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. 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 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. 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. The WTP is a long-term project that DOE currently estimates will cost over $12 billion and take almost 20 years to complete.