M&O contractors operate and maintain NNSA’s three national security laboratories, as well as the infrastructure necessary to support the nuclear weapons stockpile and the capabilities to conduct the scientific, technical, engineering, and production activities that ensure the continued safety and reliability of the stockpile. These laboratories perform various forms of weapons research and development activities as follows: Los Alamos National Laboratory in Los Alamos, New Mexico, operated by Los Alamos National Security, LLC,nuclear components and providing unique capabilities such as neutron scattering and radiography. Los Alamos also manufactures plutonium components and weapons detonators. is responsible for Lawrence Livermore National Laboratory in Livermore, California, operated by Lawrence Livermore National Security, LLC,responsible for nuclear components and providing unique capabilities in high-energy density physics; high explosives research, development, and assessment; and environmental containment of high-hazard experiments. Sandia National Laboratories in Albuquerque, New Mexico, and Livermore, California, operated by Lockheed Martin Corporation, is primarily responsible for nonnuclear components, including environmental testing of nuclear weapons systems, nonnuclear component engineering, and some nonnuclear component production. NNSA and DOE officials are responsible for a variety of oversight functions at the laboratories. For example, NNSA oversees and conducts annual performance reviews of its M&O contractors at each laboratory. OFFM, which includes the field Chief Financial Officer, is primarily responsible for ensuring the integrity of the laboratories’ financial management systems, including the proper allocation of direct and indirect costs. In addition, NNSA maintains an on-site presence at each of the laboratories through field offices that assist in the daily management of the M&O contractor. The DOE OIG, which has audit authority at NNSA laboratories, assists NNSA in carrying out its oversight responsibilities by conducting independent audits as necessary. In general, federal contractors such as NNSA’s M&O contractors are subject to federal Cost Accounting Standards. These standards provide direction for the consistent and equitable distribution of contractors’ costs to help federal agencies more accurately determine the actual costs of its contracts. Table 1 briefly describes Cost Accounting Standards. Appendix II describes these standards in more detail. In addition to Cost Accounting Standards, M&O contractors, DOE, and NNSA must comply with other federal requirements, including the Federal Acquisition Regulation and DOE financial management and accounting orders. In particular, the Federal Acquisition Regulation applies to federal agencies to help regulate the policies and procedures for acquisitions for the government. A requirement of this regulation is that a contractor’s costs must be reasonable. We previously reported that indirect costs could not be readily compared across laboratories and discussed steps DOE has taken to try to provide more comparability of its costs. Specifically, in 2005, we reported that differences in how indirect costs are identified and allocated to programs and differences in the facilities’ missions, corporate structures, and accounting systems affected the comparability of costs across laboratories. In that report, we noted that while DOE required its M&O contractors to separately report data on costs to support missions, such as administrative support, these costs could not be readily compared. These include costs that are classified as both direct and indirect. Further, in 2012, in response to limitations in these data, we reported that DOE was trying to improve its ability to oversee its M&O contractors’ costs through the implementation of the Institutional Cost Reporting initiative.Specifically, this initiative is a multiyear effort that aims to collect certain cost data and report them at an aggregate level across broad cost categories such as maintenance and central administrative support. M&O contractors differ in how they classify and allocate indirect costs, which continues to make it difficult for NNSA, Congress, and others to compare program costs across laboratories. Recognizing the limitations of its cost data, DOE and NNSA are implementing the Institutional Cost Reporting initiative, but this initiative may only provide limited improvements over existing data. M&O contractors’ differ in how they allocate indirect costs to specific programs, as allowed by Cost Accounting Standards. To allocate costs to programs, M&O contractors classify costs as either direct or indirect. Direct costs, such as labor and materials, are assigned to the benefitting program or programs. Indirect costs—those costs that cannot be assigned to a particular program such as costs for administration and site support—are accumulated, or grouped, into indirect costs pools. The M&O contractor estimates the amount of indirect costs (accumulated into indirect cost pools) that will need to be distributed to each program and adjusts the costs to actual costs by the end of the fiscal year. The contractor then distributes these costs based on a rate in accordance with the cost allocation model. Typically, labor costs receive a higher allocation of indirect costs than do costs such as direct material expenditures. The final program cost is the sum of the total direct costs plus the indirect costs distributed to the program (see fig. 1). In implementing this allocation process, however, similar costs can be allocated differently because M&O contractors’ cost allocation models, which outline the M&O contractor’s structure for identifying and allocating indirect costs, differ. Officials in NNSA’s OFFM said that because of the flexibility the Cost Accounting Standards provide, NNSA does not have the authority to require M&O contractors to classify and allocate costs in a uniform manner. Specifically, M&O contractor cost allocation models differ in how they (1) classify costs as either direct or indirect, (2) accumulate these costs into indirect cost pools, and (3) distribute indirect costs to specific programs. For example: Classification. M&O contractors differ in how they classify costs as direct or indirect. For example, M&O contractors at Los Alamos told us they make significant use of service centers—departments which perform specific technical or administrative services for programs such as for telecommunications and computing and separately assign these costs directly to the benefitting laboratory department overheads or programs. In total, service center costs for fiscal year 2012 totaled around $180 million at Los Alamos. In contrast, M&O contractors at Lawrence Livermore reported making limited use of service centers—their costs totaling around $20 million for fiscal year 2012—and instead classified these costs as indirect. Lawrence Livermore officials said that they conducted a business process analysis, which found that it was more efficient and cost-effective for their laboratory to allocate these costs through an indirect-cost pool than to try to develop and administer service centers that would then charge each program directly. Accumulation. M&O contractors differ in how they accumulate indirect costs into indirect-cost pools. For example, the M&O contractor at Sandia used both program management and division support indirect- cost pools to accumulate certain indirect support costs that could not be charged to specific projects. The M&O contractors at Los Alamos and Lawrence Livermore recovered these costs through different indirect-cost pools such as program office overhead and site support. For fiscal year 2011, we found that M&O contractors accumulated costs into differing numbers of indirect-cost pools, with one site using as few as 4 pools and another using as many as 11. Distribution. M&O contractors differ in how they distribute indirect costs accumulated into indirect-cost pools to programs. For example, in fiscal year 2013, the M&O contractor at Lawrence Livermore distributed General and Administrative costs—costs incurred for the administration of the lab such as executive management and human resources—to total costs excluding materials and subcontract costs incurred by programs, while the M&O contractor at Los Alamos distributed these costs to total program costs including those for labor, materials, and subcontract costs. M&O contractors’ cost allocation models have also substantially changed over time. For example, according to M&O contractor documentation for Los Alamos, the M&O contractor substantially changed and simplified its cost allocation model in fiscal year 2013 to improve compliance with Cost Accounting Standards and increase the transparency of these costs. M&O contractor documentation outlining the major changes indicated that these changes increased administrative efficiency at the laboratory. While the change in the cost allocation model did not change the total amount of indirect costs allocated at the laboratory, the changes did affect the amount of indirect costs allocated to certain program costs, such as the cost of subcontractors employed at the laboratory and construction projects, which now received a greater distribution of indirect costs. The M&O contractor at Lawrence Livermore also substantially changed its cost allocation model in recent years. For example, for fiscal years 2005 to 2013, the M&O contractor decreased the number of different rates used to allocate indirect costs to its programs from 184 to 12. The M&O contractor at Sandia has also substantially changed its cost allocation model since fiscal year 2010. For example, the M&O contractor combined certain indirect pools and changed the amount of indirect costs allocated to some program costs, such as those for subcontractor labor. Because of the differences in how M&O contractors allocate indirect costs and changes in allocation practices over time, it remains difficult to compare program costs either across laboratories or at an individual laboratory over time. In particular, it is unclear whether the allocation differences or other factors, such as more effective program management, were the primary cause for the difference in program costs. Specifically, differences in how costs are classified as either indirect or direct, accumulated into indirect-cost pools, and distributed to specific programs can impact the ratio of indirect to total program costs at the laboratories. This ratio is, in part, used by Congress to compare M&O contractor performance. However, as we have previously reported, this ratio alone should not be used as a tool to compare performance as it does not account for the myriad factors that can affect the ratio of indirect to total program costs. Specifically, data on these costs do not account for differences in M&O contractor allocation practices or differences in laboratories’ mission, size, age, or condition, which affects costs.