Contract Reform Is Risky Business

nergy Secretary Bill Richardson has had a lot on his plate since taking office in August 1998. There's been the unveiling of the world's fastest computer, debate on electricity deregulation and controversy over the alleged theft of nuclear warhead technology from the Los Alamos National Laboratory in New Mexico.

Taking on a comparatively low profile, contract reforms that began in 1994 have also been pushed forward, with contracts increasingly being competitively awarded using a fixed-price, performance-based approach. Since 1994, DOE has competed 18 major contracts to manage and operate agency facilities across the country. And in fiscal 1998, the department competed 93 percent of new contracts for activities other than managing and operating sites. Thanks to the reforms, the average time to prepare a solicitation has dropped from two years to less than six months.

Observers agree that DOE contracting methods have improved, but they note lingering problems. In a January report (GAO/OCG-99-6), the General Accounting Office declared DOE's contract management a "high-risk area" warranting continued close observation. "DOE has had difficulty completing large projects on time and within budget," the report said. From 1980 to 1996, DOE engaged in 80 major system acquisitions. Of these, 31 were stopped before completion, after spending more than $10 billion, the report said. Fifteen were finished, but many of those were behind schedule and over budget. Twenty-seven of the 34 ongoing projects have had cost overruns averaging more than 70 percent, GAO noted.

Then in June, GAO reported (RCED-99-141) that DOE does not know whether performance-based contracts at its national laboratories improve contractor performance and reduce government costs. Science and technology research and development do not always lend themselves to easily defined performance objectives, GAO found, and DOE's early performance-based contracting attempts led contractors to focus on activities tied to performance fees while neglecting other important tasks.

Part of DOE's contracting problems stem from the agency's changing mission. Today, DOE's chief duties are promoting scientific research, overseeing the country's nuclear weapons inventory and cleaning up former weapons production sites. But it wasn't so long ago that DOE's primary mission was very different: managing production of the nation's nuclear weapons arsenal. This change has made some projects obsolete. It has also made it hard for the agency to maintain congressional support for long-term, expensive projects. In addition, because Congress doesn't approve the full cost of each project up front, DOE must settle for incremental-and frequently insufficient-funding on an annual basis, often triggering delays and cost overruns.

Internal factors also have contributed to contracting problems. The agency's "inadequate technical and managerial skills have resulted in higher costs and delays," because DOE cannot properly oversee contracts, GAO auditors have argued. Such shortcomings led to the six-year delay and $900 million overrun on the Defense Waste Processing Facility in South Carolina, according to GAO. Agency efforts to improve the situation have come up short, GAO says. Not only must DOE rely on outside technical expertise to evaluate complex cleanup proposals, but agency staff also have insufficient experience and expertise in administering the new fixed-price contracts, according to GAO.

"GAO missed the mark" on this observation, says Richard Hopf, DOE's deputy assistant secretary for procurement and assistance management. "The bigger challenge is not with the procurement workforce but rather the program and technical workforce. The critical skill gap is the ability to draft statements of work for highly complex work activities adequate to support a fixed-price contract."

Likewise, Hopf argues, GAO was off base in its June report on performance-based contracts. In a pointed response to the report, Hopf wrote that DOE's evaluations showed the new approach was working. "Although it is unlikely that in the future we will identify some scientifically conclusive mechanism to confirm or deny these early assessments, it would appear intuitively obvious that defining performance expectations and measuring results is an effective management tool," he wrote.

Still, DOE officials acknowledged the shortage of staff expertise in contract management back in 1994, when a contract reform team declared that the agency lacked sufficient in-house skill in such areas as contract administration, cost estimation and financial management. Since then, DOE has sought to obtain certification for most of the agency's procurement staff, an effort that should be completed in fiscal 2000. Also next year, the department will begin offering advanced studies in procurement. "The objective is to train tomorrow's purchasing leaders in the new skills and knowledge basics that are critical to successfully continuing the major changes thus far made in the procurement community," Hopf says.

Downsizing and budget constraints certainly haven't helped DOE sort out its skill needs. Since former Secretary Hazel O'Leary launched the Strategic Alignment Initiative downsizing plan in 1995, DOE has seen its ranks drop 25 percent to about 11,000 employees. The headquarters procurement staff has been cut in half. Contractor employees, who once numbered 150,000, are down to about 103,000. "The impact of personnel reductions and ongoing budget limits, which have virtually precluded the hiring of new blood, are among procurement management's biggest worries," Hopf says.

The agency also has grappled with problems in its contract incentives process. The DOE inspector general criticized department officials in 1997 and 1998 for providing too little guidance on developing and administering such incentives. DOE has tried to rectify the problem by issuing more guidance, providing training and incorporating lessons learned from past years' experiences. Hopf insists that incentives have significantly helped boost contractor performance. For example, at the Kansas City Plant, which manufactures non-nuclear components for the country's nuclear weapons stockpile, the use of incentive fees helped reduce the occurrence of safety problems to one of the lowest rates in DOE. Private firms now use the new level as a benchmark, Hopf says.

Oversight Heat

The agency's management and integration contracts, which grew out of the contract reform effort, came under congressional scrutiny last year. Specifically, lawmakers targeted the M & I contract awarded to Fluor Daniel at Hanford in 1996 for significant cost and time overruns related to work on the Spent Nuclear Fuel project. The structure puts in place one general contractor to oversee the work of specialized subcontractors. In the view of some members of Congress, the set-up merely creates another layer of bureaucracy. "It seems to be quite inefficient," agreed Gary Jones, a GAO auditor, at a May 1998 hearing of the House Commerce Oversight and Investigations Subcommittee. "I'm not sure DOE has figured out what its role is versus that of the integrating contractor."

DOE remains committed to the management and integration concept, Hopf says, because it allows for "greater use of competitive fixed-price subcontracting, increasing the department's ability to obtain cost-effective, best-in-class subcontractors for specific tasks." In the Hanford case, Fluor Daniel took a financial hit because of its poor performance, he adds. Out of $7.2 million of available fees the company could have earned in fiscal 1998, "not only did [Fluor Daniel Hanford] not earn any fee, they were penalized by negative incentives which resulted in additional losses of fees otherwise earned on other activities," Hopf says.

Budget Priorities

For fiscal 2000, DOE officials have requested $17.8 billion, an amount slightly below this year's appropriation of nearly $18 billion because of some one-time adjustments. Program funding would actually increase by $717 million, or 4 percent, under the request. Although DOE does not give procurement a separate budget line item, officials estimate that procurement spending will be about $16.6 billion in fiscal 2000. Also under the budget request, DOE's privatization plan-which seeks alternative financing strategies such as fixed-price, performance-based contracts for large-scale cleanup design and construction projects-would receive $228 million, about the same as in fiscal 1999.

About one-third of the budget-$6.5 billion, $100 million more than the current fiscal year-would fund environmental cleanup, restoration and waste management efforts. Through contractors, DOE manages more than 100 hazardous, radioactive and mixed-waste sites, remnants of the Cold War nuclear weapons production complex, in more than 30 states. A continuing clean-up priority is the accelerated closure effort launched in 1997 to speed up and cut the costs of cleanup at the 53 DOE sites still contaminated with nuclear matter.

In a June 1998 report, "Accelerating Cleanup: Paths to Closure," DOE established a goal of completing work on 90 percent of the projects by 2006. The initiative began with only two sites-Rocky Flats, Colo., and Fernald, Ohio. The acceleration of activities such as shutting down nuclear facilities and packaging and shipping plutonium metals and oxides has allowed DOE to cut four years off the expected cleanup time needed for Rocky Flats, and three years for Fernald. Because of these successes, DOE has added the following four sites to the initiative: Mound, Ashtabula and Columbus in Ohio, and West Valley, N.Y.

The budget request would grant DOE's national security programs $6.2 billion in fiscal 2000, a $244 million increase. Most of that would go to the Stockpile Stewardship Program, which seeks to keep the nation's nuclear inventory reliable without underground nuclear testing. A key part of the SSP is the Accelerated Strategic Computing Initiative, through which DOE is producing increasingly sophisticated weapons simulation software and computers. Last year, DOE cranked up the world's fastest computers, capable of 3 trillion operations per second. By 2004, DOE hopes to have computers that can do 100 trillion operations per second.

DOE has requested $2.3 billion for energy resource programs in fiscal 2000, up slightly from 1999. More than half of that would go to programs related to energy efficiency and renewable energy, with the rest spread among programs for fossil energy, nuclear energy and power marketing.

As DOE moves forward with its competitive contracting efforts, officials also are hoping to finish revising the regulations underlying management and operating contracts. The changes, in part, will eliminate terms and conditions that are redundant with the Federal Acquisition Regulation, which governs procurement governmentwide. The agency hopes that the new regulatory language will help ensure more procurement consistency across DOE sites.