Hanford’s aging underground tanks contain about 54 million gallons of highly radioactive waste. DOE currently estimates the total cost of cleaning up the tank waste at more than $50 billion (in actual year dollars). To convert the waste into a form for more permanent storage, the waste will be separated into high-level and low-activity components and then, through a process called vitrification, converted into a glass-like material that can be poured into steel containers where it will harden. The immobilized high-level waste will be stored on-site for eventual shipment to a national repository, while the low-activity waste will be permanently disposed of on the Hanford Site. DOE envisioned that two contractors would build and operate demonstration facilities that would initially treat at least 6 percent of the waste. DOE referred to this part of the waste treatment effort as phase I. DOE estimated that phase I would last at least until 2007 and cost about $3.2 billion and another $1.1 billion in contract support costs, for a total of about $4.3 billion. In September 1996, DOE awarded a fixed-price contract for $27 million to each of the two contractor teams to begin phase I by developing preliminary facility designs and other preliminary project plans. One team was led by BNFL and the other team was led by Lockheed Martin Advanced Environmental Systems (Lockheed). In phase II, contractors would compete for a contract to process the remaining tank waste. DOE’s experience during the initial part of phase I led to a change in the contracting approach. In May 1998, after reviewing the preliminary designs and plans submitted by the two competing teams, DOE decided to continue phase I with only one contractor—BNFL. On August 24, 1998, DOE signed a fixed-price contract with BNFL for $6.9 billion to continue with phase I. DOE estimated that its other costs related to supporting BNFL’s efforts would be about $2 billion, bringing the project’s total estimated cost to about $8.9 billion. DOE’s August 1998 contract with BNFL is a substantial departure from DOE’s original privatization strategy. According to DOE, changes to its initial approach were made to optimize the technical approach and to make the project financially feasible or to reduce the likelihood of performance failure. These changes fall into four main areas: competition, financial issues, facility issues, and schedule revisions. Unlike DOE’s original approach, the project no longer includes competition between contractors. DOE and outside expert reviewers found that the approach set forth by the Lockheed team presented an unacceptably high technical risk in attaining DOE’s cleanup goals. In contrast, DOE concluded that BNFL’s technical approach was sound, using technologies for waste treatment and vitrification that were well developed and had been used in other waste treatment situations. Therefore, DOE authorized only BNFL to proceed through the remainder of phase I. The extent to which competition will be present in phase II is unknown. DOE’s approach to financing the project has shifted from requiring the contractor to obtain all needed financing to a strategy of agreeing to repay BNFL’s debts above its equity, insurance, and other limited funds if BNFL defaults on its loans and DOE terminates the contract. DOE officials said that the government’s commitment to repay the contractor’s debt was needed, in large part, to make the project financially feasible. Government backing of the private debt is an unusual feature for a fixed-price contract because the government normally does not agree to pay a contractor’s debt as an allowable cost. Another change was that neither contractor was willing to commit to a fixed-unit price and schedule without adding significant contingency to the price of the contract. The August 1998 contract identified a target price and set August 2000 as the date at which the unit price will be fixed and BNFL’s funding commitments will be established. The original proposal included temporary facilities that were estimated to have a useful life of approximately 10 years. According to DOE, however, both BNFL and Lockheed concluded that shorter-term facilities were not feasible and that more permanent facilities were needed to provide the required levels of safety, operability, and maintainability. The contract now requires the waste treatment facilities to be designed to operate for a minimum of 30 years and have the capability to increase capacity. DOE said that although this approach means much more expensive facilities than originally anticipated and, therefore, an increase in project costs for phase I, the more permanent and expandable facilities allow DOE more flexibility and options in how the waste cleanup is completed. In addition to more permanent, costly facilities, the new contract extends the design period and delays the start of construction about 19 months beyond what was originally planned. Both BNFL and Lockheed indicated that additional time was needed to further develop the project’s design and plans for meeting regulatory and permitting requirements. The contractors believed that adhering to the original schedule would carry too many uncertainties and that they would be unable to obtain needed financing for the project unless a more realistic schedule could be negotiated. The current schedule and cost estimates for the project are substantially greater than DOE’s original estimates. In 1996, DOE estimated that in the first phase of the project, two contractors would process 6 percent of the waste by 2007 and up to 13 percent of the waste by 2011. DOE is now estimating that the first phase will last until at least 2017 and 10 percent of the waste will be processed. Design activities have been extended by 2 years, construction will take about 4 years longer, and the time to process the waste increased from 5 years to about 10 years. Estimated costs for the project have also increased significantly. The total project costs for phase I, including DOE’s support costs, increased from $4.3 billion in the original estimate to $8.9 billion in the current estimate (in constant fiscal year 1997 dollars). The waste processing facilities now being designed will cost nearly $1 billion more to build than the demonstration facilities DOE originally proposed. Because of the longer period during which investors will expect a return on investments, equity and debt financing costs are expected to increase from about $1 billion to more than $3 billion. And, the average cost to process waste will double from $760,000 per metric ton to $1.5 million per metric ton. Despite the dramatic increase in estimated costs for this project, in July 1998, DOE estimated that its revised approach for phase I would provide savings of 26 to 36 percent when compared with two alternatives—a management and operations (M&O) contract or a cost-reimbursement contract with performance-based incentives. The savings estimate of 36 percent was based on comparing the proposed BNFL fixed-price approach with an M&O approach based on past Hanford management and operating contractor cost data; the estimate of 26 percent was based on a comparison with the estimated cost for BNFL to perform the work under a cost-reimbursement contract. However, our review of DOE’s most recent estimates indicate that the savings amounts should be viewed with considerable caution. Specifically, Comparing its revised approach to a M&O contracting approach is not meaningful because DOE would no longer seriously consider using such an approach. DOE’s cost savings analysis could be more meaningful if it included a range of contracting and financing options such as various combinations of government and private financing. For the contract alternatives DOE considered in its analysis, the margin of error was plus or minus 40 percent, meaning that the actual cost could be up to 40 percent less than or greater than the estimate presented. Because the order of magnitude estimates are subject to so much variability, it is difficult to assign much credence to this overall savings estimate. Cost growth estimates were not used consistently. For the comparison between a fixed-price contract and a cost-reimbursement contract with performance incentives, DOE assumed that cost growth would be 68 percent for the cost-reimbursement contract, and the fixed-price contract would have no cost growth. However, other evidence indicates that fixed-price contracts may have greater cost growth than cost-reimbursement contracts. Specifically, a DOE funded study found that fixed-price contracts had greater cost growth than cost-reimbursement contracts. Under the revised contract approach, DOE faces a substantial financial risk that could be in the billions of dollars. This risk comes mainly in the form of an agreement to pay BNFL for much of the debt incurred in constructing and operating the waste treatment facilities if BNFL defaults on its loan payments and DOE terminates the contract. This agreement has the same practical effect as a loan guarantee and is a dramatic departure from the original privatization strategy. If DOE had provided a guarantee for BNFL’s loans from a private lender, the Federal Credit Reform Act would have required DOE to estimate the net present value of the subsidy cost of the loan guarantee over the term of the loan and to have budget authority available for this full cost before the guarantee could be provided. The amount of DOE’s potential liability is unknown, because the amount of borrowing that will be covered under the commitment will likely not be determined until the contract price is established in August 2000. However, BNFL’s vice president and project manager told us that DOE’s potential liability could be as much as $3 billion. He said that in the case of a default, $3 billion is about the maximum debt that would be outstanding after BNFL’s equity and contingency funds were applied. DOE’s financial risks hinge on a number of factors that could potentially affect the project. We identified six main types of factors, which we believe merit continued attention as the project proceeds.