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entitled 'Department of Energy: Additional Opportunities Exist for 
Reducing Laboratory Contractors' Support Costs' which was released on 
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Report to the Subcommittee on Energy and Water Development, Committee 
on Appropriations, House of Representatives: 

September 2005: 

Department of Energy: 

Additional Opportunities Exist for Reducing Laboratory Contractors' 
Support Costs: 

GAO-05-897: 

GAO Highlights: 

Highlights of GAO-05-897, a report to the Subcommittee on Energy and 
Water Development, Committee on Appropriations, House of 
Representatives: 

Why GAO Did This Study: 

In fiscal year 2004, about two-thirds of the Department of Energy’s 
(DOE) $26.9 billion in spending went to 28 major 
facilities—laboratories, production and test facilities, and nuclear 
waste cleanup and storage facilities. DOE spent about $2.9 billion in 
fiscal year 2004 to support the mission of its five largest 
laboratories (see table). GAO was asked to examine (1) recent trends in 
indirect and functional support cost rates for these five laboratories, 
noting key differences in how contractors classify costs, and (2) the 
efforts of DOE and its contractors to reduce indirect and other support 
costs and identify additional opportunities for savings. 

What GAO Found: 

For fiscal years 2000 through 2004, laboratory-reported rates for 
indirect costs—those not charged directly to a specific 
program—increased at two laboratories and decreased at three. However, 
indirect cost rates cannot be compared across laboratories because 
contractors classify different portions of support costs as indirect. 
To facilitate analysis, DOE requires the laboratories to report what it 
called “functional support costs,” or costs that support missions, 
regardless of whether they are classified as direct or indirect costs. 
Using this measure, three laboratories’ rates—that is, functional 
support costs divided by total costs—increased and two laboratories’ 
rates decreased over the 5-year period. While functional support cost 
rates improved comparability, several DOE and contractor officials said 
that the definitions for some categories of support costs, such as 
“facilities management,” are unclear, leading to confusion and 
inconsistent reporting. 

DOE and its contractors have initiated several steps to reduce indirect 
and other support costs but can take additional actions to improve 
their implementation. First, DOE’s laboratory contracts have 
increasingly included incentives to encourage cost reductions. In 
fiscal year 2004, for example, the National Nuclear Security 
Administration began an “award-term” pilot program that allows a 
contractor to earn extra contract years based on performance and cost-
saving achievements. However, DOE is expanding use of this incentive 
without evaluating it. Second, DOE requires its contractors to 
benchmark employee benefits and to reduce benefits if they exceed the 
benchmark, but DOE did not promptly enforce these requirements at one 
laboratory and exempted two others. Third, DOE has begun to address a 
$1.9 billion backlog of deferred maintenance to reduce long-term costs. 
However, without a more rigorous approach, the backlog will persist 
well into future decades. Lastly, while some laboratories have used 
process improvement programs to streamline business processes and 
reduce costs, others do not have such programs, nor are they required 
to have them. 

Functional Support Costs for Five DOE Laboratories Reviewed, Fiscal 
Year 2004: 

Dollars in millions: 

National laboratory: Idaho; 
Contractor: Battelle Energy Alliance; 
Functional support costs: $377.5. 

National laboratory: Lawrence Livermore; 
Contractor: University of California; 
Functional support costs: $573.2. 

National laboratory: Los Alamos; 
Contractor: University of California; 
Functional support costs: $889.1. 

National laboratory: Oak Ridge; 
Contractor: UT–Battelle, LLC; 
Functional support costs: $292.9. 

National laboratory: Sandia; 
Contractor: Lockheed Martin Corporation; 
Functional support costs: $718.0. 

Source: DOE. 

[End of table] 

What GAO Recommends: 

GAO is recommending that DOE take several actions to improve the 
comparability of functional support cost data among laboratories and 
reduce support costs by assessing the overall effectiveness of 
initiatives and ensuring that DOE laboratories adopt important cost-
saving initiatives. 

In commenting on the draft report, DOE generally concurred with GAO’s 
recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-05-897. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Jim Wells at (202) 512-
3841 or wellsj@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Some Laboratories' Cost Rates Have Increased While Others Have 
Decreased, but Not All Rates Are Comparable: 

DOE and Its Contractors Have Taken Actions to Reduce Indirect and Other 
Support Costs, but Opportunities Exist for Further Reductions: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Scope and Methodology: 

Appendixes: 

Appendix I: Award-Term Provisions at Four DOE Sites: 

Appendix II: Comments from the Department of Energy: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Functional Support Cost Rates for Five Laboratories, Fiscal 
Years 2000-04: 

Table 2: Results of the DOE-Funded Employee Benefit Value Studies for 
Each of the Five Laboratories: 

Table 3: Award-Term Provisions for Four DOE Facilities: 

Abbreviations: 

CFO: chief financial officer: 

DOE: Department of Energy: 

NNSA: National Nuclear Security Administration: 

Letter September 9, 2005: 

The Honorable David L. Hobson: 
Chairman: 
The Honorable Peter J. Visclosky: 
Ranking Minority Member: 
Subcommittee on Energy and Water Development: 
Committee on Appropriations: 
House of Representatives: 

In fiscal year 2004, about two-thirds of the Department of Energy's 
(DOE) $26.9 billion in spending went to 28 major facilities, including 
laboratories, nuclear weapons test and production facilities, and 
nuclear waste cleanup and storage facilities. DOE primarily uses 
contractors--industrial firms and nonprofit organizations, including 
educational institutions--to manage and operate these facilities. DOE 
oversees these contractors' activities through its headquarters program 
offices--primarily the National Nuclear Security Administration (NNSA), 
the Office of Environmental Management, and the Office of Science--and 
site offices located at each facility. 

DOE reimburses its contractors for the costs incurred in carrying out 
the department's missions. These include costs that can be directly 
identified with a specific DOE program (known as direct costs) and 
costs of activities that indirectly support a program (known as 
indirect costs), such as administrative activities, utilities, and 
building maintenance. To ensure that DOE programs are appropriately 
charged for incurred costs, contractors' accounting systems assign the 
direct costs associated with each program and collect similar types of 
indirect costs into pools and allocate them proportionately among the 
programs. 

Historically, DOE obtained information on contractors' overall indirect 
cost rates--the ratio of indirect costs to total operating costs--as a 
basis for assessing contractors' efficiency in performing their 
missions. However, the indirect cost rates of different facilities 
cannot readily be compared (1) because cost accounting standards and 
federal regulations provide contractors with flexibility regarding the 
extent to which they identify incurred costs directly with a specific 
program and how they collect similar costs into indirect cost pools and 
allocate them among programs and (2) because of differences in the 
facilities' missions, corporate structures, and accounting 
systems.[Footnote 1] As a result, contractors' methods for accumulating 
and allocating indirect costs vary--that is, a cost classified as an 
indirect cost at one laboratory may be classified as a direct cost at 
another. For example, electricity and other utility costs are usually 
classified as indirect because they are not associated with a single 
program; however, electricity costs could be charged directly if, for 
example, a laboratory installs a meter to track the electricity 
consumption in a building used solely by one program. 

In the mid-1990s, DOE's chief financial officer (CFO) created 22 
standard categories of "functional support costs" to obtain more 
consistent information about the support costs at DOE's major 
contractor-operated facilities. These categories include, for example, 
executive direction, information services, procurement, maintenance, 
and facilities management. Each of the 22 categories is defined to 
cover all related costs, irrespective of whether contractors classify 
them as direct or indirect. Beginning in fiscal year 1997, the CFO and 
the Financial Management Systems Improvement Council, composed of DOE 
and contractor financial officials, have required the department's 
primary contractors to annually report these costs. To oversee the 
quality of these data, contractors' financial personnel generally peer 
review the data for each facility once every few years. In fiscal year 
2004, functional support costs accounted for $7.2 billion, or nearly 40 
percent, of the contractors' $18.1 billion total costs. The functional 
support costs for the five largest DOE laboratories were $2.9 billion. 

You asked us to examine (1) recent trends in reported indirect and 
functional support cost rates at the largest DOE contractor-operated 
laboratories, noting any key differences in how the contractors 
determine which costs are indirect and how these rates compare with 
those of similar laboratories in other federal agencies, and (2) the 
efforts of DOE and its laboratory contractors to reduce indirect and 
other support costs, identifying additional opportunities for potential 
savings. In response, we reviewed DOE's five laboratories with the 
greatest total operating costs--NNSA's Lawrence Livermore National 
Laboratory, Los Alamos National Laboratory, and Sandia National 
Laboratories; the Office of Science's Oak Ridge National Laboratory; 
and the Office of Nuclear Energy's Idaho National Laboratory.[Footnote 
2] The total costs of these five laboratories, $7.5 billion, accounted 
for more than a quarter of DOE's total fiscal year 2004 budget. For 
purposes of comparison with other federal laboratories, we identified 
two similar large, contractor- operated laboratories--the Jet 
Propulsion Laboratory, located in Pasadena, California, and operated by 
the California Institute of Technology for the National Aeronautics and 
Space Administration; and Lincoln Laboratory, located in Lexington, 
Massachusetts, and operated by the Massachusetts Institute of 
Technology for the Department of the Air Force. We determined that the 
selection of these seven laboratories was appropriate for our design 
and objectives and would generate valid and reliable evidence to 
support our work. 

To examine recent trends in the indirect cost rates of the five DOE 
laboratories, we obtained indirect cost rates from each laboratory for 
fiscal years 2000 through 2004 and identified cost-rate trends, 
reviewed differences in what types of costs the laboratories included 
in their indirect cost pools and how they allocated these costs, and 
reviewed the laboratories' indirect cost rates and those of the Jet 
Propulsion Laboratory and Lincoln Laboratory. We did not include 
indirect cost rates in this report because some of these data are 
proprietary. We also examined the fiscal years 2000 through 2004 data 
that DOE's CFO published in its Fiscal Year 2004 Support Cost by 
Functional Activity Report to compare these costs for the five DOE 
laboratories. To examine the efforts of DOE and its laboratory 
contractors to reduce indirect and other support costs, we reviewed 
contractual provisions, key cost-saving initiatives, and audits. 
Specifically, we reviewed the management and operating contracts for 
each of the five laboratories, including clauses focused on reducing 
functional support costs; analyzed several key initiatives that DOE and 
its contractors have undertaken to reduce costs and the initiatives' 
applicability to other DOE facilities; and examined reports of DOE's 
Office of Inspector General and the contractors' internal audit teams. 
We performed our work between January 2005 and August 2005, in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

For fiscal years 2000 through 2004, reported indirect cost rates 
increased at two laboratories operated by DOE contractors and decreased 
at three of them. Los Alamos had the largest reported increase, 10.4 
percent, which it attributes to its July 2004 suspension of almost all 
of the laboratory's operations in response to safety and security 
concerns. Idaho had the largest decrease, 32.1 percent, primarily 
because of changes in its accounting for indirect costs. Although a 
contractor's overall indirect cost rates are generally comparable over 
time, some rates, such as Idaho's fiscal year 2004 rate, are not 
comparable. Specifically, in fiscal year 2004, the contractor at Idaho 
reclassified a large portion of its indirect costs as direct to prepare 
for a new environmental cleanup contract that is separate from its 
laboratory operations contract. In addition, indirect costs cannot be 
compared across laboratories because one contractor may classify a 
greater portion of a particular support cost as an indirect cost than 
another contractor. For example, from fiscal years 2000 through 2003, 
Idaho classified all of its administrative support as indirect costs, 
while other laboratories, such as Oak Ridge, classified administrative 
support as both direct and indirect costs. In addition, Lawrence 
Livermore and Oak Ridge treat maintenance for roads and grounds as 
indirect expenses, while Idaho treats them as direct expenses. 

Regarding functional support costs, three laboratories' rates increased 
and two laboratories' rates decreased over the 5-year period we 
examined. Again, Los Alamos had the largest increase, and Idaho had the 
largest decrease. While functional support cost rates facilitate 
greater comparability across laboratories, several DOE and contractor 
officials told us that the definitions for some categories are unclear, 
leading to confusion among categories. Notably, the "facilities 
management" and "maintenance" categories are ambiguous and, hence, are 
not fully comparable across laboratories. Because of the differences in 
how DOE contractors categorize direct and indirect costs, and because 
only DOE contractors report functional support costs, the rates at 
DOE's laboratories cannot be compared with those of the Jet Propulsion 
Laboratory or Lincoln Laboratory. For example, Jet Propulsion 
Laboratory officials told us that they categorize all their costs as 
direct in accordance with their contract with the National Aeronautics 
and Space Administration. 

DOE and its contractors have taken several actions to reduce indirect 
and other support costs, but improved implementation could also produce 
savings--particularly in the following areas of contract incentives, 
contractors' employee benefits, deferred maintenance, and process 
improvements: 

* DOE's management and operating contracts have increasingly included 
incentives to encourage cost reductions. For example, beginning in 
fiscal year 2003, DOE contracts have placed greater emphasis on 
performance objectives and fees based on the efficiency of 
laboratories' business operations. In addition, in fiscal year 2004, 
NNSA began a pilot "award-term" program that allows the contractor at 
Sandia to earn up to 5 additional years on its 5-year contract if it 
receives an overall rating of "outstanding" each year and achieves cost 
savings sufficient to fund completion of projects that were approved 
but did not receive full funding. In the first year of the pilot 
program, Sandia's contractor earned a 1-year extension on its contract. 
DOE has proposed to expand this pilot program to the Los Alamos 
contract--and to allow contract extensions of up to 13 years beyond the 
proposed 7-year contract term--even though the award-term program is 
less than 2 years old and DOE has not yet evaluated its effectiveness. 
For example, DOE has not evaluated whether the cost savings achieved 
impaired the quality of work. 

* DOE requires its contractors to benchmark the value of pension and 
other benefit programs with those of industry and to reduce the value 
of benefits if they exceed the overall benchmarked average by 5 percent 
or more. However, DOE has exempted the University of California, which 
manages Lawrence Livermore and Los Alamos, from benchmarking the value 
of its benefits because those laboratories use the university's benefit 
program. Of the three remaining laboratories, Idaho and Oak Ridge have 
benefits whose values fall within the allowable range, while Sandia's 
benefits have substantially exceeded the overall benchmarked average 
since 2002, with current pension benefits being 68 percent higher. DOE 
did not request that Sandia's contractor propose corrective actions 
until May 2005, 3 years after discovering the benefits were too high. 
While enforcing the limits on benefit values is a step in the right 
direction, DOE has not set any limits on benefit costs. Because the 
value of the benefits does not necessarily correlate with their costs, 
controlling the benefits' value alone may not be the most effective 
means to manage costs. Although DOE proposed in November 2003 to 
require contractors to evaluate both the value and cost of their 
benefits, it has not yet finalized this requirement, over 2 years 
later. 

* After decades of neglect, DOE has begun to address a backlog of 
deferred maintenance at its facilities to reduce support costs in the 
long term. As required by DOE, the five laboratories have 10-year plans 
to reduce their maintenance backlog, which was valued at $1.9 billion 
in fiscal year 2004. However, without a more rigorous approach, the 
backlog will persist well beyond 10 years. To speed the backlog 
reduction for NNSA facilities--including Lawrence Livermore, Los 
Alamos, and Sandia--the Congress has funded the first 3 years of a 10- 
year effort to "buy down" the backlog. However, only Lawrence Livermore 
and Sandia have demonstrated success with long-term approaches to 
further reduce their maintenance backlogs and minimize reaccumulation. 
For example, Lawrence Livermore charges DOE and other agency programs 
that use the laboratory about $8 per square foot for maintenance in an 
effort to reduce the backlog. 

* Idaho, Lawrence Livermore, and Sandia have used process improvement 
programs to assess their operations and reduce costs. For example, 
Idaho used process improvement methods to reduce the average cost of 
each of 16 safety assessment reports, for a total 2-year savings of 
$907,000. While it is generally recognized that using a process 
improvement program is a good business practice, neither Los Alamos nor 
Oak Ridge has one. 

We are making several recommendations to the Secretary of Energy to 
improve the comparability of functional support cost data among 
laboratories and to reduce these costs by assessing the overall 
effectiveness of initiatives and ensuring that other DOE laboratories 
adopt important cost-saving initiatives. In commenting on a draft of 
this report, DOE generally concurred with all of the recommendations. 

Background: 

The Federal Acquisition Regulation and Cost Accounting Standards 
provide overall requirements for allocating incurred costs either 
directly to a program or indirectly to pools of similar types of costs 
that are allocated proportionately among the programs. For example, to 
avoid double counting and ensure that DOE programs and other federal 
agencies pay an appropriate share of indirect costs, the standards 
require that a contractor use consistent methods for estimating costs 
for each project or activity. That is, if the laboratory charges one 
project $8 per square foot for maintenance, it must charge other 
projects in the same manner. Contractors submit for DOE approval 
accounting policy statements describing how they will classify costs as 
direct or indirect. 

DOE improved its ability to compare laboratories' costs in fiscal year 
1997, when it began requiring contractors to report all functional 
support costs, regardless of how they were classified. Functional 
support cost data facilitate comparisons of laboratories' costs because 
they are intended to include all costs that support laboratory 
missions, regardless of whether a particular laboratory has classified 
the support costs as direct or indirect. However, functional support 
costs have limitations in that they cannot account for differences in 
the mission, size, age, or location of DOE facilities. Facility 
comparisons need to factor in the differences, for example, in (1) 
maintenance costs for a 50-year-old manufacturing facility as compared 
with those of a modern research facility or (2) safety and health costs 
at a facility that uses nuclear materials as compared with a facility 
with no nuclear materials. 

Some Laboratories' Cost Rates Have Increased While Others Have 
Decreased, but Not All Rates Are Comparable: 

From fiscal years 2000 through 2004, indirect cost rates increased at 
two of the five DOE laboratories we examined and decreased at the other 
three laboratories. A laboratory's indirect cost rates are generally 
comparable over time, but the indirect cost rates of different 
laboratories are not comparable because contractors often categorize 
costs differently. Regarding functional support costs, three of the 
five laboratories' rates increased, while rates of two laboratories 
decreased during the same 5-year period. While functional support cost 
data help DOE to compare rates across laboratories, several DOE and 
contractor officials told us that the definitions for some categories 
are unclear, leading to confusion among categories. Finally, because of 
the differences in how DOE contractors categorize direct and indirect 
costs, and because other federal, non-DOE contractors do not collect 
and report functional support costs, the rates at DOE's laboratories 
cannot be compared with those of the Jet Propulsion Laboratory or 
Lincoln Laboratory. 

Two DOE Laboratories' Indirect Cost Rates Have Increased and Three Have 
Decreased, but These Rates Are Not Comparable across Laboratories: 

From fiscal years 2000 through 2004, indirect cost rates increased at 
two laboratories operated by DOE contractors and decreased at 
three.[Footnote 3] Los Alamos had the largest increase--10.4 percent. 
Nearly all of this increase occurred during the 4TH quarter of fiscal 
year 2004 and, according to Los Alamos officials, was attributable to 
the "stand down" of activities that the laboratory director ordered in 
July 2004 in response to a series of safety and security incidents. In 
particular, the Los Alamos officials told us that the stand down 
resulted in lower program costs without similarly lower indirect costs. 
For example, $8 million in staff costs for the stand down's first 2 
days was treated as indirect costs as laboratory managers developed 
plans for assessing and resolving the safety and security issues. Once 
risk assessment and mitigation activities began, stand-down costs were 
charged directly to benefiting programs. Los Alamos officials stated 
that general and administrative costs, especially costs in the 
"executive direction" category, were higher than expected, while direct 
program costs were lower. The indirect cost rate for Lawrence Livermore 
increased as well by 2.9 percent from fiscal years 2000 through 2004 
because of additional costs, such as those related to facilities 
safety, maintenance, environmental protection, and hazard control. 

In contrast, Idaho National Laboratory's indirect cost rate decreased 
by 32.1 percent during the 5-year period, mainly because the contractor 
reclassified a large portion of its costs associated with environmental 
cleanup operations from indirect to direct in fiscal year 2004. 
According to contractor officials, these costs were reclassified in 
response to DOE's decision to split the management and operating 
contract, which expired during fiscal year 2005, into two parts by 
awarding separate contracts for laboratory operations and the 
environmental restoration of the site. Laboratories can make changes in 
how they account for indirect costs, and, when they do, they are 
required to document these changes in their disclosure statement for 
DOE approval. The indirect cost rates for Oak Ridge and Sandia 
decreased by 7.3 percent and 2.2 percent, respectively, between fiscal 
years 2000 and 2004. According to Oak Ridge contractor officials, the 
decrease resulted from several factors, including management's decision 
to limit the growth of indirect costs while the laboratory's total 
spending grew--when total costs increase at a higher rate than indirect 
costs, the indirect cost rate will decrease because the rate equals the 
indirect costs divided by total costs. 

Indirect cost rates cannot be meaningfully compared across laboratories 
because one contractor may track costs more closely, allowing the 
contractor to classify a higher proportion of the cost of a support 
activity, such as administration, as a direct cost than another 
contractor does. For example, from fiscal years 2000 through 2003, Oak 
Ridge and Sandia classified administrative support costs as both 
indirect and direct costs, while Idaho classified all administrative 
support costs as indirect. Similarly, Idaho classified road and ground 
maintenance as direct costs, while Lawrence Livermore and Oak Ridge 
treated them as indirect costs. Two contractor officials provided other 
examples of costs that laboratories are likely to classify differently: 
subcontract administration, any type of fringe benefit, program 
management, organizational management and administration, facility 
management and maintenance, and information technology functions. A 
Lawrence Livermore official noted, for example, that one contractor may 
treat desktop software used by many programs as a direct cost, while 
another contractor may bundle these software purchases into a common 
site license that is paid from an indirect account. The indirect cost 
rate may be higher in the latter case, but the goods may be obtained at 
a lower cost. Thus, higher indirect costs do not necessarily equate 
with less efficiency. 

Further, the five DOE contractors use different methods to classify 
support activities--that is, they differed in how indirect costs are 
collected and distributed. For example, one contractor used 4 major 
indirect cost pools while another contractor used 12 indirect cost 
pools for distribution among programs. Similarly, the number of major 
service centers at the five DOE laboratories ranged from 6 to 14. 
Service centers are accounts where costs of specific services are 
accumulated and charged on the basis of services rendered, either to a 
program or to other indirect cost pools. Common service centers are 
telecommunications and computing centers. 

Functional Support Cost Rates Provide More Comparability than Indirect 
Costs, Although the Definitions for Some Categories Are Unclear: 

Table 1 shows that for fiscal years 2000 through 2004, three 
laboratories' functional support cost rates increased and two 
laboratories' decreased. These rates are the functional support costs 
as a percentage of total costs without capital construction. Again, Los 
Alamos had the largest increase, 8.1 percent, and Idaho had the largest 
decrease, 11.8 percent.[Footnote 4] 

Table 1: Functional Support Cost Rates for Five Laboratories, Fiscal 
Years 2000-04: 

Laboratory: Idaho; 
FY 2000: 52.5%; 
FY 2001: 52.1%; 
FY 2002: 51.4%; 
FY 2003: 51.7%; 
FY 2004: 46.3%; 
Percentage change for FYs 2000-04: (11.8)%. 

Laboratory: Lawrence Livermore; 
FY 2000: 32.4%; 
FY 2001: 34.5%; 
FY 2002: 35.1%; 
FY 2003: 36.1%; 
FY 2004: 34.0%; 
Percentage change for FYs 2000-04: 4.9%. 

Laboratory: Los Alamos; 
FY 2000: 39.7%; 
FY 2001: 41.0%; 
FY 2002: 40.1%; 
FY 2003: 39.5%; 
FY 2004: 42.9%; 
Percentage change for FYs 2000-04: 8.1%. 

Laboratory: Oak Ridge; 
FY 2000: 36.6%; 
FY 2001: 34.6%; 
FY 2002: 34.3%; 
FY 2003: 36.2%; 
FY 2004: 35.8%; 
Percentage change for FYs 2000-04: (2.2%). 

Laboratory: Sandia; 
FY 2000: 33.5%; 
FY 2001: 33.5%; 
FY 2002: 32.5%; 
FY 2003: 34.7%; 
FY 2004: 33.7%; 
Percentage change for FYs 2000-04: 0.6%. 

Source: DOE's CFO, Fiscal Year 2004 Support Cost by Functional Activity 
Report (Washington, D.C.). 

Note: This table excludes the "safeguards and security" category from 
the functional support costs because DOE and the laboratories have 
treated them as direct costs after they began receiving line-item 
funding. We also excluded "capital construction" from total costs. 
While these rates are more comparable than indirect cost rates, they 
are not entirely comparable, as discussed in this report. 

[End of table] 

Functional support costs were primarily developed to facilitate the 
analysis of each facility's costs. While not intended for comparison 
purposes, they provide more comparability across laboratories than 
indirect costs because they are developed on the basis of standard, 
defined cost categories. However, detailed analysis is required to 
determine whether rate differences are the result of inefficiencies or 
other factors, such as differences in each facility's mission, 
activities, location, or size. For example, costs for safety and 
health, maintenance, and utilities at Los Alamos are higher than costs 
at other sites because, according to DOE officials, the laboratory has 
2,224 facilities on 27,800 acres of mesas and canyons. Also, Los Alamos 
uses plutonium and other hazardous materials, which require added 
safety procedures, and accelerator facilities, which consume large 
amounts of electricity. 

While functional support cost rates facilitate improved analysis of 
laboratory costs, several DOE and contractor officials told us that the 
definitions for some categories are somewhat unclear, leading to 
confusion in how to categorize certain costs. Notably, the "facilities 
management" and "maintenance" categories are somewhat ambiguous and, 
hence, are not fully comparable across laboratories. Peer reviewers 
checking for accuracy of classification of costs have found that 
several laboratories have misclassified costs between the two 
categories. In July 2003, peer reviewers found that Sandia had 
classified $1.1 million of facilities management costs as maintenance 
and $8.8 million in maintenance costs as facilities management. In June 
2004, peer reviewers found that Los Alamos had classified $550,000 in 
maintenance costs as facilities management. In addition, in fiscal year 
2003, a Lawrence Livermore internal review found that the laboratory 
had categorized plant facility engineering costs as maintenance, while 
other laboratories had categorized these costs as facilities 
management. In 2004, after discussing the categories with DOE and 
contractor officials involved in reviewing functional support cost 
data, Lawrence Livermore moved $15 million from the fiscal years 2002 
and 2003 maintenance category to the facilities management category. 
Most of the peer reviews for the DOE laboratories and other facilities 
found difficulties with which cost elements were placed in or omitted 
from "facilities management" and "maintenance," according to our 
analysis. In addition, peer reviews at Los Alamos and Oak Ridge found 
over $2 million of legal or information services costs that was 
misclassified in the "executive direction" category, another example of 
a category whose definition may be unclear. Idaho officials reported 
that discrepancies in executive direction cost data between Idaho and 
other sites resulted from uncertainty about how many levels of 
management or what type of site development and strategic planning 
costs are to be included in the executive direction category. 

Differences in interpretation result from insufficiently detailed 
guidance for developing functional support costs. The guidance 
primarily consists of 10 pages of 22 support category definitions. 
DOE's Web site does not have more detailed instructions that 
contractors can turn to when they are uncertain whether a cost should 
be classified under one category or another. Contractor officials 
developing cost data often turn to different DOE or contractor 
officials with responsibility for these data for help, increasing the 
likelihood of getting different advice, despite the fact that 
consistency is key to data quality. Several DOE and contractor 
officials with responsibility for these data agreed that more specific 
guidance would cost little to develop and would increase consistency in 
reporting. For example, some officials said they could post a list of 
common laboratory errors on the Financial Management Systems 
Improvement Council's Web site, based on peer review findings of the 
past few years. 

DOE Laboratories' Cost Rates Cannot Be Compared with Those of Other 
Federal Laboratories: 

Because comparisons of indirect cost rates are not very meaningful and 
non-DOE contractors do not report functional support costs, the cost 
rates for DOE's laboratories cannot be compared with those of the Jet 
Propulsion Laboratory or Lincoln Laboratory. The Jet Propulsion 
Laboratory, operated by the California Institute of Technology, is the 
lead center for robotic exploration of space. Virtually all of the work 
it performs is under a single National Aeronautics and Space 
Administration agreement, which states that all of the laboratory's 
costs are direct, according to laboratory officials.[Footnote 5] 
Lincoln Laboratory, located on Hanscom Air Force Base, conducts applied 
research to develop advanced technology in remote sensing, space 
surveillance, missile defense, battlefield surveillance and 
identification, communications, air traffic control, and biological and 
chemical defense for the Department of Defense and other federal 
agencies. The laboratory's indirect cost rate cannot be compared with 
those of DOE laboratories without a detailed understanding of 
differences in (1) contract provisions and other requirements; (2) how 
contractors classify costs as direct or indirect; and (3) research 
missions and activities, such as the added costs at the DOE 
laboratories associated with safety requirements for handling 
radioactive and other hazardous materials. Lincoln Laboratory's 
indirect cost rate increased by 13.9 percent between fiscal years 2000 
and 2004 because of a new enterprisewide accounting and management 
reporting system and infrastructure improvements for laboratory test 
facilities, according to laboratory officials. 

DOE and Its Contractors Have Taken Actions to Reduce Indirect and Other 
Support Costs, but Opportunities Exist for Further Reductions: 

DOE and its contractors have numerous efforts under way to reduce 
indirect and other support costs; however, we identified several 
efforts that could be strengthened to further reduce costs. First, DOE 
is including incentives in its contracts to encourage indirect cost 
reductions. DOE officials stated that one of these incentives, a pilot 
to award additional contract years for performance, had produced cost 
savings. DOE is expanding this incentive to additional laboratories, 
although it has not evaluated its effectiveness. Second, DOE generally 
requires contractors to offer employee benefits that are similar in 
value to those of comparable organizations, but the department has done 
little to enforce this requirement. Third, DOE has begun requiring 
contractors to address a backlog of maintenance projects while they 
also manage current maintenance needs. Although this effort will 
involve costs in the near term, it could reduce support costs in the 
long term. However, only Lawrence Livermore and Sandia have programs 
that have been shown to be sustainable over several years and appear to 
be promising models. Finally, while DOE and some contractors have 
reduced costs through process improvement programs, consolidated 
procurement actions, and audits by DOE's Inspector General and DOE 
contractor audit groups, opportunities exist for further cost savings 
through these activities. 

DOE Is Increasingly Using Contractual Incentives to Encourage Cost 
Savings but Is Expanding a Key Program without Evaluating Its 
Effectiveness: 

Recently, NNSA has taken several actions to improve business operations 
and achieve support cost savings through contractual incentives. For 
example, Sandia's management and operating contract that NNSA extended 
to the Sandia Corporation, a subsidiary of Lockheed Martin Corporation, 
in October 2003 gives higher priority to improved performance and 
greater efficiency in business operations. Specifically, 40 percent of 
the contract's annual award fee in fiscal years 2004 and 2005 is based 
on Sandia's performance in areas such as information technology, 
procurement, human resources, and maintenance. Similarly, NNSA's 
management and operating contracts for Lawrence Livermore and Los 
Alamos have given greater emphasis to improved performance and greater 
efficiency in business operations. For example, the Los Alamos 
contract's performance measures that focused on business operations 
increased from about 28 percent in fiscal year 2002 to 40 percent in 
fiscal year 2005. NNSA also has added provisions to some of its 
contracts to allow the laboratories to reinvest cost savings in other 
activities considered to be indirect costs.[Footnote 6] 

In addition, the Sandia contract initiated a pilot award-term program 
under which an additional year may be awarded to the life of the 
contract for each year the contractor achieves an overall outstanding 
performance rating. A key performance target is finding sufficient cost 
savings to be applied to unfunded projects.[Footnote 7] In fiscal year 
2004, the first year of the pilot program, Lockheed Martin earned a 1- 
year extension on its contract and documented $38 million in cost 
savings, which it spent on agreed-upon projects, such as the following: 

* $14 million for reprogramming security and safeguards to meet the new 
design basis threat, 

* $9.8 million for investing in computer clusters for defense projects, 

* $3 million for purchasing equipment to refurbish the pulsed power 
accelerator, 

* $2 million for enhancing the classified network, 

* $2 million for cleaning up beryllium contamination, and: 

* $0.3 million for negotiating an agreement with Russia on polymer 
research. 

Although Sandia and NNSA officials stated that they believe the award- 
term program emphasizes improved performance and cost savings better 
than provisions in prior contracts, NNSA has not evaluated the nearly 2-
year-old pilot. Such an evaluation could compare the benefits of 
redirecting funds for better mission uses with the costs of forgoing 
recompetition of the contract and examine whether the cost savings 
resulted in any negative effects on reduced work quality. The 
evaluation also could determine whether award-term incentives need to 
be revised in other contracts to improve their effectiveness and 
sustainability, particularly since the mission and level of performance 
among contractors vary. By expanding the incentive without evaluating 
it, DOE does not know if it is receiving benefits commensurate with 
awarding extra years to the contract term. Despite the lack of 
evaluation, DOE's Office of Science extended the award-term incentive 
to Lawrence Berkeley National Laboratory, and NNSA plans to extend it 
to Los Alamos and the Nevada Test Site later this year when it awards 
new contracts. As a result, Lawrence Berkeley's contractor, the 
University of California, can potentially earn up to 15 additional 
years on its recently awarded 5-year contract; the request for 
proposals for the Nevada Test Site states that the contractor can 
potentially earn up to 5 additional years on its 5-year contract; and 
the request for proposals for Los Alamos states that the contractor can 
potentially earn up to 13 additional years. (See app. I for more 
information on this topic.) 

DOE Has Not Always Enforced Its Requirement That Contractors' Employee 
Benefits Be Comparable with Those of Similar Organizations: 

To ensure that the value of each contractor's employee benefits are 
comparable with its competitors and that costs are reasonable, DOE 
Order 350.1 requires its management and operating contractors to 
periodically benchmark the value of their employee benefit packages-- 
including retirement pensions, health care, death, and disability--with 
those of organizations with whom the contractors compete in hiring 
employees.[Footnote 8] The DOE order requires that if the value of a 
contractor's benefits exceeds the average benchmarked value by more 
than 5 percent, the contractor will provide DOE with a plan to adjust 
the benefits so that they fall within 5 percent of the benchmarked 
value. DOE must ensure that the contractor's proposed adjustments are 
acceptable and reasonable. More specifically, the DOE order requires 
that the contractors use a professionally recognized measure to compare 
the value of their benefits with those of other organizations. The 
contractors can use a nationally recognized consulting firm with 
expertise in benefit value studies to perform such a study every 3 
years or perform an annual employee benefit comparison survey through 
the U.S. Chamber of Commerce. A benefit value study determines the 
average of each benefit for 15 organizations with similar workforces. 
The average value of the benefits becomes the benchmark against which 
the contractor's benefits are assessed. 

The benefit value studies conducted for Lawrence Livermore, Los Alamos, 
and Sandia in 2004 show that the value of employee benefits for these 
laboratories exceeded the benchmark by more than 5 percent in several 
of the four primary categories of benefits. More importantly, the 
studies showed that the overall benefits for those three laboratories 
exceeded the allowable 5 percent variance for the overall benefits (see 
table 2). Lawrence Livermore and Los Alamos both had benefit values 
that far exceeded the benchmark and, in many categories, both 
laboratories exceeded all comparators. For example, pension benefits 
for both laboratories exceeded those of all 15 comparators and were 
nearly twice those of the benchmarked value. Lawrence Livermore, Los 
Alamos, and Sandia were highest or second highest in most benefit 
categories. Sandia's defined benefit pension was second highest of all 
15 comparators and exceeded the benchmarked value by 68 percent. In 
contrast, the value of benefits for Idaho and Oak Ridge did not exceed 
the 5 percent allowable range. 

Table 2: Results of the DOE-Funded Employee Benefit Value Studies for 
Each of the Five Laboratories: 

Laboratory: Idaho; 
Benefits exceeded benchmark by more than 5 percent: None. 

Laboratory: Lawrence Livermore; 
Benefits exceeded benchmark by more than 5 percent: Retirement, Health 
care, Death, All benefits. 

Laboratory: Los Alamos; 
Benefits exceeded benchmark by more than 5 percent: Retirement, Health 
care, Death, All benefits. 

Laboratory: Oak Ridge; 
Benefits exceeded benchmark by more than 5 percent: None. 

Laboratory: Sandia; 
Benefits exceeded benchmark by more than 5 percent: Retirement, Health 
care, Death, Disability, All benefits. 

Source: DOE. 

Note: The health care and retirement values represent the benefits with 
the highest average values, while the death and disability values 
represent the benefits with the lowest values. All health care values 
reflect both pre-and post-retirement health care values. We did not 
independently verify the data used for the comparison studies. 

[End of table] 

DOE did not require prompt action to adjust benefits at the three 
laboratories that exceeded the benchmarked value. Initially, DOE and, 
later, NNSA exempted Lawrence Livermore and Los Alamos from the DOE 
benchmark because the contract with the University of California, which 
manages the laboratories, allowed the university to extend its own 
benefits package to laboratory employees. When the DOE order was issued 
in 1996, the existing contract with the university took precedence, 
according to a university document. DOE did not request a benefit value 
study until 2004, after it was determined that the Los Alamos and 
Lawrence Livermore contracts were scheduled to be competed and DOE 
became concerned about long-term liabilities for employees' 
postretirement costs. DOE has no short-term liability for the pension 
benefits because the pension plan is fully funded and is projected to 
remain fully funded for at least the near term, according to university 
officials. However, DOE's liability for long-term pension benefits for 
these laboratories remains undetermined. In an effort to reduce this 
liability, NNSA is requiring a stand-alone pension plan for the winning 
bidder of the Los Alamos contract, which DOE plans to award at the end 
of this year. 

Similarly, after a benefit value study in 2001 showed that the value of 
Sandia's benefits exceeded the benchmarked value, NNSA did not require 
Sandia to adjust its benefits. In this case, an actuarial study showed 
that NNSA had minimal risk that it would have to contribute to Sandia's 
pension plan for at least 5 years. However, the amount of long-term 
liability is again undetermined because the study could not reliably 
determine the risk of NNSA having to contribute beyond 5 years. When a 
new benefit value study was completed 3 years later, in May 2004, NNSA 
required Sandia to submit a corrective action plan to adjust the 
benefits. NNSA received Sandia's plan for making adjustments in June 
2005, but officials are requiring modifications before approving the 
plan. 

Finally, while benchmarking the value of benefits is a step in the 
right direction, DOE does not require contractors to benchmark the 
costs of their benefits. NNSA officials stated that cost studies are 
needed because the value of benefits may not be directly proportional 
to their costs. For example, while value and cost are generally highly 
correlated, it is possible that a contractor may negotiate high-value 
benefits that have a low cost, or low-value benefits that have a high 
cost. DOE has not yet finalized the revisions to DOE Order 350.1, which 
includes a draft provision to require benchmarking of costs, in 
addition to benefits. In commenting on this report, DOE officials 
stated that, since late 2004, DOE solicitations and awards for 
management and operating contracts required contractors to conduct 
benefit value and cost studies. In addition, our April 2004 report (1) 
noted that DOE should review postretirement costs because they have a 
continuous and compounding effect as they are paid out for each year of 
retirement and (2) recommended that DOE strengthen its oversight of 
postretirement benefits by focusing more attention on long-term 
costs.[Footnote 9] 

DOE Has Begun to Focus on Deferred Maintenance, but Efforts at Some of 
the Laboratories Are Not Sustainable: 

For more than 2 decades, DOE orders and policies have required that 
contractors' maintenance programs ensure the safe, reliable, and 
efficient operation of buildings and equipment. They have also required 
that these programs be adequately funded to ensure that the design 
requirements of the buildings and equipment are met or exceeded for 
their operating lives, and that industry standards for maintenance are 
applied.[Footnote 10] Industry standards, for example, require that 
maintenance budgets be developed using historical and other information 
on the resources required to maintain the structure or equipment in 
good repair. Industry standards and the National Academy of Sciences 
have recommended that day-to-day maintenance requires continuous annual 
funding of about 2 percent to 4 percent of the replacement plant 
value.[Footnote 11] 

Despite requirements, for many decades, DOE and its contractors have 
neglected the routine maintenance of buildings and equipment--including 
inspection of fire alarms, upgrades to electrical systems, and testing 
of equipment critical to the nuclear weapons program. DOE and 
contractor officials stated that the mission always took priority for 
resource allocations. This practice has resulted in a maintenance 
backlog that will cost an estimated $1.9 billion for the five 
laboratories, excluding deferred maintenance for unused buildings. 
Maintenance that continues to be deferred, particularly on older 
structures and equipment, will contribute to an increasing growth in 
deferred maintenance costs, including replacement costs for certain 
equipment parts. For example, Lawrence Livermore reports that its 
deferred maintenance costs continue to escalate each year because of 
the higher probability of failure in the operability of aging 
structures and equipment. In fiscal year 2004, Los Alamos reported that 
it had the oldest structures of the three weapons laboratories, with an 
average structure age of 33 years. Los Alamos also reported that it had 
the highest level of deferred maintenance of the five laboratories, 
accounting for about one-third, or $547 million, of the backlog for the 
five laboratories. 

The backlog could also jeopardize the safe, reliable, and efficient 
operation of the buildings and equipment. At Los Alamos, for example, 
the backlog put at risk the safety of some workers. Officials 
inspecting the fire protection system in early fiscal year 2004 
reported that the fire sprinklers were not properly winterized to 
protect them from freezing, as required by fire codes and standards. 
The inspectors reported that at least three fire sprinkler pipes had 
frozen since November 2003, creating a safety concern in the event of a 
fire. At Idaho, the backlog has placed reliable operation of the 
Advanced Test Reactor at risk. Specifically, the deferral of 
maintenance and recapitalization for several key systems--including the 
waste control system and the digital monitoring system--has resulted in 
the reliance on an outdated computer system for which technical support 
is no longer available and replacement parts can only be found in used 
parts markets. Loss of any these key systems could require Idaho to 
temporarily shut down the Advanced Test Reactor, hindering test plans 
and DOE's nuclear energy mission. Idaho plans to continue replacing 
failing parts in the computer system until it can fund a full system 
replacement. 

DOE has begun to focus on deferred maintenance in an effort to reduce 
the backlog and long-term costs. DOE's Defense Programs, the 
predecessor to NNSA, first began to address the maintenance backlog in 
fiscal year 2000. Defense Programs required the nuclear weapons 
facilities to develop 10-year plans to evaluate short-and long-term 
maintenance needs and develop long-term efforts to better manage the 
maintenance backlog. At about the same time, the Congress began 
providing funding for certain maintenance programs, such as NNSA's 
Readiness in Technical Base and Facilities Program. Some DOE 
laboratories also are using different types of indirect costs, such as 
space charges, to help address maintenance. Additionally, in fiscal 
year 2002, the Congress began funding the Facilities and Infrastructure 
Recapitalization Program to reduce long-term deferred maintenance for 
NNSA facilities. The program can also be used to demolish certain 
structures. Demolishing or consolidating structures can help reduce 
maintenance and other operating costs. Between fiscal years 2002 and 
2005, the Congress provided about $1 billion for this program and, in 
fiscal year 2005, NNSA requested an additional $1.7 billion for fiscal 
years 2006 through 2009. When established, the program had two key 
goals. First, contractors are to stabilize deferred maintenance by the 
end of fiscal year 2005 so that there is no further growth in backlog. 
NNSA informed the Congress that contractors have met this goal of 
stabilizing deferred maintenance. The second goal is for contractors to 
reduce the maintenance backlog so that the backlog for mission-critical 
and nonmission-critical structures is less than 5 percent and less than 
10 percent, respectively, of replacement plant value by fiscal year 
2009. However, an NNSA official stated that most of NNSA's contractors 
will not be able to meet this goal because the $1.7 billion budget 
request for fiscal years 2006 through 2009 was reduced by $574 million. 

Furthermore, in fiscal year 2003, DOE adopted NNSA's lead by addressing 
maintenance in 10-year plans to better manage maintenance overall, 
including deferred maintenance. As with NNSA's long-term planning 
requirements, DOE Order 430.1B requires that all DOE facilities develop 
10-year plans to assess, among other things, their short-term and long- 
term maintenance needs. Although the order does not have specific time 
lines associated with reducing deferred maintenance, DOE's headquarters 
program offices are responsible for approving the 10-year plans and for 
tracking the performance of the facilities against the plans. DOE's 
Office of Engineering and Construction Management has general oversight 
over DOE Order 430.1B, including the review of the 10-year plans and 
the tracking of program office performance. 

Despite all of these efforts, DOE contractors report that deferred 
maintenance will continue to be a significant problem in the short term 
and long term. Of the five laboratories, Lawrence Livermore has 
demonstrated the most sophisticated and sustainable approach that fully 
funds maintenance needs and reduces deferred maintenance over the long 
term. Lawrence Livermore's plan, first implemented in 1998, relies on a 
combination of funding, including two directly funded NNSA programs-- 
the Readiness in Technical Base and Facilities Program and the 
Facilities and Infrastructure Recapitalization Program--and an indirect 
cost pool established for its Maintenance Management Program. The 
Maintenance Management Program collects funds ($8 per square foot) from 
all users of its buildings--including NNSA and other DOE and non- DOE 
programs. About 20 percent of the collected funds are spent on deferred 
maintenance at the laboratory, in accordance with the program. The 
program identifies the most critical needs for maintenance on the basis 
of a matrix balancing "mission-essential" and "probability of failure" 
criteria. In addition, the charge itself encourages more efficient use 
of space and the return of unneeded space for use for other purposes or 
demolition. Also, other Lawrence Livermore cost pools, such as the 
Institutional General Plant Project, help fund capital improvements 
that can help address maintenance by upgrading structures and 
equipment. By managing the various elements of its maintenance effort, 
Lawrence Livermore stopped the growth of its maintenance backlog by 
fiscal year 2002. Despite the anticipated reductions in the Facilities 
and Infrastructure Recapitalization Program, Lawrence Livermore 
projects that it can reduce its deferred maintenance to within NNSA's 
industry standards by 2011. 

Sandia has an approach similar to Lawrence Livermore's, relying on a 
combination of funds for addressing its maintenance and deferred 
maintenance costs. Using an established methodology, a committee sets 
maintenance priorities and determines how to spend funds collected from 
an internal cost recovery pool. Sandia charges building users $12 per 
square foot and expects to initiate increases to space charges over the 
next 4 years to compensate for expected cuts in maintenance funding. As 
a result, despite the anticipated reductions in the Facilities and 
Infrastructure Recapitalization Program, Sandia projected in March 2005 
that it would reduce its deferred maintenance to within NNSA's industry 
standards by 2011. 

Los Alamos officials acknowledge that they cannot achieve NNSA's goals 
for reductions in deferred maintenance given the expected cuts in the 
Facilities and Infrastructure Recapitalization Program in the 
foreseeable future. Contractor and NNSA officials acknowledge that Los 
Alamos' maintenance program is not sustainable, particularly given its 
current level of funding for maintenance. Any reductions in backlog as 
a result of the Facilities and Infrastructure Recapitalization Program 
would reaccumulate when that funding ended. Similarly, even though Oak 
Ridge provides additional support for maintenance by charging for space 
used, officials report that without additional infrastructure renewal 
or recapitalization funds to address aging facilities, the charge is 
insufficient to fully fund its maintenance needs. Without this 
additional funding, Oak Ridge reports that its maintenance backlog will 
continue to grow. Finally, Idaho has passed many of its deferred 
maintenance liabilities on to another contractor responsible for 
cleaning up part of the laboratory site; nevertheless, Idaho reports 
that without additional funding, its maintenance backlog will continue 
to grow. 

DOE and Some Contractors Have Reduced Support Costs through Process 
Improvement Programs, Audits, and Procurement Consolidation: 

Idaho, Lawrence Livermore, and Sandia have reduced support costs 
through programs to improve business and other processes, while Los 
Alamos and Oak Ridge do not have such programs. In addition, DOE and 
some of the laboratories we reviewed have some efforts under way to 
consolidate procurement actions. Finally, DOE's Inspector General and 
contractors' internal audit groups have contributed to some cost 
savings by auditing support functions. 

Three Laboratories Have Reduced Costs through Process Improvement 
Programs, While Two Laboratories Do Not Have Such Programs: 

Process improvement is the practice of taking an analytical look at 
different steps that go into developing a product or delivering a 
service and assessing how those processes could be conducted better. In 
a process improvement initiative, participants may define the process 
and metrics, measure performance, analyze root causes of problems, 
improve areas of low performance, and develop controls for the process. 
Typically, the process improvement initiative involves iterative cycles 
of identification and improvement, fueled by employee participation in 
identifying problem areas and recommending steps to improve them. It is 
generally recognized that process improvement is a good business 
practice. Process improvement programs can increase product or service 
quality, while decreasing costs. Public and private organizations have 
reported significant returns on investment through process improvement 
programs. 

Several DOE laboratories and production facilities, including Idaho, 
Sandia, and Lawrence Livermore, have used process improvement methods, 
such as Six Sigma and Lean Six Sigma, to reduce costs.[Footnote 12] Six 
Sigma and Lean Six Sigma are rigorous and disciplined methodologies 
that use data and statistical analyses to measure and improve the 
performance of a company's operations by identifying and eliminating 
defects in manufacturing and service-related processes. Idaho used Six 
Sigma to reduce the average cost of 16 Safety Assessment Reports for a 
total savings of $907,000 from fiscal years 2002 through 2003. Sandia 
used Lean Six Sigma to streamline its accounts payable purchase order 
process, potentially leading to savings of more than $1 million over a 
5-year period. Finally, Lawrence Livermore used Six Sigma and other 
methods to improve processes in the areas of safety, security, resource 
management, and property management. For example, the laboratory 
reduced security staff overtime by increasing the workday to 12 hours 
and reported a $2.3 million annual savings. The laboratory also 
standardized the hours of the perimeter security gates and closure of 
redundant gates in an effort to save $300,000 annually. Lawrence 
Livermore plans to train 400 managers by the fall of 2006 in a new 
process improvement method based on a combination of Lean Six Sigma and 
a method used at the United Kingdom's Atomic Weapons Establishment, 
which provides warheads for nuclear deterrence. 

Neither Oak Ridge nor Los Alamos have process improvement programs, 
although some DOE and laboratory officials agreed that such programs 
can help reduce costs. When laboratories do not have some type of 
process improvement program, DOE has little assurance that managers are 
identifying and addressing inefficient or ineffective processes. 

Many of the DOE Inspector General's Reports Have Reviewed Support 
Activities: 

Many of the DOE Inspector General's reports have examined support 
activities at DOE laboratories and other facilities, including 
security, procurement, property management, information resources, 
financial management, and financial controls. The Inspector General has 
found opportunities for reducing indirect and other support costs. For 
example, in 2003, the Inspector General's audit of central office 
expenses for the Thomas Jefferson National Accelerator Facility 
questioned $4.6 million in costs claimed by and paid to the contractor 
for central office expenses from November 1999 to September 2002. These 
questioned expenses included costs that were not allowable, such as 
alcoholic beverages, and costs that were not adequately supported or 
documented. The audit resulted in $3.5 million in savings to DOE. In 
2003, an audit of Los Alamos reported support and other costs of $14.6 
million that were potentially unallowable, including meals, excessive 
travel costs, and an internal audit function that did not meet DOE 
requirements. DOE officials are in the process of determining 
allowability of the questioned amount. In addition to the Inspector 
General audits, contractors' internal auditors annually perform an 
audit of the allowability of costs as claimed by contractors.[Footnote 
13] This audit addresses both indirect and direct costs, identifying 
whether or not costs are allowable under the terms of the contract. For 
example, one such audit, conducted at Sandia in fiscal year 2003, 
projected $112,000 in unallowable costs--DOE is in the process of 
determining the precise amount. 

DOE Has Consolidated Some Procurement Actions: 

DOE and its management and operating contractors have reduced support 
and other costs by consolidating their procurements of computer 
equipment, office supplies, and other bulk items into single contracts 
that result in volume discounts and the need for fewer purchasing 
resources. In particular, DOE established an Integrated Contractor 
Procurement Team that pursues buying opportunities and has negotiated 
over 40 purchasing agreements with vendors to reduce procurement staff 
time and obtain favorable prices, according to a DOE official. The 
team, composed of contractor purchasing agents, surveys sites to 
determine what contractors are paying for a product and whether they 
can negotiate a better price. A contractor that wants to purchase goods 
(e.g., paper) can review a list of agreements and supplier contact 
information on the Integrated Contractor Procurement Team's Web site 
and use its Basic Order Agreement. This saves contractors and suppliers 
time because they do not need to renegotiate all the terms of the 
contract. Contractors do not track savings resulting from the use of 
Integrated Contractor Procurement Team, but they have collected some 
examples of savings that total about $12 million to $15 million, 
annually. 

Other efforts to save time and money through consolidation of 
procurement actions include the following: 

* NNSA has required Lawrence Livermore, Los Alamos, and Sandia to begin 
analyzing their spending using similar software so that opportunities 
for consolidated purchases among the three laboratories can be 
identified. 

* Lawrence Livermore has hired a specialist who is focused full-time on 
analyzing the laboratories' spending patterns and identifying 
opportunities for consolidation. As a result of opportunities being 
identified, the procurement office expects to reduce the number of 
subcontracts by 10 percent, saving procurement staff time. The 
laboratory also has developed 13 Electronic Ordering System agreements 
through which suppliers provide electronic catalogs with over 2 million 
commercial items (e.g., computers, electrical and plumbing supplies, 
and chemicals) that laboratory employees can purchase online. The 
purchases are automatically routed through an approval system. 

* Oak Ridge consolidated its new radio system, which is used by 
security and maintenance staff, with other DOE facilities in the area, 
reportedly saving $900,000 on purchase prices plus $475,000 in annual 
costs. 

Laboratory officials told us that opportunities exist for further cost 
savings through reduced staff time and better prices by consolidating 
procurements with each contractor's parent organization, other DOE 
facilities, or other federal agencies' facilities in the same region. 
Idaho officials cited the potential for reducing costs for using 
consolidated procurements with nearby military bases and other 
facilities. An NNSA procurement official noted that laboratories could 
save through increased use of Integrated Contractor Procurement Team 
agreements, noting that some procurement officials may not be aware of 
available opportunities. 

Conclusions: 

In an era of federal budget constraints, it is crucial to efficiently 
manage support costs at DOE laboratories, thereby maximizing funds 
available for laboratory missions. DOE and its contractors have taken 
steps to reduce support costs, but additional opportunities exist. To 
help decision makers analyze support costs across the laboratories, 
several years ago DOE began to require laboratories to report 
functional support costs. However, peer reviews have revealed some 
problems with these data and challenges remain in comparing costs, in 
part because of ambiguity in the definitions for some categories of 
support costs. To encourage contractors to reduce support costs, DOE 
also piloted a program to award contract years for performance 
improvement and cost savings. However, by expanding the pilot incentive 
program without evaluating it, DOE does not know if it is receiving 
benefits commensurate with awarding extra years to the contract term. 
In another effort to save money, DOE developed requirements to ensure 
that contractors' employee benefits are comparable with those of 
similar organizations with whom they compete for critically skilled 
staff. However, DOE has not always required its contractors to reduce 
employee benefits that substantially exceed the value of their 
competitors' benefits and has not required contractors to benchmark the 
costs of their benefits, potentially adding billions of dollars in long-
term costs. Furthermore, while DOE has begun to address the $1.9 
billion backlog of deferred maintenance to reduce long-term costs and 
improve the safe, efficient, and reliable operation of equipment and 
buildings, only Lawrence Livermore and Sandia have demonstrated 
sustainable approaches that successfully reduced their backlogs. 
Lastly, process improvement programs are generally considered a good 
business practice, and three laboratories have reduced costs through 
their own programs. DOE, however, does not require laboratories to have 
such programs, and some laboratories have not instituted one. Overall, 
while DOE has made progress, without additional attention to these 
initiatives, the department may miss the opportunity to produce 
significant savings. 

Recommendations for Executive Action: 

To improve the quality and comparability of DOE facilities' support 
cost data, we recommend that the Secretary of Energy direct the CFO to 
work with the Financial Management Systems Improvement Council to 
clarify definitions of functional support cost categories. 

To determine whether the department receives benefits commensurate with 
awarding 1 or more extra years to the contract term, we recommend that 
the Secretary of Energy direct NNSA to evaluate the effectiveness of 
its pilot award-term program at Sandia National Laboratories, 
particularly the nature and extent of work quality improvements, prior 
to extending the program to other laboratories. 

To provide competitive but economical employee benefits, we recommend 
that the Secretary of Energy complete the revision of DOE Order 350.1 
and ensure that the order (1) extends the requirement to benchmark the 
value of employee benefits to all contractors; (2) requires prompt 
corrective action if the value of benefits exceeds the allowable range; 
and (3) extends the benchmarking requirements to include the costs, as 
well as the values, of the benefits. 

To reduce long-term maintenance costs at contractor-operated 
facilities, we recommend that the Secretary of Energy develop a long- 
term sustainable approach that meets day-to-day maintenance 
requirements, reduces the maintenance backlog, and minimizes its 
reaccumulation. 

To facilitate the further reduction of support costs, we recommend that 
the Secretary of Energy require that each DOE management and operating 
contractor implement a process improvement program that routinely 
assesses the efficiency and effectiveness of business practices and 
other operations. 

Agency Comments: 

We provided DOE with a draft of this report for its review and comment. 
In written comments, DOE generally concurred with our recommendations. 
(See app. II.) DOE also provided a number of technical comments, which 
we incorporated in this report as appropriate. 

Scope and Methodology: 

To examine indirect cost-rate trends at each of the five largest DOE 
laboratories, we analyzed each laboratory's indirect cost-rate data for 
fiscal years 2000 through 2004. Specifically, we interviewed laboratory 
financial officials and analyzed documents to determine how each 
laboratory calculated its overall indirect costs rate by (1) 
classifying costs as direct or indirect and (2) collecting indirect 
costs into pools and distributing them among other cost pools or 
directly to program sponsors. Furthermore, because DOE and its 
management and operating contractors use functional support cost data 
to help assess certain activities, we analyzed these rates for the five 
laboratories for fiscal years 2000 through 2004, along with the results 
of peer reviews performed at each laboratory. 

We surveyed laboratory financial officials on the reliability of the 
indirect and functional support cost data, covering issues such as data 
entry access, quality control procedures, and the accuracy and 
completeness of these data. Follow-up questions were added whenever 
necessary. In addition, we reviewed all data provided by the 
laboratories, investigated instances where we had questions regarding 
issues such as categories or amounts, and made corrections as needed. 
On the basis of this work, we determined that the financial data 
provided were sufficiently reliable for the purposes of our report. We 
presented percentage changes in the overall indirect cost rates for 
fiscal years 2000 through 2004 that the five laboratories reported. 
However, because of limitations discussed in this report, analyses of 
increases or decreases in these rates mean little without a careful 
analysis of how a contractor classifies costs, and one contractor's 
rates cannot be compared with those of others. Moreover, we analyzed 
changes in classification of costs or changes in mission over time to 
determine if these data were comparable over several years at a single 
laboratory. We noted in our report when we found changes in 
classification that affected the comparability of data at a single 
location over time. 

To assess the efforts of DOE and its laboratory contractors to reduce 
support costs and identify additional opportunities for savings, we 
visited each of the five laboratories to interview senior managers and 
obtain supporting documentation, interviewed DOE officials, and 
examined prior GAO and DOE Inspector General reports. In the course of 
this work, we identified opportunities for further potential cost 
savings. We then interviewed cognizant laboratory and DOE officials 
about actions taken to address each opportunity and reviewed supporting 
documentation. Specifically, to review DOE's contract provisions, we 
interviewed DOE contracting officers and obtained information about 
recent contractual provisions that emphasized potential cost savings or 
improved efficiency. To address DOE's liabilities related to employee 
benefits, we analyzed benefit value studies for each of the 
laboratories and compared the results of our analysis with the 
department's requirements. We also interviewed DOE, NNSA, and 
contractor officials to clarify the results of the studies and to 
provide us with documentation on proposed resolutions, as appropriate. 
It was not our intent to verify, nor would we have been able to 
independently verify, the accuracy of actuarial calculations, 
assumptions, or data used in the comparison studies due to the 
proprietary nature of benefits that consulting firm databases used to 
conduct the studies. 

To address the maintenance backlog, we analyzed data from DOE's Office 
of Engineering and Construction Management, which collects information 
on deferred maintenance. We also analyzed each laboratory's 10-year 
plan and related documents and compared the results of our analysis 
with NNSA's and the department's requirements. We spoke with cognizant 
officials at DOE headquarters and its site offices and with laboratory 
managers to verify the results of our analysis and to determine the 
actions being taken to address the backlog. To examine the 
laboratories' use of process improvement programs, we reviewed examples 
that the three laboratories provided of improved effectiveness and of 
reduced costs for their business operations and interviewed senior 
managers at the other two laboratories regarding what they had done to 
improve business operations. 

As agreed with your offices, unless you publicly announce the contents 
of this report, we plan no further distribution of it until 30 days 
from the date of this letter. At that time, we will send copies to the 
Secretary of Energy; the Director, Office of Management and Budget; and 
other interested parties. We will also make copies available to others 
on request. In addition, the report will be available at no charge on 
the GAO Web site at [Hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about the report, please 
contact me at (202) 512-3841. 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 are listed in appendix III. 

Signed by: 

Jim Wells: 
Director, Natural Resources and Environment: 

[End of section] 

Appendixes: 

Appendix I: Award-Term Provisions at Four DOE Sites: 

The Department of Energy (DOE) introduced award-term incentives as a 
pilot program to Sandia in fiscal year 2004, and then expanded the use 
of the incentives to the Lawrence Berkeley contract and to the final 
request for proposals for Los Alamos and the Nevada Test Site, as shown 
in table 3. The language in the final request for proposals for Los 
Alamos, if placed in the contract, would award additional years to the 
contract term if the contractor (1) achieves a certain level of 
performance to be determined by the DOE contracting officer and (2) 
meets other conditions, such as finding cost savings and using these 
savings to adequately perform approved work. As shown in table 3, Los 
Alamos can earn 13 additional years on its 7-year contract. 

Table 3: Award-Term Provisions for Four DOE Facilities: 

Provisions: Duration of contract (years); 
Final request for proposals: Los Alamos: 7; 
Final request for proposals: Nevada Test Site: 5; 
Existing contracts: Lawrence Berkeley: 5; 
Existing contracts: Sandia: 5. 

Provisions: Total number of years that can be added to contract; 
Final request for proposals: Los Alamos: 13; 
Final request for proposals: Nevada Test Site: 5; 
Existing contracts: Lawrence Berkeley: 15; 
Existing contracts: Sandia: 5. 

Provisions: Possible total number of years of contract with award term; 
Final request for proposals: Los Alamos: 20; 
Final request for proposals: Nevada Test Site: 10; 
Existing contracts: Lawrence Berkeley: 20; 
Existing contracts: Sandia: 10. 

Provisions: Level of performance needed to be assessed at to earn award 
term; 
Final request for proposals: Los Alamos: Annual determination by NNSA; 
Final request for proposals: Nevada Test Site: Based on incentive fee 
earned; 
Existing contracts: Lawrence Berkeley: First 3 years: satisfactory; 
Subsequent years: Outstanding; 
Existing contracts: Sandia: Outstanding each year. 

Provisions: Requires cost savings to earn award term; 
Final request for proposals: Los Alamos: Yes; 
Final request for proposals: Nevada Test Site: No; 
Existing contracts: Lawrence Berkeley: No; 
Existing contracts: Sandia: Yes. 

Source: DOE. 

[End of table] 

Key differences between the Los Alamos final request for proposals and 
the Sandia contract are as follows: 

* The level of performance required to receive additional contract 
years can be determined by the contracting officer for Los Alamos, but 
Sandia's contract requires outstanding performance. NNSA officials 
stated that the recent history of performance at Los Alamos may take 
several years to reverse, and the contractor may not be able to achieve 
overall "outstanding" ratings in the initial years of the contract. The 
officials also noted that the flexibility may allow the contracting 
officer to focus on certain areas for improvement, such as business 
operations. 

* The contract term for Los Alamos could be 20 years, rather than the 
10 years allotted to Sandia. The 20-year term for Los Alamos requires a 
deviation from DOE Acquisition Regulation 970.1706-1, which limits DOE 
contracts to 10 years. 

[End of section] 

Appendix II: Comments from the Department of Energy: 

Department of Energy: 
Washington, DC 20585: 

August 12, 2005: 

Mr. Jim Wells:
Director, Natural Resources and Environment: 
Government Accountability Office: 
Washington, DC 20548: 

Mr. Wells: 

Thank you for the opportunity to comment on draft report GAO-05-897, 
Department of Energy: Additional Opportunities Exist for Reducing 
Laboratory Contractors' Support Costs. The Department of Energy's 
official comments are enclosed for your consideration. While we 
generally concur with the recommendations presented in the report, we 
believe incorporation of the referenced comments is critical to ensure 
the accuracy and clarity of the results. If you have any questions, 
please contact John Newell, Director, Office of Program Liaison and 
Financial Analysis, at 202-586-8921. 

Sincerely, 

Signed by: 

Susan J. Grant: 
Chief Financial Officer: 

Enclosure: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Jim Wells (202) 512-3841: 

Staff Acknowledgments: 

In addition to the contact named above, Richard Cheston, Beverly 
Peterson, Robert Sanchez, James Espinoza, and Cynthia Norris made key 
contributions to this report. Also contributing to this report were 
Chuck Bausell, Virginia Chanley, Nancy Crothers, Alison O'Neill, and 
Omari Norman. 

(360536): 

FOOTNOTES 

[1] See the Cost Accounting Standards (48 C.F.R. Part 9904) for 
detailed cost accounting requirements. 

[2] Prior to February 2005, Idaho National Laboratory was known as 
Idaho National Engineering and Environmental Laboratory. DOE's Office 
of Nuclear Energy is responsible for the laboratory, while DOE's Office 
of Environmental Management is responsible for the environmental 
cleanup of the site. 

[3] Because the Congress began providing funding specifically for 
security in fiscal year 2001, we asked the laboratories to exclude 
security from their prior indirect rates to provide consistent trend 
data. 

[4] Functional support costs accounted for about 40 percent of the 28 
contractors' fiscal year 2004 operating costs of $17.4 billion. 

[5] The Jet Propulsion Laboratory tracks "distributive costs," which 
are similar to, but not comparable with, the DOE laboratories' indirect 
costs. These distributive costs increased by 9.5 percent between fiscal 
years 2000 and 2004. 

[6] A January 2005 NNSA policy letter expanded the use of reinvested 
savings to other approved areas. The final request for proposals for 
the contract at Los Alamos allows a percentage of savings in indirect 
costs to be applied to one of these approved areas--contractor-directed 
research and development at universities and small technology companies 
in northern New Mexico. Until recently, DOE and NNSA used a contract 
provision that rewarded contractors for cost savings by allowing them 
to keep up to 25 percent of documented cost savings that DOE or NNSA 
officials had reviewed and approved. However, NNSA officials stated 
that this provision was not effective because the claimed cost savings 
could not be verified. 

[7] Under the contract, Lockheed Martin shall apply cost efficiencies 
achieved during a given fiscal year only to unfunded priority direct 
mission work that NNSA and Lockheed Martin had agreed upon at the 
beginning of the fiscal year, provided that this work is within the 
same appropriation and budget and reporting category, unless NNSA 
approves a formal reprogramming action. 

[8] The value of the benefit packages varies by laboratory, and the 
potential liability for DOE may be substantial. For example, DOE 
estimates that, for the five laboratories, its long-term liabilities 
for postretirement medical and pension benefits are at least $2.9 
billion. 

[9] GAO, Department of Energy: Certain Postretirement Benefits for 
Contractor Employees Are Unfunded and Program Oversight Could Be 
Improved, GAO-04-539 (Washington, D.C.: Apr. 15, 2004). 

[10] For example, DOE Order 4330.4B, effective in 1994, specified that 
sufficient resources should be budgeted to ensure the reliability, 
safety, and operability of structures, systems, and components, and 
that maintenance programs should meet equivalent industry guidelines. 

[11] Building Research Board, Committing to the Cost of Ownership: 
Maintenance and Repair of Public Buildings (Washington, D.C.: June 
1990). NNSA determines replacement plant value by a formula that 
estimates the value of replacing structures and equipment at each site. 

[12] Other commonly used process improvement methods include Total 
Quality Management and ISO 9000. 

[13] The Inspector General, the cognizant auditor for DOE's management 
and operating contractors, supplements its audit program with each 
contractor's internal audit activities. 

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