safety and reliability of our nuclear weapon stockpile.  Therefore, the department has compelling reasons to ensure that it has in  place an effective set of contracting and management practices and  controls.
Thank you, Madam Chairman and Members of the Subcommittee. This  concludes my testimony. I would be pleased to respond to any questions  that you may have.
section_title: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact Ms. Robin  Nazzaro at (202) 512-3841. Individuals making key contributions to this  testimony included Carole Blackwell, Bob Crystal, Doreen Feldman, Molly  Laster, Carol Shulman, Stan Stenersen, and Bill Swick.
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