Department of Energy

DOE03: Make Field Facility Contracts Outcome-Oriented


The Department of Energy's (DOE's) national laboratories, including weapons laboratories and production plants, were established by the federal government to attract the best minds in the country to conduct scientific research and development (R&D) projects of national significance. DOE operates 16 major R&D laboratories and several production installations through management and operating (M&O) contracts with large private sector companies, universities, and nonprofit organizations (for example, Westinghouse, Martin Marietta, the Universities of California and Chicago, and Princeton University).

At the national laboratories and nuclear weapons production centers, the govern-ment owns all the land, facilities, and equipment, while the contractor manages the facility and employs research, development, and production personnel. The contractor also employs various support and maintenance personnel needed to operate the installation.

The national laboratories represent a partnership between government and private industry to develop and maintain worldwide leadership and competitiveness in various scientific disciplines (nuclear research, highenergy physics, mathematics, high-speed computing, engineering, and others). DOE laboratories have played an integral part in developing the nation's defense capability and in carrying out basic research in all major fields, including energy.

M&O contracts at DOE amount to $16 billion annually and currently employ 140,000 people.(1) Contracts were initiated in the 1940s and 1950s, primarily for nuclear weapons and other nuclear research, design, and production. The projects developed into programs of extraordinary scale, challenge, and uncertainty. For example, the contractor for Argonne National Laboratory, located near Chicago, is the University of Chicago. The installation employs 4,840 employees and operates 26 major research facilities. R&D includes experimental and theoretical research in the physical, life, and environmental sciences to support development of energy technologies and to advance scientific understanding. The 1993 operating budget was $527 million. Lawrence Livermore National Laboratory, outside San Francisco, is run by the University of California. The Laboratory employs 8,000 employees and conducts national security, energy, environmental, and biological R&D. Its 1993 annual operating budget is $1.2 billion.

Each site is unique because of its location, physical arrangement, size, and mission. The mission at a site can involve theoretical research, applied research, weapons research, nuclear weapons production, non- nuclear production, environmental restoration, or a combination of these missions.

Because the government wanted to take advantage of private sector capabilities to carry out research of critical national importance, government-owned, contractor-operated (GOCO) R&D facilities were constructed using M&O contracts for the national laboratories. The contracts have traditionally contained broad oversight and performance requirements and special provisions for the contractor. The contractor requires no capital investment. The government sets up a special bank account to cover operating expenses; this covers all costs except costs for deliberate waste, fraud, and abuse. These provisions were necessary during the early, uncertain, and urgent stages of nuclear weapons development. The M&O contract approach has come under increasing criticism from DOE program officials, the Office of Management and Budget, the General Accounting Office (GAO), and Congress. Criticism includes poor business management practices and inadequate cost accounting procedures. An M&O contract typically includes:

--- long-term, core scientific and technological research or production missions;

--- special one-time R&D projects; and

--- support functions and daily operations and maintenance activities at the installation.(2)

The M&O contract for each GOCO laboratory and weapons center has typically been awarded on a cost reimbursement-type contract basis that covers five-year periods with options for contractor renewal. While such contracts may be appropriate for complex and high-risk scientific projects, they may not be the most cost-effective management arrangement for routine support functions. For that reason, some of those functions are subcontracted by the prime contractor.

A close association has developed between DOE program managers at headquarters and contractor laboratory managers. Congress appropriates funds for R&D by program (laboratories get no appropriation). Program managers direct major research funding to the specific laboratories they believe are best able to carry out the work, based on proposals from those laboratories. Within program areas, laboratory managers compete with others in their scientific field for this R&D funding. The complexity of the projects, the close association between the contractor and the government at a GOCO facility, and special provisions in M&O contracts have resulted both in R&D success and in a number of administrative complications that have been documented in GAO and DOE Inspector General reports.

In 1990, GAO designated DOE's contract management as one of 16 high-risk areas governmentwide because of its extensiveness and history of inadequate contractor oversight. For example, DOE's nuclear weapons labs have routinely reported quantities of nuclear materials as "in use" or "needed" when they were actually excess. Sandia National Laboratory reported $500,000 worth of excess uranium as "needed." Lawrence Livermore, Los Alamos, and Savannah River also reported incorrectly. These inaccuracies affect DOE's ability to forecast nuclear materials requirements and result in purchasing and storage costs that are larger than necessary, as well as added safety and environmental risks.(3)

Many other documented incidents involving complications in security and contracting have been serious and costly. For example, tens of thousands of documents relating to secret nuclear weapons and laser technology could not be located. Also, since 1986, Lawrence Livermore Laboratory has leased 58 vehicles from the University of California (the M&O contractor) using a sole-source contract and at a cost of $987,000 when the vehicles could have been obtained through the General Services Administration at a cost of $396,000. In addition, in 1989, Los Alamos Laboratory, when performing work for non-federal parties, exceeded sponsor advances by $460,000 and its approved budget authority by $719,000, putting DOE at-risk for financing the sponsors' work.(4)

Subcontracting by DOE's M&O contractors amounts to roughly $5 billion per year and has also been subject to criticism. DOE reviews have disclosed excessive use of sole-source subcontracts, inadequate separation of duties, and initial prices below review thresholds that are subsequently raised by contract modifications.(5) They have also revealed significant deficiencies in record keeping and analysis needed to ensure that prices were fair and reasonable. When M&O contractors do not take full advantage of competition and fixed-price mechanisms in their subcontracts, they pay more than they should for the goods and services that they buy on behalf of the government.

Oversight of M&O contracts is performed by government officials in program offices and operations offices. Program managers oversee the science, technology, research, and development aspects of laboratory and weapons production activity. Operations office managers oversee contractual and cost accounting matters and provide day-to-day oversight and an on-site field presence. Relative to the size of the contracts being managed and the complexity of the work being performed, the government oversight staff is considered to be small and inadequately trained. Oversight is also hampered by a lack of specificity in the descriptions of products of M&O contracts and performance requirements, expectations, and measurement criteria.

In many cases, DOE officials are limited in their ability to specify objective measures in contracts because entities outside DOE that sponsor or regulate DOE activities have failed to provide adequate performance criteria to DOE. This is particularly true for work done in defense programs and environmental restoration. Moreover, in areas involving basic science, where outcomes cannot be specified, performance criteria based on peer review are needed to promote the best basic science without discouraging creative research.

Alternative management and contracting arrangements exist that might improve both the control and cost of operations and support at laboratories and weapons production plants. One option is to separate large M&O contracts into their major components and replace them with more traditional contracts. Another is to assume direct government management for selected activities of existing M&O contracts as those contracts expire. Under this option, government operations office officials would manage, rather than oversee, certain carefully chosen contractor and subcontractor functions that are now managed by the M&O contractor.

The Secretary of Energy is well aware of the weaknesses in the contracting system she has inherited. In testimony before the House Committee on Energy and Commerce on May 26, 1993, she summarized her concerns and announced a series of initiatives to improve DOE contract management.(6) Included was the formation of a contract reform team to perform a top-to-bottom review of DOE's contracting mechanisms and practices. The team is tasked to present a report to the Secretary by December 31, 1993, containing recommendations to improve accountability, stimulate competition, and simplify administration.

The Secretary is also applying quality management to the Department and its contractors. In an effort to do more, do it better, and use fewer resources, the Secretary is developing a comprehensive strategy that deals with all aspects of science and technology. Current management practices are being improved to enhance accountability and reponsiveness to national needs. As part of a strategic planning process, a new and effective system is being developed with specific performance criteria, objectives, and performance metrics to make results-oriented evaluation and budgeting a reality.

In the National Performance Review Accompanying Report on budget issues, it is recommended that managers should have the flexibility to spend their available dollars in a manner that will most effectively achieve the agency's mission. Managers should consider both government employees and contractor personnel within their personnel ceilings and should select the most appropriate and cost- effective combination. Long-range financial plans and sound accounting systems must first be in place before the government makes the transition to this approach. Assuming support for this approach, DOE program managers and operations officials should consider the mix of contractor and government personnel at laboratories and weapons production centers and recommend changes to optimize the use of available funding.


1. DOE program managers should increase the use of performance objectives and goal-based budgeting when establishing funding levels for programs and projects.

DOE should provide contractors with performance-based contracts containing clear, specific directions, incentives, and measures to test performance and compliance. Performance criteria should be crafted for each mission area to capture its unique features. DOE program managers and Department of Defense officials should jointly define tests for performance of defense activities. Environmental cleanup activities should be measured against predetermined definitions of acceptable outcomes.

2. DOE program managers should promote better coordination and more active competition at and among facilities.

Program officials should be encouraged to rely less on sole-source arrangements with DOE labs and to solicit bids on projects from all government facilities and the private sector. This should be done in conjunction with a thorough scientific evaluation of proposals using the best elements of peer review.

3. DOE should strengthen the authority of government field managers and hold them accountable.

Federal field managers should be more active in cost estimating, cost accounting and oversight of core contracts, and the management of support functions and non-core activities.

4. DOE should test and assess alternatives to the cost reimbursement contract model traditionally used by the agency at laboratories and weapons production plants.

Since DOE's facilities and their missions are varied, a number of different contracting mechanisms is likely to be more appropriate than a single mechanism for all sites. Tests should be conducted at individual sites before adopting them more broadly at national laboratories and weapons centers.

When significant cost savings can be achieved, serious consideration should be given to a structure in which on-site federal managers play a more direct role in managing a facility-- for example, managing one-time projects and such support functions as security and maintenance of buildings, grounds, and roads. Where savings are anticipated from the substitution of government personnel for contractor personnel, DOE's appropriation should be reduced by the amount of the savings.

DOE should also increase the use of competitive, fixed-price contracts, subcontracts, and grants for non- core activities including discrete environmental cleanup projects, one-time R&D projects, and routine installation M&O services.

5. DOE should improve the capability of the financial management systems used to accumulate data from laboratories and weapons centers to measure, analyze, report, and control spending so that it is uniform, accurate, and received rapidly for programs and facilities.

All contractors and all facilities should be required to report to DOE using a standard financial reporting system, except in cases where the cost to implement the system would exceed the benefits. Federal program managers should be more active in the management of funds, obligating them for clearly defined activities with specified outcomes.


The operation of national labs including the advancement of science, research, and development as well as normal maintenance and support of buildings, roads, and grounds would be conducted in a more open, fair, and objective environment. Enhanced competition among labs and cooperation with industry and universities will improve performance while lowering costs.

Fiscal Impact

Under present conditions, government employees at DOE operations offices oversee contractors who manage and operate government-owned laboratories and nuclear weapons production sites. As proposed, at selected locations, government employees would become actively involved in, and responsible for, the management and operations of the site and for the contracts in effect there. Reconsideration of the mix of government and contractor personnel is expected to result in net reductions in personnel, overhead, and prime contractor fees for subcontractor activities. Savings will begin to materialize in fiscal 1995.

Budget Authority (BA) and Outlays (Dollars in Millions) 
Fiscal Year
               1994    1995    1996    1997    1998    1999    Total
BA             n/a    -60.0   -90.0  -120.0  -150.0  -150.0   -570.0
Outlays        n/a    -36.0   -78.0  -108.0  -138.0  -138.0   -498.0
in FTEs        n/a    400     600     800   1,000   1,000    1,000


1. U.S. Congress, House, Committee on Energy and Commerce, Subcommittee on Oversight and Investigations, "Contract Management and Administration at the Department of Energy," statement by Hazel R. O'Leary, May 26, 1993, p. 3.

2. "Core missions" are missions at specific laboratories or weapons production sites designated by the Secretary of Energy based on established expertise and demonstrated capabilities.

3. U.S. General Accounting Office (GAO), Energy Management: Vulnerability of DOE's Contracting to Waste, Fraud, Abuse, and Mismanagement, GAO/RCED-92-101 (Washington, D.C.: U.S. General Accounting Office [GAO], April 1992), p. 20.

4. Ibid., p. 19.

5. U.S. General Accounting Office, Energy Mangement: DOE Actions to Improve Oversight of Contractors' Subcontracting Practices, GAO/RCED-92-28 (Washington, D.C.: GAO, October 1991), pp. 1, 3.

6. Statement by Hazel R. O'Leary.

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