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Indirect Cost Management Has Improved, but Additional Opportunities 
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United States Government Accountability Office: 
GAO: 

Report to the Subcommittee on Energy and Water Development, Committee 
on Appropriations, U.S. Senate: 

June 2013: 

National Nuclear Security Administration: 

Laboratories' Indirect Cost Management Has Improved, but Additional 
Opportunities Exist: 

GAO-13-534: 

GAO Highlights: 

Highlights of GAO-13-534, a report to the Subcommittee on Energy and 
Water Development, Committee on Appropriations, U.S. Senate. 

Why GAO Did This Study: 

NNSA, a semiautonomous agency within DOE, oversees the nation’s 
nuclear security programs. M&O contractors manage NNSA’s facilities, 
including its national security laboratories––Lawrence Livermore, Los 
Alamos, and Sandia. Each year, M&O contractors spend billions of 
dollars to manage and operate these laboratories. Costs include both 
direct costs-—which can be identified with a specific objective or 
program-—and indirect costs, such as management, administrative, and 
facility costs. Federal Cost Accounting Standards give M&O contractors 
flexibility in how costs are classified as direct or indirect and 
allocated to programs. 

GAO was asked to review M&O contractor indirect cost management. GAO 
examined (1) whether laboratory M&O contractors' practices differ for 
allocating indirect costs and, if so, how; (2) the extent to which 
NNSA ensures that laboratory M&O contractors’ allocated indirect costs 
are accurate; and (3) the extent to which NNSA ensures that laboratory 
M&O contractors’ indirect costs are reasonable. GAO reviewed NNSA and 
laboratory M&O contractor data and documents and spoke with DOE and 
NNSA officials and M&O contractors. 

What GAO Found: 

The National Nuclear Security Administration’s (NNSA) management and 
operating (M&O) contractors differ in how they classify and allocate 
indirect costs at NNSA laboratories. Although different approaches are 
allowed by Cost Accounting Standards, these differences limit the 
ability to compare program costs across the laboratories. Recognizing 
the limitations of its current cost data, the Department of Energy 
(DOE) and NNSA are implementing the Institutional Cost Reporting 
initiative intended to create a standardized report of certain costs, 
including many indirect costs. However, DOE is uncertain how it will 
use the data gathered by this initiative, and these efforts may 
provide only limited improvements because the data will continue to 
only be reported at an aggregate level. 

NNSA examines M&O contractors’ models for allocating indirect costs 
for compliance with Cost Accounting Standards’ requirements at least 
annually, which helps ensure accuracy. NNSA has identified instances 
when these models did not comply with these requirements, but NNSA has 
worked with M&O contractors to address these issues. NNSA generally 
relies on the M&O contractors’ internal audits, however, to assess 
whether M&O contractors’ day-to-day cost allocation practices conform 
to disclosed cost allocation models. NNSA reviews some summary data to 
independently assess day-to-day compliance with Cost Accounting 
Standards but does not conduct independent audits. DOE’s Office of 
Inspector General (OIG) has audit authority at NNSA laboratories. OIG 
officials stated that the frequency and scope for conducting audits to 
assess contractors’ compliance with Cost Accounting Standards should 
be based on the level of risk. However, NNSA and OIG officials and M&O 
contractors hold varying opinions regarding the level of risk that 
inaccurate indirect cost allocation practices at the laboratories 
pose. In the absence of formal, periodic risk assessments, NNSA may 
not have a well-documented basis for its decisions regarding the type, 
timing, and extent of future monitoring or oversight. 

NNSA reviews M&O contractors’ cost data and other information to 
assess the reasonableness of their costs, including indirect costs. 
NNSA also uses other means to help ensure the reasonableness of these 
costs. For example, NNSA’s contracts require M&O contractors to 
regularly benchmark their costs to other contractors and industry. 
These requirements, however, do not specify the areas that should be 
examined, how frequently benchmarking should occur, and what process 
should be used for implementing any needed corrective actions. As a 
result, M&O contractor efforts to benchmark costs varied across 
laboratories. 

What GAO Recommends: 

GAO recommends DOE clarify the uses of the data gathered through the 
Institutional Cost Reporting initiative, conduct periodic risk 
assessments, and incorporate more specific requirements for 
benchmarking in its laboratory M&O contracts. DOE generally agreed 
with GAO’s recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-13-534]. For more 
information, contact David C. Trimble at (202) 512-3841 or 
trimbled@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

M&O Contractors Differ in How They Allocate Indirect Costs, and 
Efforts to Standardize Cost Reporting May Provide Limited Improvements: 

NNSA Takes Some Steps to Assess the Accuracy of M&O Contractors' 
Indirect Cost Allocations: 

NNSA Reviews M&O Contractor Information and Uses Other Means to Help 
Ensure the Reasonableness of Indirect Costs: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Federal Cost Accounting Standards: 

Appendix III: Comments from the National Nuclear Security 
Administration: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Cost Accounting Standards: 

Figure: 

Figure 1: Overview of Management and Operating (M&O) Contractor 
Process for Identifying Costs as Direct or Indirect and Allocating to 
Programs: 

Abbreviations: 

CAPE: Cost Assessment and Program Evaluation: 

DOD: Department of Defense: 

DOE: Department of Energy: 

M&O: Management and Operating: 

NNSA: National Nuclear Security Administration: 

OFFM: Office of Field Financial Management: 

OIG: Office of Inspector General: 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

June 28, 2013: 

The Honorable Dianne Feinstein: 
Chairman: 
The Honorable Lamar Alexander: 
Ranking Member: 
Subcommittee on Energy and Water Development: 
Committee on Appropriations: 

United States Senate: 

The National Nuclear Security Administration (NNSA)--a semiautonomous 
agency within the Department of Energy (DOE)--manages the nation's 
nuclear security programs.[Footnote 1] The primary missions of these 
programs are to maintain the safety, security, and effectiveness of 
the U.S. nuclear weapons stockpile; reduce the global threat posed by 
nuclear proliferation and terrorism; and provide nuclear propulsion 
systems for the U.S. Navy. NNSA undertakes these responsibilities 
through eight sites. Three of these sites--Lawrence Livermore National 
Laboratory, Los Alamos National Laboratory, and Sandia National 
Laboratories--are national security laboratories. These three 
laboratories are critical to carrying out NNSA's mission to provide 
management and security of the nation's nuclear weapons programs. The 
laboratories also support additional missions, including nuclear 
nonproliferation activities and work for other federal agencies such 
as the Departments of Defense and Homeland Security. In fiscal year 
2012, NNSA's annual appropriation was $11 billion, $4.64 billion of 
which funded these three laboratories. 

To manage and operate its laboratories, NNSA relies on management and 
operating contractors, known as M&O contractors, and reimburses them 
for the costs incurred in carrying out NNSA's missions. These M&O 
contractor costs include both direct costs--costs that can be directly 
identified with specific cost objectives such as a program or project-
-and indirect costs--costs of activities that cannot be specifically 
identified with a specific cost objective but which indirectly support 
a program, such as management, administrative, and facility costs. M&O 
contractors are required to follow federal requirements governing NNSA 
indirect cost management. These include Cost Accounting Standards, 
which contain requirements for the measurement, assignment, and 
allocation of costs to government contracts and provide criteria for 
the classification and allocation of indirect costs. These standards 
also provide contractors with some flexibility in how they classify 
and allocate indirect costs.[Footnote 2] In addition, the Federal 
Acquisition Regulation requires that these costs be reasonable, among 
other things. In recent years, according to NNSA officials, indirect 
costs have accounted for about half of these three laboratories' 
budgets. 

We have reported on NNSA's indirect costs in the past. In 2005, we 
reported that indirect costs at NNSA's laboratories could not be 
readily compared because of differences in how indirect costs are 
identified and allocated to programs, and because of differences in 
the facilities' missions, corporate structures, and accounting 
systems.[Footnote 3] In 2010, we reported that NNSA does not collect 
reliable and timely information on indirect costs at the NNSA sites, 
including the laboratories, which is crucial for effective management 
of government operations and for oversight.[Footnote 4] In 2012, we 
identified opportunities for the laboratories to streamline their 
support functions, which include many indirect costs.[Footnote 5] 
Further, NNSA's and the DOE Office of Environmental Management's 
contract and project management for major projects--$750 million or 
greater--remain on our list of programs at high risk of fraud, waste, 
abuse, and mismanagement or are in most need of transformation. 
[Footnote 6] In addition to our concerns, the Department of Defense 
(DOD), which depends on NNSA to assess and maintain the reliability 
and safety of the nuclear weapons stockpile and helps fund these 
efforts, has expressed concerns about NNSA's ability to accurately 
understand and assess its major program costs. The National Defense 
Authorization Act for 2013,[Footnote 7] as well as the Nuclear Weapons 
Council,[Footnote 8] tasked the Office of the Secretary of Defense's 
Cost Assessment and Program Evaluation (CAPE) to work with NNSA to 
develop more accurate cost estimates for its weapons programs. 

You asked us to review M&O contractor indirect cost management at 
NNSA's national security laboratories. Our report examines: (1) 
whether laboratory M&O contractors' practices differ for allocating 
indirect costs and if so, how; (2) the extent to which NNSA ensures 
that laboratory M&O contractors' allocated indirect costs are 
accurate; and (3) the extent to which NNSA ensures that laboratory M&O 
contractors' indirect costs are reasonable. 

To determine whether laboratory M&O contractors' practices differ for 
allocating indirect costs, and if so, how, we reviewed federal Cost 
Accounting Standards, which in part guide M&O contractor allocation 
practices, and NNSA and M&O contractor documentation associated with 
complying with these standards. We met with officials from NNSA's 
Office of Field Financial Management (OFFM) in Albuquerque, New 
Mexico. We also visited Lawrence Livermore, Los Alamos, and Sandia 
national laboratories and interviewed NNSA field office officials and 
M&O contractors. We reviewed NNSA and contractor documents showing the 
actions taken by NNSA and the M&O contractors to manage indirect costs 
at the three laboratories, as well as data on these costs. We reviewed 
indirect cost data used by M&O contractors to document compliance with 
Cost Accounting Standards and manage indirect costs and met with 
knowledgeable NNSA officials and M&O contractors to assess the 
reliability of these data. We found them to be sufficiently reliable 
for the purposes of this report. To gather additional perspectives on 
how differences in cost allocation practices affect stakeholders, we 
met with officials from DOD's CAPE to discuss their review of the 
laboratories' costs and possible ways to improve the data collected 
that is needed to support cost analysis informed decision making 
across the NNSA laboratories and sites. 

To examine the extent to which NNSA ensures that laboratory M&O 
contractors' reported indirect costs are accurate, we reviewed reports 
prepared by each contractor's internal audit function. We also 
interviewed NNSA officials and M&O contractors to discuss steps taken 
to ensure compliance with federal Cost Accounting Standards and 
interviewed officials from the DOE Office of Inspector General (OIG) 
to determine their role in assessing M&O contractors' compliance. 

To examine the extent to which NNSA ensures that laboratory M&O 
contractors' indirect costs are reasonable, we reviewed pertinent 
documents and interviewed NNSA officials and M&O contractors about 
steps taken to assess the reasonableness of indirect costs. We also 
reviewed the M&O contracts in place in fiscal year 2012 and fiscal 
year 2012 performance evaluations of the laboratory M&O contractors to 
identify the financial incentives, if any, provided to M&O contractors 
to manage costs, including indirect costs. We reviewed studies 
completed during the period from 2008 to 2012 to assess the 
reasonableness of laboratories' costs. Additional details on our 
objectives, scope, and methodology can be found in appendix I. 

We conducted this performance audit from April 2012 to June 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

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,[Footnote 9] is responsible for 
nuclear components and providing unique capabilities such as neutron 
scattering and radiography. Los Alamos also manufactures plutonium 
components and weapons detonators. 

* Lawrence Livermore National Laboratory in Livermore, California, 
operated by Lawrence Livermore National Security, LLC,[Footnote 10] is 
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.[Footnote 11] 

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. 

Table 1: Cost Accounting Standards: 

Cost accounting standard: 401; 
Brief description: Requires consistency in estimating, accumulating, 
and reporting costs. 

Cost accounting standard: 402; 
Brief description: Requires consistency in allocating cost incurred 
for the same purpose. 

Cost accounting standard: 403; 
Brief description: Addresses allocation of home office expenses. 

Cost accounting standard: 404; 
Brief description: Addresses capitalization of tangible assets. 

Cost accounting standard: 405; 
Brief description: Addresses accounting for unallowable costs. 

Cost accounting standard: 406; 
Brief description: Addresses cost accounting period. 

Cost accounting standard: 407; 
Brief description: Addresses use of standard costs for direct material 
and direct labor. 

Cost accounting standard: 408; 
Brief description: Addresses accounting for costs of compensated 
personal absences. 

Cost accounting standard: 409; 
Brief description: Addresses depreciation of tangible capital assets. 

Cost accounting standard: 410; 
Brief description: Addresses allocation of business unit general and 
administrative expense to cost objectives. 

Cost accounting standard: 411; 
Brief description: Addresses accounting for acquisition costs of 
material. 

Cost accounting standard: 412; 
Brief description: Addresses composition and measurement of pension 
costs. 

Cost accounting standard: 413; 
Brief description: Addresses adjustment and allocation of pension 
costs. 

Cost accounting standard: 414; 
Brief description: Addresses cost of money as an element of the cost 
of facilities capital. 

Cost accounting standard: 415; 
Brief description: Addresses accounting for the cost of deferred 
compensation. 

Cost accounting standard: 416; 
Brief description: Addresses accounting for insurance costs. 

Cost accounting standard: 417; 
Brief description: Addresses cost of money as an element of the cost 
of capital assets under construction. 

Cost accounting standard: 418; 
Brief description: Addresses allocation of direct and indirect costs. 

Cost accounting standard: 420; 
Brief description: Addresses accounting for independent research and 
development costs and bid and proposal costs. 

Sources: GAO analysis based on information provided by NNSA officials 
and general Cost Accounting Standards information. 

Note: Cost Accounting Standard 419 was consolidated with Cost 
Accounting Standard 418 and therefore no longer exists. 

[End of table] 

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.[Footnote 12] 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.[Footnote 13] 
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.[Footnote 14] 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 Allocate Indirect Costs, and 
Efforts to Standardize Cost Reporting May Provide Limited Improvements: 

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. 

Differences in How M&O Contractors Allocate Indirect Costs Limit the 
Comparability of Program Costs across Laboratories: 

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 benefiting 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 figure 1). 

Figure: Overview of Management and Operating (M&O) Contractor Process 
for Identifying Costs as Direct or Indirect and Allocating to Programs 

[Refer to PDF for image: process illustration] 

M&O Contractor Costs: 
Costs are incurred by the management and operating (M&O) contractor to
conduct work at the laboratory. 

Direct: 
Labor; Materials; 
Costs that benefit a particular program or project are classified as 
“direct.” 

Indirect: 
General and Administrative (G&A); Site Support; 
Costs that benefit multiple programs or projects or the laboratory as a
whole are classified as “indirect” and then accumulated, or grouped, 
into indirect-cost pools such as General and Administrative and Site 
Support. 

M&O Contractor Costs Are Allocated to Programs: 

Labor; Materials: Direct costs are assigned to the benefiting program 
or project. 

G&A: Actual indirect costs are distributed to programs based on the 
actual direct costs they incur at rates, in part, determined by the 
type of expense. Fewer types of indirect costs are distributed to 
direct material expenditures than to direct labor expenditures. 

Sire support: The ways in which these costs are allocated differ 
across laboratories. 

Final Program Cost: 
Labor and Materials Total; Total Indirect Costs; 
The program’s total cost is the sum of the direct and indirect costs. 

Sources: GAO analysis of NNSA and M&O contractor documentation. 

Note: We use the term programs in this report to mean efforts managed 
by M&O contractors. 

[End of figure] 

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 benefiting 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.[Footnote 15] 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. For example, the maintenance costs for a 50-year-old 
manufacturing facility will likely be higher than those of a modern 
research facility. 

DOE officials noted that Cost Accounting Standards do not require all 
contractors to use the same methodology to allocate indirect costs and 
that project management and cost estimation can be conducted through a 
variety of project management tools. However, GAO has previously noted 
shortcomings with data collected, as well as its use by DOE and NNSA 
to manage projects and estimate costs. For example, in 2010, we 
reported that NNSA cannot accurately identify the total costs to 
operate and maintain weapons facilities and infrastructure. In 2011, 
we reported that NNSA needs more comprehensive infrastructure and 
workforce data to improve its enterprisewide decision making. Further, 
in 2012, we reported that NNSA lacked the analytical capability needed 
to review proposals for program activities and verify cost estimates. 
Additionally, according to a senior CAPE official responsible for 
working with NNSA to develop more accurate cost estimates for its 
weapons programs, the cost data collected by NNSA's M&O contractors 
has shortcomings. According to the official, M&O contractors organize 
their cost data to meet two primary goals. First, contractors want to 
ensure that they are fully reimbursed for their costs. Second, 
contractors want to ensure that they fairly allocate indirect costs to 
programs and projects. However, the CAPE official stated that these 
data are of limited use to support decision making for programs, 
projects, and activities including weapons life extension programs, 
facility construction projects, and facility operations. The official 
stated that, during his team's review, they found that the M&O 
contractors' cost data for the laboratories was rarely in a form that 
would be useful for decision-making analysis. In addition, the 
official stated that the quality of data varied widely across M&O 
contractors and substantial effort by the CAPE team and the M&O 
contractor was required to understand and explain trends in the data. 
The CAPE official added that NNSA does not currently have the data 
needed to accurately identify the total costs to operate and maintain 
its weapons facilities and structures. The official stated that NNSA's 
needs are changing rapidly as officials deal with difficult choices in 
a budget-constrained environment. He added that the need for better 
cost data collection to support decision making is both immediate and 
imperative. The official stated that CAPE is actively working with 
NNSA to guide and improve its ability to gather, analyze, and present 
more useful M&O contractor cost data to decision makers. In May 2013, 
NNSA announced the creation of the Office of Program Review and 
Analysis, to provide independent analytical advice to help improve 
NNSA's ability to budget, plan, and oversee programs. 

DOE and NNSA Are Taking Additional Steps to Standardize the Reporting 
of Certain Indirect Costs, but These Efforts May Provide Only Limited 
Improvements: 

DOE and NNSA are taking steps to standardize the reporting of certain 
costs; however, these efforts may provide only limited improvements 
because the data will continue to only be reported at an aggregate 
level. As noted previously, in 2010, DOE began implementation of 
Institutional Cost Reporting--a DOE-wide initiative to create a 
standardized report of certain costs, including many indirect costs--
to improve its ability to oversee its sites' costs. Specifically, 
Institutional Cost Reporting is a system to collect and report costs 
at an aggregate level across 28 broad cost categories. DOE officials 
and documentation noted several anticipated improvements that are 
expected from implementing Institutional Cost Reporting, including 
improved data reliability as compared with previous method for 
collecting and reporting support costs. In January 2012, we 
recommended that DOE take steps to ensure that the data resulting from 
the Institutional Cost Reporting are complete and comparable for 
monitoring sites' support costs, and DOE concurred with our 
recommendation.[Footnote 16] DOE established joint DOE and contractor 
teams to perform peer reviews intended in part to standardize the data 
collected through Institutional Cost Reporting. In May 2013, DOE 
officials said that they had completed the reviews for several sites, 
including Lawrence Livermore, Los Alamos, and Sandia. Officials stated 
that they were uncertain when the remaining reviews would be completed. 

According to DOE documents, the Institutional Cost Reporting 
initiative established general goals to develop more timely, accurate, 
and meaningful data on M&O contractor's costs. However, DOE officials 
responsible for helping implement the initiative stated that they are 
uncertain how or if the data will actually be used. This is because 
this initiative replaced an earlier system used by DOE to collect and 
report support costs and, like this earlier system, the Institutional 
Cost Reporting data will only provide data at an aggregate level 
across cost categories, such as maintenance. In addition, DOE 
officials told us that since the Institutional Cost Reporting data 
appear at an aggregate level, further analyses will be needed to 
assess the causes for any differences in Institutional Cost Reporting 
cost categories across the laboratories and other sites. For example, 
if costs for an activity such as maintenance are significantly higher 
at one laboratory than another, further research would be needed to 
determine if the difference is due to efficiency or differences in 
mission, condition of infrastructure, location, or other reasons. A 
senior DOE official said that Institutional Cost Reporting is in its 
early stages and that DOE does not currently know how the data will be 
used. Further, DOE officials said they were uncertain about the extent 
to which Institutional Cost Reporting data can be used to improve the 
transparency and management of laboratory costs, especially indirect 
costs. To better understand the Institutional Cost Reporting data and 
help identify potential management uses, DOE officials said that they 
had initiated several analyses to review specific cost items in the 
Institutional Cost Reporting data. However, a DOE official helping 
oversee these efforts noted that the data gathered through 
Institutional Cost Reporting may ultimately not prove to be useful, as 
it may not provide meaningful data that can be used to aid management 
and oversight. Officials with DOD's CAPE office have also expressed 
concerns over the usefulness of these aggregated data to improve 
transparency, aid management, and identify opportunities for cost 
savings. Moreover, in commenting on a draft of this report, DOE noted 
that it has determined that the Institutional Cost Reporting 
initiative data are aggregated at such a high level that they cannot 
be used to compare detailed contractor costs. 

OFFM officials also stated that their use of the Institutional Cost 
Reporting data to assess costs and potentially identify cost savings 
is still largely in the planning stages. Specifically, OFFM officials 
stated that, while the Institutional Cost Reporting data is more 
useful and comparable than other data, such as indirect cost rates, 
additional analyses are still needed to determine if the cost 
differences identified in Institutional Cost Reporting data are due to 
efficiency differences or other differences among the laboratories. To 
date, OFFM officials have taken some steps to use Institutional Cost 
Reporting data to compare costs across its laboratories and help 
identify cost savings. For example, NNSA officials said they used 
Institutional Cost Reporting data to help compare M&O contractor 
costs. Following this comparison, OFFM is now planning an effort to 
reduce the amount of state taxes paid by its M&O contractors. 

NNSA Takes Some Steps to Assess the Accuracy of M&O Contractors' 
Indirect Cost Allocations: 

NNSA has taken steps to examine the accuracy of M&O contractors' cost 
allocation models, but actions to independently assess day-to-day cost 
allocation practices have been more limited. Specifically, NNSA's OFFM 
examines laboratory M&O contractors' cost allocation models for 
compliance with Cost Accounting Standards requirements, which helps 
ensure accuracy. NNSA generally relies on M&O contractors' internal 
audits to assess whether day-to-day cost allocation practices conform 
to disclosed M&O contractor models. NNSA's efforts to independently 
assess M&O contractors' day-to-day cost allocation practices to ensure 
compliance with Cost Accounting Standards are more limited. 

NNSA Examines Laboratory M&O Contractors' Cost Allocation Models for 
Compliance with Cost Accounting Standards: 

NNSA's OFFM examines laboratory M&O contractors' detailed cost 
allocation models for compliance with Cost Accounting Standards each 
time a contractor changes its model, which typically occurs upon 
initiation of the contract and at least annually thereafter. 
Specifically, within 60 days before a contractor implements changes in 
a new cost allocation model, the contractor must submit the proposed 
changes--in a document called a disclosure statement--to OFFM for a 
compliance review. These disclosure statements include a summary and 
justification of proposed changes, a reference to the Cost Accounting 
Standards that apply to each change, and information on the 
anticipated impact of the proposed changes on a program area's costs. 
OFFM reviews the disclosure statement to determine whether the 
proposed change is adequately described and complies with applicable 
Cost Accounting Standards. In doing so, OFFM typically follows a 
detailed review plan or checklist adapted as necessary for the review, 
including conducting on-site visits or follow-up with the contractor 
to ensure the disclosed changes to the model are in compliance with 
Cost Accounting Standards. Based on this review, OFFM sends its 
recommendation for approval of the disclosure statement to the 
contracting officer, who then makes the determination to approve. 

OFFM works with laboratory M&O contractors to try to bring cost 
allocation models into compliance with Cost Accounting Standards and 
has identified instances when a laboratory's cost allocation model did 
not comply with Cost Accounting Standards. Some of these instances 
affected the accurate allocation of indirect costs. OFFM officials 
stated that instances of noncompliance have been resolved or are in 
the process of being resolved. Examples are as follows: 

* In March 2009, OFFM and NNSA site officials determined that the M&O 
contractor's indirect cost allocation model for Lawrence Livermore did 
not fully comply with Cost Accounting Standards. Specifically, 
activities such as science and technology strategic planning and 
laboratory outreach were included in a strategic mission support 
indirect-cost pool. These costs were viewed by Lawrence Livermore as 
broadly institutional in the same manner as General and Administrative 
costs. According to NNSA officials, the M&O contractor allowed this 
practice to occur because it believed that these programs did not 
equitably benefit from the activities covered by these indirect costs. 
OFFM officials disagreed, and the M&O contractor changed its cost 
allocation model in fiscal year 2013 to include these indirect costs 
in the General and Administrative indirect-cost pool. 

[Side bar] 

Change in National Ignition Facility Indirect Cost Allocation: 

In April 2010, the management and operating (M&O) contractor at 
Lawrence Livermore National Laboratory agreed to correct its cost 
allocation model and bring it into compliance with Cost Accounting 
Standards. Specifically, the laboratory agreed that, beginning in 
fiscal year 2013, it would use the same indirect cost allocation rates 
for the National Ignition Facility that it used for other programs. By 
correcting the model, the M&O contractor estimates an annual total 
cost increase to the National Ignition Facility of about $134 million 
for fiscal year 2013, and a resulting decrease for other programs’ 
total annual costs. Examples are as follows: 

* Defense programs: cost decrease of about $60 million (12.3 percent); 

* Nonproliferation: cost decrease of about $9 million (9.2 percent); 
                                        
* Office of Science: cost decrease of about $6 million (7.4 percent); 

* Safe-Secure: cost decrease of about $9 million (12.3 percent); 

* Work for the Department of Homeland Security: cost decrease of about 
$5 million (11.6 percent); 

* Work for the Department of Defense: cost decrease of about $21 
million (10.9 percent). 

[End of side bar] 

* In October 2009, OFFM reviewed M&O contractor indirect cost 
allocations at Lawrence Livermore being applied to the National 
Ignition Facility--a research facility intended to demonstrate nuclear 
fusion reactions using lasers--and determined that the M&O 
contractor's cost allocation model did not comply with certain aspects 
of the Cost Accounting Standards. Specifically, the M&O contractor's 
model did not equitably distribute indirect costs during the 
construction of the facility, as the Cost Accounting Standards 
require. NNSA's contracting officer concurred but permitted the M&O 
contractor to continue using this model through October 2012 to 
minimize disruption to the program. As a result, 18 other programs at 
the site continued to assume a greater share of these indirect costs, 
which totaled about $134 million for fiscal year 2013, according to 
our analysis of M&O contractor documents. For example, according to 
M&O contractor documents, the Departments of Defense and Homeland 
Security, which conduct research at Lawrence Livermore, paid more each 
year to cover indirect costs that would have otherwise been collected 
from the National Ignition Facility project. 

* In July 2010 and January 2011, OFFM determined that the M&O 
contractor's indirect cost allocation model for Los Alamos did not 
fully comply with Cost Accounting Standards because construction 
projects and certain other types of labor were fully or partially 
exempt from having to contribute the standard cost allocation amounts 
for General and Administrative indirect costs at the laboratory. 
According to OFFM officials, other programs at the site needed to 
contribute more money to the General and Administrative cost pool to 
compensate for this shortfall, resulting in the inequitable sharing of 
these indirect costs across all programs. Los Alamos changed its 
allocation model in fiscal year 2013 to eliminate these exemptions and 
more equitably share these indirect costs across all programs. 

NNSA Generally Relies on M&O Contractors' Internal Audits to Assess 
Whether Day-to-day Cost Allocation Practices Conform to Disclosed M&O 
Contractor Models: 

Officials with NNSA's OFFM told us that they generally rely on the M&O 
contractors' internal audit efforts to assess whether M&O contractors' 
day-to-day cost allocation practices conform to their disclosed cost 
allocation models. OFFM officials told us that they perform some 
limited testing to verify that M&O contractors' practices conform to 
their cost allocation models but that they largely rely on the M&O 
contractors' internal audit groups to perform this verification. 
[Footnote 17] M&O contractors' internal audits have found that some 
contractor allocation practices do not conform to their models. 
Internal audits at all three of the laboratories identified some 
problems--particularly with how labor hours are charged to projects, 
but NNSA officials stated that these problems are not significant in 
relation to the costs incurred by M&O contractors. According to OFFM 
officials, M&O contractors, and documents, the laboratories have 
corrected or are in the process of correcting these problems, and 
follow-up audits are also being conducted at some sites to verify that 
problems are adequately addressed. Following are examples: 

* Los Alamos. In 2009, Los Alamos' M&O contractor conducted an 
internal audit to determine whether its laboratory's day-to-day labor 
allocation practices conformed to its disclosed cost allocation model. 
The audit determined that labor hours reported by M&O contractor 
employees did not always reflect the actual work performed, and labor 
costs may not have been allocated equitably among all benefiting 
programs and therefore was not consistent with their cost allocation 
model. For example, one employee interviewed during the contractor's 
internal audit noted an instance where labor hours were transferred 
from one program to another to prevent a cost overrun. The M&O 
contractor identified and implemented corrective actions to address 
the problem, including providing training and guidance to laboratory 
employees about proper time and labor reporting practices. In April 
2011, the M&O contractor's internal audit office conducted a follow-up 
audit and found that three of four corrective actions identified in 
the prior report were completed but that there was still need for 
further improvement regarding the allocation of labor costs. 
Specifically, the follow-up report concluded that the allocation of 
indirect labor costs posed a high risk and significant concern. 
According to the M&O contractor documentation, M&O contractor managers 
later determined that the problem was not significant enough to 
warrant further corrective action. However, the M&O contractor's 
internal audit management and OFFM officials told us that they are 
continuing to work to resolve the issue. 

* Lawrence Livermore. Lawrence Livermore's M&O contractor internal 
auditors reported similar problems in September 2010, including some 
instances where indirect labor hours were inaccurately allocated to 
direct projects, inconsistent with its disclosed cost allocation 
model. To correct these problems, M&O contractor managers agreed to 
update policies, procedures, and guidance on proper cost allocation 
practices at the laboratory, and develop training for employees. The 
M&O contractor's internal audit office plan for fiscal year 2013 
states that it expects to review the results of prior internal audits 
to determine the need for additional audits in specific areas. 

* Sandia. Based on the problems found at the other two laboratories, 
an NNSA Sandia Field Office official recently asked its M&O 
contractor's internal audit office at Sandia to verify Sandia's labor 
hour allocations. Sandia's internal audit office reported in October 
2012 that M&O contractor employees were not always accurately 
allocating their time in accordance with actual work performed. 
Corrective actions in response to this audit are still being 
implemented. Specifically, the M&O contractor agreed to improve 
guidance and training provided to all employees about proper time 
charging practices and policies, and to conduct periodic self-
assessments to ensure compliance with these practices and policies. 

NNSA's Efforts to Independently Assess M&O Contractors' Day-to-day 
Cost Allocation Practices for Compliance With Cost Accounting 
Standards Are Limited: 

Although NNSA's OFFM has responsibility for supporting contracting 
officers in the day-to-day oversight of M&O contractors' management of 
indirect costs, its role does not include conducting independent 
audits to assess compliance with Cost Accounting Standards, according 
to OFFM officials. On a limited basis, however, OFFM reviews some 
summary M&O contractor data to determine whether actual cost 
allocation practices are consistent with disclosed practices and 
complies with applicable federal requirements, and conducts expanded 
reviews, as needed. Specifically, M&O contractors must annually submit 
a formal statement documenting the total size of their indirect-cost 
pools and allocations, as well as the indirect rates used during the 
previous fiscal year. In addition to these steps, OFFM can request 
audit assistance from the OIG--which has audit authority at NNSA 
laboratories. 

OIG officials stated that the frequency and scope for conducting 
audits for contractors' compliance with Cost Accounting Standards 
should be based on the level of risk. However, OFFM and OIG officials 
and M&O contractors hold varying opinions regarding the level of risk 
of inaccurate indirect cost allocation practices at the laboratories. 
For example, some OFFM and OIG officials and M&O contractors told us 
that they believe the risk is generally low compared with other 
federal agencies. Specifically, because NNSA M&O contractor operations 
are federally funded, and the operations are not mixed with private 
activities, the risk is low that federal funds are being used to pay 
an inequitable and higher share of indirect costs for private, 
nonfederal activities. In contrast, senior NNSA field office official 
told us that he is concerned about the ongoing possibility that 
indirect costs could be manipulated--that is, allocated to other 
programs--to avoid exceeding program budgets and, therefore, believes 
the risk is high. This concern was echoed by an M&O contractor's 
internal audit office, which reported in April 2011 that, based on its 
audit findings the allocation of indirect costs posed a high risk. 
This contractor's internal audit office also confirmed that M&O 
contractor labor hours in at least one instance were transferred to 
another program to prevent a cost overrun. Despite the uncertainty of 
the risk of noncompliance, NNSA's Chief Financial Officer in OFFM does 
not conduct formal periodic risk assessments. One of the federal 
standards for internal control--risk assessment--states that 
management should assess the risks faced entity-wide,[Footnote 18] and 
at the activity level, from both external and internal sources. The 
standard also states that if risks have been identified, management 
should decide what actions should be taken to mitigate them. The 
identification and prioritization of these risks can then influence 
decisions regarding the type, timing, and extent of future monitoring 
or oversight. Risk identification methods may include, among other 
things, forecasting and strategic planning, and consideration of 
findings from audits and other assessments. Without a formal, periodic 
risk assessment regarding the level of risk posed by noncompliance, 
NNSA may not have a well-documented basis for its decisions regarding 
the type, timing, and extent of future monitoring or oversight. 

Recently, the OIG has taken some steps to improve its understanding of 
the risks associated with M&O contractors' noncompliance with Cost 
Accounting Standards. First, the OIG contracted a private auditing 
firm to perform a limited audit at Lawrence Livermore in 2012 to test 
compliance with one Cost Accounting Standard that addresses the 
allocation of direct and indirect costs.[Footnote 19] In April 2013, 
the OIG reported that no compliance problems or potential issues or 
challenges were identified. Second, in January 2013, OIG officials 
stated that they were developing additional guidance to ensure that 
field staff document their consideration of these risks in their 
annual assessments, as necessary. 

NNSA Reviews M&O Contractor Information and Uses Other Means to Help 
Ensure the Reasonableness of Indirect Costs: 

NNSA reviews M&O contractor information to assess the reasonableness 
of M&O contractor costs, including indirect costs, at the 
laboratories. NNSA also uses other means to help ensure the 
reasonableness of costs, such as requiring M&O contractors to compare 
costs with other laboratories and industry, but these efforts vary 
across laboratories. 

NNSA Reviews M&O Contractor Information to Assess Whether Indirect 
Costs Are Reasonable: 

NNSA reviews M&O contractor information and cost data to assess the 
reasonableness of M&O contractor costs at the laboratories. In order 
for a contractor's costs to be reimbursed, they must be reasonable. 
The Federal Acquisition Regulation provides that a cost is reasonable 
based on a number of considerations and circumstances, including 
whether the type of cost is generally recognized as ordinary and 
necessary for the conduct of the contractor's business or the contract 
performance.[Footnote 20]To demonstrate compliance with the Federal 
Acquisition Regulation, M&O contractors submit summary and some 
detailed information and data on their costs to NNSA and the OIG for 
review and approval. For example, according to DOE guidance, M&O 
contractors are required to annually prepare and submit summary 
information identifying costs incurred during the year. This 
information is then reviewed by NNSA's field office Chief Financial 
Officer, contracting officers located at the laboratories, and the 
OIG, among others. Further, NNSA contracting officers told us that 
they review the M&O contractors' own system of internal controls for 
ensuring that incurred indirect costs comply with contract provisions, 
such as by reviewing the M&O contractors' internal audits assessing 
the reasonableness of their costs. Contracting officers serve a 
principal role in ensuring the reasonableness of M&O contractor costs, 
as required in the Federal Acquisition Regulation. Decisions to 
approve M&O contractor costs are documented in contracting officers' 
approval memos, however, the specific steps taken in these reviews to 
determine reasonableness are not documented. In addition to the 
contracting officers' review efforts, OFFM officials stated that they 
review M&O contractors' high-level summary indirect cost information 
to help ensure the reasonableness of M&O contractor costs. OFFM 
officials stated that they act in a supporting role to the review 
efforts of the contracting officers in helping to ensure the 
reasonableness of M&O contractors' costs. 

NNSA Uses Other Means to Help Ensure the Reasonableness of Costs, but 
These Efforts Vary Across Laboratories: 

NNSA also uses other means to encourage M&O contractors to manage the 
laboratories in a cost-efficient and effective manner. In particular, 
NNSA includes provisions in its contracts to encourage or require 
laboratories to take steps to manage costs. For example, NNSA's 
contracts require M&O contractors to regularly benchmark costs to 
standards for high performing external businesses and other 
contractors. Laboratory M&O contractors take some steps to benchmark 
costs and practices to industry and take corrective actions as needed, 
but these efforts have varied from laboratory to laboratory. For 
example, the M&O contractor at one laboratory stated that they 
undertook a benchmarking study to compare the costs of servicing the 
laboratory's fleet of vehicles in-house as compared with using an 
outside vendor. The M&O contractor, concluding that an outside 
provider would be more cost-effective, contracted with an outside 
provider and estimated an annual savings of approximately $775,000. In 
addition to M&O contractor-led efforts, NNSA has also taken steps to 
benchmark costs at its laboratories and sites. Specifically, NNSA 
hired external consulting groups to conduct benchmarking studies in 
the areas of finance, information technology, and human resources 
management across multiple NNSA sites, which provided their reports to 
NNSA in March 2009.[Footnote 21] These studies identified areas for 
improvement and, while M&O contractors noted that they consider the 
information from these studies in decision-making processes, they were 
unable to provide documentation showing what steps were taken 
specifically in response to findings or recommendations in these 
studies. 

Although contracts for the three laboratories do require that 
benchmarking be performed, the contract provisions do not specify the 
areas that should be examined, how frequently benchmarking should 
occur, and what process should be used for implementing any needed 
corrective actions. In contrast, DOE provides more specific 
requirements for benchmarking pension and post-retirement benefit 
costs.[Footnote 22] Specifically, DOE guidance requires contractors to 
benchmark certain employee benefits every 2 to 3 years and implement 
corrective action plans if benchmarking efforts show that the value of 
certain employee benefits are 5 percent or higher than industry 
averages. 

In addition to benchmarking, OFFM is involved in other activities to 
help identify cost savings, improve efficiency, and help ensure the 
reasonableness of costs. We previously reported on efforts taken by 
DOE and NNSA to reduce M&O contractors' costs at its laboratories such 
as through streamlining and centralizing certain support functions, 
such as for human resources.[Footnote 23] In addition to those 
efforts, the OIG also conducts audits to help reduce costs, including 
indirect costs. OFFM officials said that they also participate in 
NNSA's Business Management Advisory Council, which includes NNSA's 
Chief Operating Officer, chief operating officers from each M&O 
contractor, field office representatives, and the NNSA Senior 
Procurement Executive. The Business Management Advisory Council meets 
quarterly to discuss proposals and initiatives to improve efficiency 
and identify cost savings. For example, we previously reported that, 
in 2011, the Business Management Advisory Council considered 
consolidating human resource and other services at all of NNSA's sites 
to achieve cost savings.[Footnote 24] 

To further encourage M&O contractors to manage the laboratories in an 
effective and efficient manner, NNSA also includes performance-based 
fees in its contracts. Specifically, field office contracting 
officials rate the M&O contractors' efforts to identify and implement 
cost-savings measures, while also achieving mission goals, through 
annual performance evaluation plans. These cost management efforts 
also include efforts to identify and implement cost-savings measures. 
However, according to NNSA officials, the amount of performance-based 
fee tied to cost management efforts is relatively small--$1 million or 
less at each laboratory annually--and may not provide a meaningful 
incentive to the contractors. In contrast, the overall incentive fees 
for laboratory M&O contractor work can be up to $60 million annually. 
NNSA officials stated that, because financial incentive amounts are 
limited, mission work could be negatively impacted if financial 
incentives were redirected to improving cost management at the 
laboratories. 

NNSA is exploring ways to improve the use of incentives in its 
contracts to encourage M&O contractors to manage the laboratories in 
an efficient and effective manner. Specifically, according to NNSA 
officials, NNSA added requirements in the proposed combined contract 
for its Y-12 and Pantex sites in fiscal year 2013, which would link 
future contract extensions to cost-savings goals to improve cost 
management.[Footnote 25] For example, these new provisions would have 
required the M&O contractors to achieve at least 80 percent of the 
proposed cost-savings measures, as outlined in their contractual 
language, in order to receive a contract extension. However, we have 
questioned these anticipated cost savings because of the limited 
details available about the actual work that will be consolidated, and 
the adequacy of data used to estimate cost savings.[Footnote 26] As of 
June 2013, the status of NNSA's combined contract award for the Y-12 
and Pantex sites is uncertain. On April 29, 2013, we sustained 
portions of bid protests regarding this combined contract. 
Specifically, we concluded that NNSA failed to meaningfully assess the 
majority of each offeror's proposed cost savings, and based its source 
selection decision on the unsupported assumption that all cost savings 
proposed by every offeror would be achieved. The protest decision 
recommended that NNSA reopen the procurement for this contract and 
request additional information from the offerors about their proposed 
cost savings.[Footnote 27] Following this decision, in May 2013, NNSA 
announced that it would reopen competition for the combined contract. 
Because the contract has not yet been implemented, it is too soon to 
evaluate the effectiveness of these new contract provisions, but NNSA 
officials stated they anticipate incorporating similar provisions into 
future contracts for the laboratories. 

Conclusions: 

It is critical that NNSA and its M&O contractors ensure that the 
billions of dollars spent each year at the laboratories are used 
effectively. Because Cost Accounting Standards allow flexibility in 
how M&O contractors classify and allocate direct and indirect costs to 
programs, however, it can be difficult to assess cost data and 
meaningfully compare cost management performance across laboratories. 
Recognizing these challenges, DOE has been developing the 
Institutional Cost Reporting initiative to separately collect data on 
certain costs, including many indirect costs, in an effort to improve 
its ability to oversee M&O contractors' costs, including, indirect 
costs, at the NNSA laboratories. The initiative is still under 
development, however, and the uses for the data collected have not 
been determined. Without a clearer understanding of how Institutional 
Cost Reporting data can be used to manage costs and what data are 
needed, it is unclear if this initiative will provide meaningful 
improvement over existing data. 

NNSA has made progress in improving M&O contractors' cost allocation 
models to better comply with Cost Accounting Standards. However, key 
officials hold differing views about the level of risk of inaccurate 
indirect cost allocation practices at the laboratories. OIG officials 
stated that the frequency and scope for conducting audits for 
contractors' compliance with Cost Accounting Standards should be based 
on the level of risk. However, OFFM does not conduct periodic, formal 
risk assessments of contractor compliance to determine the level of 
risk. Without such assessments, NNSA does not have important 
information needed to make decisions about the type, timing, and 
extent of future monitoring or oversight. 

In addition to efforts to assess the accuracy of indirect costs, NNSA 
and M&O contractors also use benchmarking as a means to assess the 
reasonableness of costs. Although DOE orders and M&O contracts define 
specific benchmarking requirements for pension costs, contracts are 
less specific in terms of what types of indirect costs should be 
benchmarked, how frequently benchmarking should take place, and the 
process for ensuring corrective actions are taken, as needed. Without 
more consistent and comparable benchmarking, NNSA will likely lack 
useful data about costs across the laboratories, as well as in the 
private sector, that could inform cost management decisions at the 
laboratories and identify areas for cost savings. 

Recommendations for Executive Action: 

To help improve its ability to oversee M&O contractor costs, including 
indirect costs, for its laboratories and make more effective use of 
DOE and contractor resources, we recommend the Secretary of Energy 
take--or, as appropriate, direct the Administrator of NNSA to take--
the following three actions: 

* Clarify how data collected by the Institutional Cost Reporting 
initiative will be used. 

* Direct OFFM to conduct formal, periodic risk assessments of M&O 
contractors' compliance with Cost Accounting Standards by using (1) 
laboratory M&O contractor internal audit results, (2) OIG audit 
results, and (3) other relevant information obtained through ongoing 
monitoring and oversight to provide a well-documented basis for its 
future monitoring and oversight, including determining the appropriate 
level of OIG audit assistance needed. 

* Incorporate more specific benchmarking requirements into future 
laboratory contracts--similar to the benchmarking requirements used by 
DOE to assess and manage pension and post-retirement benefit costs--
including which costs should be benchmarked, how frequently 
benchmarking should occur, and what process should be used to ensure 
corrective actions are taken, as needed. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to DOE for its review and comment. 
In written comments, NNSA's Associate Administrator for Management and 
Budget, responding on behalf of DOE and NNSA, wrote that DOE agreed 
with our report's three recommendations. DOE's written comments on our 
draft report are included in appendix III. DOE also provided technical 
comments, which we incorporated into the report as appropriate. 

In response to our first recommendation that DOE clarify how data 
collected by the Institutional Cost Reporting initiative will be used, 
DOE stated in its written comments that it will clarify the uses of 
the data, and that its estimated completion for this action is 
September 30, 2013. However, DOE stated that it has determined that 
the data are aggregated at such a high level that they cannot be used 
to compare detailed contractor costs. We remain concerned that, 
without better cost data, DOE and NNSA may continue to be limited in 
their abilities to effectively oversee M&O contractor costs. DOE 
agreed with our second recommendation that it conduct formal, periodic 
risk assessments of M&O compliance with Cost Accounting Standards. In 
its comments, DOE stated that OFFM will conduct such assessments and 
that its estimated completion date for this action is September 30, 
2013. The agency also agreed in principle to our third recommendation 
that it incorporate more specific benchmarking requirements into 
future laboratory contracts, similar to its benchmarking requirements 
used to assess and manage pension and postretirement benefit costs, 
stating that it would evaluate options to determine appropriate 
benchmarking requirements for inclusion in future M&O contracts. DOE 
stated that the estimated completion for this action is December 31, 
2013. 

DOE also provided a general comment referencing our draft report's 
discussion of the flexibility afforded NNSA's eight integrated 
contractors by Cost Accounting Standards and the cost data collected 
by NNSA. In particular, DOE stated that the Cost Accounting Standards 
intentionally afford flexibility for all government contractors and 
that our report leaves the false impression that NNSA is somehow 
required to create consistency, when current practices are 
intentionally designed for flexibility. As stated in our report, we 
agree that Cost Accounting Standards provide flexibility for 
contractors and provided additional clarification in the report. DOE 
stated that the repeated statements about "flexibility" and how the 
current data do not address CAPE-identified requirements are 
misleading to the average reader who may not distinguish between the 
appropriateness of accounting practices and the separate issue of 
collecting data from accounting and other project management systems. 
DOE noted that project management and cost estimation are done through 
a variety of project management tools and that, as presented, the 
report would give the impression that NNSA is somehow not "accounting" 
for costs appropriately, and it is factually incorrect to suggest that 
accounting practices that adhere to applicable law are somehow askew. 
We recognize that there are various methods to gather data, however, 
as our previous work and CAPE's work have noted, these data have 
shortcomings for supporting decision making for programs, projects, 
and activities. NNSA also stated that it agreed that efforts to 
produce information to better support decision making from existing 
data could be improved. We continue to believe that improved data 
could aid DOE and NNSA in their efforts to oversee and manage sites' 
costs. 

We are sending copies of this report to the Secretary of Energy, the 
NNSA Administrator, the appropriate congressional committees, and 
other interested parties. In addition, the report is available at no 
charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact me at (202) 512-3841 or trimbled@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix IV. 

Signed by: 

David C. Trimble: 
Director, Natural Resources and Environment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

This report examines (1) whether laboratory Management and Operating 
(M&O) contractors' practices differ for allocating indirect costs and, 
if so, how; (2) the extent to which National Nuclear Security 
Administration (NNSA) ensures that laboratory M&O contractors' 
allocated indirect costs are accurate; and (3) the extent to which 
NNSA ensures that laboratory M&O contractors' indirect costs are 
reasonable. 

To determine whether laboratory M&O contractors' practices differ for 
allocating indirect costs, and, if so, how, we reviewed federal Cost 
Accounting Standards, which, in part, guide M&O contractor allocation 
practices, and NNSA and M&O contractor documentation associated with 
complying with these standards. We met with officials from NNSA's 
Office of Field Financial Management (OFFM) in Albuquerque, New 
Mexico. We also visited Lawrence Livermore, Los Alamos, and Sandia 
National Laboratories and interviewed M&O contractors and NNSA field 
office officials. We reviewed NNSA and contractor documents showing 
the actions taken by NNSA and the M&O contractors to manage indirect 
costs at the three laboratories, as well as data on these costs. We 
reviewed indirect cost data used by M&O contractors to document 
compliance with Cost Accounting Standards and manage indirect costs 
and met with knowledgeable NNSA officials and M&O contractors to 
assess the reliability of these data. We found them to be sufficiently 
reliable for the purposes of this report. To gather additional 
perspectives on how differences in cost allocation practices affect 
stakeholders, we met with the Office of the Secretary of Defense's 
Cost Assessment and Program Evaluation (CAPE) office to discuss their 
review of the laboratories' cost accounting systems to improve cost 
estimation for weapons stockpile programs. To describe DOE and NNSA's 
Institutional Cost Reporting initiative, we spoke with DOE officials 
in its headquarters and Germantown, Maryland, offices for financial 
management and accounting and NNSA officials in OFFM. We also reviewed 
DOE and NNSA internal guidance, as well as documents describing this 
initiative. 

To examine the extent to which NNSA ensures that laboratory M&O 
contractors' reported indirect costs are accurate, we reviewed 
relevant federal requirements, in particular, federal Cost Accounting 
Standards. We also interviewed OFFM officials and M&O contractors to 
discuss whether and how these standards apply to laboratory M&O 
contractors and the steps taken to ensure that M&O contractor cost 
allocation models comply with applicable standards. In addition, we 
obtained specific information regarding OFFM's identification of key 
instances where the M&O contractors' cost allocation models did not 
comply with these standards, how they did not comply, and the general 
status of actions to correct any significant problems. To determine 
the extent to which NNSA ensures that laboratory M&O contractor's day-
to-day cost allocation practices conform to their disclosed cost 
allocation models, we interviewed OFFM, M&O contractor internal audit, 
and DOE Office of Inspector General (OIG) officials. As appropriate, 
we reviewed relevant past audits at each of the laboratories, the 
associated corrective actions taken and planned, and general plans for 
future audits. To understand the OIG's historical involvement in 
conducting independent audits of Cost Accounting Standards at NNSA 
laboratories, we reviewed relevant correspondence between NNSA and the 
OIG, and met with OIG officials to clarify their role in conducting 
past and future audits. 

To examine the extent to which NNSA ensures that laboratory M&O 
contractors' indirect costs are reasonable, we reviewed pertinent 
documents and interviewed NNSA officials and M&O contractors about 
steps taken to assess the reasonableness of indirect costs. We 
reviewed requirements relating ensuring the reasonableness of costs, 
including the Federal Acquisition Regulation, DOE's accounting 
handbook, and DOE orders. We reviewed the M&O laboratory contracts in 
place in fiscal year 2012 to identify requirements for managing costs, 
including indirect costs. We also identified any requirements in the 
contracts for benchmarking efforts and financial incentives, if any, 
to encourage cost management. We reviewed performance evaluations of 
the laboratory M&O contractors to identify any information related to 
the reasonableness of costs or the effectiveness of cost-savings 
initiatives. We also reviewed pertinent NNSA and contractor documents 
related to the review and approval of M&O contractor costs, including 
reasonableness. We reviewed pertinent studies performed by NNSA, M&O 
contractors, or outside consulting firms that were completed between 
2008 and 2013 related to assessing or addressing the reasonableness of 
laboratories' costs. We reviewed NNSA requirements linking M&O 
contract extensions to cost-savings initiatives to help ensure the 
reasonableness of costs, including the proposed combined contract for 
the Y-12 and Pantex sites. We met with officials from OFFM in 
Albuquerque and also visited Lawrence Livermore, Los Alamos, and 
Sandia National Laboratories to interview M&O contractors and NNSA 
field office officials on their efforts to ensure cost reasonableness 
at the laboratories, and to discuss any opportunities for improvement 
in this area. 

We conducted this performance audit from April 2012 to June 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our: 

findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Federal Cost Accounting Standards: 

Cost Accounting Standard: 401: Consistency in Estimating, 
Accumulating, and Reporting Costs; 
Description: The cost accounting practices used in accumulating and 
reporting of actual cost must be consistent with the practices used in 
estimating costs in pricing proposals. The purpose of the standard is 
to enhance the likelihood that comparable transactions are treated 
alike and to obtain improved reliability of estimates and comparisons 
with performance. 

Cost Accounting Standard: 402: Consistency in Allocating Cost Incurred 
for the Same Purpose; 
Description: The same type of cost must be consistently classified as 
direct or indirect with respect to all work performed. The purpose of 
this standard is to require that each type of cost is allocated only 
once and on only one basis to any contract or other cost objective in 
order to prevent overcharging of some contracts and to eliminate 
double counting. 

Cost Accounting Standard: 403: Allocation of Home Office Expenses to 
Segments; 
Description: Establishes the criteria for allocation of home office 
expenses to segments and minimizes the amount of such expenses 
classified as residual. 

Cost Accounting Standard: 404: Capitalization of Tangible Assets; 
Description: Facilitates the consistent measurement of costs based on 
a capitalization policy that adheres to the criteria of the standard. 

Cost Accounting Standard: 405: Accounting for Unallowable Costs; 
Description: The purpose of this standard is to facilitate the 
negotiation, audit, and settlement of unallowable costs. 

Cost Accounting Standard: 406: Cost Accounting Period; 
Description: Provides criteria for the periods to be used as cost 
accounting periods for contract estimating, accumulating, and 
reporting of cost. 

Cost Accounting Standard: 407: Use of Standard Costs for Direct 
Material and Direct Labor; 
Description: Provides criteria for using standard costs for 
estimating, accumulating, and reporting costs of direct material and 
direct labor. The standard also provides criteria regarding the 
establishment of standards, accumulation of standard costs, and 
disposition of variances from standard costs. 

Cost Accounting Standard: 408: Accounting for Costs of Compensated 
Personal Absences; 
Description: Provides criterion for assigning these compensated 
personal costs to the cost accounting period in which the related 
entitlement is earned. 

Cost Accounting Standard: 409: Depreciation of Tangible Capital Assets; 
Description: Provides criteria for assigning costs of tangible assets 
to cost accounting periods and for consistent allocation of those 
costs to cost objectives. 

Cost Accounting Standard: 410: Allocation of Business Unit General and 
Administrative Expense to Cost Objectives; 
Description: Provides criteria for the allocation of the cost of 
general and administrative expenses based on their beneficial or 
causal relationships. 

Cost Accounting Standard: 411: Accounting for Acquisition Costs of 
Material; 
Description: This standard requires the contractor to have written 
statements of accounting policies and practices for accumulating the 
costs of material and for allocating costs of material to cost 
objectives. 

Cost Accounting Standard: 412: Composition and Measurement of Pension 
Costs; 
Description: Establishes the components of pension costs and the bases 
for measuring such costs. It also provides criteria for determining 
the amount of pension costs to be assigned to cost accounting periods. 

Cost Accounting Standard: 413: Adjustment and Allocation of Pension 
Costs; 
Description: Provides for adjustment of pension cost for actuarial 
gains and losses, their assignment to cost accounting periods, and 
bases for allocation of pension costs to business segments. 

Cost Accounting Standard: 414: Cost of Money as an Element of the Cost 
of Facilities Capital; 
Description: Provides for the explicit recognition of the cost of 
money for facilities capital as an element of contract costs. 

Cost Accounting Standard: 415: Accounting for the Cost of Deferred 
Compensation; 
Description: Provides criteria for the measurement and assignment of 
deferred compensation costs to cost accounting periods. The cost of 
deferred compensation is to be assigned to the cost accounting period 
in which the contractor incurs an obligation to compensate the 
employee. 

Cost Accounting Standard: 416: Accounting for Insurance Costs; 
Description: Provides criteria for the measurement of insurance costs, 
the assignment of such costs to cost accounting periods, and their 
allocation to cost objectives. 

Cost Accounting Standard: 417: Cost of Money as an Element of the Cost 
of Capital Assets Under Construction; 
Description: Establishes criteria for the measurement of the cost of 
money attributable to capital assets under construction, fabrication, 
or development as an element of the cost of those assets. 

Cost Accounting Standard: 418: Allocation of Direct and Indirect Costs; 
Description: Provides for consistent determination of direct and 
indirect costs, provides criteria for the accumulation of indirect 
costs, including service center and overhead costs in indirect-cost 
pools, and provides guidance relating to the selection of allocation 
measures based on the beneficial or causal relationship between an 
indirect-cost pool and cost objectives. 

Cost Accounting Standard: 420: Accounting for Independent Research and 
Development Costs and Bid and Proposal Costs; 
Description: Provides criteria for the accumulation of independent 
research and development costs and bid and proposal costs. It also 
provides criteria for the allocation of such costs to cost objectives 
based on the beneficial or causal relationship between such costs and 
cost objectives. 

Sources: GAO analysis based on information provided by NNSA and the 
Department of Defense. 

Note: Cost Accounting Standard 419 was consolidated with Cost 
Accounting Standard 418 and therefore no longer exists. 

[End of table] 

[End of section] 

Appendix III: Comments from the National Nuclear Security 
Administration: 

Department of Energy: 
National Nuclear Security Administration: 
Washington, DC 20585: 

June 18, 2013: 

Mr. David Trimble: 
Director: 
Natural Resources and Environment: 
Government Accountability Office: 
Washington, DC 20458: 

Dear Mr. Trimble: 

Thank you for the opportunity to review the Government Accountability 
Office's (GAO) draft report titled "National Nuclear Security 
Administration: Laboratories' Indirect Cost Management Has Improved 
but Additional Opportunities Exist, GA0-13-534." I understand the GAO 
began this review in response to a request made by the Subcommittee on 
Energy and Water Development, Senate Committee on Appropriations, and 
was asked to examine: (1) whether laboratory Management and Operating 
(M&O) contractors' practices differ for allocating indirect costs and, 
if so, how; (2) the extent to which the National Nuclear Security 
Administration (NNSA) ensures that the laboratory M&O contactors' 
allocated indirect costs are accurate; and (3) the extent to which 
NNSA ensures that laboratory M&O contractors' indirect costs are 
reasonable. Based on their findings, the GAO provided three 
recommendations for executive action, focusing on clarifying planned 
usages for indirect cost data collected, formalizing risk assessment, 
and providing more specificity in contractor benchmarking requirements. 

NNSA agrees with the recommendations, and the enclosure to this letter 
provides our detailed response which identifies the milestones and 
timelines for addressing the GAO's findings. In addition, we have 
provided general and technical comments to enhance the clarity and 
factual accuracy of the report. If you have any questions regarding 
this response, please contact Dean Childs, Director, Office of Audit 
Coordination and Internal Affairs, at (301) 903-1341. 

Sincerely, 

Signed by: 

Cynthia A. Lersten: 
Associate Administrator For Management and Budget: 

Enclosure: 

Response to GAO Draft Report, GAO-13-534: 
"NATIONAL NUCLEAR SECURITY ADMINSTRATION: Laboratories' Indirect Cost
Management Has Improved but Additional Opportunities Exist" 

The Government Accountability Office (GAO) recommended the Secretary 
of Energy take - or, as appropriate, direct the Administrator of the 
National Nuclear Security Administration (NNSA) to take - the 
following actions: 

Recommendation 1: Clarify how data collected by the Institutional Cost 
Reporting initiative will be used. 

Management Response: Concur. 

The Department of Energy (DOE) Office of Chief Financial Officer will 
clarify the use of the Institutional Cost Report (ICR) which provides 
aggregated integrated contractor cost data in certain categories. 
After completing several integrated contractor peer reviews of the ICR 
report, we determined that the data are aggregated at such a high 
level that the report cannot be used to compare detailed contractor 
costs. The estimated completion date for this action is September 30, 
2013. 

Recommendation 2: Conduct formal, periodic risk assessments of 
Management and Operating Contractors' (M&O) compliance with Cost 
Accounting Standards (CAS) by using: (1) laboratory M&O contractor 
internal audit results: (2) Office of Inspector General (OIG) audit 
results; and (3) other relevant information obtained through ongoing 
monitoring and oversight to provide a well documented basis for its 
future monitoring and oversight, including determining the appropriate 
level of OIG audit assistance needed. 

Management Response: Concur. 

The NNSA Office of Field Financial Management (OFFM) will conduct 
formal, periodic risks assessments of M&O compliance with CAS. which 
will incorporate the following elements: (1) laboratory M&O contractor 
internal audit results: (2) OIG audit results; and (3) other relevant 
information obtained through ongoing monitoring and oversight. OFFM 
will include recommendations for OIG and internal audit assistance as 
part of the formal risk assessment process. The estimated completion 
date for this action is September 30, 2013. 

Recommendation 3: Incorporate more specific benchmarking requirements 
into future laboratory contracts, similar to the benchmarking 
requirements used by DOE to assess and manage pension and post 
retirement benefit costs, including which costs should be benchmarked, 
how frequently benchmarking should occur and what process should be 
used to ensure corrective action are taken as needed. 

Management Response: Concur in Principle. 

NNSA agrees in principle with the recommendation and will evaluate 
options in order to determine appropriate benchmarking requirements 
for inclusion in future Management and Operating contracts to include 
detailing which costs should be benchmarked, how frequently
benchmarking should occur and what process should be used to ensure 
corrective action are taken as needed. The estimated completion date 
for this activity is December 31, 2013. 

General Comment: 

GAO's report repeatedly references the flexibility afforded NNSA's 
eight Integrated Contractors by Cost Accounting Standards (as 
established by Public law 100-679), and states that changes in 
allocation methodologies make it difficult to compare program costs 
across laboratories or at an individual laboratory over time. It may 
be helpful if the report noted that under the Public Law, the Cost 
Accounting Standard Board - chaired by the Office of Management and 
Budget (OMB) - sets the definitions for Cost Accounting Standards 
(CAS) and that the Board intentionally affords flexibility for all 
government contractors for a variety of reasons. As written, the 
report leaves the false impression that NNSA is somehow required to 
create consistency, when current practices are intentionally designed 
for flexibility. 

GAO also quotes a senior official of the Cost Assessment and Program 
Evaluation (CAPE) organization as indicating that cost data collected 
by NNSA Integrated Contractors has shortcomings regarding support of 
decision making for programs, projects and activities including 
weapons life extension programs, facility construction projects, and 
facility operations. NNSA would recommend that the report emphasize 
that CAPE's assessments reflect concerns that CAPE has about the data 
to meet CAPE requirements. The current CAS standards are designed to 
meet the requirements of a variety of customers and users, not just a 
particular stakeholder. It is likely that other stakeholders would 
disagree with CAPE regarding what data are needed. 

While not explicitly stated, these repeated statements about 
"flexibility" and how the current data does not address CAPE-
identified requirements is misleading to the average reader who may 
not distinguish between the appropriateness of accounting practices 
and the separate issue of collecting data from accounting and other 
project management systems (for example, the Institutional Cost 
Reporting Initiative). Project management and cost estimation is done 
through a variety of project management tools - the institutional cost 
report does not, and should not, be driving overall NNSA project cost 
projections and project management. As presented, the report would 
give the impression that NNSA is somehow not "accounting" for costs 
appropriately, and it is factually incorrect to suggest that 
accounting practices that adhere to applicable law are somehow askew. 

NNSA agrees efforts to produce information which better supports 
decision making from existing data can be improved: however, we 
believe that the report does not currently clarify and balance 
discussion regarding the contractors' accounting practices. We 
therefore request that the GAO clearly state that NNSA accounting 
practices adhere to public law applicable to all government 
contractors. It should also be pointed out that the Department has an 
unqualified external audit opinion, supporting the fair and accurate 
presentation of its accounting data. 

Technical Comments: 

1. Page 13, 3rd bullet titled "Distribution--The last sentence of this 
bullet states "Because of these differences, indirect costs were 
spread across different program costs at Lawrence Livermore.' This 
statement is misleading. The use of a Value Added Base (VAB) does not 
result in indirect costs being spread over fewer program costs. With 
the use of a VAB, fully burdened labor costs appear to be higher than 
fully burdened material costs. Overall, the programs receive their 
proportional share of the General and Administrative (G&A) costs. 

Page 18, first bullet - This bullet currently states: 

* In March 2009, OFFM and NNSA site officials determined that the M&O 
contractor's indirect cost allocation model for Lawrence Livermore did 
not fully comply with Cost Accounting Standards. Specifically, the 
model did not require some programs, such as science and technology 
strategic planning and laboratory outreach programs, to contribute the 
standard cost allocation amounts for General and Administrative 
indirect costs at the laboratory. According to NNSA officials, the M&O 
contractor allowed this practice to occur because it believed that 
these programs did not equitably benefit from the activities covered 
by these indirect costs. OFFM officials disagreed, and the M&() 
contractor changed its cost allocation model in fiscal year 2013 to 
more equitably share these indirect costs across all programs. 

For clarity and accuracy, please restate the bullet as follows: 

* "In March 2009, OFFM and NNSA site officials determined that the M&O 
contractor's indirect cost allocation model for Lawrence Livermore did 
not fully comply with Cost Accounting Standards. Specifically, 
activities such as science and technology strategic planning and 
laboratory outreach were included in the Strategic Mission Support 
(SMS) pool. These costs were viewed by LLNL as broadly institutional 
in the same manner as G&A. According to NNSA officials, the M&O 
contractor allowed this practice to occur because it believed that 
these programs would be better monitored if they remained separate 
from G&A. OFFM officials disagreed, and the M&O contractor changed its 
cost allocation model in fiscal year 2013 to include these indirect 
costs in the G&A pool." 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David C. Trimble, (202) 512-3841 or trimbled@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Janet Frisch, Assistant 
Director; Paul Kinney; Mehrzad Nadji; Alison O'Neill; Christopher 
Pacheco; Sophia Payind; Cheryl Peterson; Steven Putansu; Kiki 
Theodoropoulos; Nick Weeks; and William Woods made key contributions 
to this report. 

[End of section] 

Footnotes: 

[1] Congress created NNSA as a semiautonomous agency within the 
Department of Energy in 1999 (Title 32 of the National Defense 
Authorization Act for Fiscal Year 2000, Pub. L. No. 106-65, § 3201 et 
seq.). 

[2] See appendix II for description of Cost Accounting Standards 
applicable to laboratory M&O contractors. 

[3] GAO, Department of Energy: Additional Opportunities Exist for 
Reducing Laboratory Contractors' Support Costs, [hyperlink, 
http://www.gao.gov/products/GAO-05-897] (Washington, D.C.: Sept. 9, 
2005). 

[4] GAO, Nuclear Weapons: Actions Needed to Identify Total Costs of 
Weapons Complex Infrastructure and Research and Production 
Capabilities, [hyperlink, http://www.gao.gov/products/GAO-10-582] 
(Washington, D.C.: June 21, 2010). 

[5] GAO, Department of Energy: Additional Opportunities Exist to 
Streamline Support Functions at NNSA and Office of Science Sites, 
[hyperlink, http://www.gao.gov/products/GAO-12-255] (Washington, D.C.: 
Jan. 31, 2012). 

[6] GAO, High-Risk Series: An Update, [hyperlink, 
http://www.gao.gov/products/GAO-13-283] (Washington, D.C.: Feb. 14, 
2013). 

[7] Pub. L. No. 112-239, 126 Stat. 1632 (2013). 

[8] The Nuclear Weapons Council coordinates activities jointly managed 
by DOD and DOE to support the nuclear stockpile. 

[9] Los Alamos National Security, LLC, is an organization managed by 
the University of California; Bechtel National, Inc.; The Babcock & 
Wilcox Company; and URS Corporation. 

[10] Lawrence Livermore National Security, LLC, is an organization 
managed by Bechtel National, University of California, Babcock and 
Wilcox, Washington Division of URS Corporation, and Battelle. 

[11] NNSA relies on the combined efforts of the DOE OIG, OFFM, M&O 
contractor internal audit management, and others, as outlined in the 
Cooperative Audit Strategy published in 1992, as well as other audit 
and assessment processes, to monitor indirect and direct costs on an 
ongoing basis. 

[12] [hyperlink, http://www.gao.gov/products/GAO-05-897] and 
[hyperlink, http://www.gao.gov/products/GAO-12-255]. 

[13] [hyperlink, http://www.gao.gov/products/GAO-05-897]. 

[14] [hyperlink, http://www.gao.gov/products/GAO-12-255]. 

[15] [hyperlink, http://www.gao.gov/products/GAO-05-897]. 

[16] [hyperlink, http://www.gao.gov/products/GAO-12-255]. 

[17] These internal audits are conducted by the M&O contractors' 
internal audit group or at times performed by external audit firms 
under contract with the M&O contractor. 

[18] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[19] The OIG also contracted with an audit firm to perform audits of 
compliance with Cost Accounting Standards at the Savannah River Site. 
An audit report is still in the process of being developed. 

[20] Federal Acquisition Regulation, 48 C.F.R. § 31.201-3. 

[21] Hackett Group, Achieving World Class Performance: Finance and HR 
Benchmark Results Executive Briefing, March 2009. Grant Thornton, 
Department of Energy National Nuclear Security Administration 
Enterprise Optimization Consulting Services Initial Assessment, March 
16, 2009. Aon Consulting, National Nuclear Security Administration 
Acquisition Strategy Team (AST); Part I: Analysis of Retirement Income 
Benefit Issues by Acquisition Option, and Part II: Analysis of Health 
Care Benefit Issues by Acquisition Option, March 19, 2009. 

[22] DOE Order 350.1, Chg 3, Contractor Human Resource Management 
Programs 

[23] [hyperlink, http://www.gao.gov/products/GAO-12-255]. 

[24] [hyperlink, http://www.gao.gov/products/GAO-12-255]. 

[25] The Y-12 National Security Complex in Oak Ridge, Tennessee, 
manufactures components for nuclear weapons, including uranium 
components, evaluates, tests, assembles, and disassembles these 
components; supplies highly enriched uranium for use in naval 
reactors. The Pantex Plant in Amarillo, Texas, evaluates, repairs, and 
dismantles nuclear weapons; conducts high explosive research and 
development. 

[26] GAO, Modernizing The Nuclear Security Enterprise: The National 
Nuclear Security Administration's Proposed Acquisition Strategy Needs 
Further Clarification and Assessment, [hyperlink, 
http://www.gao.gov/products/GAO-11-848] (Washington, D.C.: Sept. 20, 
2012). 

[27] Nuclear Production Partners, LLC, and Integrated Nuclear 
Production Solutions, LLC., B-407948, April 29, 2013. 

[End of section] 

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