DOE manages the largest laboratory system of its kind in the world. Since the early days of the World War II Manhattan Project, DOE’s laboratories have played a major role in maintaining U.S. leadership in research and development. DOE is responsible for ensuring that the laboratory system—with 22 laboratories in 14 states, a combined budget of over $10 billion a year, and a staff of about 60,000—is managed in an effective, efficient, and economical manner. DOE contracts with educational institutions and private sector organizations for the management and operation of 18 of its laboratories. (App. I lists DOE’s national laboratories.) The remaining four laboratories are staffed by federal employees. DOE pays its laboratory contractors all allowable costs. DOE can also pay contractors a separate fee, or profit, as compensation for operating the laboratories. Fees are based on the contract value and the technical complexity of the work to be performed at a laboratory, but also on the degree of financial liability or risk that a contractor is willing to assume. Under performance-based contracting principles, fees can include both a fixed amount and an amount that is linked to achieving performance objectives. One of DOE’s major goals in performance-based contracting is to develop performance objectives for each contractor that are specific, results-oriented, measurable, and reflect the most critical activities. DOE’s implementation of performance-based contracting for its laboratories is in a state of transition. While most of its laboratory contracts contain some performance-based features, the contracts negotiated by DOE vary from contract to contract. For example, DOE is incorporating performance-based features in all of its laboratory contracts, although measures vary substantially in number, ranging from a low of 7 in one laboratory contract to about 250 in another. Also, DOE has negotiated performance fees in only 9 of its 18 laboratory contracts because the remaining laboratories are still operating under DOE’s traditional approach in which fees are not linked to performance. We found that similar laboratories managed by similar contractors have different contracts. The wide diversity of contract features reflects DOE’s philosophy of relying on DOE field units to tailor contracts to local conditions and contractors’ preferences. Since introducing performance-based contracting in 1994, DOE and its laboratory contractors have struggled to find the right mix of measures that accurately and reliably capture the contractors’ performance. According to DOE field staff, in the early years of contract reform, DOE encouraged its field units to construct as many measures as they could, but provided limited guidance on how to accomplish this task. As a result, early attempts led to large numbers of performance measures. A large number of measures diminishes the importance of any single measure, whereas a small number results in measures that are too broad to be meaningful. For example, a DOE field official told us, “The original guidance from DOE Headquarters was to [develop performance measures] as much as possible. Unfortunately, there was inadequate guidance on how to do this. . . . The number of performance measures . . . is too large. However, if we fail to cover an activity [with a measure] the contractor may not give the attention needed to the activity.” DOE and its laboratories are still attempting to develop the right number of measures. For example, we found that the number of performance measures in the laboratory contracts we examined ranged from a low of 7 measures at the Ames Laboratory in Iowa to about 250 at the Idaho National Engineering and Environmental Laboratory in Idaho. DOE and its contractors are also working to develop measures that reliably address the most important activities of the laboratories. According to a field official, DOE’s early attempts at developing performance measures resulted in contractors focusing only on those activities that were tied to performance fees, while neglecting other important activities. Another DOE site official stated, “erformance-based contracting tends to focus too much on the monetary reward . . . and less on an analysis of performance. The incentive at the labs should be good science, not more dollars.” Developing the right number and type of performance measures is an evolving process between DOE and its contractors. Most DOE and contractor representatives told us that they are making progress in finding measures that accurately and reliably reflect performance, particularly in management and operations activities. Measuring a contractor’s performance in science and technology is more difficult. Science and technology measures are broader in scope and typically rely on peer reviews and a contractor’s self-assessment for evaluating performance. Although performance fees are a major feature of performance-based contracting, only 9 of the Department’s 18 laboratory contracts have them. Nine of the remaining laboratory contracts operate under DOE’s traditional fixed-fee arrangement, and one laboratory contract has no fee. Fixed fees are earned regardless of performance and were commonly used before DOE adopted performance-based contracting as its normal business practice. Appendixes I and II summarize laboratory fee arrangements and illustrate the wide variety of fee arrangements in use. In commenting on a draft of this report, DOE said that by the end of calendar year 1999, the majority of laboratory contracts that provide fees will have performance-based fee structures. Performance fees were introduced as a way of encouraging superior performance and can include an incentive and an award fee. An incentive fee is usually applied to activities for which progress can be accurately measured, for example, cleaning up 40 barrels of toxic waste within a prescribed period of time. An award fee is usually applied to tasks that are harder to measure and require a more subjective judgment of performance, for example, assessing a contractor’s attention to community relations. Performance fees represent the amount of a contractor’s total fee placed “at risk” since the fee that could be earned is determined by how well the contractor performs. As the following examples show, some laboratory contracts include both types of performance fees, while others rely solely on an incentive fee or an award fee. Still others have neither and use only fixed fees. At the Sandia National Laboratories in New Mexico and the Oak Ridge National Laboratory in Tennessee, DOE negotiated fixed-fee contracts. Both of these laboratories are operated by subsidiaries of the Lockheed Martin Corporation—a for-profit company. DOE officials told us they were confident that incentive fees were not needed for these laboratories because the existing Lockheed Martin contractors’ performance is superior and introducing incentive fees might distract the contractors from performing all essential work. At the Idaho National Engineering and Environmental Laboratory in Idaho, operated by Lockheed Martin Idaho Technologies Company, DOE uses a combination of fixed, incentive, and award fees. DOE officials told us that incentive fees were used because of the many different tasks that could be identified and measured, but that award fees were also needed to assess activities that required more subjective judgments. At the Stanford Linear Accelerator Center in California, operated by Stanford University, DOE negotiated a no-fee contract, the only such arrangement in the laboratory system. According to DOE, the laboratory contractor does not want a fee for operating this laboratory because a fee would not motivate performance and may be a detriment to the conduct of outstanding science, which is the primary mission of this laboratory. The Lawrence Berkeley National Laboratory and Lawrence Livermore National Laboratory in California and the Los Alamos National Laboratory in New Mexico are operated by the University of California. The contracts contain a fixed fee and an incentive fee for meeting expectations, plus another amount for exceeding expectations. A senior DOE official acknowledged the variability in laboratory contracts but said that imposing uniform practices throughout the laboratory system would not necessarily improve the overall performance and accountability of the contractors. According to DOE and laboratory officials, there are several reasons for the variability in the contracts. First, the laboratories engage in different activities with different levels of technical complexities. Second, some contractors are willing to assume greater financial risk or liability and thus expect a higher or different fee arrangement. Finally, DOE field officials who negotiate the contracts employ features that they believe are best suited for their particular circumstances. However, we found that similar laboratories operated by similar contractors have different fee arrangements. For example, both the Lawrence Berkeley and Argonne national laboratories have similar research missions and are both managed by university contractors. However, Lawrence Berkeley’s contractor, the University of California, works under a fixed-fee plus performance fee arrangement, while Argonne’s contractor, the University of Chicago, works under a performance fee arrangement only. We also found substantial variations in contracting philosophy among DOE field officials. DOE relies on field units to negotiate its contracts, including whether to use performance-based fees, and how performance objectives and measures will be accomplished. Some of these officials told us that performance fees are important motivators, while others said performance fees can distract the contractor from other important work. In commenting on a draft of this report, DOE provided us with additional reasons for the variability in contracts, including the timing of when contractors first converted to performance-based contracting, the nature of the proposals received in competitive awards, and the negotiated terms in contract extensions. In addition, DOE cited other motivations for laboratory contractors, such as their reputations in the scientific community and contract extensions. DOE’s guidance states that the purpose of performance-based contracting is to obtain better performance or lower costs or both. DOE has not analyzed the impact of performance-based contracting on its laboratory contractors. As a result, it has not determined whether performance-based contracting is achieving the intended objectives of reducing costs and improving performance. DOE officials told us that the amounts of fees paid to laboratory contractors have generally increased with the implementation of performance-based contracting but that it is difficult to determine the return on this investment since contractors are also assuming more risk or liability for costs previously paid by DOE. Increased liabilities include costs due to a failure to exercise prudent business judgment on the part of the contractor’s managerial personnel. DOE has not analyzed the relative costs and benefits to the government of using higher fees in performance-based contracts.