This background section discusses (1) NNSA’s methods of accounting for and tracking costs, (2) the legislative requirement for NNSA to develop a plan to improve and integrate financial management, and (3) leading practices for strategic planning. NNSA contractors use different methods to account for costs, according to NNSA officials. In general, federal Cost Accounting Standards govern how federal contractors, including NNSA’s contractors account for costs. Federal Cost Accounting Standards provide direction for the consistent and equitable distribution of contractors’ costs to help federal agencies more accurately determine the actual costs of their contracts, projects, and programs. In particular, these standards establish requirements for the measurement, assignment, and allocation of costs to government contracts and provide criteria for the classification and allocation of indirect costs. To allocate costs to programs, contractors are to classify costs as either direct or indirect. Direct costs, are assigned to the benefitting program or programs. Indirect costs—those costs that cannot be assigned to a particular program such as costs for administration and site support—are to be accumulated, or grouped, into indirect cost pools. The contractor is to estimate the amount of indirect costs (accumulated into indirect cost pools) that will need to be distributed to each program and adjust the costs to actual costs by the end of the fiscal year. The contractor then is to distribute these costs based on a rate in accordance with the cost allocation model. The final program cost is the sum of the total direct costs plus the indirect costs distributed to the program. In implementing this allocation process, federal Cost Accounting Standards provide contractors with flexibility regarding the extent to which they identify incurred costs directly with a specific program and how they collect similar costs into indirect cost pools and allocate them among programs. Therefore, similar costs may be allocated differently because contractors’ cost allocation models differ. Specifically, cost models may differ in how they (1) classify costs as either direct or indirect, (2) accumulate these costs into indirect cost pools, and (3) distribute indirect costs to benefitting programs. Examples follow: Classification. Contractors may differ in how they classify costs as direct or indirect. For example, electricity and other utility costs are usually classified as indirect because they are not associated with a single program; however, electricity costs could be charged directly if, for example, a contractor installs a meter to track the electricity consumption in a building used solely by one program. Accumulation. Contractors may differ in how they accumulate indirect costs into indirect-cost pools. The number and type of cost pools used to accumulate indirect costs may vary. Distribution. Management and Operating (M&O) contractors may differ in how they distribute indirect costs accumulated into indirect- cost pools to programs. Because similar indirect costs can be allocated differently by different contractors and contractors may change the way they allocate indirect costs over time, it is difficult to compare contractor costs among sites. NNSA contractors also use different methods to track costs, according to NNSA officials. Specifically, NNSA contractors use different work breakdown structures (WBS) for tracking costs. A WBS is a method of deconstructing a program’s end product into successive levels (of detail) with smaller specific elements until the work is subdivided to a level suitable for management control. Within WBSs, cost elements capture discrete costs of a particular activity of work, such as labor, material, and fringe benefits. The use of different methods to track cost makes it difficult for NNSA and others to understand or compare costs for comparable activities across programs, contractors, and sites. For example, in 2011 we concluded that the cost savings that NNSA anticipated from the consolidation of the M&O contracts for two of its production sites were uncertain, in part, because historic cost data were not readily available for NNSA to use in its cost analysis. More specifically, we found that a key step in NNSA’s process for estimating savings—developing a comparative baseline of historical site costs––is a difficult and inexact process because DOE and NNSA contractors use different methods for tracking costs, and DOE’s cost data are of limited use in comparing sites. To obtain more consistent information on costs, some program offices have developed customized contractor cost reporting requirements and designed various systems to collect the cost information needed to manage their programs. For example, NNSA’s Office of Defense Programs began developing a data system in 2007—the Enterprise Portfolio Analysis Tool (EPAT)—to provide a consistent framework for managing the planning, programming, budgeting, and evaluation processes within Defense Programs. EPAT has evolved to incorporate a common WBS to allow managers to compare the budget estimates for analogous activities across the nuclear security enterprise regardless of which contractor or program is conducting them. However, NNSA officials told us that neither EPAT nor other customized, program-specific cost collection systems satisfy the section 3128 requirements for establishing an NNSA-wide approach to collecting cost information. According to NNSA officials, EPAT is not suitable because, among other reasons, it is not designed to reconcile with the DOE’s official accounting system. Section 3128 of the National Defense Authorization Act for Fiscal Year 2014 requires NNSA to develop a plan for improving and integrating financial management of the nuclear security enterprise. The Joint Explanatory Statement accompanying the act states that NNSA is to develop a plan for a common cost structure for activities at different sites with the purpose of comparing how efficiently different sites within the NNSA complex are carrying out similar activities. According to the act, matters to be included in the plan are: (1) an assessment of the feasibility of the plan (2) the estimated costs of carrying out the plan, (3) an assessment of the expected results of the plan, and (4) a timeline for implementation of the plan. In April 2014, to address the requirements of section 3128, NNSA formed a Lean Six Sigma team of 20 federal and contractor staff. In December 2014, the team produced a report that summarized the results of the team’s effort and included a number of recommendations to NNSA. According to the report, the team’s work also addressed separate but related requirements contained in a different section of the National Defense Authorization Act for Fiscal Year 2014. Specifically, section 3112 requires the NNSA Administrator to establish a Director for Cost Estimation and Program Evaluation to serve as the principal advisor for cost estimation and program evaluation activities, including development of a cost data collection and reporting system for designated NNSA programs and projects. Therefore, according to the December 2014 report, the team focused on both the requirements of section 3128 and the development of a cost data collection and reporting system required by section 3112. We have previously reported that, in developing new initiatives, agencies can benefit from following leading practices for strategic planning. Congress enacted the GPRA Modernization Act of 2010 (GPRAMA) to improve the efficiency and accountability of federal programs and, among other things, to update the requirement that federal agencies develop long-term strategic plans that include agencywide goals and strategies for achieving those goals. The Office of Management and Budget (OMB) has provided guidance in Circular A-11 to agencies on how to prepare these plans in accordance with the GPRA Modernization Act of 2010 (GPRAMA) requirements. We have reported in the past that, taken together, the strategic planning elements established under the Government Performance and Results Act of 1993 (GPRA), as updated by GPRAMA, and associated OMB guidance, along with practices we have identified, provide a framework of leading practices that can be used for strategic planning at lower levels within federal agencies, such as planning for individual divisions, programs, or initiatives. In February 2016, more than13 months after the statutory reporting deadline, NNSA produced a plan with the stated purpose of integrating and improving the financial management of the nuclear security enterprise. NNSA’s plan includes the four elements required under section 3128—a feasibility assessment, estimated costs, expected results, and an implementation timeline—but contains few details related to each of these elements. Feasibility assessment. NNSA’s plan includes a section entitled feasibility, which lists concerns regarding the feasibility of implementing the plan. The concerns listed are (1) the availability of resources, (2) the identification and implementation of an information technology solution, (3) the alignment of contractor systems and cost models with a new standardized reporting framework, and (4) that the use of the enterprise-wide approach may come at the expense of specific ad hoc reporting requests. NNSA’s feasibility assessment does not provide any specific information regarding these concerns. In addition, it does not provide information on potential costs or benefits, which will be needed to determine if the planned investment of time and other resources will yield the desired results. Estimated cost. The plan includes information on the estimated cost of its implementation plan. It states that total federal and contractor implementation costs are estimated to be between $10 million and $70 million, with the largest variable in the estimate being the cost of the information technology system requirements. NNSA’s cost estimate, however, provides no details regarding how the estimate was developed, beyond stating that it is based on professional judgment and input from NNSA’s contractors. Instead, the plan states that NNSA will provide a more precise estimate as the agency determines total staffing and information requirements. Expected results. The plan does not explicitly include a discussion of the expected results. However, the plan concludes that the collection of standard performance and cost data will improve both program and financial management through improved cost analysis, cost estimating, and program evaluation. The language in the conclusion, however, provides no details regarding the ways in which cost analysis, cost estimating, and program evaluation will be improved. Implementation timeline. The plan states that contractors will begin reporting detailed cost data into a common NNSA system in fiscal year 2019 and includes an implementation timeline for meeting this goal. (see fig. 1). Elements of the timeline include developing and implementing an enterprise-wide financial management policy, exploring the feasibility of a common WBS for NNSA, and standardizing direct and indirect cost elements. While NNSA’s plan says its timeline is “notional,” the plan provides a specific time frame of 3 to 5 years during which the core elements are expected to be completed. Moreover, the plan does not identify which elements are considered the “core elements” or explain the reasoning behind the implementation timeframe of 3 to 5 years. As of December 2016, NNSA has fully implemented one of the elements included in the timeline by creating and filling the position of Program Director of Financial Integration. Other elements that were scheduled under NNSA’s implementation timeline to begin in fiscal year 2015 and early fiscal year 2016 were not started according to the timeline but are now underway. For example, the timeline indicates that NNSA will begin developing and implementing an enterprise-wide financial management policy during the second half of fiscal year 2015 but this effort was not initiated until October 2016. The elements listed in NNSA’s timeline correspond with the recommendations included in the December 2014 internal NNSA report The report recommended that NNSA: establish a clear and consistent program management policy addressing common program management data reporting requirements for all work performed with NNSA funding; establish a standard WBS for all work performed within the nuclear establish a clear and consistent policy and methodology for identifying base capabilities and programs of record that is systematically applied; report financial data by standardized labor categories, labor hours, functional elements, and cost elements; enhance or develop an agency data Warehouse and analytical tools; establish a knowledge management function; and appoint an “Executive Champion” to implement the recommendations and plan. However, NNSA’s plan does not include additional details regarding each of the elements listed in its timeline or contain many of the details included in its internal agency report. Instead of using the information and recommendations from the December 2014 report as a basis for developing an actionable implementation plan, NNSA summarized portions of the report and issued the summary document as its official plan. Moreover, differences between the internal report and the published plan are not discussed or explained—potentially creating ambiguity as to NNSA’s planned approach. For example, the internal agency report recommends that NNSA establish a standard WBS for all work performed within the nuclear security enterprise. NNSA’s plan, however, states that NNSA will explore the feasibility of a common WBS—which leaves open the option of not creating a common WBS. NNSA’s plan does not fully incorporate leading practices, which limits its usefulness as a planning tool and limits the effectiveness of NNSA’s effort to provide meaningful financial information to Congress and other stakeholders. Reliable financial information is important for making programmatic and budgetary decisions and providing appropriate oversight. To improve the consistency of this information, as discussed previously, Congress directed NNSA to develop a financial integration plan. In developing plans for implementing new initiatives, agencies— including NNSA—can benefit from following leading practices for strategic planning. These leading practices include (1) defining the mission and goals of a program or initiative, (2) defining strategies and identifying resources needed to achieve goals, (3) ensuring leadership involvement and accountability, and (4) involving stakeholders in planning. We highlight these four practices because NNSA’s financial improvement and integration initiative is still being developed, and these practices are particularly relevant to the early stages of developing a strategic plan. NNSA’s plan, however, does not fully incorporate any of these leading practices. Table 1 shows our assessment of the extent to which NNSA used these practices in developing its plan for improving and integrating its financial management. Mission and goals. NNSA’s plan does not explicitly include a mission statement or strategic goals; as a result, it is difficult to understand fully what NNSA’s plan is intended to do and how it will do it. More specifically, it’s unclear if the sole purpose of the plan is to satisfy section 3128 requirements and the information needs of Congress or if it is also intended to satisfy the information needs of NNSA decision makers. For example, the plan’s executive summary states that NNSA developed the plan to address specific requirements set forth in section 3128 of the National Defense Authorization Act for Fiscal Year 2014; however, information presented in the plan’s conclusions suggests that the plan may also be intended to satisfy the information needs of NNSA decision makers. In addition, while the plan concludes that the collection of standard performance and cost data will improve both program and financial management through improved cost analysis, cost estimating, and program evaluation, it does not explicitly present this as a goal either in the conclusions or earlier in the plan. Strategies and resources needed to achieve goals. NNSA’s plan does not include strategies to address management challenges or describe the specific resources needed to meet goals. We have previously reported that when developing a strategic plan, it is particularly important for agencies to define strategies that address management challenges that threaten their ability to meet long-term strategic goals and include a description of the resources, actions, time frames, roles, and responsibilities needed to meet established goals. NNSA’s plan includes a list of the challenges NNSA will face during implementation of the plan—including challenges related to the availability of resources and identifying and implementing an information technology solution—and provides a “notional” implementation timeline with milestones for certain significant actions. However, beyond the high- level cost estimate provided, NNSA’s plan does not include a description of the specific resources needed to meet specific elements of the plan or define strategies that address these management challenges. Leadership involvement and accountability. The CIOs for NNSA and DOE were not involved in developing the NNSA financial integration plan. An agency’s senior leadership is key to ensuring that strategic planning becomes the basis for day-to-day operations. The NNSA CIO told us that he was aware of Section 3128 but was not involved in developing the plan or determining how to identify a system to meet the section 3128 requirements. NNSA officials told us that they did not think it was necessary to get the NNSA or DOE CIOs involved with the team because the agency had yet to identify the requirements for a new information technology system. However, this assertion is inconsistent with information contained in NNSA’s December 2014 Lean Six Sigma report which states that a sub-team was formed to determine the data system requirements for collecting and reporting costs that would satisfy sections 3128 and 3112 of the National Defense Authorization Act for Fiscal Year 2014. Stakeholder involvement. Key stakeholders, such as program managers were not involved in developing the mission, goals, or strategies associated with the plan. We have previously reported that it is important for agencies to involve stakeholders in developing their mission, goals, and strategies to help ensure that the highest priorities are targeted. However, NNSA did not involve key stakeholders in the development of its financial integration plan. The Lean Six Sigma team that NNSA formed to develop the plan was widely represented in terms of geographic location and included representatives from NNSA’s budget, financial management, information technology, and cost-estimating communities, but key stakeholders, such as federal program managers were not included in the effort. NNSA officials told us that the biggest challenge NNSA will face in implementing the plan will be overcoming cultural resistance to change and the parochial interests of different program offices—particularly for program offices that have developed their own independent technology solutions for collecting the cost data they need to manage. Yet, the involvement from NNSA program management offices was limited to budget and finance staff. According to NNSA officials, program managers were invited to participate in the Lean Six Sigma team but none volunteered. Moreover, the federal program manager from one of NNSA’s largest programs—the B-61 Life Extension Program—told us that he was not involved in the team and was only vaguely aware of the section 3128 requirement for NNSA to develop a financial integration plan. Given that program managers are a primary user of managerial cost information, obtaining their perspectives and getting their buy-in is important. NNSA also did not solicit input from congressional staff in the development of the plan. NNSA officials told us that the only time they met with congressional staff regarding Section 3128 was in May 2015 to brief staff on their progress, but this was after they were done studying the issue. Because NNSA’s plan does not fully incorporate leading strategic planning practices, such as those included in table 1, it has not provided a useful road map for guiding NNSA’s effort. According to the NNSA official who is responsible for overseeing the execution of the plan—the Director of Financial Integration—the plan NNSA submitted to Congress was not a comprehensive or actionable plan. In addition, other NNSA officials told us that the plan they submitted to Congress was never intended to provide a road map to guide their efforts. More specifically, they said that they disagree with the premise that the plan submitted to Congress should have been a detailed, operational plan with specific milestones and extensive information about costs, schedule, and risks. Instead, according to these NNSA officials, the purpose of the plan was to identify general principles and a strategic vision for achieving financial integration. The Director of Financial Integration, who accepted this position in January 2016 shortly before NNSA issued its plan, told us in July and in November 2016 that he was in the process of developing an actionable plan with specific goals, objectives, and milestones and acknowledged that key stakeholders, such as program managers, would need to be involved in the process. However, he did not tell us when the more detailed, actionable plan would be finalized and, on the basis of planning documents he provided us; it is unclear if the new plan will incorporate leading practices. Until an actionable plan is in place that incorporates leading strategic planning practices, NNSA cannot be assured that it has established a roadmap to effectively guide and assess the success of this initiative. Effective management and oversight of the contracts, projects, and programs that support NNSA’s mission are dependent upon the availability of reliable enterprise-wide management information and, as required, NNSA has provided Congress with a plan for improving and integrating its financial management. Although NNSA’s plan includes the elements required under section 3128, details are limited, and it appears that this plan will not provide the framework needed to guide NNSA’s efforts and ensure that Congress and other stakeholders have accurate, reliable cost information that can be compared across programs, contractors, and sites. In particular, NNSA’s plan has not provided an effective framework for guiding NNSA’s effort because it does not incorporate leading planning practices including (1) defining the missions and goals of a program or initiative, (2) defining strategies and identifying resources needed to achieve goals, (3) ensuring leadership involvement, and (4) involving stakeholders in planning. In addition, differences between NNSA’s internal report and the published plan are not discussed or explained—potentially creating ambiguity as to NNSA’s planned approach. NNSA officials have acknowledged that the plan they submitted to Congress is not a comprehensive or actionable plan. The Director of Financial Integration has taken steps to develop an actionable plan, but it is unclear when the plan will be finalized or the extent to which it will incorporate leading practices. Until a plan that incorporates leading practices is in place, NNSA cannot be assured that its efforts will result in a cost collection model that satisfies the information needs of Congress or improves program and financial management through improved cost analysis, cost estimating, and program evaluation. Such information would better position NNSA to address longstanding contract and project management challenges. Without proper planning NNSA could waste valuable resources, time, and effort in its financial management improvement and integration process. To help provide a roadmap to effectively guide NNSA’s effort to integrate and improve its financial management, we recommend that the NNSA Administrator direct the Program Director of Financial Integration to develop a plan for producing cost information that fully incorporates leading practices. We provided a draft of this report to NNSA for its review and comment. NNSA provided written comments, which are reproduced in appendix I, and technical comments that were incorporated as appropriate. In its written comments, NNSA stated that it will update the plan and address the items GAO identified. Although NNSA has agreed to implement our recommendation, in its written comments, NNSA states that given the plan’s “early level of maturity” GAO’s evaluation of the plan against leading practices resulted in a somewhat misleading conclusion. We disagree. The purpose of a plan is to provide a roadmap to guide the agency’s effort. Regardless of the plan’s maturity, incorporating leading practices for strategic planning can improve its utility. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of NNSA, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or trimbled@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact named above, Diane LoFaro (Assistant Director), Mike LaForge (Assistant Director), Cheryl Harris; Charles Jones, and Mark Keenan made key contributions to this report.

Summary: Effective management and oversight of contracts, projects, and programs are dependent upon the availability of reliable enterprise-wide financial management information. Such information is also needed by Congress to carry out its oversight responsibilities and make budgetary decisions. However, meaningful cost analysis of NNSA programs, including comparisons across programs, contractors, and sites, is not possible because NNSA's contractors use different methods of accounting for and tracking costs. The National Defense Authorization Act for Fiscal Year 2014 required NNSA to develop and submit to Congress a plan to improve and integrate its financial management. An explanatory statement accompanying the act included a provision for GAO to review the adequacy of NNSA's plan. This report evaluates the extent to which NNSA's plan (1) addresses the objectives of the act and (2) follows leading practices for planning. GAO reviewed NNSA's plan and compared it with legislative requirements and leading practices for planning and interviewed NNSA officials. On February 5, 2016, more than 13 months after the statutory reporting deadline, the National Nuclear Security Administration (NNSA) submitted to Congress a plan for improving and integrating its financial management. The plan includes the four elements required by the National Defense Authorization Act for Fiscal Year 2014—a feasibility assessment, estimated costs, expected results, and an implementation timeline—but contains few details related to each of these elements. For example, NNSA's feasibility assessment includes a list of implementation concerns—including general concerns related to the availability of resources and to identifying and implementing an information technology solution—but does not provide any specific information regarding these concerns. In addition, NNSA's plan includes a cost estimate of between $10 million and $70 million but provides no details on how the estimate was developed beyond stating that it is based on professional judgment and input from NNSA's contractors. The plan also includes a “notional” implementation timeline that calls for the plan's core elements to be completed in 3 to 5 years but does not include details on which elements are considered core elements. NNSA's financial integration plan does not fully incorporate leading strategic planning practices, which limits its usefulness as a planning tool as well as the effectiveness of NNSA's effort to provide meaningful financial information to Congress and other stakeholders. As GAO has reported previously, in developing plans for implementing new initiatives, agencies can benefit from following leading practices for strategic planning. These leading practices include (1) defining the missions and goals of a program or initiative, (2) defining strategies and identifying resources needed to achieve goals, (3) ensuring leadership involvement, and (4) involving stakeholders in planning. However, NNSA's plan does not fully incorporate any of these leading practices. For example, beyond the high-level cost estimate provided, NNSA's plan does not include a description of the specific resources needed to meet specific elements of the plan or define strategies that address management challenges, including the implementation concerns identified in the plan's feasibility assessment. In addition, NNSA did not involve key stakeholders in developing its plan. Because NNSA's plan does not incorporate leading strategic planning practices, it has not provided a useful road map for guiding NNSA's effort. NNSA officials told GAO that the plan they submitted to Congress was never intended to provide a road map to guide their efforts. Instead, they said the purpose of the plan was to identify general principles and a strategic vision for achieving financial integration. The NNSA official responsible for overseeing the plan's execution told GAO, he has begun to develop a more comprehensive and actionable plan to guide NNSA's effort. However, it is unclear when the new plan will be finalized or the extent to which it will incorporate leading practices. Until a plan is in place that incorporates leading strategic planning practices, NNSA cannot be assured that its efforts will result in a cost collection tool that produces reliable enterprise-wide information that satisfies the needs of Congress and program managers. Such information would better position NNSA to address long-standing contract and project management challenges. Without proper planning, NNSA could waste valuable resources, time, and effort on its financial integration effort. To provide a road map to guide NNSA's financial management improvement effort, GAO recommends that the NNSA Administrator direct the Program Director of Financial Integration to develop a plan for producing cost information that fully incorporates leading planning practices. NNSA agreed to update its plan and address the items GAO identified.