This section discusses DOE’s missions and spending, contract types, contract oversight, IPERA risk assessment and IG requirements, and the roles and responsibilities of organizations involved in DOE’s IPERA activities. DOE’s missions include developing, maintaining, and securing the nation’s nuclear weapons capability; cleaning up the environmental damage resulting from more than 60 years of producing nuclear weapons; and conducting basic energy and science research and development. The department carries out these diverse missions at 85 different sites across the country, including major laboratories and field facilities. With a DOE workforce of about 15,000 employees and in excess of 100,000 contractor staff, the department relies primarily on its contractors to manage and operate its sites and accomplish its missions. DOE oversees the work of its contractors through its staff and program offices at DOE headquarters and its field offices. For example, DOE contracting officers provide oversight and ensure contractors are in compliance with the terms of their contracts. In fiscal year 2013, DOE spent about 90 percent of its total annual budget, or $24 billion of $26.4 billion, on contracts. A significant share of this spending, about $17.1 billion in fiscal year 2013, was for management and operating (M&O) contracts, which are used by DOE generally for the purposes of managing DOE laboratories and other government-owned or government-controlled facilities. DOE’s M&O contracts, among other things, provide contractors with the authority to draw money directly from DOE-funded accounts to pay for contract performance. In contrast, for the less common non-M&O contracts, DOE relies on more traditional bill payment methods—which include receipt of an invoice, payment approval and authorization, and disbursement of funds. In addition to conducting work through its contractors, DOE manages a number of grant and loan programs—which accounted for about $2.4 billion of DOE spending in fiscal year 2013. DOE also includes the Federal Energy Regulatory Commission and the Power Marketing Administrations. Federal agencies can choose among a number of different types of contracts to procure goods and services, including fixed-price, time-and- materials, and cost-reimbursement contracts. The choice of contract type is a principal means for agencies to divide the risk of cost overruns between the government and the contractor. For example, under a firm- fixed-price contract, the contractor assumes most of the cost risk; by accepting responsibility for completing a specified amount of work for a fixed price, the contractor earns a profit if the total costs it incurs in performing the contract are less than the contract price, but loses money if its total costs exceed the contract price. Under a time-and-materials contract, by contrast, the government bears the risk of cost overruns because payment is based on the number of labor hours billed at a fixed hourly rate that includes wages, overhead, general administrative costs, profit, and the costs of materials if applicable. However, time-and- materials contracts include a ceiling price that the contractor exceeds at its own risk, meaning there is no guarantee that costs above the ceiling price will be reimbursed by the government. Under cost-reimbursement types of contracts, the government assumes the cost risk because it pays the contractor’s allowable costs incurred, to the extent prescribed by the contract, although these contracts also establish a ceiling that the contractor exceeds at its own risk. In fiscal year 2013, about 90 percent, or $21.7 billion, of DOE’s total contract spending was on cost-reimbursement type contracts that include contractor fees, according to DOE officials. This includes cost-plus-fixed- fee, cost-plus-incentive-fee, and cost-plus-award-fee contracts. Under these types of contracts, the federal agency reimburses a contractor for all allowable costs and also pays a fee that is either fixed at the outset of the contract or adjustable based on objective or subjective performance criteria set out in the contract. Cost-reimbursement types of contracts place the primary risk of cost overruns on the government because of the potential for the government to pay more than the contract’s estimated cost and because the government must reimburse the contractor’s costs of performance up to the contract cost ceiling regardless of whether the end item or service is completed. In a September 2009 report, we concluded that cost-reimbursement types of contracts are suitable only when the agency’s requirements cannot be defined sufficiently or the cost of the work cannot be estimated with sufficient accuracy to allow for the use of any type of fixed-price contract. Cost-reimbursement type contracts allow the agency to contract for work that might otherwise present too great a risk to contractors. The choice of a contract type—and whether the contract is an M&O contract or not—will also affect the types of internal control and contract auditing activities needed to help protect the government’s interests and reduce the risk of improper payments. Under federal standards for internal control, control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achieving effective results. Control activities include both preventive and detective controls. Preventive controls—such as invoice review prior to payment—are controls designed to prevent improper payments (errors and fraud), waste, and mismanagement. Detective controls—such as incurred cost audits—are designed to identify errors or improper payments after the payment is made. Incurred cost audits are intended to examine contractors’ cost representations and reach an opinion on whether the costs are allowable, allocable to government contracts, and reasonable in accordance with the contract and applicable government acquisition regulations. We have previously concluded that a sound system of internal controls contains a balance of both preventive and detective controls that is appropriate for the agency’s operations. DOE’s contracting activities for both M&O and non-M&O contracts are governed by federal law and regulations, including the Federal Acquisition Regulation as supplemented by the Department of Energy Acquisition Regulation. The contracting cycle consists of activities throughout the acquisition process, including preaward, award, and contract administration and management. Prior to contract award, an agency generally identifies a need and develops a requirements package. Under the Federal Acquisition Regulation, the agency generally determines the method of acquisition; solicits and evaluates bids or proposals; determines the adequacy of the contractor’s accounting system; and ultimately negotiates a price and contract terms, resulting in the contract award. After contract award, the Federal Acquisition Regulation generally requires the agency to perform activities related to contract administration and management, which involves monitoring the contractor’s performance, as well as reviewing and approving (or disapproving) the contractor’s requests for payments. Contract auditing assists in achieving prudent contracting by providing those responsible for government procurement with financial information and advice relating to contractual matters and the effectiveness, efficiency, and economy of contractors’ operations. Depending on the contract type, various contract audit activities can occur in the preaward, award, and administration and management phases of a contract. For example, before awarding a cost-reimbursement or other non-fixed-price type contract, the Federal Acquisition Regulation requires agency contracting officers to determine the adequacy of a contractor’s accounting system. After certain types of contracts are awarded, contract audits—including incurred cost audits—are intended to be a key control to help ensure that contractors are charging the government in accordance with applicable laws, regulations, and contract terms. At DOE, the requirements and responsibility for conducting contract and other audits— including incurred cost audits and audits of subcontractor costs—vary, depending on whether the contract is an M&O or a non-M&O type contract, as follows: M&O contracts. In its M&O contracts, DOE does not require contractors to submit invoices; instead, the agency provides contractors with the authority to draw funds directly from federal accounts to pay for contract performance. Therefore, DOE does not rely on traditional invoice reviews prior to payment as a means of helping prevent improper payments. Instead, DOE relies on a combination of audits of contractor accounting systems and certain detective controls. Specifically, using a process known as the Cooperative Audit Strategy, DOE relies on its M&O contractors to perform the audit work necessary to ensure that their accounting systems are adequate and that they are charging DOE for only those costs that are allowable under the contract. As part of DOE’s Cooperative Audit Strategy, M&O contractors are required to maintain an internal audit organization that is responsible for performing operational and financial audits, including incurred cost audits, and assessing the adequacy of management control systems.addition, M&O contractors are required to provide adequate audit coverage of subcontractors where costs incurred are a factor in In determining the amount payable.to submit an annual Statement of Costs Incurred and Claimed that includes the contractor’s certification that the costs claimed represent allowable contract costs. To support this statement, the contractors’ internal audit organization conducts an annual incurred cost audit. Among other things, in conducting the annual incurred cost audit, the internal auditors are expected to develop a sampling methodology that will allow them to test selected transactions to determine whether the associated costs are allowable under the contracts’ terms and to make projections regarding the total amount of unallowable costs based on the testing results. According to DOE’s Financial Management Handbook, under the Cooperative Audit Strategy, DOE’s IG is required to annually perform an assessment of these statements for the 10 M&O contractors who incurred and claimed the most costs annually. For the remaining M&O Statements of Costs Incurred and Claimed, the IG is required to perform assessments on a rotational basis, meaning the IG reviews a few each year until it completes all of the remaining ones and then starts over again.