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Washington, DC 20548: July 12, 2013: Congressional Committees: Nuclear Weapons: Factors Leading to Cost Increases with the Uranium Processing Facility: The Y-12 National Security Complex in Oak Ridge, Tennessee, is the National Nuclear Security Administration's (NNSA) site for conducting enriched uranium activities, producing uranium-related components for nuclear warheads and bombs, and processing nuclear fuel for the U.S. Navy.[Footnote 1] According to NNSA, the Y-12 plant's current enriched uranium operations (1) have an inefficient workflow due to the patchwork of facilities and equipment, (2) experience continually rising operations and maintenance costs and frequent outages and work interruptions due to facility age and deterioration, and (3) involve processes that could expose workers to radiological contamination, among other things. To address these issues, in 2004, NNSA decided to construct the Uranium Processing Facility (UPF).[Footnote 2] According to NNSA, the UPF will: * consist of a single, consolidated uranium processing and component production facility less than half the size of the existing Y-12 plant facilities; * reduce the costs of enriched uranium processing by using modern processing equipment and consolidated operations; and: * use new technologies and other features that provide better worker protection and environmental health and safety. The UPF is to be built adjacent to the Highly Enriched Uranium Materials Facility (HEUMF)--the nation's central repository for such material--and the facilities are to be joined.[Footnote 3] We reported in November 2010 that UPF had experienced significant cost increases. [Footnote 4] More recently, the upper bound of the UPF's cost range has increased from approximately $1.1 billion in 2004 to $6.5 billion in 2012. At the request of the Senate Appropriations Committee, Subcommittee on Energy and Water Development, and in accordance with the requirements contained in the National Defense Authorization Act for Fiscal Year 2013, GAO is to report quarterly on the UPF.[Footnote 5] Our objective for this first quarterly report was to identify factors that contributed to UPF's cost increase.[Footnote 6] During April 2013, we provided your staff with our preliminary observations on the reasons leading to UPF's cost increases. The attached briefing slides include the information provided (see enclosure I), and this report formally transmits this information to you. To conduct our work, we reviewed pertinent cost estimate documents prepared by NNSA; the UPF contractor; and the U.S. Army Corps of Engineers (Corps). We visited the Y-12 plant to receive briefings, tour the current enriched uranium facilities, and interview NNSA and contractor officials; we also interviewed NNSA headquarters officials and officials from the Corps. The Corps conducted an independent cost estimate of the UPF in 2011. We conducted this performance audit from January 2013 to July 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. In summary, we found the following: * Overly optimistic NNSA assumptions about the UPF contained in multiple cost estimates prepared from 2004 to 2011 are the primary factors that contributed to its cost increase.[Footnote 7] Initial UPF cost estimates in 2004 and 2007 were largely based on the estimated cost to construct HEUMF because the facilities were assumed to be similar in form and design. However, NNSA designed the HEUMF as a storage facility for highly enriched uranium, in contrast to the more complex assembly/disassembly, processing, and machining operations that are to be housed in UPF. In addition, revised UPF cost estimates in 2010 and 2011 assumed that annual appropriations would not be subject to budget constraints. None of these assumptions proved to be accurate. * In June 2012, the Deputy Secretary of Energy approved an updated cost range for the UPF ($4.2 to $6.5 billion) and deferred significant portions of the original scope. According to NNSA documentation, this deferral was due, in part, to the UPF's increased cost estimate and to accelerate the completion of portions of the scope that were of highest priority. * In August 2012, the UPF contractor concluded that the UPF's roof would have to be raised 13 feet and that the start of construction would be further delayed. These factors resulted in approximately $540 million in additional costs to the UPF and occurred because the contractor did not adequately manage and integrate the design work subcontracted to the four other contractors. Given these additional costs, the confidence in the cost estimate range approved in June 2012 has been reduced, and it is not clear if the cost estimate range remains valid. For additional information on the results of our work, please see the briefing slides provided in enclosure I. While we are currently not making any recommendations for congressional consideration or agency action, we will continue to review UPF as required by the National Defense Authorization Act for Fiscal Year 2013. In addition, we have ongoing audits on NNSA major projects and cost-estimating practices and will make recommendations, if appropriate, based on these future reviews. We provided a draft of this report to NNSA for review and comment. In written comments (see enclosure II), NNSA's Associate Administrator for Management and Budget stated that, while our presentation was generally accurate with respect to the history of the UPF cost estimates, the agency believes the presentation does not reflect the efforts taken to improve UPF cost estimating and project execution. In its comments, NNSA provided several examples of completed and ongoing corrective actions, such as making significant organizational changes; applying dedicated resources to improve the evaluation of the UPF's cost estimate; and articulating expectations to its contractor partners and using the contract to hold the UPF contractor team accountable for deficient work, which the agency believes will improve UPF project management. Furthermore, in its comments, the Associate Administrator for Management and Budget stated that NNSA had corrected the contractor's cost estimating optimism bias and improved its risk management processes and are updating assessments of cost and impact as the UPF project design continues to mature. NNSA's comments stated that with these corrective actions in place, the agency believes that the cost baseline established at the next key project milestone will represent a credible basis for completing the project within the established cost. Evaluating the effectiveness of UPF-related corrective actions was beyond the scope of this work. We are encouraged by NNSA's stated efforts to improve its cost estimating and project management capabilities. It is possible that some of NNSA's stated actions, such as correcting the contractor's cost estimating optimism bias, could result in a more accurate cost estimate. However, there remains some uncertainty regarding UPF's cost estimate. As noted in our briefing slides, NNSA did not update the June 2012 range estimate to fully reflect the $540 million in additional costs associated with the need to raise UPF's roof 13 feet to ensure the processing equipment would fit into the facility (i.e., the space/fit issue). NNSA plans to complete its review and approval of a new official cost estimate during the next key project milestone in June 2014--approximately 2 years after NNSA learned of the space/fit issue. As our briefing slides also discuss, several identified project risks remain and will require mitigation if they occur. Until the estimate is updated in June 2014, it is unclear how the agency's stated corrective actions, the $540 million in additional costs, and the remaining project risks will impact the new cost estimate. We are sending copies of this report to the Secretary of Energy, Administrator of NNSA, and the appropriate congressional committees. This report is also available at no charge on the GAO website at [hyperlink, http://www.gao.gov]. If you or your staff members have any questions concerning 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 key contributions to this report were Jonathan Gill (Assistant Director), Patrick Bernard, Will Horton, Jason Lee, Timothy Persons, Cheryl Peterson, and Karen Richey. Signed by: David C. Trimble: Director, Natural Resources and Environment: Enclosures--2: List of Committees: The Honorable Carl Levin: Chairman: The Honorable James M. Inhofe: Ranking Member: Committee on Armed Services: United States Senate: The Honorable Dianne Feinstein: Chairman: The Honorable Lamar Alexander: Ranking Member: Subcommittee on Energy and Water Development: Committee on Appropriations: United States Senate: The Honorable Howard P. "Buck" McKeon: Chairman: The Honorable Adam Smith: Ranking Member: Committee on Armed Services: House of Representatives: The Honorable Rodney P. Frelinghuysen: Chairman: The Honorable Marcy Kaptur: Ranking Member: Subcommittee on Energy and Water Development: Committee on Appropriations: House of Representatives: [End of section] Enclosure I: Briefing on the Uranium Processing Facility: Factors Leading to Cost Increases: For Congressional Committees: April 2013: Introduction: The Y-12 National Security Complex in Oak Ridge, Tennessee, is the National Nuclear Security Administration's (NNSA) site for conducting enriched uranium activities, producing uranium-related components for nuclear warheads and bombs, and processing nuclear fuel for the Navy. NNSA is a separately organized agency within the Department of Energy (DOE). The site has received periodic upgrades, but NNSA officials said that support utilities, equipment, and buildings need to be modernized for the Y-12 plant to continue to meet its mission. According to NNSA, the Y-12 plant's current enriched uranium operations: * have an inefficient workflow due to the patchwork of facilities and equipment; * require materials to be transported between multiple buildings during processing; * experience continually rising operations and maintenance costs and frequent outages and work interruptions due to facility age and deterioration; * do not meet a number of current regulatory and design standards, including those for protection against fire and natural occurrences, such as earthquakes or tornadoes; * involve processes that could expose workers to radiological contamination or other dangers; and; * require a significant number of security personnel to patrol a 154- acre protected area. In 2004, NNSA decided to construct the Uranium Processing Facility (UPF).[Footnote 1] According to NNSA, the UPF will: * consist of a single consolidated uranium processing and component production facility less than half the size of the existing Y-12 plant facilities; * reduce the costs of enriched uranium processing by using modern processing equipment and consolidated operations; and; * use new technologies and other features that provide better worker protection and environmental health and safety. The UPF is to be built adjacent to the Highly Enriched Uranium Materials Facility (HEUMF)--the nation's central repository for such materials-- and the facilities will be joined. Constructed from 2004 to 2009, HEUMF is responsible for the receipt, shipment, and interim and long- term storage of current and projected inventories of highly enriched uranium. The upper bound of the UPF's cost range has increased from approximately $1.1 billion in 2004 to $6.5 billion in 2012. Objectives, Scope and Methodology: At the request of the Senate Appropriations Committee, Subcommittee on Energy and Water Development, and in accordance with the requirements contained in the National Defense Authorization Act for Fiscal Year 2013, GAO is to report quarterly on the UPF. Our objective for this first briefing was to identify factors that contributed to UPF's cost increase. Subsequent briefings will focus on technology readiness and risk management, among other things. To do this work we: * reviewed pertinent cost estimate documents prepared by NNSA, the UPF contractor, and the U.S. Army Corps of Engineers (Corps); * visited the Y-12 plant to receive briefings and tour the current enriched uranium facilities; * interviewed: - NNSA headquarters officials; - NNSA and contractor officials at the Y-12 plant; and; - officials from the Corps, which conducted an independent cost estimate (ICE) of the UPF in 2011. NNSA reviewed a draft version of this presentation for factual accuracy. NNSA provided technical clarifications, which we incorporated as appropriate. Scope and Methodology: We conducted this performance audit from January 2013 to April 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. Results in Brief: Overly optimistic assumptions contained in multiple cost estimates prepared between 2004 and 2011 are the primary factors that contributed to UPF's cost increase. Specifically: * initial UPF cost estimates were largely based on inaccurate cost estimates for HEUMF, and; * revised UPF cost estimates assumed that annual appropriations would not be subject to budget constraints. In June 2012, the Deputy Secretary of Energy approved an updated cost range and deferred significant portions of the original scope. According to NNSA documentation, this deferral was due, in part, to the project's increased cost estimate and to accelerate the completion of the highest priority scope. In August 2012, the contractor concluded that UPF's roof would have to be raised 13 feet, and the start of construction would be delayed, among other things. These factors resulted in approximately $540 million in additional costs and occurred because the contractor did not adequately manage and integrate the design work subcontracted to four other contractors. Given these additional costs, it is unclear if the cost estimate range approved in June 2012 remains valid. Background: In 1990, GAO designated DOE program management as a high-risk area vulnerable to fraud, waste, abuse, and mismanagement. GAO's most recent high-risk list narrowed this focus to NNSA and DOE's Office of Environmental Management major projects (i.e., projects over $750 million). DOE has taken steps to address GAO's concerns, including developing an order that defines DOE's project management principles and process: Order 413.38, Program and Project Management for the Acquisition of Capital Assets. NNSA is required to manage the UPF project in accordance with this order. DOE's order defines a project management process consisting of a series of management reviews and approvals, called "critical decisions" (CD), that are required to move a project forward from project planning and design to implementation. * CD 0: Approve mission need and a rough order of magnitude cost range. * CD 1: Approve an approach and preliminary cost range. * CD 2: Approve the performance baseline-defined as a project's cost, schedule, and scope--and develop a definitive cost estimate. * CD 3: Approve the start of construction. * CD 4: Approve the start of operations. According to our cost-estimating guide, high-quality cost estimates are: (1) well-documented, (2) comprehensive, (3) credible, and (4) accurate.[Footnote 2] At CD 0 and CD 1, a cost estimate may be presented as a range. The estimate range (lower and upper bounds) is established by considering a risk analysis conducted by the project team. The upper bound of the cost range represents a scenario where there is a high likelihood of occurrence of the identified risks. At CD 2, a cost estimate is usually provided as a single point that is risk adjusted and captures the total cost to acquire the capital asset. In general, a cost estimate (range or point) includes: * the price and amount of resources (e.g., labor, commodities, etc.) needed to accomplish a scope of work, stated in constant dollars; * contractor controlled management reserve (i.e., "known unknowns"); * escalation costs that account for the effects of inflation between the time the estimate is prepared and when a given scope of work is to be performed; * contingency funds held at or above the government program office for items that are outside of the contractor's control (i.e., "unknown unknowns"); * confidence levels that determine the likelihood that a project can be completed at a specific cost. The greater the confidence level, the greater the amount of contingency is needed because the tendency is for costs to overrun rather than underrun. In January 2010, we reported on DOE's project cost-estimating function.[Footnote 3] We found that DOE did not have a cost-estimating policy and that the cost-estimating guide it developed in the 1990s was out of date and did not include important components. For example, the guide assigned responsibilities to offices that no longer existed and was based on policies that had been canceled. We have ongoing work on cost estimating at DOE. In November 2010, DOE took steps to enhance project oversight by requiring an ICE for projects with values over $100 million. As shown in table 1, the UPF's estimated cost has increased, its completion date has been delayed, and substantial portions of its original scope have been deferred. Table: UPF's Cost, Schedule, Scope, and Key Assumptions Over Time: Date/critical decisions: 2004/CD 0; Cost range: $600 million to $1.1 billion (2004 constant dollars); Proposed start of construction: 2008; Proposed start of operations: 2012; Scope: Consolidates all uranium operations; Key cost assumptions: Proposed costs to construct HEUMF could be used as basis for UPF estimate. Date/critical decisions: 2007/CD 1; Cost range: $14 to $3.5 billion (escalated dollars)[A]; Proposed start of construction: 2011; Proposed start of operations: 2018; Scope: Consolidates all uranium operations; Key cost assumptions: Proposed costs to construct HEUMF could be used as basis for UPF estimate. Date/critical decisions: 2010/NNSA directed the contractor to update the CD 1 cost estimate; Cost range: $4.2 to $6.5 billion (escalated dollars)[A]; Proposed start of construction: 2011; Proposed start of operations: 2022; Scope: Consolidates all uranium operations; Key cost assumptions: Annual appropriations would not be subject to budgetary constraints. Date/critical decisions: 2011/Army Corps of Engineers independent cost estimate; Cost range: $6.5 to $7.5 billion (escalated dollars)[A]; Proposed start of construction: 2011; Proposed start of operations: 2023; Scope: Consolidates all uranium operations; Key cost assumptions: Annual appropriations would not be subject to budgetary constraints. Date/critical decisions: 2012/CD 1 reaffirmation, which is required by Order 413.3B if original CD 1 cost range increases by more than 50 percent; Cost range: $4.2 to $6.5 billion (escalated dollars)[A]; Proposed start of construction: 2012; Proposed start of operations: 2023; Scope: Does not consolidate all uranium operations[B]; Key cost assumptions: Scope reduced to building exterior, all support systems, and Building 9212 capabilities, which include uranium purification and casting. All other capabilities deferred. [A] Escalated dollars account for the effects of inflation between the time the estimate is prepared and when a given scope of work is to be performed. [B] Scope does not include capabilities of Building 9204-2E (assembly and dismantlement, among other things), Building 9215 (machining), and Building 9998 (product certification). Sources: GAO analysis of NNSA and Corps data. [End of table] NNSA owns the buildings, equipment, and the components produced at the Y-12 plant, but the site is operated under contract to NNSA by Babcock & Wilcox Technical Services Y-12, LLC (B&W), a partnership of the Babcock & Wilcox Company and Bechtel Corporation. B&W is also the contractor managing the UPF design. B&W has subcontracted portions of the design work to four other contractors. The UPF Federal Project Director is the federal official with primary responsibility for management of the project and oversight of B&W. Figure: Proposed UPF design in 2004: [Refer to PDF for image: drawing] Shows the planned UPF (labeled by its name at the time: EUMF, or the Enriched Uranium Materials Facility) and the HEUMF in 2004. An underground tunnel would connect the two facilities. Source: NNSA. [End of figure] Figure: Proposed UPF design in 2010: [Refer to PDF for image: drawing] Shows the planned UPF in 2010, which would be linked to HEUMF by an above-ground connector. Source: NNSA. [End of figure] Factors That Contributed to UPF's Cost Increase: 2004 and 2007 Cost Estimates Were Largely Based on Inaccurate Cost Estimates for HEUMF: According to federal officials, prior to developing the 2004 UPF cost estimate, NNSA directed B&W to use the estimated cost to construct HEUMF as the basis for the UPF estimate because the facilities were to be similar in form and design. However, HEUMF provided an inaccurate cost basis because: * HEUMF's estimated cost increased substantially. According to NNSA officials, the reasons for the increase included changes to security policy and the need to meet rigorous nuclear facility construction quality requirements. * HEUMF is less complex than UPF. HEUMF was designed as a storage facility for highly enriched uranium, in contrast to the more complex assembly/disassembly, processing, and machining operations that are to be housed in UPF. The 2004 UPF cost estimate when the project was at CD 0 ($600 million to $1.1 billion in 2004 constant year dollars) used the 2004 HEUMF cost estimate to obtain a cost per square foot, and then increased that by 25 percent to account for UPF's larger number of floors and mezzanines. [Footnote 4] However, this assumption was overly optimistic because HEUMF's 2004 cost estimate was $321 million, but the facility's actual final cost was $527 million, a 64 percent increase. According to a senior NNSA project official, the agency did not fully account for UPF's complexity (as compared to HEUMF) in its 2004 cost estimate. For example, this official said that the utilities needed to support UPF's production mission are more numerous and provide a much larger amount of electricity than the utilities needed to support HEUMF's storage mission. The 2007 UPF cost estimate when the project was at CD 1 ($1.4 to $3.5 billion): * updated the 2004 estimate to reflect increased labor prices, among other things; * included $1.1 billion in contingency funds to address risks that were not under the control of the project, such as material and commodity cost growth, and the key NNSA document supporting this decision cited project execution difficulties experienced by the HEUMF; * did not fully meet all four characteristics of a high-quality cost estimate. We reported in 2010 that the estimate was partially well- documented, partially comprehensive, somewhat credible, and somewhat accurate.[Footnote 5] Factors That Contributed to UPF's Cost Increase: UPF's 2010 and 2011 Cost Estimates Assumed Annual Appropriations Would Not Be Subject to Budget Constraints: In 2010, B&W updated the 2007 CD 1 cost estimate. NNSA directed the update to develop a resource-loaded project schedule, among other things. The 2010 cost estimate ($4.2 to $6.5 billion): Assumed a funding profile, where annual appropriations: * were not subject to budgetary constraints; * could change significantly year-to-year as the UPF moved between phases (e.g., design work, site preparation, construction, facility start-up testing). NNSA officials told us that, historically, DOE construction projects have not been funded in this manner. Showed increased methodological rigor over the 2004 and 2007 cost estimates as B&W followed an engineering build-up or "bottoms-up" estimate. * This method builds the overall cost estimate by summing detailed estimates done at lower work levels while employing industrial engineering principles. * For example, B&W representatives told us that they developed the overall cost estimate by combining detailed estimates for the over 200 engineering systems (e.g., heating, ventilation, and air conditioning as well as equipment instrumentation and controls) needed in the UPF. From July 2010 to August 2011, the Corps conducted an ICE to assist the UPF federal management team determine the reasonableness of B&W's 2010 cost estimate. The ICE assumed, like the B&W estimate, that annual appropriations would not be subject to budgetary constraints. While the Corps was conducting its work, NNSA issued guidance in February 2011 that limited UPF funding to between $200 million and $500 million annually. In documentation explaining the funding limits, NNSA stated that the planned construction of UPF and the Chemistry and Metallurgy Research Replacement (CMRR) project at Los Alamos would be done so as "to not redirect funding from the core mission of managing the stockpile and sustaining the science, technology, and engineering capabilities of the nuclear security enterprise." In 2011, the Corps provided cost estimates and the start of operations dates for both funding scenarios: * Annual appropriations not subject to budget constraints: - $6.5 to $7.5 billion and facility begins operations in FY 2023. - Over $900 million required annually for 4 consecutive fiscal years. * Annual appropriations subject to budget constraints contained in NNSA's February 2011 guidance: - $10.3 to $11.6 billion and facility begins operations in FY 2035. - Appropriations limited to between $200 and $500 million annually. Officials told us that the longer schedule significantly increased the costs for level-of-effort activities (e.g., program management and systems engineering), which are needed throughout the project's duration. UPF's 2010 and 2011 Cost Estimates Assumed Annual Appropriations Would Not Be Subject to Budget Constraints, but NNSA Later Limited Funding: Figure: UPF cost and schedule under different funding profiles: [Refer to PDF for image: multiple line graph] Total cost range with funding profile not subject to budget constraints: $6.5-$7.5 billion. Total cost range with limited funding profile: $10.3-$11.6 billion. Fiscal year: 2013; 2011 Corps ICE optimal funding profile: $720.2 million; Corps analysis of limited funding profile: $190 million. Fiscal year: 2014; 2011 Corps ICE optimal funding profile: $826.6 million; Corps analysis of limited funding profile: $350 million. Fiscal year: 2015; 2011 Corps ICE optimal funding profile: $972.6 million; Corps analysis of limited funding profile: $350 million. Fiscal year: 2016; 2011 Corps ICE optimal funding profile: $1.053 billion; Corps analysis of limited funding profile: $350 million. Fiscal year: 2017; 2011 Corps ICE optimal funding profile: $1.070 billion; Corps analysis of limited funding profile: $500 million. Fiscal year: 2018; 2011 Corps ICE optimal funding profile: $927.7 million; Corps analysis of limited funding profile: $500 million. Fiscal year: 2019; 2011 Corps ICE optimal funding profile: $242.4 million; Corps analysis of limited funding profile: $500 million. Fiscal year: 2020; 2011 Corps ICE optimal funding profile: $113.1 million; Corps analysis of limited funding profile: $500 million. Fiscal year: 2021; 2011 Corps ICE optimal funding profile: $55.3 million; Corps analysis of limited funding profile: $500 million. Fiscal year: 2022; 2011 Corps ICE optimal funding profile: $23.1 million; Corps analysis of limited funding profile: $500 million. Fiscal year: 2023; 2011 Corps ICE optimal funding profile: $60 million; Corps analysis of limited funding profile: $500 million. Fiscal year: 2024; Corps analysis of limited funding profile: $500 million. Fiscal year: 2025; Corps analysis of limited funding profile: $500 million. Fiscal year: 2026; Corps analysis of limited funding profile: $500 million. Fiscal year: 2027; Corps analysis of limited funding profile: $500 million. Fiscal year: 2028; Corps analysis of limited funding profile: $500 million. Fiscal year: 2029; Corps analysis of limited funding profile: $500 million. Fiscal year: 2030; Corps analysis of limited funding profile: $500 million. Fiscal year: 2031; Corps analysis of limited funding profile: $500 million. Fiscal year: 2032; Corps analysis of limited funding profile: $500 million. Fiscal year: 2033; Corps analysis of limited funding profile: $500 million. Fiscal year: 2034; Corps analysis of limited funding profile: $75 million. Fiscal year: 2035; Corps analysis of limited funding profile: $100 million. Source: GAO analysis of Corps data. [End of figure] UPF's Current Cost Estimate Does Not Include Significant Portions of Original Scope: In February 2012, NNSA deferred portions of the UPF's scope that was included in all prior cost estimates and slightly increased the project's funding profile.[Footnote 6] In explaining this decision, NNSA documentation stated that: * the cost range contained in the Corps ICE challenged NNSA's ability to complete the entire original scope for less than $6.5 billion (i.e., the upper limits of the cost range presented by B&W in 2010), and; * scope is being deferred in order to accelerate the transition of Building 9212 capabilities into UPF. Building 9212 was constructed in the1940s and is the highest priority scope. According to the UPF Federal Project Director, Building 9212 capabilities will compose approximately 70 percent of UPF's processing equipment. In June 2012 and during the CD 1 reaffirmation process, which is required by DOE Order 413.3B when a cost estimate increases by more than 50 percent, the Deputy Secretary of Energy approved this reduced- scope UPF at a cost range of $4.2 to $6.5 billion. * The UPF had a point estimate of $5.2 billion as well as $1.2 billion in NNSA contingency. * According to NNSA officials, these amounts were developed to meet the NNSA policy requirement that cost estimates be developed at the 85 percent confidence level. NNSA Determined That the UPF Would Need to Be Enlarged, Resulting in Additional Costs: In August 2012, B&W concluded that UPF's roof would have to be raised 13 feet to ensure, among other things, the processing equipment would fit into the facility. NNSA officials told us that this problem arose because B&W did not adequately manage and integrate the design work subcontracted to four other contractors. Based on this issue, NNSA rated B&W's FY 2012 UPF performance as "unsatisfactory." Agency officials told us that B&W did not earn any award fee for its UPF work in FY 2012. NNSA documents state that addressing this space/fit issue will require substantial design rework, cost an additional $540 million, delay the start of construction, and delay the start of facility operations by 13 months. Earlier analyses identified this issue as a potential project risk, but it was not considered to be one of the project's most significant risks, according to NNSA officials, as its impact to the UPF's cost was estimated to be approximately $80 million. In October 2012, NNSA updated the June 2012 point estimate from approximately $5.2 billion to $5.8 billion to reflect the additional costs associated with the space/fit issue. These costs were paid out of NNSA contingency. NNSA officials said that they did not update the June 2012 range estimate ($4.2 to $6.5 billion) because, among other reasons, the project's estimate will undergo a complete review to establish the cost baseline at CD 2. B&W representatives said that they are planning to submit CD 2 materials to NNSA in September 2013 and expect to receive approval by June 2014. It is unclear if the project's current cost range of $4.2 to $6.5 billion remains valid because: * NNSA's current point estimate is $6.0 billion as design costs for certain processing equipment has increased; * the space/fit issue required approximately 45 percent of NNSA's contingency to address; NNSA's contingency planning did not account for such a large sum of money being needed to address this risk; and; * several identified project risks, including all risks related to construction activities, remain and would require mitigation if they were to occur. It is possible that additional funds will be needed to ensure there is sufficient contingency to complete the UPF within a cost range that meets NNSA's 85 percent confidence level. As part of the CD 2 process, NNSA plans to establish a firm cost baseline by June 2014. Next Steps: UPF Cost Estimate: As stated earlier, 8&W representatives said that they are planning to submit required CD 2 materials to NNSA in September 2013 and expect to receive approval by June 2014. DOE Order 413.38 requires an ICE at CD 2. GAO could assess, under this mandate or in a separate request, the extent to which UPF's CD 2 cost estimate meets the best practices established in our cost guide. Briefing slides footnotes: [1] Per Section 3123 of the National Defense Authorization Act for FY 2013, the UPF project is now known as the Uranium Capabilities Replacement Project. NNSA uses the new nomenclature in its FY 2014 budget request. [2] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs, [hyperlink, http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009). [3] GAO, Department of Energy: Actions Needed to Develop High-Quality Cost Estimates for Construction and Environmental Cleanup Projects [hyperlink, http://www.gao.gov/products/GAO-10-199] (Washington, D.C., Jan. 14, 2010). [4] If the estimate is presented in escalated dollars, B&W officials said that the upper bound of the cost estimate would be $1.3 billion. [5] [hyperlink, http://www.gao.gov/products/GAO-10-199]. [6] NNSA has continued to increase the project's planned funding profile. According to NNSA's FY 2014 budget request for UPF, the agency plans to request an average of approximately$531 million for FY 2014 through FY 2018 with the maximum request being $640 million in FY 2018. [End of Enclosure I] Enclosure II: Comment from the National Nuclear Security Administration: Department of Energy: National Nuclear Security Administration: Washington, DC 20585: June 27, 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) congressional briefing slides titled "Briefing on the Uranium Processing Facility (UPF) — Factors Leading to Cost Increases" (GAO-13-686R). I understand the GAO is required to report quarterly on the UPF in response to a request made by the Senate Appropriations Committee, Subcommittee on Energy and Water Development, and in accordance with the requirements contained in the National Defense Authorization Act for Fiscal Year 2013. The briefing slides reflect the briefing as provided to the committees in April 2013. While the GAO briefing is generally accurate with respect to the history of the UPF cost estimates, the National Nuclear Security Administration (NNSA) believes the briefing does not reflect the efforts taken to improve estimating and project execution on the UPF project. NNSA has made the commitment to ensure that the UPF cost baseline to be approved at Critical Decision (CD-2) reflects a credible, accurate and defensible basis to allow for accountability during the execution of the project's final design and construction activities. NNSA has made significant organizational changes and has applied dedicated resources to improve the evaluation of the project estimate prior to establishing the UPF baseline. The enclosure to this document highlights specific actions NNSA has taken to strengthen project management at UPF and for all of its projects. With these corrective actions in place, we are confident that the UPF baseline to be established at CD-2 will represent a credible basis for successful completion of the project within the established cost and schedule. 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 Briefing Slides (GAO-13-686-R): "Briefing on the Uranium Processing Facility — Factors Leading to Cost Increases" General Comments: While the Government Accountability Office (GAO) briefing on factors leading to the cost increases on the Uranium Processing Facility (UPF) is generally accurate with respect to the history of the UPF cost estimates, NNSA believes the briefing does not reflect the efforts taken to improve estimating and project execution on the UPF project. NNSA has made the commitment to ensure that the UPF cost baseline to be approved at Critical Decision (CD-2) reflects a credible, accurate and defensible basis to allow for accountability during the execution of the project final design and construction activities. NNSA has made significant organizational changes and has applied dedicated resources to improve the evaluation of the project estimate prior to establishing the UPF baseline. In February 2013, GAO changed their High Risk List for the NNSA to include only our major systems projects which have a total project cost of $750 Million or greater. This shift is a direct result of our improved performance on delivering the smaller projects in our portfolio. Building on improvements in front end planning, estimating, and oversight, 100% of NNSA's projects completed in calendar years 2010 through 2012 that were base-lined after 2006 met the Department's success metric of completing within 10% of the original budget, and 87% were completed at or under the original budget. As a part of NNSA's organizational realignment, our Federal Project Director (FPD) assigned to UPF directly reports to the Associate Administrator for Acquisition and Project Management. Additionally, NNSA has committed to providing the necessary staffing to support the FPD, and in those cases where personnel with requisite experience and certifications levels are not available, NNSA is augmenting the FPD's staff with personnel from the US Army Corps of Engineers and from the Enterprise Construction Management Services support contractor. We have also adopted the peer review process used so successfully by the Office of Science, in providing critical independent assessments of our work throughout the project life cycle. Our FPDs assigned to UPF and other capital projects are also certified Contracting Officer Representatives which ensures they have a sound understanding of the Federal Acquisition Regulations and have a broad knowledge base with which to communicate contract performance expectations. Our FPDs work together with our contracting officers to ensure our contractors deliver on the expectations identified in our contracts and work authorizations. NNSA's contractor partners are the largest and most successful design and construction companies in the world. We have selected them to work on our projects because of their reputations in delivering complex state of the art facilities on time and on budget. By more clearly defining our expectations, strengthening our contract deliverables and incentives, and appropriately sharing risk and accountability, we are seeing more focused leadership attention from the parent companies of our Management and Operating Contractors, who currently perform most of our construction work. They are utilizing corporate resources and have brought in more experienced talent to replace or supplement their staff on projects that are not performing to expectations. Most importantly, we have clearly articulated our expectations to our contractor partners and are using the contract to hold them accountable for deficient work. For instance, in fiscal year (FY) 2012, the UPF contractor team did not meet the commitment to deliver the 90% design on schedule, primarily due to the process systems requiring more floor space and building height than anticipated and necessitating a significant redesign effort. NNSA did not approve incentive fee payments for these design deliverables in FY 2012. NNSA has also worked hard to address previous cost estimating issues on UPF. We corrected the contractor's estimate optimism bias by incorporating lessons learned across the complex in cost estimating and risk management. The UPF contractor is now using actual commodity installation rates, more realistic escalation rates, quality control and project management costs, and reasonable risk models based on recent experience within the Complex unless there is a credible, substantive reason to use more optimistic estimates. This change in approach enabled us to understand the cost range established in 2007 was no longer achievable. Working with the National Laboratories, Office of Defense Programs, and our Management and Operating Contractor, we reviewed the original project requirements and developed a new scope and cost range that focused on incorporating our most mission-critical processes into UPF, with the balance as deferred scope. The project was reaffirmed by the Deputy Secretary in June 2012 with the minimum scope to meet mission needs at a cost range of $4.2 - $6.5 Billion, an increase of $3.0 Billion from the previous estimates at the top end. We have improved our risk management processes to more definitively document our potential risks and risk mitigation strategies, and are updating our assessments of cost and impact as the project design continues to mature. The engineering, procurement, and construction community has underestimated the cost of several nuclear facilities over the past decade. The risks realized by the entire community are being considered in the development of the UPF project estimate. The Acting Administrator has maintained the Agency's commitment to ensuring that the necessary front end planning is accomplished and design of the nuclear facility is 90% complete before establishing the UPF project baseline. UPF will achieve 90% design completion prior to the approval of the formal baseline for the UPF project. Maturing the design to a 90% completion threshold allows for a more accurate estimate of project costs, and ensures that the impact of risks inherent to NNSA and nuclear industry facilities are understood as the project moves toward the start of nuclear facility construction. We have instituted a weekly call among the key project team members and stakeholders to elevate issues that require leadership decisions, have instituted a monthly senior leadership integrated project team meeting where representation from key NNSA stakeholders are briefed by the UPF FPD, and issues requiring resolution by their staffs are highlighted and managed to closure. We have worked with the federal and contractor workforces to reemphasize the principles of a safety based work culture, encouraging issues to be raised early so they can be resolved as quickly and economically as possible. With these corrective actions in place, we are confident that the UPF baseline to be established at CD-2 will represent a credible basis for successful completion of the project within the established cost and schedule. [End of section] Footnotes: [1] NNSA is a separately organized agency within the Department of Energy. NNSA owns the buildings, equipment, and the components produced at the Y-12 plant, but the site is operated under contract to NNSA by Babcock & Wilcox Technical Services Y-12, LLC (B&W), a partnership of the Babcock & Wilcox Company and Bechtel Corporation. [2] B&W is the contractor managing the UPF design and has subcontracted portions of the design work to four other contractors. [3] Constructed from 2004 to 2009, HEUMF is responsible for the receipt, shipment, and interim and long-term storage of current and projected inventories of highly enriched uranium. [4] GAO, Nuclear Weapons: National Nuclear Security Administration's Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness, [hyperlink, http://www.gao.gov/products/GAO-11-103] (Washington, D.C.: Nov. 19, 2010). [5] The National Defense Authorization Act for Fiscal Year 2013 renamed the UPF as the Uranium Capabilities Replacement Project. NNSA uses the new nomenclature in its fiscal year 2014 budget request. [6] Subsequent quarterly reports will focus on technology readiness and risk management, among other things. [7] In January 2010, we found that DOE and NNSA needed to improve their cost-estimating practices. See, GAO, Department of Energy: Actions Needed to Develop High Quality Cost Estimates for Construction and Environmental Cleanup Projects. [hyperlink, http://www.gao.gov/products/GAO-10-199] (Washington, D.C.: Jan. 14, 2010). [End of section] GAO’s Mission: The Government Accountability Office, the audit, evaluation, and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. 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