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

Letter

Background

DOE’s Hanford site in southeastern Washington State was established in 1943 to produce nuclear materials for the nation’s defense. Although DOE stopped producing nuclear material at Hanford in 1989, millions of gallons of high-level radioactive waste from production still remain in aging, underground waste tanks, most of which are beyond their design life and many of which have reportedly leaked waste into the soil. Since production ended, DOE has attempted and abandoned several different approaches to treat and dispose of Hanford’s tank wastes. DOE’s current approach, the WTP project, is intended to separate the waste into high- level and low-activity fractions, and immobilize all of the high-level fraction and about half of the low-activity fraction of Hanford’s approximately 56 million gallons of radioactive waste for permanent disposal. To achieve this goal, DOE contracted with Bechtel in 2000 to construct a complex of 3 waste processing facilities, an analytical laboratory, and over 20 smaller, supporting facilities to treat and package the waste. The original contract was for $4.3 billion, with a completion date of 2011. However, since then numerous problems with the design and construction of the facilities have resulted in several cost and schedule overruns. DOE currently estimates that the WTP project will cost $12.2 billion, with a completion date of late 2019. (See fig. 1 for an aerial view of WTP as of March 2007.)

DOE relies almost entirely on contractors to carry out its production, research, and cleanup missions. DOE’s history of inadequate management and oversight of contractors and of failure to hold its contractors accountable led us in 1990 to designate DOE’s contract management, including both contract administration and project management, as a high- risk area vulnerable to fraud, waste, abuse, and mismanagement. Similarly, both DOE and DOE’s Office of Inspector General have reported contract and project management as significant DOE management challenges since the 1990s. Over the years, we have also reported on project management weaknesses at WTP. Because of both contractor and DOE management problems with the project, DOE directed Bechtel to slow down or stop construction activities on two of the major facilities—the pretreatment facility and the high-level waste facility. The construction slowdown caused Bechtel to lay off several hundred construction workers in 2005, and caused Bechtel’s total annual WTP expenditures to drop from $751 million in fiscal year 2005 to $498 million in fiscal year 2006. However, Bechtel is preparing to restart construction on the two facilities and hire several hundred more workers in 2007 and 2008. While the majority of Bechtel’s WTP employees are located at or near the WTP construction site in Richland, Washington, some are also located off-site, primarily at Bechtel corporate offices in California and Maryland. DOE officials stated that because of the difficulty of hiring engineers willing to relocate to Richland, Bechtel plans to hire many more off-site employees in the future and is in the process of establishing a satellite office in Oakland, California, and expanding a satellite office in Frederick, Maryland, exclusively for the WTP project.

While our previous reports on WTP primarily discussed DOE’s project management practices, this report addresses aspects of its contract administration practices. Contract administration involves those activities performed by government officials, such as the program office staff, contracting officer and representatives, property administrator, and financial staff, after a contract has been awarded to help ensure that the contractor complies with the terms of the contract and that the government gets what it paid for at an appropriate cost. DOE and the contractor must also comply with applicable provisions of the FAR, which is the primary regulation that federal agencies must follow when acquiring supplies and services with appropriated funds. The Department of Energy Acquisition Regulation establishes uniform acquisition policies that implement and supplement the FAR and is applicable to DOE acquisitions. The contract also specifies the DOE orders and directives that are applicable to the project. These orders and directives may impose requirements on DOE, the contractor, or both.

Contract Requirements

Under the WTP contract, Bechtel must submit an invoice to DOE twice a month for reimbursement of all allowable costs incurred to complete the contract. Excluding incentive fees, each semimonthly invoice averaged more than $30 million in costs during fiscal year 2005, and more than $20 million during fiscal year 2006. DOE’s WTP contracting officer was responsible for approving each invoice within a few days so that DOE could pay the contractor within 7 days of receiving the invoice as required under the contract. However, if DOE discovers an overpayment or underpayment after approval, it can make a subsequent adjustment at any time prior to contract closeout.

Under the terms of the contract, the FAR, and the cost accounting standards, reimbursable costs include supplies and services purchased directly for the contract, payments to subcontractors, direct labor, direct travel, other direct costs, and properly allocable and allowable indirect costs. The FAR and the cost accounting standards provide the cost principles and procedures for determining the allowability, allocability, and reasonableness of such costs. Bechtel calculates the indirect costs in each invoice based on the various indirect cost billing rates that Bechtel and the government’s corporate administrative contracting officer negotiate and agree to each year. Once agreed upon, the same set of rates applies to all of Bechtel’s government contracts. The corporate administrative contracting officer assigned to oversee Bechtel is an official of DCMA, a component of the Department of Defense. DCAA and, to a lesser extent, DCMA, perform various reviews and audits of Bechtel’s corporate-wide billing, purchasing, and accounting systems as well as various reviews of direct and indirect costs.

The WTP contract provides that title to property purchased by the contractor for which the contractor is reimbursed by the government passes to the government, and that the contractor is responsible and accountable for all such property. It further requires the contractor to establish and maintain a program for the use, maintenance, repair, protection, and preservation of government property in accordance with sound business practice and with FAR 45.5. The FAR provides additional requirements for the contractor’s property control program, such as requirements for the contractor to investigate and report to the DOE property administrator all cases of loss, damage, or destruction of government property and to require and ensure that subcontractors provided government property under the prime contract comply with the FAR requirements. The FAR requires DOE to review and approve the contractor’s property control system and to perform reviews to ensure compliance with the government property clauses of the contract. In addition, DOE Order 580.1, Department of Energy Personal Property Management Program, sets forth the standards, practices, and performance expectations for the management of personal property owned by DOE, including requirements for DOE property administrators to develop and apply an oversight program, resolve property administration issues, and make recommendations concerning the acceptability of contractor personal property management systems.

Internal Control

Internal control is the first line of defense in safeguarding assets and preventing and detecting fraud and errors. Internal control is not one event or activity but a series of actions and activities that occur throughout an entity’s operations on an ongoing basis. It comprises the plans, methods, and procedures used to effectively and efficiently meet missions, goals, and objectives. As required by 31 U.S.C. § 3512(c),(d), commonly referred to as the Federal Managers’ Financial Integrity Act of 1982, GAO issues standards for internal control in the federal government. These standards provide the overall framework for establishing and maintaining internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. The accompanying internal control standards tool provides additional guidance to assist agencies in maintaining or implementing effective internal control and in determining what, where, and how improvements can be implemented. The standards include establishment of a positive control environment that provides discipline and structure as well as a climate that influences the quality of internal control. As we reported in our Executive Guide, Strategies to Manage Improper Payments: Learning from Public and Private Sector Organizations (improper payments guide), a lack of or breakdown in internal control may result in improper payments. Improper payments are a widespread and significant problem in government and include inadvertent errors, such as duplicate payments and miscalculations; payments for unsupported or inadequately supported claims or invoices; payments for services not rendered; and payments resulting from outright fraud and abuse.

Inadequate DOE Controls Heightened Risk of Improper WTP Contractor Payments

DOE’s controls over payments to contractors were not effectively designed to adequately reduce the risk of improper payments, particularly given the inherent financial risks of the WTP project. Specifically, several factors combine to pose a significant inherent risk of improper payments to the government on this project, including the size and complexity of the project, escalating cost and schedule estimates, and the significant volume of transactions Bechtel bills to DOE each invoice. However, despite these risks, DOE performed little or no review of the contractor’s invoices in fiscal years 2005 and 2006 or of supporting documents for the almost $1.25 billion Bechtel billed to DOE on these invoices. Instead, DOE relied primarily on DCAA’s review and approval of Bechtel’s financial systems and on Bechtel’s review and approval of subcontractor charges. DOE’s heavy reliance on others, with little oversight of its own, exposed the hundreds of millions of dollars it spent annually on the project to an unnecessarily high risk of improper payments.

WTP Project Has Significant Inherent Risks

The WTP is a long-term project that DOE currently estimates will cost over $12 billion and take almost 20 years to complete. The size and complexity of the project and the escalating cost and schedule estimates pose a significant inherent risk to the government of improper payments that warrants a commensurate level of internal controls and oversight to help mitigate such risk. Table 1 illustrates the major categories of expenditures billed by Bechtel and reimbursed by DOE for the project in fiscal years 2005 and 2006.

As discussed in GAO’s improper payments guide, the risk of improper payments increases in programs with a significant volume of transactions or emphasis on expediting payments. Bechtel bills DOE for thousands of transactions totaling tens of millions of dollars on every semimonthly invoice. In addition, the WTP contract specifies that DOE pay the contractor within 7 days of receipt of a proper invoice rather than the 30 days normally allowed under the Prompt Payment Act before it becomes liable for a late payment interest penalty. This large volume of transactions combined with the expedited payment terms increases the risk of improper payments.

In addition, as a cost-plus-incentive-fee contract, the WTP contract type has its own inherent risks. Specifically, cost-reimbursement contracts (1) place maximum risk with the government and minimum risk with the contractor and (2) provide the contractor with little financial incentive to control costs. In some cases, the government may incorporate incentives within the fee structure to encourage the contractor to control costs, which DOE did in Bechtel’s contract by providing the potential for Bechtel to earn incentive fees based on the relationship of total allowable costs to certain cost targets. In this case, however, the current contract incentives are no longer meaningful because the current cost and schedule goals are no longer achievable due to the cost overruns and schedule delays that have already occurred. The FAR specifies that a cost-reimbursement contract may be used only when appropriate government surveillance during contract performance will provide reasonable assurance that efficient methods and effective cost controls are used. Further, GAO’s Standards for Internal Control in the Federal Government states that internal control should provide for an assessment of the risks the agency faces from both external and internal sources. It also states that once risks have been identified, they should be analyzed for their possible effect, including estimating the risk’s significance, assessing the likelihood of its occurrence, and deciding how to manage the risk and what actions should be taken. Despite these requirements, DOE did not perform or document any type of formal risk assessment as a basis for determining the level of surveillance and internal controls it would use to manage the substantial risks associated with this project. Consequently, the low level of contractor oversight carried out by DOE was not commensurate with the high level of risk, thereby increasing the vulnerability of the contract payments to waste, fraud, and abuse.

DOE Performed Little or No Review of Contractor Invoices

Despite the project’s risks, in fiscal years 2005 and 2006 DOE performed little review of contractor invoices or supporting documents for the millions of dollars in charges that Bechtel billed to DOE twice a month. GAO’s Standards for Internal Control in the Federal Government states that internal control activities—such as approvals, authorizations, verifications, reconciliations, and reviews—should help ensure that actions are taken to address risks. It further states that control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results.

In fiscal years 2005 and 2006, Bechtel invoiced DOE twice a month for WTP expenses, averaging $20 million to $30 million and thousands of transactions per invoice. According to DOE officials, because of the size and volume of transactions in each invoice, the contractor did not provide supporting documents for the individual charges with each invoice but instead agreed to make them available to DOE upon request. DOE officials stated that prior to fiscal year 2005, a DOE accountant would judgmentally select from each invoice a few of the individual charges listed and request the contractor to provide the supporting documents for them. However, after a reorganization in fiscal year 2005 placed the contracting officer and the accounting staff that performed the invoice reviews in separate branches, DOE discontinued the reviews and instead conducted only an annual review of a few dozen transactions selected from two or three invoices. The contracting officer who was responsible for approving the invoices for payment said that DOE reduced the frequency of its invoice reviews in fiscal years 2005 and 2006 based on the results of the prior reviews. Consequently, he stated that his review of the invoice was limited primarily to ensuring that the contractor used the correct overhead and indirect cost billing rates; did not make any large, obvious mistakes; and properly treated any specific, unusual transactions he was expecting based on the project’s progress.

However, we found the lack of detail on the invoices for direct costs other than labor hindered DOE’s ability to identify potentially improper charges, obvious mistakes, or unusual transactions based on the invoice alone. For example, a standard invoice review procedure would include looking for items with descriptions of potentially unallowable charges. However, this type of review was impossible to perform on WTP billings because neither the contractor’s invoices nor the billing system that generated them provided adequate descriptions of the charges. The FAR and the WTP contract require a proper contractor’s invoice to include the description, quantity, unit price, and extended price of supplies delivered or services performed. However, the contractor’s invoice does not provide, and DOE has not required, purchase descriptions. Instead, Bechtel’s invoices list most transactions under broad cost categories such as “construction material & supplies” or “subcontracts, consultants, & outside services” with vendor or subcontractor names, dates, and amounts. Thus, the lack of transaction descriptions would make it difficult for the contracting officer to identify obvious mistakes or unusual transactions, as well as potentially improper charges. Fig. 2 illustrates the level of detail provided, taken from an actual page of an invoice billed to DOE.

DOE’s WTP project directors, who were responsible for overseeing the design and construction of designated WTP facilities and thus had more knowledge of daily work activities, received an abbreviated version of the invoice twice a month for review. However, we found that the abbreviated invoice provided only summary totals for labor, other direct costs, and indirect costs and did not provide even the limited transaction detail that was included in the full invoice. Thus, the project directors’ reviews were limited primarily to assessing whether the total costs billed for their respective projects appeared reasonable given their projects’ annual budgets and progress. Although these project directors had project knowledge, the lack of invoice detail prevented them from performing any meaningful review of specific costs. For example, one report the project directors received for project management purposes was a biweekly report showing the construction materials Bechtel used during that period. However, the abbreviated invoice did not show the type and amount of materials purchased or used, or even a summary total of construction materials billed. Thus, the information on the two documents could not be compared and neither could be meaningfully used to confirm or question individual costs being billed to DOE.

According to DOE officials, there was no requirement specifying how frequently invoices should be reviewed or how such reviews should be performed. DOE had previously issued a local directive, dated September 23, 2002, specific to the WTP project that provided DOE staff with instructions for reviewing Bechtel’s semimonthly invoices. However, DOE officials stated the directive is inactive because it supplemented the WTP contract management plan that was undergoing revision, even though the plan had not been updated since July 11, 2002. According to DOE’s acquisition guide, voucher (invoice) processing and review is an important aspect of contract management, and thus the guide recommends that the contract management plan discuss the process for reviewing and approving invoices and discuss the roles and responsibilities of individuals who are directly involved in the process. The lack of a current contract management plan and corresponding requirements for invoice review—specifying an appropriate level, extent, and responsibilities—further impedes the effective administration of the WTP contract.

DOE Placed Undue Reliance on DCAA and Other Entities

The manager of the DOE staff that previously performed the invoice reviews stated that he did not believe that the FAR required DOE to review the invoiced charges because DCAA had already audited and considered Bechtel’s accounting system to be adequate. Specifically, he stated that FAR 32.503-4 allowed DOE to rely on the internal controls of Bechtel’s accounting system because DCAA had certified Bechtel’s system; thus the invoice reviews DOE performed in the past were beyond what the FAR required. However, FAR 32.500 explicitly states that that section of the FAR does not apply to payments under cost-reimbursement contracts and, therefore, FAR 32.503-4 does not apply to the WTP contract. Instead, the FAR recognizes that cost-reimbursement contracts carry a greater degree of risk to the government, and specifies that cost-reimbursement contracts should have appropriate government surveillance during performance to provide reasonable assurance that efficient methods and effective cost controls are used.

GAO’s Standards for Internal Control in the Federal Government states that internal control should be designed to ensure that ongoing monitoring occurs in the course of normal operations, is performed continually, and is ingrained in the agency’s operations. While the standards acknowledge that separate evaluations can also be useful by focusing directly on the controls’ effectiveness at a specific time, both ongoing monitoring activities and separate evaluations of the internal control system should be considered in assessing the continued effectiveness of internal control. Consequently, while external reviews such as DCAA’s can supplement an overall system of internal control, they are not a substitute for them. Although DCAA conducts several types of audits of Bechtel, it generally conducts its reviews at the corporate-wide level and not at the level specific to a particular contract. Bechtel maintains one overall accounting system that includes various feeder and subsystems—such as the timekeeping and billing systems—for the entire corporation. DCAA audits these systems on a cyclical basis, such that each system is reviewed only once every 3 to 4 years, and these systems audits are not intended to determine the allowability of specific costs. Although DCAA performs annual incurred cost audits that do examine the allowability of the contractor’s direct and indirect costs, there is a significant time lag between when a calendar year closes and when the audit takes place. For example, as of the end of fiscal year 2006 the most recent audit DCAA completed of Bechtel’s incurred costs covered calendar year 2003. This delay was caused in part by the typical 8 months that it may take for the contractor to submit its final indirect cost rate proposal for the year reviewed and in part by a backlog of incurred cost audits at DCAA. In addition, DCAA’s incurred cost audits of Bechtel express an opinion on the allowability of both direct and indirect costs for all of Bechtel’s government contracts and subcontracts. Although the WTP project accounts for a substantial portion of Bechtel’s total federal contract dollars, the 2003 incurred cost audit report listed over 50 applicable Bechtel contracts. Consequently, WTP was just one of many contracts included in the audit’s scope of review.

In addition, DOE relied primarily on Bechtel to review and validate subcontractor charges without having an adequate process in place to assess whether Bechtel was properly carrying out this responsibility. While we recognize that under the FAR the government does not have privity of contract, that is, a direct contracting relationship, with the prime contractor’s subcontractors, the government should have a process in place to ensure that the prime contractor is providing adequate oversight and effective cost control of its subcontractors’ expenditures. This need is even more pronounced when both the prime contract and the subcontract are cost-reimbursable contracts. In fiscal years 2005 and 2006, Bechtel had over 150 subcontracts open, of which 7 were cost-reimbursable subcontracts with a total contract value of $495 million. DOE’s internal controls for ensuring the propriety of subcontractor costs were limited primarily to including selected subcontractor purchases during its periodic reviews of Bechtel’s invoices. However, as noted previously, during the period of our review DOE performed little review of the contractor’s invoices. DOE officials stated they also rely on DCMA’s contractor purchasing system review of Bechtel, which includes reviewing the contractor’s controls for subcontracting. However, similar to the DCAA system reviews described above, DCMA’s contractor purchasing system review of Bechtel is a corporate-wide review performed only about once every 3 years, and the review is not intended to determine the allowability of specific costs. Because a substantial portion of Bechtel’s WTP expenditures goes to subcontractors, for which DOE ultimately pays, DOE should have a process in place to provide reasonable assurance that it can rely upon Bechtel’s controls to ensure subcontractors’ expenditures are allowable and necessary.

The use of cost-reimbursement contracts places special responsibilities on the contracting agency to monitor and control costs by using good contract management and administration practices, including proper internal controls. By not adequately monitoring charges, DOE may not be identifying errors or the weaknesses that allowed them to occur and thus is providing no deterrent to future errors or improprieties. Although DOE officials stated that they were comfortable with the current level of review because they had not found a significant number of errors in the past, as noted in the Strategies to Manage Improper Payments guide, most improper payments associated with federal programs go unidentified typically because of factors such as insufficient oversight or monitoring.

DOE recently took some steps to begin strengthening its oversight of contractor payments. Based on weaknesses identified in its limited fiscal year 2006 annual review of transactions selected from two invoices, DOE began performing monthly invoice reviews in fiscal year 2007. While this is a step in the right direction, it is no substitute for a comprehensive approach that includes an appropriate assessment of risk that could then be used as a basis to design a system of internal control that would be effective in reducing the risk of improper payments. In addition, without sufficient detail in the invoices from which the transactions are selected, such reviews are minimally effective in identifying potential improper payments.

DOE’s Oversight Controls for Project Assets Were Inadequate

DOE did not perform adequate oversight to reasonably ensure that Bechtel had established proper accountability for assets purchased with WTP project funds. The FAR and the contract require the contractor to establish a property management program to safeguard and account for such assets. The FAR also requires DOE to review the contractor’s property program to ensure compliance with the property clauses of the contract. However, we found that DOE relied primarily on the contractor to manage WTP property without adequate oversight to help ensure that the contractor complied with these requirements. As a result, until recently DOE management was largely unaware of numerous internal control weaknesses in the contractor’s property management system, which exposed WTP assets to loss or misuse. While new property managers for DOE and Bechtel have begun addressing the internal control weaknesses we identified, both DOE and the contractor will need continued vigilance in their oversight and management of WTP property to help ensure that it is adequately safeguarded and tracked.

DOE Did Not Ensure the Contractor Maintained Adequate Accountability over Property

DOE reimbursed Bechtel more than $100 million and $200 million in fiscal years 2006 and 2005, respectively, for property purchased for the direct construction of the WTP facilities or to support the construction activities. Such property varies by type and value and includes (1) construction materials, which may be consumed during construction and incorporated into an end product (e.g., cement and pipes); (2) plant equipment, which is personal property of a capital nature and used for administrative or general plant purposes (e.g., cranes and vehicles); (3) sensitive items, which are personal property susceptible to theft and misappropriation (e.g., computers and audiovisual equipment); and (4) tools, which include both inexpensive handheld tools as well as power tools costing thousands of dollars.

Despite the hundreds of millions of dollars in WTP funds expended to acquire property over the years, DOE performed little oversight of Bechtel’s property management program, relying primarily on the contractor to meet property requirements and self-report its compliance. Although the contractor was responsible for the day-to-day management of the property, the FAR required DOE to (1) review and approve the contractor’s property management system and (2) ensure compliance with the government property clauses of the contract. In addition, DOE’s own policies required DOE to maintain records of approvals and reviews of contractors’ property management systems. Nonetheless, besides issuing a letter dated November 21, 2002, approving Bechtel’s property control system, DOE did not document its review of the system and could not provide any supporting documentation demonstrating what it reviewed as the basis for approving the system. The DOE official responsible for the approval told us that he reviewed the contractor’s policies and procedures and spot-checked implementation of procedures on site but did not formally document his assessment or corrective actions he required of the contractor. Consequently, there was no documentary evidence available from which we or DOE could evaluate the adequacy of the original assessment and any corrective actions.

Moreover, DOE did not perform sufficient reviews after its 2002 approval of Bechtel’s property management system to help ensure that Bechtel followed property procedures and complied with FAR and contract requirements. GAO’s Standards for Internal Control in the Federal Government states that internal control should be designed to provide reasonable assurance regarding prevention of or prompt detection of unauthorized acquisition, use, or disposition of an agency’s assets. However, the DOE official responsible for the oversight of WTP assets from May 2005 to May 2006 stated that he never went out to the WTP site to review procedures, observe property management operations, or conduct spot checks of property because he did not have the time to perform such reviews. While DOE received some reports from the contractor related to property—such as periodic reports of lost, damaged, or destroyed government property and Bechtel’s annual performance measures report that included limited summary-level data, such as percentage of items located during physical inventories—it accepted these reports without performing on-site observations or reviewing any supporting documentation to validate the information. In addition, DOE relied solely on Bechtel to ensure that subcontractors maintained adequate accountability for government property they possessed without having a process in place to assess whether Bechtel was properly carrying out this responsibility.

DOE officials acknowledged that DOE oversight of WTP property management has been inadequate and attributed this control weakness to a staffing shortage. According to DOE’s personal property director at DOE headquarters and the WTP contracting officer, a dedicated DOE property administrator should have been assigned to the WTP project, but DOE had difficulty filling the position. As a result, DOE did not assign a property administrator dedicated to the WTP project until June 2006, over 5 years after it awarded the contract. In the meantime, DOE assigned to the DOE Richland Office’s property management officer the oversight responsibility for all government property at Hanford—including WTP property—held by DOE and several contractors. Although DOE’s written responsibilities for such property officers identify them as the leader of an appraisal team responsible for ensuring that DOE contractors established and maintained effective property management programs, a former property officer stated that he was never assigned staff to assist him with his oversight responsibilities. The lack of dedicated DOE staff to oversee management of WTP property was further exacerbated by the high turnover rate of property officers assigned to Hanford. DOE officials stated that there have been four property officers at Hanford within the past 5-½ years, and that they were assigned other collateral duties in addition to their property oversight responsibilities.

Ongoing monitoring of the contractor’s program to safeguard and account for WTP assets located both on- and off-site is critical for preventing and detecting the loss and misuse of such assets. Had DOE implemented effective oversight controls, it may have identified the numerous weaknesses in the contractor’s property management program described below and could have directed the contractor to take corrective actions sooner.

Contractor Did Not Have Adequate Controls for Maintaining Property Accountability

We identified several weaknesses with Bechtel’s property management program that increased the risk of theft, loss, or misuse of government assets. The WTP contract provides that title to property purchased by the contractor for which the contractor is reimbursed by the government passes to the government, and that the contractor is responsible and accountable for all such property in accordance with sound business practice and with applicable provisions of FAR 45.5. As part of these responsibilities, the FAR requires the contractor to establish and maintain a program to control, protect, preserve, and maintain all government property. As of September 30, 2006, Bechtel reported that it had about $65 million in its inventory of capital equipment and sensitive property and $16 million in its tools inventory related to the WTP project. Bechtel had about $100 million in its construction materials inventory as of May 2007. (See fig. 3 for a sample of equipment and tools used at WTP.)

Our review of Bechtel’s property management program disclosed numerous internal control weaknesses that exposed government assets to an increased risk of theft, loss, or misuse and decreased the likelihood of detecting such incidents in a timely manner: Inadequate segregation of duties. GAO’s Standards for Internal Control in the Federal Government state that key duties and responsibilities should be divided among different people to reduce the risk of error or fraud. The FAR and Bechtel’s own policies require that personnel who perform the physical inventory not be the same individuals who maintain the property records. However, during our review, one Bechtel employee was primarily responsible for reviewing the procurement system to identify accountable property purchased, bar coding property when received, entering new property items into Bechtel’s government property system, performing annual physical inventories, and updating the government property system for the results of the inventory. In addition, no one reviewed the data she entered into the property system. Bechtel management attributed this control weakness to reduced staffing caused by the construction slowdown.

Inaccurate property system data. Bechtel used its government property system to track its inventory of capital equipment and sensitive items. Thus, Bechtel’s property procedures required it to maintain the government property system in a manner sufficient to keep database records current and accurate. For example, the procedures state that property management staff are responsible for updating the property records with current locations and custodians. However, during our physical observations of selected property items, we identified items recorded in Bechtel’s government property system with the wrong custodian or location and items recorded in the system that were actually missing. We also identified property that Bechtel had purchased and received but not recorded in the government property system, such as personal digital assistants, copiers, and computer equipment. Bechtel’s property management staff explained that the failure to record the items was caused in part by property staff errors in determining whether to record certain items and to receiving staff’s failure to promptly notify property staff of newly acquired property. Bechtel property staff recorded the assets in their property system after we brought them to their attention.

Inadequate inventory procedures. The FAR requires the contractor to conduct periodic physical inventories of all government property in its possession or control. It also requires the contractor, with the approval of the government property administrator, to establish the type, frequency, and procedures for such inventories. However, we found that Bechtel’s procedures did not specify the frequency or type of inventory required for construction materials, and DOE approved Bechtel’s inventory procedures for materials without an established time frame. Consequently, Bechtel’s property manager stated that while it had performed some spot inventories of selected materials at various times, Bechtel had not performed a complete inventory of materials in fiscal years 2005 or 2006 because of staffing shortages. Bechtel property management staff also stated that they inventory all assets recorded in Bechtel’s government property system annually, yet we identified about 900 items recorded as of September 30, 2006, that the system showed had not been inventoried within the prior year. Bechtel staff claimed that the information in the property system was wrong and that the items had been inventoried, but could not provide adequate documentation to support their claim. We selected 32 of these items for observation and could not locate 4 of them. Records in the government property system as of September 30, 2006, for these 4 missing items—3 computers and 1 projector that are considered sensitive assets—showed that they had not been inventoried in over 2 years.

Inadequate policies and procedures for the accountability of tools. Bechtel acquires a large number of tools at substantial cost for the WTP construction project, billing the government $2.3 million for tools in fiscal year 2005 alone. Tools are easily pilferable, and while many tools may be considered nominal in cost, some cost thousands of dollars and thus warrant commensurate controls to safeguard them effectively. However, we identified several weaknesses with Bechtel’s management of tools. For example, because Bechtel lacked adequate inventory procedures for tools, workers could check out tools from the main tool crib indefinitely without the tools ever being inventoried to ensure that they still existed and were being utilized. Additionally, employee exit procedures were not consistently followed to ensure that terminated employees returned their tools before leaving. We selected for observation five tools that property records showed were assigned to former employees, and found that all five were missing. Furthermore, our review of the tools database and human resource records showed that some workers checked out tools the day before or the day of their termination dates. Bechtel also lacked adequate guidelines for the disposal of tools damaged through normal wear and tear. Specifically, until recently there was no requirement to obtain Bechtel or DOE property management approval to dispose of worn tools. As a result, warehouse staff independently designated over $90,000 of tools as “worn” and disposed of them without any management concurrence required.

Lack of compliance with property checkout procedures. Bechtel’s property procedures required employees to obtain a property pass for items removed from project-controlled areas, and to renew the pass annually if the asset was still needed off-site by presenting the item to the property staff for inspection. We reviewed Bechtel’s government property system and found that about 100 of the 300 items checked out—primarily computers—had expired property passes, some of which had expired as far back as March 2005. We selected 10 assets with expired property passes to observe, and could only locate 9 of them. The missing item, whose property pass had expired in March 2006, was also one of the computers discussed previously that had not been recently inventoried. Bechtel property staff stated they query the government property system monthly to identify and alert custodians of property passes that are about to expire, but could not explain how they missed the expired passes we identified.

Lost, damaged, or destroyed property items not promptly reported. Although the FAR requires the contractor to investigate and report to DOE all cases of loss, damage, or destruction of government property, Bechtel did not always submit such reports to DOE timely. For example, Bechtel did not report to DOE the loss of 3 laptop computers and 2 projectors until 2 years after it first identified them as missing. In April 2007, Bechtel reported to DOE another 15 computers, a printer, and a projector as missing. Bechtel’s government property system indicated and Bechtel’s property staff confirmed that Bechtel first identified at least 2 of these items as missing as far back as 2002. Part of the cause for these delays was that until August 2006 neither Bechtel nor DOE had policies requiring specific time frames for investigating and reporting such incidents. Bechtel officials acknowledged that they should have reported these missing assets more promptly but stated that the delays were caused by Bechtel staff not always promptly reporting lost or damaged government property to Bechtel property staff, and by property staff delaying submitting the reports in hopes that the missing assets would eventually be found. These delays in reporting missing assets, particularly computers that may contain sensitive or proprietary information, decreased the opportunity for DOE to require a timely and thorough investigation into the losses and to require Bechtel to promptly implement controls to help avert future losses of a similar nature.

Inadequate oversight of subcontractors with WTP assets. Bechtel works with numerous subcontractors that supply materials and services to help construct WTP facilities, some of which possess WTP property. The FAR requires the prime contractor to ensure that its subcontractors adequately care for and maintain government property and ensure that it is used only for authorized purposes. This is particularly important since the subcontractors generally maintain the property records for government property they purchase and use, rather than Bechtel. Consequently, Bechtel’s property procedures require its property manager to review and approve its subcontractors’ government property programs. However, Bechtel did not adequately perform such reviews or follow up on subcontractors’ property management issues. For example: Although Bechtel policy required it to audit its subcontractors’ government property programs, one subcontractor refused to be audited by Bechtel because the subcontractor claimed that it already had a property program approved and audited by the government. Even though that program had no relevance to the WTP contract, Bechtel never audited the subcontractor. In addition, this subcontractor refused to provide Bechtel a copy of its property policies and procedures, citing proprietary concerns. Thus, Bechtel had no basis for and never assessed the adequacy of this subcontractor’s property management program.

The subcontractors’ property management policies were not always complete or consistent with Bechtel’s property policies. For example, one subcontractor’s policy lacked formal procedures for reporting lost, damaged, or destroyed government property and thus did not have any requirements for reporting such items promptly. Another subcontractor’s policy for tracking sensitive items was inconsistent with Bechtel’s own policy. Specifically, the subcontractor’s dollar threshold for tracking sensitive items, such as cameras and video equipment, was higher than Bechtel’s threshold. As a result, WTP assets susceptible to theft and misuse were not being consistently tracked in the property systems for inventory control purposes.

Bechtel did not timely follow up on subcontractor property management issues it identified through its audit and oversight to ensure that the subcontractors properly implemented corrective actions. For example, during an April 2005 subcontractor audit, Bechtel identified several government assets that were not marked with indication of government ownership as required by the FAR. In its audit report, Bechtel indicated that it would perform a follow- up review within 30 days to ensure that corrective actions were implemented; however, it could not provide us any documentation that such follow-up was performed. During our visit to that subcontractor in February 2007, we saw several government assets that were not marked as government property. During the same April 2005 audit, Bechtel discovered a missing computer and instructed the subcontractor to submit a lost property report, which the subcontractor submitted in June 2005. Bechtel rejected the report and requested a revision, but did not follow up with the subcontractor to ensure that a revised report was submitted. Consequently, Bechtel did not receive a revised report until February 2007, which it subsequently submitted to DOE.

DOE and Bechtel Are Implementing Corrective Actions

DOE has recently taken steps to increase its oversight of Bechtel’s WTP property management program. At the time we began our audit, DOE hired a property administrator responsible solely for overseeing the WTP property management program. This property administrator has taken on a more active oversight role through his procedural and compliance reviews. For example, since his arrival in mid-2006 he has issued specific requirements to the contractor for reporting lost, damaged, or destroyed property more timely; directed the contractor to perform a materials inventory at least annually; issued guidelines for performing inventories of tools checked out to workers; and performed several on-site inspections identifying instances of noncompliance and corrective actions for Bechtel to address. In addition, he has directed the contractor to prepare and submit for his approval a detailed inventory plan for construction materials specifying the inventory type, frequency, and detailed procedures.

For its part, Bechtel has also initiated a number of corrective actions to improve its management of government property. Bechtel also hired a new property manager in mid-2006 who in turn hired several additional property staff to better address the segregation-of-duties issue and to help implement requirements. The new property manager has developed and issued new policies, such as a policy requiring Bechtel and DOE property management concurrence prior to disposing of worn tools. In addition, he implemented a new property database system and tasked his staff with correcting errors in the property system. He stated he also plans to review Bechtel’s receiving process and tools accountability.

Because the policy and procedural changes primarily occurred after our review period, we have not assessed the effectiveness of the changes. If implemented properly, these should help improve the contractor’s management of government property and DOE’s oversight of the contractor’s program. However, additional issues remain which, if not addressed, will continue to expose government property to an increased risk of theft, loss, or misuse.

Conclusions

DOE’s oversight of contractor billings and property management on the WTP project did not have the level of internal controls that would be expected of a project of this magnitude and complexity. DOE’s lack of appropriate oversight controls for contractor invoices significantly increased its vulnerability to improper payments. Further, DOE did not establish basic oversight controls to reasonably ensure that Bechtel and its subcontractors appropriately tracked and safeguarded the millions of dollars in property and equipment purchased for the project. Given that DOE has estimated that it will likely spend at least another $9 billion on the WTP project over the next decade or more, it is critically important that it establish appropriate oversight and controls commensurate with the risks involved in this costly, complex project. This is particularly important in the near term as the project ramps back up and the contractor begins to hire hundreds of additional workers in Hanford and at off-site locations. The recent corrective actions taken to date, if effectively implemented, are positive first steps to improving DOE’s oversight of contractor payments and property management. DOE management’s commitment and continued attention to these areas will be essential to establishing a lasting and more effective administration of the WTP contract.

Recommendations for Executive Action

To improve DOE’s oversight of and accountability for WTP expenditures, we recommend the following 11 actions. To improve DOE’s review and approval process for contractor billings, we recommend that the Secretary of Energy direct the Assistant Secretary for Environmental Management or designee to: Perform an assessment of the risks associated with WTP contract payments, including subcontractor payments, which should include comprehensively identifying the risks, performing a risk analysis of their possible effects, and identifying the actions—both preventive and detective—to be taken to mitigate those risks.

Based on the results of the risk assessment, establish appropriate policies and procedures for effective review and approval of the prime contractor’s invoices. Such policies and procedures should specify the steps to be performed for review and approval, the individuals responsible for carrying out these steps, the level of invoice detail needed to perform an appropriate review, and the appropriate documentation to be maintained of that review process.

Establish a policy and procedures to periodically assess the prime contractor’s oversight of subcontractor payments to determine if there are any deficiencies and corrective actions needed and assess whether the controls can be sufficiently relied on to ensure that subcontractor payments are allowable, reasonable, and in compliance with all FAR and contract requirements.

To strengthen DOE’s accountability for contractor-acquired government property, we recommend that the Secretary of Energy direct the Assistant Secretary for Environmental Management or designee to: Follow DOE’s existing requirements to periodically document and assess the contractor’s property management program for compliance with the FAR and DOE policy.

Follow DOE’s existing requirements to document the adequacy of corrective actions planned and implemented by the contractor to address weaknesses identified in DOE’s assessments of the contractor’s property management program.

Direct the contractor to implement control procedures to help ensure the timeliness and accuracy of information entered into the property systems.

Review the adequacy of Bechtel’s proposed inventory plan for construction materials once submitted, and ensure that the approved plan is properly implemented.

Direct the contractor to establish appropriate controls to ensure that employee exit procedures requiring terminated employees to return tools before they leave are followed.

Direct the contractor to establish a formal policy and procedures for property staff to (1) periodically monitor the government property system for assets with property passes that are due to expire soon, (2) notify property custodians with such assets to renew their property passes or return the items if no longer needed, and (3) ensure that such assets are verified as required.

Direct the contractor to establish control procedures to help ensure that Bechtel staff and subcontractors report lost or damaged government assets to property management in a timely manner so that they can be forwarded to DOE within recently established time frames.

Establish procedures to periodically assess the prime contractor’s oversight of its subcontractors in possession of government property to ensure that the prime contractor (1) audits applicable subcontractors’ property management programs as required, (2) reviews applicable subcontractors’ property management policies and procedures for completeness and consistency, and (3) follows up on and documents resolution of corrective actions in a timely manner.

Agency Comments and Our Evaluation

We provided a draft of this report to DOE for its review and comment. In its written comments, DOE stated it had assessed the risk of improper payments at contract inception, but agreed with the recommendation to perform an updated risk assessment to ensure adequate oversight and accountability for WTP expenditures. It did not specifically comment on the remaining recommendations. DOE stated in the letter that it would engage with DCAA to update the assessment of the risks, revise the current policies and procedures related to contractor billings as necessary, and assess the adequacy of property management staff levels and capabilities to ensure that adequate coverage is provided for oversight of the WTP. However, while not disputing the specific facts contained in the report, the letter states that DOE believes (1) the controls in place during the period of review, fiscal years 2005 and 2006, met the requirements and intent of the applicable federal acquisition regulation, DOE orders, and contract terms; (2) the combination of the contractor’s billing systems, DCAA’s ongoing audits, and the recurring DOE review of selected invoices adequately prevent unallowable or improper costs, and (3) the property management weaknesses and corrective actions reflected in our reported findings and recommendations were self-identified by DOE and the contractor. DOE also provided technical comments that we subsequently discussed with DOE officials and incorporated as appropriate.

We disagree with DOE’s contention that the controls in place during the period of review met the requirements and intent of the applicable FAR requirements, DOE orders, and WTP contract terms. For example, as noted in our report, the FAR and the WTP contract require that a proper contractor’s invoice include the description, quantity, and unit price of supplies delivered or services performed, but Bechtel’s invoice did not include such detail and DOE did not enforce the requirement. DOE’s policies required it to maintain records of its reviews of contractors’ property management systems, but DOE could not produce any documentation demonstrating what it reviewed as the basis for approving Bechtel’s property management system. The FAR requires that personnel who perform the physical inventory not be the same individuals who maintain the property records, but at the time of our review one property staff member was performing both of these duties. These and other examples in our report illustrate that DOE’s and the contractor’s controls did not always meet FAR, DOE, or WTP contract requirements.

Further, as reflected in both the report title and objectives, the focus of our report was not limited to DOE’s compliance with regulations, but more broadly on the adequacy of its internal controls over contractor payments and project assets. The Standards for Internal Control in the Federal Government, with which DOE as a federal agency must comply, state that internal control is an integral part of managing an organization, and involves providing reasonable assurance that the agency not only complies with applicable laws and regulations, but also operates efficiently and effectively, including the use of the entity’s resources. Internal control is to serve as the first line of defense in safeguarding assets and preventing and detecting errors and fraud. Internal control helps organizations achieve desired results through effective stewardship of public resources. Our report discusses several areas in which DOE had not developed the policies needed to effect adequate internal control. For example, there was no requirement specifying how frequently contractor invoices should be reviewed or how such reviews should be performed. Similarly, until August 2006 neither Bechtel nor DOE had policies requiring specific time frames for reporting lost, damaged, or destroyed property items. Thus, while taking 2 years to report such property to DOE may not have violated any specific FAR, DOE, or contract requirements up to that point, such practices did not constitute acceptable internal control.

Regarding the contractor billing process, DOE stated that it assessed the risk of improper payments at contract inception and believes the combination of the contractor’s billing systems (based upon DCAA’s assurances), DCAA’s ongoing audits, and the recurring DOE review of selected invoices adequately prevent unallowable or improper costs. We disagree. The WTP project has changed significantly since contract inception. Numerous DOE and contractor problems and project management weaknesses over the years have contributed to an almost threefold increase in the project’s estimated cost and an almost twofold increase in the completion schedule since the contract began in December 2000. Thus, a risk assessment performed at contract inception does not reflect current conditions and risks and thus does not provide a proper foundation for designing an adequate system of internal control.

Further, while we agree that a DCAA audit of contract costs can provide a detective control to help determine whether contractor costs were proper, reliance on an after-the-fact audit is not an acceptable replacement for the type of real-time monitoring and oversight of contractor costs—preventive controls—that we found to be deficient. Also, as noted in our report, while the FAR allows contracting agencies to rely on DCAA’s certification of the contractor’s accounting system for certain types of payments, the FAR explicitly excludes payments under cost-reimbursement contracts from this provision, recognizing that cost-reimbursement contracts carry a greater degree of risk to the government and therefore must have appropriate surveillance during performance to provide reasonable assurance that efficient methods and effective cost controls are used. It is important that DOE establish a control environment that includes specific control activities to prevent questionable or improper payments to begin with or that detects them soon after they occur so that they can be resolved in a timely manner. Primary reliance on an audit of contractor costs by DCAA 3 years after DOE reimbursed the contractor for such costs is not adequate given the magnitude of the contract.

With regard to DOE’s invoice reviews, we noted in our report that DOE began performing monthly invoice reviews in fiscal year 2007, which we believe is a step in the right direction. However, we continue to maintain that the effectiveness of such reviews is hindered by the lack of detail in the invoices from which the transactions are judgmentally selected. Given the many challenges and events that have occurred on this project since the contract began, a proper and current assessment of the risks that is then used as the foundation for designing an overall system of internal control is needed to effectively reduce the risk of improper payments. DOE has committed to updating its assessment of the risks and revising its policies and procedures as necessary, and we will continue to monitor its progress in addressing our recommendations in this area.

With regard to the property management issues identified, we commend DOE and the contractor for taking a more aggressive approach in the last year toward improving the WTP property management program, which we recognized in our report. Throughout our fieldwork, we raised issues and concerns regarding property management weaknesses we observed, some of which we recognize were also being identified by DOE and the contractor concurrent with our review. For example, during our initial site visit in June 2006 we obtained some of the contractor’s reports of lost, damaged, and destroyed property and noted significant delays in Bechtel’s reporting of these assets. During the same week, DOE issued a memo to the contractor questioning these delays, and subsequently issued a new policy in August 2006 to improve the timeliness of such reporting. However, we disagree with DOE’s contention that all of the weaknesses and corrective actions reflected in our findings and recommendations were self-identified by DOE and the contractor. Our audit work identified many internal control weaknesses that were not identified before we raised them or did not result in corrective action until after we brought them to DOE’s or the contractor’s attention during the course of our audit.

For example, it was our data mining queries of the property databases that identified the assets checked out to employees with expired property passes, property items purchased and received that had not been recorded in the government property system, and tools that were still assigned in the property records to former employees. Our physical observations of selected property items identified items recorded in Bechtel’s government property system with the wrong custodian or location and items recorded in the tools database that were missing. Our inquiries and walk-throughs of operations identified still other weaknesses. For example, after Bechtel told us on May 14, 2007, that a complete materials inventory had not been done for 2005 or 2006, DOE issued a memo to the contractor on May 17, 2007, expressing disappointment in Bechtel’s inability to provide us with materials inventory results, and directed the contractor to begin conducting annual materials inventories starting in 2007. We were encouraged by the fact that as we asked questions and raised concerns with both DOE and contractor staff throughout our audit, they typically took prompt action to address these issues. Continued focus on this area with prompt, corrective actions consistent with our recommendations will go a long way toward reducing the risk of theft, loss, or misuse of WTP assets.

We are sending copies of this report to other interested congressional committees and to the Secretary of Energy. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions on this report, please contact me at (206) 287-4809 or by email at calboml@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III.

Appendix I: Scope and Methodology

For this review, we considered internal controls in place during fiscal years 2005 and 2006 at the Department of Energy (DOE) and at Bechtel National, Inc. (Bechtel) related to the Hanford Waste Treatment and Immobilization Plant (WTP) project. To perform our work, we reviewed the WTP contract; the Federal Acquisition Regulation (FAR); DOE’s Acquisition Regulation (DEAR) and other DOE directives, policies, procedures; and GAO’s Standards for Internal Control in the Federal Government to gain an understanding of the applicable requirements. We made site visits to Richland, Washington, to perform work at DOE’s Office of River Protection, Bechtel’s WTP project office, and the WTP work site. We also met with Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA) auditors and with the DCMA corporate administrative contracting officer and reviewed copies of relevant reports they had prepared based on their reviews of Bechtel to obtain an understanding of DCAA’s and DCMA’s reviews and oversight of Bechtel. We also coordinated with DOE Inspector General staff to determine whether they had performed audit work that may be relevant to our review, and met with Bechtel internal audit staff and obtained copies of their reports. Our work was not designed to determine or estimate the allowability of all contractor costs or the accountability of all property items.

Data Reliability

To assess the reliability of data we used for this report, we performed the following steps: Because Bechtel maintains the billing system that generates the hard copy invoices it provides to DOE, we requested data extracts from its billing system representing charges that Bechtel billed to DOE in fiscal years 2005 through 2006. These extracts contained the amounts billed to DOE for labor and other direct costs. To assess the reliability of the billing data extracts for purposes of our review, we (1) compared total WTP disbursements to Bechtel per DOE’s accounting records to the total amount of invoices Bechtel billed to DOE for the period, (2) compared the invoiced total to Bechtel’s schedule of amounts billed to DOE, (3) compared the amounts shown for labor and other direct costs on Bechtel’s schedule to the billing data extracts we received for the period of review, and (4) reviewed other documents to verify the amount of adjustments and other items billed. We also performed electronic testing of selected data elements, reviewed existing information about the data and the system that produced them, and interviewed Bechtel officials knowledgeable about the system. We determined that the billing data extracts were sufficiently reliable for the purposes of this report.

Because the billing system did not contain detailed information—such as purchase descriptions—for other direct costs that would enable us to sufficiently perform data mining, we worked with Bechtel staff to identify an alternative system. Bechtel’s procurement system was the primary system that contained detailed purchase descriptions; however, it did not directly feed or otherwise interface with the billing system. In addition, Bechtel officials stated that the procurement system was not designed with commensurate controls to be a source system. We worked with Bechtel staff to attempt to identify a potential work-around to link the billing system charges to the corresponding purchases in the procurement system using data from the accounts payable system; however, results of our electronic testing showed that the linkages between the data were not sufficiently reliable to perform data mining.

The billing data extracts contained detailed information on nonmanual labor costs, such as the amount of straight time and overtime paid per employee per pay period. However, because Bechtel pays its manual, or craft, labor costs directly to the unions in aggregate weekly totals, the billing data only reflect these aggregate payments. Thus, we requested a data extract of the craft labor payroll system. We assessed the reliability of the payroll data by comparing the payroll system totals to the related billing system totals for manual labor, reviewed existing information about the data and the system that produced them, and interviewed Bechtel officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report.

We assessed the reliability of extracts from Bechtel’s human resource system for nonmanual labor by performing electronic testing of required data elements, reviewing existing information about the data and the systems that produced them, and interviewing Bechtel officials knowledgeable about the systems. We determined that the data were sufficiently reliable for the purposes of this report.

Based on our property walk-throughs, we determined that controls over property were weak and that the two property databases used to track these items were incomplete and thus unreliable. Therefore, we used the property system data to perform selected internal control tests to illustrate the effects of their weak property controls, as discussed further below.

Payment Controls

To determine whether DOE’s internal controls were adequately designed to prevent and detect improper payments, we used GAO’s Standards for Internal Control in the Federal Government as a basis to assess the internal control structure—control environment, risk assessment procedures, control activities, information and communications, and monitoring efforts of DOE over contractor payments. Further, we reviewed the contract requirements, the FAR, the DEAR, and other relevant DOE policies, procedures, and guidance. We interviewed program oversight and financial management personnel regarding policies and procedures that were in place over contractor payments, performed walk- throughs of key processes, and reviewed supporting documentation to gain an understanding of DOE’s controls over contractor payments. We interviewed Bechtel staff to gain an understanding of their billing process and controls. We performed data mining on billing system nonmanual labor data, manual labor payroll data extracts, and human resource data extracts to query for records with certain characteristics, such as payments made to employees after termination dates and employees with high numbers of hours paid during a pay period; followed up on query results with Bechtel staff; and obtained and reviewed supporting data to corroborate explanations.

Property Controls

To determine whether DOE’s oversight controls reasonably ensured proper accountability over WTP property, we used our Standards for Internal Control in the Federal Government as a basis to assess the internal control structure—control environment, risk assessment procedures, control activities, information and communications, and monitoring efforts of DOE over contractor payments. Further, we reviewed the contract requirements, the FAR, the DEAR, and other relevant DOE policies, procedures, and guidance. We also reviewed contractor and selected subcontractor property management policies and procedures. We interviewed the DOE headquarters personal property management division director as well as former and current DOE officials responsible for the oversight of Bechtel’s management of WTP property to understand the level and extent of DOE oversight controls over the contractor’s property management system. Additionally, we interviewed Bechtel property management staff, requested and reviewed relevant documentation, and performed walk-throughs to gain an understanding of Bechtel’s internal controls and procedures over property management. We also performed the following tests.

Data queries. We performed data mining queries on data extracts from Bechtel’s government property system and its Toolhound system to identify records with certain characteristics, such as property not recently inventoried or items with expired property passes. We followed up on selected results with Bechtel property staff and reviewed related documentation. We also selected a nongeneralizable sample of items from our query results with different attributes to physically observe as described further below.

Physical observations. We selected assets using three different methods to perform physical observations. First, based on our query results, we selected a limited number of assets from Bechtel’s government property system and Toolhound database to observe at the WTP project site, selected WTP subcontractors in Richland, and Bechtel offices in San Francisco in order to test for existence of the assets and accuracy of recording. Second, to test for completeness of Bechtel’s and the subcontractors’ government property systems, we selected a limited number of assets we observed at WTP and subcontractor sites and determined whether they had been properly tagged as government property and recorded in the respective property systems. Third, we selected a limited number of transactions from Bechtel’s procurement, accounts payable, and purchase card databases that appeared to be potential property purchases; reviewed the supporting documents to determine whether they were in fact property purchases; traced the items to the government property system where possible to determine if they had been recorded; and physically observed some of the items. For all items observed, we reviewed supporting documentation, such as invoices, packing slips, and material receiving reports; verified the assets’ serial numbers, custodians, locations, and other key identifying information; and compared this information to the applicable property systems. Because we only selected a limited number of transactions from each method in order to test for different attributes, the results of our review cannot be used to make inferences about the population.

Contractor compliance with reporting requirements. We reviewed reports on lost, damaged, and destroyed property that Bechtel provided to DOE to assess the timeliness of the reports. We also queried the property databases and reviewed subcontractor inventory records for items indicated as lost or missing, and compared them against copies of the lost property reports to determine whether Bechtel had reported them to DOE. We requested and reviewed copies of the contractor’s audits and reviews of applicable subcontractors’ property management programs.

We provided DOE with a draft of this report for review and comment. DOE’s Assistant Secretary for Environmental Management provided written comments, which are reprinted in appendix II. We also had subsequent oral discussions with DOE officials to clarify the written comments. We also provided key DCAA and DCMA officials with draft excerpts of the report relating to their respective agencies, and incorporated as appropriate oral and written comments we received from them. Our work was performed from June 2006 through May 2007 in accordance with generally accepted government auditing standards.

Appendix II: Comments from the Department of Energy

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Doreen Eng, Assistant Director; Jessica Gray; R. Ryan Guthrie; Mary Ann Hardy; Delores Lee; Jenny Li; and Ting-Ting Wu made significant contributions to this report. Others who made important contributions included Richard Cambosos; Tim DiNapoli; and Wil Holloway.