DOE’s missions include developing, maintaining, and securing the nation’s nuclear weapons capability; cleaning up the environmental legacy resulting from over 50 years of producing nuclear weapons; and conducting basic energy and science research and development. The department carries out these diverse missions at over 50 major installations in 35 states. With a DOE workforce of about 16,000 employees and over 100,000 contractor staff, the department relies on its contractors to manage and operate its facilities and accomplish its missions. DOE manages these functions through its program offices at DOE headquarters and its field offices. The three largest program offices— Environmental Management, Defense Programs, and Science—accounted for over 70 percent of DOE’s budget for fiscal year 2001. DOE’s reliance on contractors to carry out its missions and the department’s history of both inadequate management and oversight and failure to hold its contractors accountable for results led us to designate DOE contract management as a high-risk area vulnerable to fraud, waste, abuse, and mismanagement. In response to these and other criticisms, DOE began evaluating its contracting practices and, in February 1994, issued a report—Making Contracting Work Better and Cost Less—that contained 48 recommendations. The recommendations included three key areas: selecting alternatives to traditional contracting arrangements used for management and operation of its sites, increasing competition to improve performance, and developing and using performance-based contracting tools. To facilitate and oversee the implementation of the contract reform recommendations, in June 1994, DOE established the Contract Reform Project Office, which became the Office of Contract Reform and Privatization in 1997. This office, which monitored and assessed the progress of DOE’s contract reform initiative, was disbanded in late 2001 as part of the department’s reorganization of its support offices. DOE’s Office of Management, Budget, and Evaluation/Chief Financial Officer is now responsible for oversight of DOE’s contract reform efforts. Since 1996, the department has made progress in implementing three key contract reform initiatives—developing alternative contracting approaches, increasing competition, and converting to performance-based contracts, although DOE continues to address challenges in implementing these initiatives. Concerning alternative contracting approaches, DOE encouraged the use of different types of contracts aimed at improving contractor performance and results. However, DOE did not use a systematic approach to determine the best contract type for a given situation and experienced problems with implementation. To become more systematic in making this contract selection decision, DOE has been developing a formal strategy to evaluate contract and financing alternatives and the risks associated with various approaches. In the second reform area—increasing competition—DOE changed its contracting rules to set competition as the standard approach to awarding contracts. Under these rules, the percentage of major site contracts awarded competitively (competed) increased to 56 percent as of 2001, up from 38 percent as of 1996. All but one of the 11 contracts that had not been competed were for managing research and development centers exempted by statute from mandatory competition. The department evaluates these contracts to determine whether they should be extended or competed. DOE has thus far decided on non-competitive extensions for these contracts, including some for contractors that have experienced performance problems. DOE opted to address these performance problems with specific contract provisions, but it remains to be seen whether this approach will succeed. Finally, all of DOE’s major site contracts are now performance-based, incorporating results-oriented statements of work and the performance objectives and measures used to evaluate contractor performance. To further emphasize the importance of the performance-based approach, DOE has increased the proportion of contractor fees tied to achieving the performance objectives to 70 percent in fiscal year 2001 from 34 percent in fiscal year 1996. However, development of good performance measures has continued to be a challenge, and DOE acknowledges that it must make further progress in this area. One of the major focuses of DOE’s contract reform initiative has been developing alternatives to the traditional contracts used for the management and operation of its major sites and facilities. Under these “management and operating” contracts, one primary contractor performed almost all of the work at a site, the contractor had broadly defined statements of work, and DOE reimbursed the contractor for virtually all costs. As a result, work under these contracts focused more on annual work plans and budgets rather than on specific schedule and cost targets for accomplishing work. In implementing alternatives to its traditional contracting arrangements, DOE’s intent was to use the best contracting alternative given the required work and the objectives and risks associated with that work. DOE implemented four main actions as alternatives to these management and operating contracts, but has experienced problems with implementation, in part due to difficulties in determining the most appropriate approach for a given situation, as follows: Reducing the number of large, cost-reimbursement contracts that cover virtually all of the activities at a DOE site. DOE has modified a total of 20 site contracts since 1994, so that no single contractor manages and operates those sites. Some of these management and operating contracts were divided into smaller service contracts, such as for guard services. Other management and operating contracts were changed to integration contracts (commonly called management and integration contracts). According to DOE officials, integration contracts were used to better reflect the changing mission of the site and to better tailor the contract scope to the program requirements. Under a management and integration contract, one contractor is responsible for integrating the work of a variety of subcontractors that carry out most of the actual work at the sites. The integrating contractor is responsible for selecting “best-in-class” subcontractors for specific work activities, overseeing the work done by the subcontractors, and ensuring that activities at the site are effectively coordinated. DOE has used this integration contract approach at sites such as Oak Ridge in Tennessee for environmental restoration work. However, DOE’s Office of Inspector General reported in March 2001 that the integrating contractor at Oak Ridge has subcontracted out a third less work than originally proposed, resulting in less cost savings to the government. Implementing a more disciplined approach to “make-or-buy” decisions by site contractors. DOE revised its regulations in 1997 to require that its major site contractors develop make-or-buy plans instead of having most of the work at a site performed by the primary contractor. Under these plans, the primary contractor must identify work functions that could be performed at less cost or more effectively through subcontracts. Although all of its major contractors have approved make-or-buy plans, DOE acknowledges that it does not routinely gather information on how much work is done by subcontractors, making it difficult to determine the extent to which this approach was implemented. In addition, DOE’s Office of Inspector General reported in February 2000 that three of the four contractors that it reviewed had either not included all functions in their make-or-buy plans or had not done the required cost-benefit analysis on work functions that could have been subcontracted. Implementing an alternative contracting and financing approach called privatization. DOE started its “privatization initiative” in 1995 as a way to reduce the cost and speed the cleanup of its contaminated sites. This initiative was primarily an alternative contracting and financing strategy to foster open competition for fixed-price contracts; to require the contractor to design, finance, build, own, and operate the facilities necessary to meet waste treatment requirements; and to pay the contractor for units of successfully treated waste. DOE’s experiences with this approach showed that privatization could achieve cost savings on projects with a well-defined scope of work and few uncertainties, such as laundry facilities for contaminated uniforms and other items at the Hanford site. However, on complex cleanup projects such as the effort at Idaho Falls to clean up Pit 9, privatization had little success in achieving cost savings, keeping the project moving forward on schedule, or getting improved contractor performance. Establishing “closure contracts” that tie performance incentives to contract completion, not to annual activities. DOE has used closure contracts at several sites that are scheduled for cleanup and closure, including the Rocky Flats site in Colorado and the Fernald site in Ohio. These contracts emphasize completing all work at a site or a portion of a site by a target date and at a target cost. Most of the fee or profit to be earned by the contractor depends upon meeting the schedule and cost targets. If the contractor can complete all work on time or sooner and below the target cost, then the contractor can earn additional fee. For example, under the Rocky Flats closure contract, the amount of incentive fee that the contractor can earn ranges from $130 million to $460 million, depending on cost and schedule performance against the targets. Since the target closure date for this contract is December 2006, it remains to be seen whether this approach will be effective in completing the work on time and at lower costs to the government. These problems reflected the lack of a systematic approach to deciding which contract type was best for a given situation. For example, we reported in May of 1998 that DOE’s use of fixed-price contracting was appropriate when projects were well-defined, when uncertainties could be allocated between DOE and the contractor, and when either adequate cost information or multiple competing bidders were available to determine a fair and reasonable price for the work. However, when these conditions did not exist, cost overruns and schedule delays could occur on these fixed-price contracts. DOE has begun to develop a more systematic approach to determining the best contract type for a given situation. For example, in October 2000, DOE issued new policy and guidance for the acquisition of capital assets such as waste treatment facilities. The guidance includes developing an acquisition plan that considers the financial, technical, and performance risks associated with a new project. This policy is consistent with DOE’s overall goal of tailoring the contract type to the work to be performed and the business and technical risks associated with that work.