Cooperative Threat Reduction: DOD Needs More Reliable Data to Better Estimate the Cost and Schedule of the Shchuch'ye Facility

In May 2006 (Cooperative Threat Reduction: DOD Needs More Reliable Data to Better Estimate the Cost and Schedule of the Shchuch'ye Facility), we recommended to DOD, and DOD concurred, that the Defense Threat Reduction Agency (DTRA) should ensure the Earned Value Management System (EVMS) being used by its contractor to track cost and schedule of construction of the Chemical Weapons Destruction Facility (CWDF) contains valid, reliable data and reflects actual cost and schedule conditions. On March 17, 2008 contractor officials stated that in response to the GAO report and its recommendations, senior contractor management had focused special attention and resources to the EVM system at Shchuch'ye. This resulted in their EVM system being officially validated by Defense Contracts Management Agency (DCMA) on September 1, 2006. Although the new Trilateral Arrangement signed in November 15, 2007 between DOD, the contractor, and the Russian Federation removed the requirement for the contractor to operate the EVM at the Shchuch'ye CWDF, DOD and contractor management continue to use the EVM system to track progress on site construction and validate work performed by the Russian subcontractors.

In May 2006 (Cooperative Threat Reduction: DOD Needs More Reliable Data to Better Estimate the Cost and Schedule of the Shchuch'ye Facility), we recommended, and Defense Threat Reduction Agency (DTRA) partially concurred, that DOD withhold a portion of the contractor's award fee until the Earned Value Management System (EVMS) being used by the contractor to track cost and schedule of construction of the Shchuch'ye Chemical Weapons Destruction Facility (CWDF) produced reliable data. In March 2008, according to a cognizant DOD official, DTRA had withheld some award-fee from the CWDF contractor just before the GAO report was published, and they would have withheld more had the contractor not finally delivered a validated Earned Value Management System (EVMS). Possible withholding of the award-fee thus served as an incentive for the contractor to take action and improve its EVM system. This was confirmed by contractor officials.

In May 2006 (Cooperative Threat Reduction: DOD Needs More Reliable Data to Better Estimate the Cost and Schedule of the Shchuch'ye Facility), we recommended, and Defense Threat Reduction Agency (DTRA) concurred, that DOD require Parsons to perform an Integrated Baseline Review (IBR) to provide a meaningful and valid baseline for its Earned Value Management System (EVMS). According to DOD and contractor officials in March 2008, DOD instructed the CWDF contractor to use the newly validated EVM system to complete an IBR sooner than would normally be the case, in order to determine the CWDF's cost and schedule if DOD were to stick with the traditional contracting approach on-site. The IBR revealed that trying to complete the CWDF under this approach could lead to a $300 million cost overrun. The Russians continued to maintain that they could finish the project faster and cheaper, so the project manager thought that having the Russians complete the facility would be the best approach. The IBR therefore led to new negotiations between DOD, the contractor, and the Russian government, leading to a Joint Arrangement between DOD and the Russian Federal Agency for Industry (FAI)-(signed November 2007), whereby DOD is the banker/paying agent, the FAI is responsible for letting further subcontracts to local subcontractors, and the original contractor's role has been scaled back to quality verification of work performed. Under this agreement, the Russian government has agreed to pay for any cost overruns beyond the original $1.0392 billion originally provided by DOD to complete the CWDF. The IBR therefore prevented further cost overruns at the Shchuch'ye CWDF, avoiding about $300 million in potential costs. The net present value is about $286 million.