Hanford Waste Treatment Plant
Department of Energy Needs to Strengthen Controls over Contractor Payments and Project Assets Gao ID: GAO-07-888 July 20, 2007In December 2000, the Department of Energy (DOE) awarded Bechtel National, Inc. (Bechtel) a contract to design and construct the Waste Treatment Plant (WTP), one of the largest nuclear waste cleanup projects in the nation. Originally expected to cost $4.3 billion and be completed in 2011, DOE now estimates that WTP will cost over $12.2 billion and be completed in late 2019. Weaknesses in DOE's management and oversight of contractors led GAO to designate DOE contract management as a high-risk area since 1990. GAO was asked to determine whether (1) DOE's internal controls are designed to provide reasonable assurance against improper WTP payments and (2) DOE's controls reasonably ensure proper accountability for WTP assets. GAO reviewed fiscal year 2005 and 2006 internal controls by analyzing data and documents, interviewing DOE and contractor staff, and physically observing property items.
DOE's internal controls over payments to contractors on its WTP project did not provide reasonable assurance against the risk of improper contractor payments, particularly given the project's substantial inherent risks. Several factors combined to pose a risk of improper payments on this project, including the size and complexity of this one-of-a-kind nuclear construction project, escalating cost and schedule estimates, and the thousands of charges Bechtel billed to DOE on each invoice. Despite the risks, in fiscal years 2005 and 2006 DOE performed little or no review of contractor invoices or supporting documents for the $40 million to $60 million in charges that Bechtel billed to DOE each month to help ensure the validity of these charges. Instead, DOE officials relied primarily on the Defense Contract Audit Agency's reviews of Bechtel's corporate-wide financial systems and on Bechtel's reviews of subcontractor charges for assurance that the charges were proper. DOE's heavy reliance on others, with little oversight of its own, exposed the hundreds of millions of dollars it spent annually on the project to an unnecessarily high risk of improper payments. DOE also did not adequately oversee the contractor to ensure accountability for assets purchased with WTP contract funds, relying primarily on the contractor to manage such government property without ensuring the adequacy of the contractor's controls. We found numerous internal control weaknesses with Bechtel's property management program, including poor segregation of duties, property system errors, and inadequate property procedures. For example, Bechtel did not timely prepare and submit required reports of lost or damaged property, taking up to 2 years in some instances to report missing assets, such as computers, to DOE. Bechtel also did not always review subcontractors' property management policies and procedures as required or follow up on subcontractor weaknesses it identified to help ensure that its subcontractors adequately managed and safeguarded WTP property in their possession. These property control weaknesses coupled with the lack of DOE oversight created an environment in which property could be lost or stolen without detection.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-888, Hanford Waste Treatment Plant: Department of Energy Needs to Strengthen Controls over Contractor Payments and Project Assets
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Report to the Subcommittee on Energy and Water Development, Committee
on Appropriations, House of Representatives:
United States Government Accountability Office:
GAO:
July 2007:
Hanford Waste Treatment Plant:
Department of Energy Needs to Strengthen Controls over Contractor
Payments and Project Assets:
GAO-07-888:
GAO Highlights:
Highlights of GAO-07-888, a report to the Subcommittee on Energy and
Water Development, Committee on Appropriations, House of
Representatives
Why GAO Did This Study:
In December 2000, the Department of Energy (DOE) awarded Bechtel
National, Inc. (Bechtel) a contract to design and construct the Waste
Treatment Plant (WTP), one of the largest nuclear waste cleanup
projects in the nation. Originally expected to cost $4.3 billion and be
completed in 2011, DOE now estimates that WTP will cost over $12.2
billion and be completed in late 2019. Weaknesses in DOE‘s management
and oversight of contractors led GAO to designate DOE contract
management as a high-risk area since 1990. GAO was asked to determine
whether (1) DOE‘s internal controls are designed to provide reasonable
assurance against improper WTP payments and (2) DOE‘s controls
reasonably ensure proper accountability for WTP assets. GAO reviewed
fiscal year 2005 and 2006 internal controls by analyzing data and
documents, interviewing DOE and contractor staff, and physically
observing property items.
What GAO Found:
DOE‘s internal controls over payments to contractors on its WTP project
did not provide reasonable assurance against the risk of improper
contractor payments, particularly given the project‘s substantial
inherent risks. Several factors combined to pose a risk of improper
payments on this project, including the size and complexity of this one-
of-a-kind nuclear construction project, escalating cost and schedule
estimates, and the thousands of charges Bechtel billed to DOE on each
invoice. Despite the risks, in fiscal years 2005 and 2006 DOE performed
little or no review of contractor invoices or supporting documents for
the $40 million to $60 million in charges that Bechtel billed to DOE
each month to help ensure the validity of these charges. Instead, DOE
officials relied primarily on the Defense Contract Audit Agency‘s
reviews of Bechtel‘s corporate-wide financial systems and on Bechtel‘s
reviews of subcontractor charges for assurance that the charges were
proper. DOE‘s heavy reliance on others, with little oversight of its
own, exposed the hundreds of millions of dollars it spent annually on
the project to an unnecessarily high risk of improper payments.
DOE also did not adequately oversee the contractor to ensure
accountability for assets purchased with WTP contract funds, relying
primarily on the contractor to manage such government property without
ensuring the adequacy of the contractor‘s controls. We found numerous
internal control weaknesses with Bechtel‘s property management program,
including poor segregation of duties, property system errors, and
inadequate property procedures. For example, Bechtel did not timely
prepare and submit required reports of lost or damaged property, taking
up to 2 years in some instances to report missing assets, such as
computers, to DOE. Bechtel also did not always review subcontractors‘
property management policies and procedures as required or follow up on
subcontractor weaknesses it identified to help ensure that its
subcontractors adequately managed and safeguarded WTP property in their
possession. These property control weaknesses coupled with the lack of
DOE oversight created an environment in which property could be lost or
stolen without detection.
Figure: Aerial View of the Hanford Waste Treatment Plant under
Construction:
[See PDF for Image]
Source: DOE.
[End of figure]
What GAO Recommends:
GAO makes 11 recommendations to DOE to (1) establish effective invoice
review procedures based on the WTP contract‘s risks, (2) periodically
assess the WTP contractor‘s property management program, and (3) direct
the WTP contractor to establish controls to improve accountability for
property. While DOE agreed with one recommendation, it also stated its
controls were adequate. GAO disagrees.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-888].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Linda Calbom at (206) 287-
4809 or calboml@gao.gov.
[End of figure]
Contents:
Letter:
Results in Brief:
Background:
Inadequate DOE Controls Heightened Risk of Improper WTP Contractor
Payments:
DOE's Oversight Controls for Project Assets Were Inadequate:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Energy:
Appendix III: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Fiscal Years 2005 and 2006 WTP Expenses Billed by Bechtel to
DOE:
Figures:
Figure 1: Aerial View of Hanford Waste Treatment Plant under
Construction:
Figure 2: Sample Charges from Bechtel Invoice to DOE:
Figure 3: Example of Construction Equipment and Tools Being Used at
WTP:
Abbreviations:
DCAA: Defense Contract Audit Agency:
DCMA: Defense Contract Management Agency:
DEAR: Department of Energy Acquisition Regulation:
DOE: Department of Energy:
FAR: Federal Acquisition Regulation:
WTP: Waste Treatment Plant:
United States Government Accountability Office:
Washington, DC 20548:
July 20, 2007:
The Honorable Peter J. Visclosky:
Chairman:
The Honorable David L. Hobson:
Ranking Member:
Subcommittee on Energy and Water Development:
Committee on Appropriations:
House of Representatives:
The Department of Energy (DOE) is currently constructing one of the
largest and most complex nuclear waste cleanup projects in the nation-
-the Waste Treatment and Immobilization Plant (WTP) at the Hanford site
in southeastern Washington state. DOE awarded Bechtel National, Inc.
(Bechtel) an 11-year cost-plus-incentive-fee contract in December 2000
to design, construct, and commission this one-of-a-kind nuclear waste
treatment complex.[Footnote 1] Although DOE originally projected the
plant would cost $4.3 billion and be completed in 2011, it now
estimates that the project will cost over $12.2 billion and be
completed in late 2019. Sound financial management of projects,
particularly as large and complex as the WTP project, requires
effective design of and compliance with internal controls. However,
work we have done in the past has found that DOE's controls over these
types of contracts are not always effective, largely because of DOE's
inadequate management and oversight of contractors. As a result, since
1990 we have designated DOE contract management as a high-risk area.
Given that over $3 billion has been spent on this project to date with
billions more expected to be spent in the future, this report examines
whether (1) DOE's internal controls are designed to provide reasonable
assurance that improper payments to WTP contractors will not occur or
will be detected in the normal course of business and (2) DOE's
oversight controls reasonably ensure proper accountability for assets
purchased with WTP project funds.
To address these objectives, we considered the internal controls
relevant to contractor costs and property (assets) that DOE had in
place in fiscal years 2005 and 2006. We reviewed applicable DOE
directives, policies, and procedures; WTP contract requirements; the
Federal Acquisition Regulation (FAR); the Department of Energy
Acquisition Regulation; and GAO's Standards for Internal Control in the
Federal Government to gain an understanding of the applicable internal
control requirements. We visited DOE's Office of River Protection,
which has oversight responsibility for the WTP project, in Richland,
Washington, and performed walk-throughs and observations of DOE's
oversight processes, interviewed agency officials, and reviewed related
supporting documentation and compared DOE's controls against applicable
requirements. Because the Defense Contract Audit Agency (DCAA) and the
Defense Contract Management Agency (DCMA) perform reviews and oversight
of Bechtel, we met with DCAA and DCMA auditors and with the DCMA
corporate administrative contracting officer and reviewed relevant
audit reports they prepared to better understand their work related to
Bechtel. We also met with contractor staff in Richland, reviewed data
extracts from selected Bechtel financial and property systems,
performed limited data mining[Footnote 2] procedures where possible on
the data extracts and reviewed supporting documentation, reviewed the
contractor's and selected subcontractors' property management policies
and procedures, and performed walk-throughs and observations of the
contractor's property management processes. We also performed physical
observations of selected property items at the WTP site and selected
subcontractor sites in Richland and at Bechtel offices in San
Francisco, California to test the existence, accuracy, and completeness
of a nongeneralizable selection of property items recorded in the
contractor's property system. From the procurement system, we selected
a nongeneralizable selection of property purchases to observe and to
test whether these purchases had been recorded in the property system.
The results of our review of these nongeneralizable selections cannot
be used to make inferences about the population. Our work was not
designed to determine or to project the allowability of all contractor
costs or the accountability of all property items. Our scope and
methodology are discussed in greater detail in appendix I. We performed
our work from June 2006 through May 2007 in accordance with generally
accepted government auditing standards.
Results in Brief:
DOE's internal controls over payments to the WTP contractor do not
provide reasonable assurance against the risk of improper payments,
particularly given the WTP project's substantial inherent risks.
Several factors combine to pose an inherent risk to the government of
improper payments on this project, including the size and complexity of
this one-of-a-kind nuclear construction project, the multibillion-
dollar cost and schedule overruns the project has already experienced,
and the substantial volume of transactions Bechtel bills to DOE on each
invoice. As such, the project warrants a commensurate level of internal
controls and oversight to help ensure that goods and services billed by
WTP contractors have been received and are proper. Despite these risks,
in fiscal years 2005 and 2006, DOE performed little or no review of the
contractor's invoices or supporting documents for the $40 million to
$60 million in charges that Bechtel billed to DOE each month. The need
for close, ongoing review of invoiced transactions and support is
particularly compelling given that the contractor's invoices provided
little detail as to the items purchased, contrary to FAR and contract
requirements. However, DOE officials chose instead to rely primarily on
DCAA's review and approval of Bechtel's corporate-wide financial
systems, which DOE officials believed allowed them to rely on the
contractor's systems with little or no DOE oversight. In addition, DOE
relied primarily on Bechtel to review and validate subcontractor
charges without having a process in place to assess whether Bechtel was
properly carrying out its subcontractor oversight responsibility. DOE's
heavy reliance on others, with little oversight of its own, exposed the
hundreds of millions of dollars it spent annually on the WTP project to
an unnecessarily high risk of improper payments.
DOE also did not adequately oversee the contractor to ensure proper
accountability for assets purchased with WTP contract funds. Under the
contract, the contractor is responsible and accountable for all such
property in accordance with sound business practice and applicable
sections of the FAR. However, under the FAR, DOE is responsible for
reviewing the contractor's property program to ensure compliance with
the property clauses of the contract. We found that DOE relied
primarily on the contractor to manage property without adequate
oversight of the contractor's property program. Our review of Bechtel's
property management program disclosed numerous internal control
weaknesses that hindered accountability and increased the vulnerability
of government property to theft or loss. For example, we found that
Bechtel relied primarily on one property staff person to record the
assets into its government property system, perform annual physical
inventories, and update the information in the government property
system. We also found errors and inaccuracies in the government
property system, such as items listed with incorrect property
custodians or locations, and unrecorded property items, such as
personal digital assistants. Bechtel also lacked adequate procedures
for the physical inventory of construction materials and the custodial
accountability of tools, contributing to inadequate accountability of
government property. Bechtel did not follow up on off-site property
items with expired property passes to ensure accountability for the
items, and did not adequately oversee its subcontractors to help ensure
that they appropriately managed and safeguarded WTP property that they
possessed. Bechtel also did not timely prepare and submit reports of
lost or damaged property, taking up to 2 years in some instances to
report missing assets, such as computers, to DOE. While the instances
of errors and missing assets we identified are not generalizable to the
population, they help illustrate the effects of the control weaknesses.
These internal control weaknesses over property coupled with the lack
of DOE oversight created an environment in which government property
could be lost or stolen without detection. During our review, both DOE
and Bechtel hired new property managers who in turn have made a number
of recent policy and procedural changes that, if properly implemented,
should help improve internal controls and oversight of property.
However, these actions by themselves will not address all the property
vulnerabilities we found.
We are making 11 recommendations to DOE that, if effectively
implemented, should improve DOE's oversight of WTP expenditures and
strengthen its accountability for WTP-acquired government property.
These recommendations are aimed at (1) establishing effective invoice
review and approval procedures based on the WTP contract's risks, (2)
periodically assessing the WTP contractor's property management
program, and (3) directing the WTP contractor to establish controls to
improve accountability for government property.
DOE commented on a draft of the report and stated it had assessed the
risk of improper payments at contract inception, but agreed with the
recommendation to perform an updated risk assessment to ensure adequate
oversight and accountability for WTP expenditures. DOE did not
specifically comment on the remaining recommendations. DOE stated that
it believed the controls in place during the period of review, fiscal
years 2005 and 2006, met the requirements and intent of the applicable
FAR, DOE, and contract requirements, and that its existing practices
adequately prevent unallowable or improper costs. DOE stated it would
engage with DCAA to prepare an updated assessment of the risks, revise
the current policies and procedures related to contractor billings as
necessary, and assess the adequacy of property management staff levels
and capabilities to ensure that adequate coverage is provided for
oversight of the WTP.
We disagree with DOE's contention that the controls in place during the
period of review met all FAR, DOE, and contract requirements, as noted
by several examples in our report where DOE's and/or the contractor's
controls did not meet these requirements. Further, as reflected in both
the report title and objectives, the focus of our report was not
limited to DOE's compliance with regulations, but more broadly on the
adequacy of its internal controls over contractor payments and project
assets. Thus, our report also discusses areas in which DOE had not
developed the policies needed to effect adequate internal control, and
we continue to believe that DOE cannot rely primarily on others to
ensure the propriety of its WTP contract payments. DOE's written
comments are provided in appendix II and our detailed response to these
comments is provided in the Agency Comments and Our Evaluation section
of this report.
Background:
DOE's Hanford site in southeastern Washington State was established in
1943 to produce nuclear materials for the nation's defense. Although
DOE stopped producing nuclear material at Hanford in 1989, millions of
gallons of high-level radioactive waste from production still remain in
aging, underground waste tanks, most of which are beyond their design
life and many of which have reportedly leaked waste into the soil.
Since production ended, DOE has attempted and abandoned several
different approaches to treat and dispose of Hanford's tank wastes.
DOE's current approach, the WTP project, is intended to separate the
waste into high-level and low-activity fractions, and immobilize all of
the high-level fraction and about half of the low-activity fraction of
Hanford's approximately 56 million gallons of radioactive waste for
permanent disposal.[Footnote 3] To achieve this goal, DOE contracted
with Bechtel in 2000 to construct a complex of 3 waste processing
facilities, an analytical laboratory, and over 20 smaller, supporting
facilities to treat and package the waste. The original contract was
for $4.3 billion, with a completion date of 2011. However, since then
numerous problems with the design and construction of the facilities
have resulted in several cost and schedule overruns. DOE currently
estimates that the WTP project will cost $12.2 billion, with a
completion date of late 2019. (See fig. 1 for an aerial view of WTP as
of March 2007.)
Figure 1: Aerial View of Hanford Waste Treatment Plant under
Construction:
[See PDF for image]
Source: DOE.
[End of figure]
DOE relies almost entirely on contractors to carry out its production,
research, and cleanup missions. DOE's history of inadequate management
and oversight of contractors and of failure to hold its contractors
accountable led us in 1990 to designate DOE's contract management,
including both contract administration and project management, as a
high-risk area vulnerable to fraud, waste, abuse, and mismanagement.
Similarly, both DOE and DOE's Office of Inspector General have reported
contract and project management as significant DOE management
challenges since the 1990s. Over the years, we have also reported on
project management weaknesses at WTP.[Footnote 4] Because of both
contractor and DOE management problems with the project, DOE directed
Bechtel to slow down or stop construction activities on two of the
major facilities--the pretreatment facility and the high-level waste
facility. The construction slowdown caused Bechtel to lay off several
hundred construction workers in 2005, and caused Bechtel's total annual
WTP expenditures to drop from $751 million in fiscal year 2005 to $498
million in fiscal year 2006. However, Bechtel is preparing to restart
construction on the two facilities and hire several hundred more
workers in 2007 and 2008. While the majority of Bechtel's WTP employees
are located at or near the WTP construction site in Richland,
Washington, some are also located off-site, primarily at Bechtel
corporate offices in California and Maryland. DOE officials stated that
because of the difficulty of hiring engineers willing to relocate to
Richland, Bechtel plans to hire many more off-site employees in the
future and is in the process of establishing a satellite office in
Oakland, California, and expanding a satellite office in Frederick,
Maryland, exclusively for the WTP project.
While our previous reports on WTP primarily discussed DOE's project
management practices, this report addresses aspects of its contract
administration practices. Contract administration involves those
activities performed by government officials, such as the program
office staff, contracting officer and representatives, property
administrator, and financial staff, after a contract has been awarded
to help ensure that the contractor complies with the terms of the
contract and that the government gets what it paid for at an
appropriate cost.[Footnote 5] DOE and the contractor must also comply
with applicable provisions of the FAR, which is the primary regulation
that federal agencies must follow when acquiring supplies and services
with appropriated funds. The Department of Energy Acquisition
Regulation establishes uniform acquisition policies that implement and
supplement the FAR and is applicable to DOE acquisitions. The contract
also specifies the DOE orders and directives that are applicable to the
project. These orders and directives may impose requirements on DOE,
the contractor, or both.
Contract Requirements:
Under the WTP contract, Bechtel must submit an invoice to DOE twice a
month for reimbursement of all allowable costs incurred to complete the
contract.[Footnote 6] Excluding incentive fees, each semimonthly
invoice averaged more than $30 million in costs during fiscal year
2005, and more than $20 million during fiscal year 2006. DOE's WTP
contracting officer was responsible for approving each invoice within a
few days so that DOE could pay the contractor within 7 days of
receiving the invoice as required under the contract.[Footnote 7]
However, if DOE discovers an overpayment or underpayment after
approval, it can make a subsequent adjustment at any time prior to
contract closeout.
Under the terms of the contract, the FAR, and the cost accounting
standards, reimbursable costs include supplies and services purchased
directly for the contract, payments to subcontractors,[Footnote 8]
direct labor, direct travel, other direct costs, and properly allocable
and allowable indirect costs.[Footnote 9] The FAR and the cost
accounting standards provide the cost principles and procedures for
determining the allowability, allocability, and reasonableness of such
costs.[Footnote 10] Bechtel calculates the indirect costs in each
invoice based on the various indirect cost billing rates that Bechtel
and the government's corporate administrative contracting officer
negotiate and agree to each year. Once agreed upon, the same set of
rates applies to all of Bechtel's government contracts. The corporate
administrative contracting officer assigned to oversee Bechtel is an
official of DCMA, a component of the Department of Defense. DCAA and,
to a lesser extent, DCMA, perform various reviews and audits of
Bechtel's corporate-wide billing, purchasing, and accounting systems as
well as various reviews of direct and indirect costs.[Footnote 11]
The WTP contract provides that title to property purchased by the
contractor for which the contractor is reimbursed by the government
passes to the government, and that the contractor is responsible and
accountable for all such property. It further requires the contractor
to establish and maintain a program for the use, maintenance, repair,
protection, and preservation of government property in accordance with
sound business practice and with FAR 45.5.[Footnote 12] The FAR
provides additional requirements for the contractor's property control
program, such as requirements for the contractor to investigate and
report to the DOE property administrator all cases of loss, damage, or
destruction of government property and to require and ensure that
subcontractors provided government property under the prime contract
comply with the FAR requirements.[Footnote 13] The FAR requires DOE to
review and approve the contractor's property control system and to
perform reviews to ensure compliance with the government property
clauses of the contract.[Footnote 14] In addition, DOE Order 580.1,
Department of Energy Personal Property Management Program, sets forth
the standards, practices, and performance expectations for the
management of personal property owned by DOE, including requirements
for DOE property administrators to develop and apply an oversight
program, resolve property administration issues, and make
recommendations concerning the acceptability of contractor personal
property management systems.
Internal Control:
Internal control is the first line of defense in safeguarding assets
and preventing and detecting fraud and errors. Internal control is not
one event or activity but a series of actions and activities that occur
throughout an entity's operations on an ongoing basis. It comprises the
plans, methods, and procedures used to effectively and efficiently meet
missions, goals, and objectives. As required by 31 U.S.C. §
3512(c),(d), commonly referred to as the Federal Managers' Financial
Integrity Act of 1982, GAO issues standards for internal control in the
federal government.[Footnote 15] These standards provide the overall
framework for establishing and maintaining internal control and for
identifying and addressing major performance and management challenges
and areas at greatest risk of fraud, waste, abuse, and mismanagement.
The accompanying internal control standards tool provides additional
guidance to assist agencies in maintaining or implementing effective
internal control and in determining what, where, and how improvements
can be implemented.[Footnote 16] The standards include establishment of
a positive control environment that provides discipline and structure
as well as a climate that influences the quality of internal control.
As we reported in our Executive Guide, Strategies to Manage Improper
Payments: Learning from Public and Private Sector Organizations
(improper payments guide), a lack of or breakdown in internal control
may result in improper payments.[Footnote 17] Improper payments are a
widespread and significant problem in government and include
inadvertent errors, such as duplicate payments and miscalculations;
payments for unsupported or inadequately supported claims or invoices;
payments for services not rendered; and payments resulting from
outright fraud and abuse.
Inadequate DOE Controls Heightened Risk of Improper WTP Contractor
Payments:
DOE's controls over payments to contractors were not effectively
designed to adequately reduce the risk of improper payments,
particularly given the inherent financial risks of the WTP project.
Specifically, several factors combine to pose a significant inherent
risk of improper payments to the government on this project, including
the size and complexity of the project, escalating cost and schedule
estimates, and the significant volume of transactions Bechtel bills to
DOE each invoice. However, despite these risks, DOE performed little or
no review of the contractor's invoices in fiscal years 2005 and 2006 or
of supporting documents for the almost $1.25 billion Bechtel billed to
DOE on these invoices. Instead, DOE relied primarily on DCAA's review
and approval of Bechtel's financial systems and on Bechtel's review and
approval of subcontractor charges. DOE's heavy reliance on others, with
little oversight of its own, exposed the hundreds of millions of
dollars it spent annually on the project to an unnecessarily high risk
of improper payments.
WTP Project Has Significant Inherent Risks:
The WTP is a long-term project that DOE currently estimates will cost
over $12 billion and take almost 20 years to complete. The size and
complexity of the project and the escalating cost and schedule
estimates pose a significant inherent risk to the government of
improper payments that warrants a commensurate level of internal
controls and oversight to help mitigate such risk. Table 1 illustrates
the major categories of expenditures billed by Bechtel and reimbursed
by DOE for the project in fiscal years 2005 and 2006.
Table 1: Fiscal Years 2005 and 2006 WTP Expenses Billed by Bechtel to
DOE:
Dollars in millions.
WTP expenses: Salaries and benefits;
FY 2005: $293.2;
FY 2006: $180.7.
WTP expenses: Construction materials and supplies;
FY 2005: 215.8;
FY 2006: 132.7.
WTP expenses: Subcontracts and consultants;
FY 2005: 131.2;
FY 2006: 93.8.
WTP expenses: Overhead and general and administrative costs;
FY 2005: 56.0;
FY 2006: 53.1.
WTP expenses: Incentive fees;
FY 2005: 20.7;
FY 2006: 14.5.
WTP expenses: Relocation and temporary assignments;
FY 2005: 12.2;
FY 2006: 3.9.
WTP expenses: Real property rental and operating expenses;
FY 2005: 7.3;
FY 2006: 7.4.
WTP expenses: Automotive and construction equipment and operating
expenses;
FY 2005: 6.1;
FY 2006: 0.6.
WTP expenses: Office furniture, computers, and supplies;
FY 2005: 2.5;
FY 2006: 3.8.
WTP expenses: Other;
FY 2005: 6.2;
FY 2006: 7.4.
Total expenses;
FY 2005: $751.2;
FY 2006: $497.8.
Source: GAO analysis of Bechtel billing system data.
[End of table]
As discussed in GAO's improper payments guide, the risk of improper
payments increases in programs with a significant volume of
transactions or emphasis on expediting payments.[Footnote 18] Bechtel
bills DOE for thousands of transactions totaling tens of millions of
dollars on every semimonthly invoice. In addition, the WTP contract
specifies that DOE pay the contractor within 7 days of receipt of a
proper invoice rather than the 30 days normally allowed under the
Prompt Payment Act before it becomes liable for a late payment interest
penalty.[Footnote 19] This large volume of transactions combined with
the expedited payment terms increases the risk of improper payments.
In addition, as a cost-plus-incentive-fee contract, the WTP contract
type has its own inherent risks. Specifically, cost-reimbursement
contracts (1) place maximum risk with the government and minimum risk
with the contractor and (2) provide the contractor with little
financial incentive to control costs. In some cases, the government may
incorporate incentives within the fee structure to encourage the
contractor to control costs, which DOE did in Bechtel's contract by
providing the potential for Bechtel to earn incentive fees based on the
relationship of total allowable costs to certain cost targets.[Footnote
20] In this case, however, the current contract incentives are no
longer meaningful because the current cost and schedule goals are no
longer achievable due to the cost overruns and schedule delays that
have already occurred. The FAR specifies that a cost-reimbursement
contract may be used only when appropriate government surveillance
during contract performance will provide reasonable assurance that
efficient methods and effective cost controls are used.[Footnote 21]
Further, GAO's Standards for Internal Control in the Federal Government
states that internal control should provide for an assessment of the
risks the agency faces from both external and internal sources. It also
states that once risks have been identified, they should be analyzed
for their possible effect, including estimating the risk's
significance, assessing the likelihood of its occurrence, and deciding
how to manage the risk and what actions should be taken. Despite these
requirements, DOE did not perform or document any type of formal risk
assessment as a basis for determining the level of surveillance and
internal controls it would use to manage the substantial risks
associated with this project. Consequently, the low level of contractor
oversight carried out by DOE was not commensurate with the high level
of risk, thereby increasing the vulnerability of the contract payments
to waste, fraud, and abuse.
DOE Performed Little or No Review of Contractor Invoices:
Despite the project's risks, in fiscal years 2005 and 2006 DOE
performed little review of contractor invoices or supporting documents
for the millions of dollars in charges that Bechtel billed to DOE twice
a month. GAO's Standards for Internal Control in the Federal Government
states that internal control activities--such as approvals,
authorizations, verifications, reconciliations, and reviews--should
help ensure that actions are taken to address risks. It further states
that control activities are an integral part of an entity's planning,
implementing, reviewing, and accountability for stewardship of
government resources and achieving effective results.
In fiscal years 2005 and 2006, Bechtel invoiced DOE twice a month for
WTP expenses, averaging $20 million to $30 million and thousands of
transactions per invoice. According to DOE officials, because of the
size and volume of transactions in each invoice, the contractor did not
provide supporting documents for the individual charges with each
invoice but instead agreed to make them available to DOE upon request.
DOE officials stated that prior to fiscal year 2005, a DOE accountant
would judgmentally select from each invoice a few of the individual
charges listed and request the contractor to provide the supporting
documents for them. However, after a reorganization in fiscal year 2005
placed the contracting officer and the accounting staff that performed
the invoice reviews in separate branches, DOE discontinued the reviews
and instead conducted only an annual review of a few dozen transactions
selected from two or three invoices. The contracting officer who was
responsible for approving the invoices for payment said that DOE
reduced the frequency of its invoice reviews in fiscal years 2005 and
2006 based on the results of the prior reviews. Consequently, he stated
that his review of the invoice was limited primarily to ensuring that
the contractor used the correct overhead and indirect cost billing
rates; did not make any large, obvious mistakes; and properly treated
any specific, unusual transactions he was expecting based on the
project's progress.
However, we found the lack of detail on the invoices for direct costs
other than labor hindered DOE's ability to identify potentially
improper charges, obvious mistakes, or unusual transactions based on
the invoice alone.[Footnote 22] For example, a standard invoice review
procedure would include looking for items with descriptions of
potentially unallowable charges. However, this type of review was
impossible to perform on WTP billings because neither the contractor's
invoices nor the billing system that generated them provided adequate
descriptions of the charges. The FAR and the WTP contract require a
proper contractor's invoice to include the description, quantity, unit
price, and extended price of supplies delivered or services
performed.[Footnote 23] However, the contractor's invoice does not
provide, and DOE has not required, purchase descriptions. Instead,
Bechtel's invoices list most transactions under broad cost categories
such as "construction material & supplies" or "subcontracts,
consultants, & outside services" with vendor or subcontractor names,
dates, and amounts. Thus, the lack of transaction descriptions would
make it difficult for the contracting officer to identify obvious
mistakes or unusual transactions, as well as potentially improper
charges. Fig. 2 illustrates the level of detail provided, taken from an
actual page of an invoice billed to DOE.
Figure 2: Sample Charges from Bechtel Invoice to DOE:
[See PDF for image]
Source: DOE and GAO.
Notes: N/C stands for natural classification, which the contractor uses
to identify the type of expense. For example, N/C 310 stands for
construction materials and supplies. The reference number is used by
the contractor to locate the hard copy support in its files for the
corresponding transaction.
[End of figure]
DOE's WTP project directors, who were responsible for overseeing the
design and construction of designated WTP facilities and thus had more
knowledge of daily work activities, received an abbreviated version of
the invoice twice a month for review. However, we found that the
abbreviated invoice provided only summary totals for labor, other
direct costs, and indirect costs and did not provide even the limited
transaction detail that was included in the full invoice. Thus, the
project directors' reviews were limited primarily to assessing whether
the total costs billed for their respective projects appeared
reasonable given their projects' annual budgets and progress. Although
these project directors had project knowledge, the lack of invoice
detail prevented them from performing any meaningful review of specific
costs. For example, one report the project directors received for
project management purposes was a biweekly report showing the
construction materials Bechtel used during that period. However, the
abbreviated invoice did not show the type and amount of materials
purchased or used, or even a summary total of construction materials
billed. Thus, the information on the two documents could not be
compared and neither could be meaningfully used to confirm or question
individual costs being billed to DOE.
According to DOE officials, there was no requirement specifying how
frequently invoices should be reviewed or how such reviews should be
performed. DOE had previously issued a local directive, dated September
23, 2002, specific to the WTP project that provided DOE staff with
instructions for reviewing Bechtel's semimonthly invoices.[Footnote 24]
However, DOE officials stated the directive is inactive because it
supplemented the WTP contract management plan that was undergoing
revision, even though the plan had not been updated since July 11,
2002. According to DOE's acquisition guide, voucher (invoice)
processing and review is an important aspect of contract management,
and thus the guide recommends that the contract management plan discuss
the process for reviewing and approving invoices and discuss the roles
and responsibilities of individuals who are directly involved in the
process. The lack of a current contract management plan and
corresponding requirements for invoice review--specifying an
appropriate level, extent, and responsibilities--further impedes the
effective administration of the WTP contract.
DOE Placed Undue Reliance on DCAA and Other Entities:
The manager of the DOE staff that previously performed the invoice
reviews stated that he did not believe that the FAR required DOE to
review the invoiced charges because DCAA had already audited and
considered Bechtel's accounting system to be adequate. Specifically, he
stated that FAR 32.503-4 allowed DOE to rely on the internal controls
of Bechtel's accounting system because DCAA had certified Bechtel's
system; thus the invoice reviews DOE performed in the past were beyond
what the FAR required. However, FAR 32.500 explicitly states that that
section of the FAR does not apply to payments under cost-reimbursement
contracts and, therefore, FAR 32.503-4 does not apply to the WTP
contract. Instead, the FAR recognizes that cost-reimbursement contracts
carry a greater degree of risk to the government, and specifies that
cost-reimbursement contracts should have appropriate government
surveillance during performance to provide reasonable assurance that
efficient methods and effective cost controls are used.
GAO's Standards for Internal Control in the Federal Government states
that internal control should be designed to ensure that ongoing
monitoring occurs in the course of normal operations, is performed
continually, and is ingrained in the agency's operations. While the
standards acknowledge that separate evaluations can also be useful by
focusing directly on the controls' effectiveness at a specific time,
both ongoing monitoring activities and separate evaluations of the
internal control system should be considered in assessing the continued
effectiveness of internal control. Consequently, while external reviews
such as DCAA's can supplement an overall system of internal control,
they are not a substitute for them. Although DCAA conducts several
types of audits of Bechtel, it generally conducts its reviews at the
corporate-wide level and not at the level specific to a particular
contract. Bechtel maintains one overall accounting system that includes
various feeder and subsystems--such as the timekeeping and billing
systems--for the entire corporation.[Footnote 25] DCAA audits these
systems on a cyclical basis, such that each system is reviewed only
once every 3 to 4 years, and these systems audits are not intended to
determine the allowability of specific costs. Although DCAA performs
annual incurred cost audits that do examine the allowability of the
contractor's direct and indirect costs, there is a significant time lag
between when a calendar year closes and when the audit takes place. For
example, as of the end of fiscal year 2006 the most recent audit DCAA
completed of Bechtel's incurred costs covered calendar year 2003. This
delay was caused in part by the typical 8 months that it may take for
the contractor to submit its final indirect cost rate proposal for the
year reviewed and in part by a backlog of incurred cost audits at
DCAA.[Footnote 26] In addition, DCAA's incurred cost audits of Bechtel
express an opinion on the allowability of both direct and indirect
costs for all of Bechtel's government contracts and subcontracts.
Although the WTP project accounts for a substantial portion of
Bechtel's total federal contract dollars, the 2003 incurred cost audit
report listed over 50 applicable Bechtel contracts.[Footnote 27]
Consequently, WTP was just one of many contracts included in the
audit's scope of review.
In addition, DOE relied primarily on Bechtel to review and validate
subcontractor charges without having an adequate process in place to
assess whether Bechtel was properly carrying out this responsibility.
While we recognize that under the FAR the government does not have
privity of contract, that is, a direct contracting relationship, with
the prime contractor's subcontractors,[Footnote 28] the government
should have a process in place to ensure that the prime contractor is
providing adequate oversight and effective cost control of its
subcontractors' expenditures. This need is even more pronounced when
both the prime contract and the subcontract are cost-reimbursable
contracts. In fiscal years 2005 and 2006, Bechtel had over 150
subcontracts open, of which 7 were cost-reimbursable subcontracts with
a total contract value of $495 million. DOE's internal controls for
ensuring the propriety of subcontractor costs were limited primarily to
including selected subcontractor purchases during its periodic reviews
of Bechtel's invoices. However, as noted previously, during the period
of our review DOE performed little review of the contractor's invoices.
DOE officials stated they also rely on DCMA's contractor purchasing
system review of Bechtel, which includes reviewing the contractor's
controls for subcontracting. However, similar to the DCAA system
reviews described above, DCMA's contractor purchasing system review of
Bechtel is a corporate-wide review performed only about once every 3
years, and the review is not intended to determine the allowability of
specific costs. Because a substantial portion of Bechtel's WTP
expenditures goes to subcontractors, for which DOE ultimately pays, DOE
should have a process in place to provide reasonable assurance that it
can rely upon Bechtel's controls to ensure subcontractors' expenditures
are allowable and necessary.
The use of cost-reimbursement contracts places special responsibilities
on the contracting agency to monitor and control costs by using good
contract management and administration practices, including proper
internal controls. By not adequately monitoring charges, DOE may not be
identifying errors or the weaknesses that allowed them to occur and
thus is providing no deterrent to future errors or improprieties.
Although DOE officials stated that they were comfortable with the
current level of review because they had not found a significant number
of errors in the past, as noted in the Strategies to Manage Improper
Payments guide, most improper payments associated with federal programs
go unidentified typically because of factors such as insufficient
oversight or monitoring.
DOE recently took some steps to begin strengthening its oversight of
contractor payments. Based on weaknesses identified in its limited
fiscal year 2006 annual review of transactions selected from two
invoices, DOE began performing monthly invoice reviews in fiscal year
2007. While this is a step in the right direction, it is no substitute
for a comprehensive approach that includes an appropriate assessment of
risk that could then be used as a basis to design a system of internal
control that would be effective in reducing the risk of improper
payments. In addition, without sufficient detail in the invoices from
which the transactions are selected, such reviews are minimally
effective in identifying potential improper payments.
DOE's Oversight Controls for Project Assets Were Inadequate:
DOE did not perform adequate oversight to reasonably ensure that
Bechtel had established proper accountability for assets purchased with
WTP project funds.[Footnote 29] The FAR and the contract require the
contractor to establish a property management program to safeguard and
account for such assets.[Footnote 30] The FAR also requires DOE to
review the contractor's property program to ensure compliance with the
property clauses of the contract.[Footnote 31] However, we found that
DOE relied primarily on the contractor to manage WTP property without
adequate oversight to help ensure that the contractor complied with
these requirements. As a result, until recently DOE management was
largely unaware of numerous internal control weaknesses in the
contractor's property management system, which exposed WTP assets to
loss or misuse. While new property managers for DOE and Bechtel have
begun addressing the internal control weaknesses we identified, both
DOE and the contractor will need continued vigilance in their oversight
and management of WTP property to help ensure that it is adequately
safeguarded and tracked.
DOE Did Not Ensure the Contractor Maintained Adequate Accountability
over Property:
DOE reimbursed Bechtel more than $100 million and $200 million in
fiscal years 2006 and 2005, respectively, for property purchased for
the direct construction of the WTP facilities or to support the
construction activities. Such property varies by type and value and
includes (1) construction materials, which may be consumed during
construction and incorporated into an end product (e.g., cement and
pipes); (2) plant equipment, which is personal property of a capital
nature and used for administrative or general plant purposes (e.g.,
cranes and vehicles); (3) sensitive items, which are personal property
susceptible to theft and misappropriation (e.g., computers and
audiovisual equipment); and (4) tools, which include both inexpensive
handheld tools as well as power tools costing thousands of dollars.
Despite the hundreds of millions of dollars in WTP funds expended to
acquire property over the years, DOE performed little oversight of
Bechtel's property management program, relying primarily on the
contractor to meet property requirements and self-report its
compliance. Although the contractor was responsible for the day-to-day
management of the property, the FAR required DOE to (1) review and
approve the contractor's property management system and (2) ensure
compliance with the government property clauses of the
contract.[Footnote 32] In addition, DOE's own policies required DOE to
maintain records of approvals and reviews of contractors' property
management systems.[Footnote 33] Nonetheless, besides issuing a letter
dated November 21, 2002, approving Bechtel's property control system,
DOE did not document its review of the system and could not provide any
supporting documentation demonstrating what it reviewed as the basis
for approving the system. The DOE official responsible for the approval
told us that he reviewed the contractor's policies and procedures and
spot-checked implementation of procedures on site but did not formally
document his assessment or corrective actions he required of the
contractor. Consequently, there was no documentary evidence available
from which we or DOE could evaluate the adequacy of the original
assessment and any corrective actions.
Moreover, DOE did not perform sufficient reviews after its 2002
approval of Bechtel's property management system to help ensure that
Bechtel followed property procedures and complied with FAR and contract
requirements. GAO's Standards for Internal Control in the Federal
Government states that internal control should be designed to provide
reasonable assurance regarding prevention of or prompt detection of
unauthorized acquisition, use, or disposition of an agency's assets.
However, the DOE official responsible for the oversight of WTP assets
from May 2005 to May 2006 stated that he never went out to the WTP site
to review procedures, observe property management operations, or
conduct spot checks of property because he did not have the time to
perform such reviews. While DOE received some reports from the
contractor related to property--such as periodic reports of lost,
damaged, or destroyed government property and Bechtel's annual
performance measures report that included limited summary-level data,
such as percentage of items located during physical inventories--it
accepted these reports without performing on-site observations or
reviewing any supporting documentation to validate the information. In
addition, DOE relied solely on Bechtel to ensure that subcontractors
maintained adequate accountability for government property they
possessed without having a process in place to assess whether Bechtel
was properly carrying out this responsibility.
DOE officials acknowledged that DOE oversight of WTP property
management has been inadequate and attributed this control weakness to
a staffing shortage. According to DOE's personal property director at
DOE headquarters and the WTP contracting officer, a dedicated DOE
property administrator should have been assigned to the WTP project,
but DOE had difficulty filling the position. As a result, DOE did not
assign a property administrator dedicated to the WTP project until June
2006, over 5 years after it awarded the contract. In the meantime, DOE
assigned to the DOE Richland Office's property management officer the
oversight responsibility for all government property at Hanford--
including WTP property--held by DOE and several contractors. Although
DOE's written responsibilities for such property officers identify them
as the leader of an appraisal team responsible for ensuring that DOE
contractors established and maintained effective property management
programs, a former property officer stated that he was never assigned
staff to assist him with his oversight responsibilities. The lack of
dedicated DOE staff to oversee management of WTP property was further
exacerbated by the high turnover rate of property officers assigned to
Hanford. DOE officials stated that there have been four property
officers at Hanford within the past 5-½ years, and that they were
assigned other collateral duties in addition to their property
oversight responsibilities.
Ongoing monitoring of the contractor's program to safeguard and account
for WTP assets located both on-and off-site is critical for preventing
and detecting the loss and misuse of such assets. Had DOE implemented
effective oversight controls, it may have identified the numerous
weaknesses in the contractor's property management program described
below and could have directed the contractor to take corrective actions
sooner.
Contractor Did Not Have Adequate Controls for Maintaining Property
Accountability:
We identified several weaknesses with Bechtel's property management
program that increased the risk of theft, loss, or misuse of government
assets. The WTP contract provides that title to property purchased by
the contractor for which the contractor is reimbursed by the government
passes to the government, and that the contractor is responsible and
accountable for all such property in accordance with sound business
practice and with applicable provisions of FAR 45.5.[Footnote 34] As
part of these responsibilities, the FAR requires the contractor to
establish and maintain a program to control, protect, preserve, and
maintain all government property.[Footnote 35] As of September 30,
2006, Bechtel reported that it had about $65 million in its inventory
of capital equipment and sensitive property and $16 million in its
tools inventory related to the WTP project.[Footnote 36] Bechtel had
about $100 million in its construction materials inventory as of May
2007.[Footnote 37] (See fig. 3 for a sample of equipment and tools used
at WTP.)
Figure 3: Example of Construction Equipment and Tools Being Used at
WTP:
[See PDF for image]
Source: DOE.
[End of figure]
Our review of Bechtel's property management program disclosed numerous
internal control weaknesses that exposed government assets to an
increased risk of theft, loss, or misuse and decreased the likelihood
of detecting such incidents in a timely manner:
* Inadequate segregation of duties. GAO's Standards for Internal
Control in the Federal Government state that key duties and
responsibilities should be divided among different people to reduce the
risk of error or fraud. The FAR and Bechtel's own policies require that
personnel who perform the physical inventory not be the same
individuals who maintain the property records.[Footnote 38] However,
during our review, one Bechtel employee was primarily responsible for
reviewing the procurement system to identify accountable property
purchased, bar coding property when received, entering new property
items into Bechtel's government property system, performing annual
physical inventories, and updating the government property system for
the results of the inventory. In addition, no one reviewed the data she
entered into the property system. Bechtel management attributed this
control weakness to reduced staffing caused by the construction
slowdown.
* Inaccurate property system data. Bechtel used its government property
system to track its inventory of capital equipment and sensitive items.
Thus, Bechtel's property procedures required it to maintain the
government property system in a manner sufficient to keep database
records current and accurate. For example, the procedures state that
property management staff are responsible for updating the property
records with current locations and custodians. However, during our
physical observations of selected property items, we identified items
recorded in Bechtel's government property system with the wrong
custodian or location and items recorded in the system that were
actually missing. We also identified property that Bechtel had
purchased and received but not recorded in the government property
system, such as personal digital assistants, copiers, and computer
equipment. Bechtel's property management staff explained that the
failure to record the items was caused in part by property staff errors
in determining whether to record certain items and to receiving staff's
failure to promptly notify property staff of newly acquired property.
Bechtel property staff recorded the assets in their property system
after we brought them to their attention.
* Inadequate inventory procedures. The FAR requires the contractor to
conduct periodic physical inventories of all government property in its
possession or control. It also requires the contractor, with the
approval of the government property administrator, to establish the
type, frequency, and procedures for such inventories.[Footnote 39]
However, we found that Bechtel's procedures did not specify the
frequency or type of inventory required for construction materials, and
DOE approved Bechtel's inventory procedures for materials without an
established time frame. Consequently, Bechtel's property manager stated
that while it had performed some spot inventories of selected materials
at various times, Bechtel had not performed a complete inventory of
materials in fiscal years 2005 or 2006 because of staffing shortages.
Bechtel property management staff also stated that they inventory all
assets recorded in Bechtel's government property system annually, yet
we identified about 900 items recorded as of September 30, 2006, that
the system showed had not been inventoried within the prior
year.[Footnote 40] Bechtel staff claimed that the information in the
property system was wrong and that the items had been inventoried, but
could not provide adequate documentation to support their claim. We
selected 32 of these items for observation and could not locate 4 of
them. Records in the government property system as of September 30,
2006, for these 4 missing items--3 computers and 1 projector that are
considered sensitive assets--showed that they had not been inventoried
in over 2 years.
* Inadequate policies and procedures for the accountability of tools.
Bechtel acquires a large number of tools at substantial cost for the
WTP construction project, billing the government $2.3 million for tools
in fiscal year 2005 alone. Tools are easily pilferable, and while many
tools may be considered nominal in cost, some cost thousands of dollars
and thus warrant commensurate controls to safeguard them effectively.
However, we identified several weaknesses with Bechtel's management of
tools. For example, because Bechtel lacked adequate inventory
procedures for tools, workers could check out tools from the main tool
crib indefinitely without the tools ever being inventoried to ensure
that they still existed and were being utilized. Additionally, employee
exit procedures were not consistently followed to ensure that
terminated employees returned their tools before leaving. We selected
for observation five tools that property records showed were assigned
to former employees, and found that all five were missing. Furthermore,
our review of the tools database and human resource records showed that
some workers checked out tools the day before or the day of their
termination dates. Bechtel also lacked adequate guidelines for the
disposal of tools damaged through normal wear and tear. Specifically,
until recently there was no requirement to obtain Bechtel or DOE
property management approval to dispose of worn tools. As a result,
warehouse staff independently designated over $90,000 of tools as
"worn" and disposed of them without any management concurrence
required.
* Lack of compliance with property checkout procedures. Bechtel's
property procedures required employees to obtain a property pass for
items removed from project-controlled areas, and to renew the pass
annually if the asset was still needed off-site by presenting the item
to the property staff for inspection. We reviewed Bechtel's government
property system and found that about 100 of the 300 items checked out-
-primarily computers--had expired property passes, some of which had
expired as far back as March 2005. We selected 10 assets with expired
property passes to observe, and could only locate 9 of them. The
missing item, whose property pass had expired in March 2006, was also
one of the computers discussed previously that had not been recently
inventoried. Bechtel property staff stated they query the government
property system monthly to identify and alert custodians of property
passes that are about to expire, but could not explain how they missed
the expired passes we identified.
* Lost, damaged, or destroyed property items not promptly reported.
Although the FAR requires the contractor to investigate and report to
DOE all cases of loss, damage, or destruction of government property,
Bechtel did not always submit such reports to DOE timely.[Footnote 41]
For example, Bechtel did not report to DOE the loss of 3 laptop
computers and 2 projectors until 2 years after it first identified them
as missing. In April 2007, Bechtel reported to DOE another 15
computers, a printer, and a projector as missing. Bechtel's government
property system indicated and Bechtel's property staff confirmed that
Bechtel first identified at least 2 of these items as missing as far
back as 2002. Part of the cause for these delays was that until August
2006 neither Bechtel nor DOE had policies requiring specific time
frames for investigating and reporting such incidents. Bechtel
officials acknowledged that they should have reported these missing
assets more promptly but stated that the delays were caused by Bechtel
staff not always promptly reporting lost or damaged government property
to Bechtel property staff, and by property staff delaying submitting
the reports in hopes that the missing assets would eventually be found.
These delays in reporting missing assets, particularly computers that
may contain sensitive or proprietary information, decreased the
opportunity for DOE to require a timely and thorough investigation into
the losses and to require Bechtel to promptly implement controls to
help avert future losses of a similar nature.
* Inadequate oversight of subcontractors with WTP assets. Bechtel works
with numerous subcontractors that supply materials and services to help
construct WTP facilities, some of which possess WTP property. The FAR
requires the prime contractor to ensure that its subcontractors
adequately care for and maintain government property and ensure that it
is used only for authorized purposes.[Footnote 42] This is particularly
important since the subcontractors generally maintain the property
records for government property they purchase and use, rather than
Bechtel. Consequently, Bechtel's property procedures require its
property manager to review and approve its subcontractors' government
property programs. However, Bechtel did not adequately perform such
reviews or follow up on subcontractors' property management issues. For
example:
- Although Bechtel policy required it to audit its subcontractors'
government property programs, one subcontractor refused to be audited
by Bechtel because the subcontractor claimed that it already had a
property program approved and audited by the government. Even though
that program had no relevance to the WTP contract, Bechtel never
audited the subcontractor. In addition, this subcontractor refused to
provide Bechtel a copy of its property policies and procedures, citing
proprietary concerns. Thus, Bechtel had no basis for and never assessed
the adequacy of this subcontractor's property management program.
- The subcontractors' property management policies were not always
complete or consistent with Bechtel's property policies. For example,
one subcontractor's policy lacked formal procedures for reporting lost,
damaged, or destroyed government property and thus did not have any
requirements for reporting such items promptly. Another subcontractor's
policy for tracking sensitive items was inconsistent with Bechtel's own
policy. Specifically, the subcontractor's dollar threshold for tracking
sensitive items, such as cameras and video equipment, was higher than
Bechtel's threshold. As a result, WTP assets susceptible to theft and
misuse were not being consistently tracked in the property systems for
inventory control purposes.
- Bechtel did not timely follow up on subcontractor property management
issues it identified through its audit and oversight to ensure that the
subcontractors properly implemented corrective actions. For example,
during an April 2005 subcontractor audit, Bechtel identified several
government assets that were not marked with indication of government
ownership as required by the FAR.[Footnote 43] In its audit report,
Bechtel indicated that it would perform a follow-up review within 30
days to ensure that corrective actions were implemented; however, it
could not provide us any documentation that such follow-up was
performed. During our visit to that subcontractor in February 2007, we
saw several government assets that were not marked as government
property. During the same April 2005 audit, Bechtel discovered a
missing computer and instructed the subcontractor to submit a lost
property report, which the subcontractor submitted in June 2005.
Bechtel rejected the report and requested a revision, but did not
follow up with the subcontractor to ensure that a revised report was
submitted. Consequently, Bechtel did not receive a revised report until
February 2007, which it subsequently submitted to DOE.
DOE and Bechtel Are Implementing Corrective Actions:
DOE has recently taken steps to increase its oversight of Bechtel's WTP
property management program. At the time we began our audit, DOE hired
a property administrator responsible solely for overseeing the WTP
property management program. This property administrator has taken on a
more active oversight role through his procedural and compliance
reviews. For example, since his arrival in mid-2006 he has issued
specific requirements to the contractor for reporting lost, damaged, or
destroyed property more timely; directed the contractor to perform a
materials inventory at least annually; issued guidelines for performing
inventories of tools checked out to workers; and performed several on-
site inspections identifying instances of noncompliance and corrective
actions for Bechtel to address.[Footnote 44] In addition, he has
directed the contractor to prepare and submit for his approval a
detailed inventory plan for construction materials specifying the
inventory type, frequency, and detailed procedures.
For its part, Bechtel has also initiated a number of corrective actions
to improve its management of government property. Bechtel also hired a
new property manager in mid-2006 who in turn hired several additional
property staff to better address the segregation-of-duties issue and to
help implement requirements. The new property manager has developed and
issued new policies, such as a policy requiring Bechtel and DOE
property management concurrence prior to disposing of worn tools. In
addition, he implemented a new property database system and tasked his
staff with correcting errors in the property system. He stated he also
plans to review Bechtel's receiving process and tools accountability.
Because the policy and procedural changes primarily occurred after our
review period, we have not assessed the effectiveness of the changes.
If implemented properly, these should help improve the contractor's
management of government property and DOE's oversight of the
contractor's program. However, additional issues remain which, if not
addressed, will continue to expose government property to an increased
risk of theft, loss, or misuse.
Conclusions:
DOE's oversight of contractor billings and property management on the
WTP project did not have the level of internal controls that would be
expected of a project of this magnitude and complexity. DOE's lack of
appropriate oversight controls for contractor invoices significantly
increased its vulnerability to improper payments. Further, DOE did not
establish basic oversight controls to reasonably ensure that Bechtel
and its subcontractors appropriately tracked and safeguarded the
millions of dollars in property and equipment purchased for the
project. Given that DOE has estimated that it will likely spend at
least another $9 billion on the WTP project over the next decade or
more, it is critically important that it establish appropriate
oversight and controls commensurate with the risks involved in this
costly, complex project. This is particularly important in the near
term as the project ramps back up and the contractor begins to hire
hundreds of additional workers in Hanford and at off-site locations.
The recent corrective actions taken to date, if effectively
implemented, are positive first steps to improving DOE's oversight of
contractor payments and property management. DOE management's
commitment and continued attention to these areas will be essential to
establishing a lasting and more effective administration of the WTP
contract.
Recommendations for Executive Action:
To improve DOE's oversight of and accountability for WTP expenditures,
we recommend the following 11 actions. To improve DOE's review and
approval process for contractor billings, we recommend that the
Secretary of Energy direct the Assistant Secretary for Environmental
Management or designee to:
* Perform an assessment of the risks associated with WTP contract
payments, including subcontractor payments, which should include
comprehensively identifying the risks, performing a risk analysis of
their possible effects, and identifying the actions--both preventive
and detective--to be taken to mitigate those risks.
* Based on the results of the risk assessment, establish appropriate
policies and procedures for effective review and approval of the prime
contractor's invoices. Such policies and procedures should specify the
steps to be performed for review and approval, the individuals
responsible for carrying out these steps, the level of invoice detail
needed to perform an appropriate review, and the appropriate
documentation to be maintained of that review process.
* Establish a policy and procedures to periodically assess the prime
contractor's oversight of subcontractor payments to determine if there
are any deficiencies and corrective actions needed and assess whether
the controls can be sufficiently relied on to ensure that subcontractor
payments are allowable, reasonable, and in compliance with all FAR and
contract requirements.
To strengthen DOE's accountability for contractor-acquired government
property, we recommend that the Secretary of Energy direct the
Assistant Secretary for Environmental Management or designee to:
* Follow DOE's existing requirements to periodically document and
assess the contractor's property management program for compliance with
the FAR and DOE policy.
* Follow DOE's existing requirements to document the adequacy of
corrective actions planned and implemented by the contractor to address
weaknesses identified in DOE's assessments of the contractor's property
management program.
* Direct the contractor to implement control procedures to help ensure
the timeliness and accuracy of information entered into the property
systems.
* Review the adequacy of Bechtel's proposed inventory plan for
construction materials once submitted, and ensure that the approved
plan is properly implemented.
* Direct the contractor to establish appropriate controls to ensure
that employee exit procedures requiring terminated employees to return
tools before they leave are followed.
* Direct the contractor to establish a formal policy and procedures for
property staff to (1) periodically monitor the government property
system for assets with property passes that are due to expire soon, (2)
notify property custodians with such assets to renew their property
passes or return the items if no longer needed, and (3) ensure that
such assets are verified as required.
* Direct the contractor to establish control procedures to help ensure
that Bechtel staff and subcontractors report lost or damaged government
assets to property management in a timely manner so that they can be
forwarded to DOE within recently established time frames.
* Establish procedures to periodically assess the prime contractor's
oversight of its subcontractors in possession of government property to
ensure that the prime contractor (1) audits applicable subcontractors'
property management programs as required, (2) reviews applicable
subcontractors' property management policies and procedures for
completeness and consistency, and (3) follows up on and documents
resolution of corrective actions in a timely manner.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOE for its review and comment.
In its written comments, DOE stated it had assessed the risk of
improper payments at contract inception, but agreed with the
recommendation to perform an updated risk assessment to ensure adequate
oversight and accountability for WTP expenditures. It did not
specifically comment on the remaining recommendations. DOE stated in
the letter that it would engage with DCAA to update the assessment of
the risks, revise the current policies and procedures related to
contractor billings as necessary, and assess the adequacy of property
management staff levels and capabilities to ensure that adequate
coverage is provided for oversight of the WTP. However, while not
disputing the specific facts contained in the report, the letter states
that DOE believes (1) the controls in place during the period of
review, fiscal years 2005 and 2006, met the requirements and intent of
the applicable federal acquisition regulation, DOE orders, and contract
terms; (2) the combination of the contractor's billing systems, DCAA's
ongoing audits, and the recurring DOE review of selected invoices
adequately prevent unallowable or improper costs, and (3) the property
management weaknesses and corrective actions reflected in our reported
findings and recommendations were self-identified by DOE and the
contractor. DOE also provided technical comments that we subsequently
discussed with DOE officials and incorporated as appropriate.
We disagree with DOE's contention that the controls in place during the
period of review met the requirements and intent of the applicable FAR
requirements, DOE orders, and WTP contract terms. For example, as noted
in our report, the FAR and the WTP contract require that a proper
contractor's invoice include the description, quantity, and unit price
of supplies delivered or services performed, but Bechtel's invoice did
not include such detail and DOE did not enforce the requirement. DOE's
policies required it to maintain records of its reviews of contractors'
property management systems, but DOE could not produce any
documentation demonstrating what it reviewed as the basis for approving
Bechtel's property management system. The FAR requires that personnel
who perform the physical inventory not be the same individuals who
maintain the property records, but at the time of our review one
property staff member was performing both of these duties. These and
other examples in our report illustrate that DOE's and the contractor's
controls did not always meet FAR, DOE, or WTP contract requirements.
Further, as reflected in both the report title and objectives, the
focus of our report was not limited to DOE's compliance with
regulations, but more broadly on the adequacy of its internal controls
over contractor payments and project assets. The Standards for Internal
Control in the Federal Government, with which DOE as a federal agency
must comply, state that internal control is an integral part of
managing an organization, and involves providing reasonable assurance
that the agency not only complies with applicable laws and regulations,
but also operates efficiently and effectively, including the use of the
entity's resources. Internal control is to serve as the first line of
defense in safeguarding assets and preventing and detecting errors and
fraud. Internal control helps organizations achieve desired results
through effective stewardship of public resources. Our report discusses
several areas in which DOE had not developed the policies needed to
effect adequate internal control. For example, there was no requirement
specifying how frequently contractor invoices should be reviewed or how
such reviews should be performed. Similarly, until August 2006 neither
Bechtel nor DOE had policies requiring specific time frames for
reporting lost, damaged, or destroyed property items. Thus, while
taking 2 years to report such property to DOE may not have violated any
specific FAR, DOE, or contract requirements up to that point, such
practices did not constitute acceptable internal control.
Regarding the contractor billing process, DOE stated that it assessed
the risk of improper payments at contract inception and believes the
combination of the contractor's billing systems (based upon DCAA's
assurances), DCAA's ongoing audits, and the recurring DOE review of
selected invoices adequately prevent unallowable or improper costs. We
disagree. The WTP project has changed significantly since contract
inception. Numerous DOE and contractor problems and project management
weaknesses over the years have contributed to an almost threefold
increase in the project's estimated cost and an almost twofold increase
in the completion schedule since the contract began in December 2000.
Thus, a risk assessment performed at contract inception does not
reflect current conditions and risks and thus does not provide a proper
foundation for designing an adequate system of internal control.
Further, while we agree that a DCAA audit of contract costs can provide
a detective control to help determine whether contractor costs were
proper, reliance on an after-the-fact audit is not an acceptable
replacement for the type of real-time monitoring and oversight of
contractor costs--preventive controls--that we found to be deficient.
Also, as noted in our report, while the FAR allows contracting agencies
to rely on DCAA's certification of the contractor's accounting system
for certain types of payments, the FAR explicitly excludes payments
under cost-reimbursement contracts from this provision, recognizing
that cost-reimbursement contracts carry a greater degree of risk to the
government and therefore must have appropriate surveillance during
performance to provide reasonable assurance that efficient methods and
effective cost controls are used. It is important that DOE establish a
control environment that includes specific control activities to
prevent questionable or improper payments to begin with or that detects
them soon after they occur so that they can be resolved in a timely
manner. Primary reliance on an audit of contractor costs by DCAA 3
years after DOE reimbursed the contractor for such costs is not
adequate given the magnitude of the contract.
With regard to DOE's invoice reviews, we noted in our report that DOE
began performing monthly invoice reviews in fiscal year 2007, which we
believe is a step in the right direction. However, we continue to
maintain that the effectiveness of such reviews is hindered by the lack
of detail in the invoices from which the transactions are judgmentally
selected. Given the many challenges and events that have occurred on
this project since the contract began, a proper and current assessment
of the risks that is then used as the foundation for designing an
overall system of internal control is needed to effectively reduce the
risk of improper payments. DOE has committed to updating its assessment
of the risks and revising its policies and procedures as necessary, and
we will continue to monitor its progress in addressing our
recommendations in this area.
With regard to the property management issues identified, we commend
DOE and the contractor for taking a more aggressive approach in the
last year toward improving the WTP property management program, which
we recognized in our report. Throughout our fieldwork, we raised issues
and concerns regarding property management weaknesses we observed, some
of which we recognize were also being identified by DOE and the
contractor concurrent with our review. For example, during our initial
site visit in June 2006 we obtained some of the contractor's reports of
lost, damaged, and destroyed property and noted significant delays in
Bechtel's reporting of these assets. During the same week, DOE issued a
memo to the contractor questioning these delays, and subsequently
issued a new policy in August 2006 to improve the timeliness of such
reporting. However, we disagree with DOE's contention that all of the
weaknesses and corrective actions reflected in our findings and
recommendations were self-identified by DOE and the contractor. Our
audit work identified many internal control weaknesses that were not
identified before we raised them or did not result in corrective action
until after we brought them to DOE's or the contractor's attention
during the course of our audit.
For example, it was our data mining queries of the property databases
that identified the assets checked out to employees with expired
property passes, property items purchased and received that had not
been recorded in the government property system, and tools that were
still assigned in the property records to former employees. Our
physical observations of selected property items identified items
recorded in Bechtel's government property system with the wrong
custodian or location and items recorded in the tools database that
were missing. Our inquiries and walk-throughs of operations identified
still other weaknesses. For example, after Bechtel told us on May 14,
2007, that a complete materials inventory had not been done for 2005 or
2006, DOE issued a memo to the contractor on May 17, 2007, expressing
disappointment in Bechtel's inability to provide us with materials
inventory results, and directed the contractor to begin conducting
annual materials inventories starting in 2007. We were encouraged by
the fact that as we asked questions and raised concerns with both DOE
and contractor staff throughout our audit, they typically took prompt
action to address these issues. Continued focus on this area with
prompt, corrective actions consistent with our recommendations will go
a long way toward reducing the risk of theft, loss, or misuse of WTP
assets.
We are sending copies of this report to other interested congressional
committees and to the Secretary of Energy. We will also make copies
available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at hyperlink,
http://www.gao.gov.
If you or your staff have any questions on this report, please contact
me at (206) 287-4809 or by email at calboml@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix III.
Signed by:
Linda M. Calbom:
Director, Financial Management and Assurance:
[End of section]
Appendix I: Scope and Methodology:
For this review, we considered internal controls in place during fiscal
years 2005 and 2006 at the Department of Energy (DOE) and at Bechtel
National, Inc. (Bechtel) related to the Hanford Waste Treatment and
Immobilization Plant (WTP) project. To perform our work, we reviewed
the WTP contract; the Federal Acquisition Regulation (FAR); DOE's
Acquisition Regulation (DEAR) and other DOE directives, policies,
procedures; and GAO's Standards for Internal Control in the Federal
Government to gain an understanding of the applicable requirements. We
made site visits to Richland, Washington, to perform work at DOE's
Office of River Protection, Bechtel's WTP project office, and the WTP
work site. We also met with Defense Contract Audit Agency (DCAA) and
Defense Contract Management Agency (DCMA) auditors and with the DCMA
corporate administrative contracting officer and reviewed copies of
relevant reports they had prepared based on their reviews of Bechtel to
obtain an understanding of DCAA's and DCMA's reviews and oversight of
Bechtel. We also coordinated with DOE Inspector General staff to
determine whether they had performed audit work that may be relevant to
our review, and met with Bechtel internal audit staff and obtained
copies of their reports. Our work was not designed to determine or
estimate the allowability of all contractor costs or the accountability
of all property items.
Data Reliability:
To assess the reliability of data we used for this report, we performed
the following steps:
* Because Bechtel maintains the billing system that generates the hard
copy invoices it provides to DOE, we requested data extracts from its
billing system representing charges that Bechtel billed to DOE in
fiscal years 2005 through 2006. These extracts contained the amounts
billed to DOE for labor and other direct costs.[Footnote 45] To assess
the reliability of the billing data extracts for purposes of our
review, we (1) compared total WTP disbursements to Bechtel per DOE's
accounting records to the total amount of invoices Bechtel billed to
DOE for the period, (2) compared the invoiced total to Bechtel's
schedule of amounts billed to DOE, (3) compared the amounts shown for
labor and other direct costs on Bechtel's schedule to the billing data
extracts we received for the period of review, and (4) reviewed other
documents to verify the amount of adjustments and other items billed.
We also performed electronic testing of selected data elements,
reviewed existing information about the data and the system that
produced them, and interviewed Bechtel officials knowledgeable about
the system. We determined that the billing data extracts were
sufficiently reliable for the purposes of this report.
* Because the billing system did not contain detailed information--such
as purchase descriptions--for other direct costs that would enable us
to sufficiently perform data mining, we worked with Bechtel staff to
identify an alternative system. Bechtel's procurement system was the
primary system that contained detailed purchase descriptions;[Footnote
46] however, it did not directly feed or otherwise interface with the
billing system.[Footnote 47] In addition, Bechtel officials stated that
the procurement system was not designed with commensurate controls to
be a source system. We worked with Bechtel staff to attempt to identify
a potential work-around to link the billing system charges to the
corresponding purchases in the procurement system using data from the
accounts payable system; however, results of our electronic testing
showed that the linkages between the data were not sufficiently
reliable to perform data mining.
* The billing data extracts contained detailed information on nonmanual
labor costs, such as the amount of straight time and overtime paid per
employee per pay period. However, because Bechtel pays its manual, or
craft, labor costs directly to the unions in aggregate weekly totals,
the billing data only reflect these aggregate payments. Thus, we
requested a data extract of the craft labor payroll system. We assessed
the reliability of the payroll data by comparing the payroll system
totals to the related billing system totals for manual labor, reviewed
existing information about the data and the system that produced them,
and interviewed Bechtel officials knowledgeable about the data. We
determined that the data were sufficiently reliable for the purposes of
this report.
* We assessed the reliability of extracts from Bechtel's human resource
system for nonmanual labor by performing electronic testing of required
data elements, reviewing existing information about the data and the
systems that produced them, and interviewing Bechtel officials
knowledgeable about the systems.[Footnote 48] We determined that the
data were sufficiently reliable for the purposes of this report.
* Based on our property walk-throughs, we determined that controls over
property were weak and that the two property databases used to track
these items were incomplete and thus unreliable. Therefore, we used the
property system data to perform selected internal control tests to
illustrate the effects of their weak property controls, as discussed
further below.
Payment Controls:
To determine whether DOE's internal controls were adequately designed
to prevent and detect improper payments, we used GAO's Standards for
Internal Control in the Federal Government as a basis to assess the
internal control structure--control environment, risk assessment
procedures, control activities, information and communications, and
monitoring efforts of DOE over contractor payments. Further, we
reviewed the contract requirements, the FAR, the DEAR, and other
relevant DOE policies, procedures, and guidance. We interviewed program
oversight and financial management personnel regarding policies and
procedures that were in place over contractor payments, performed walk-
throughs of key processes, and reviewed supporting documentation to
gain an understanding of DOE's controls over contractor payments. We
interviewed Bechtel staff to gain an understanding of their billing
process and controls. We performed data mining on billing system
nonmanual labor data, manual labor payroll data extracts, and human
resource data extracts to query for records with certain
characteristics, such as payments made to employees after termination
dates and employees with high numbers of hours paid during a pay
period; followed up on query results with Bechtel staff; and obtained
and reviewed supporting data to corroborate explanations.
Property Controls:
To determine whether DOE's oversight controls reasonably ensured proper
accountability over WTP property, we used our Standards for Internal
Control in the Federal Government as a basis to assess the internal
control structure--control environment, risk assessment procedures,
control activities, information and communications, and monitoring
efforts of DOE over contractor payments. Further, we reviewed the
contract requirements, the FAR, the DEAR, and other relevant DOE
policies, procedures, and guidance. We also reviewed contractor and
selected subcontractor property management policies and procedures. We
interviewed the DOE headquarters personal property management division
director as well as former and current DOE officials responsible for
the oversight of Bechtel's management of WTP property to understand the
level and extent of DOE oversight controls over the contractor's
property management system. Additionally, we interviewed Bechtel
property management staff, requested and reviewed relevant
documentation, and performed walk-throughs to gain an understanding of
Bechtel's internal controls and procedures over property management. We
also performed the following tests.
* Data queries. We performed data mining queries on data extracts from
Bechtel's government property system and its Toolhound system to
identify records with certain characteristics, such as property not
recently inventoried or items with expired property passes. We followed
up on selected results with Bechtel property staff and reviewed related
documentation. We also selected a nongeneralizable sample of items from
our query results with different attributes to physically observe as
described further below.
* Physical observations. We selected assets using three different
methods to perform physical observations. First, based on our query
results, we selected a limited number of assets from Bechtel's
government property system and Toolhound database to observe at the WTP
project site, selected WTP subcontractors in Richland, and Bechtel
offices in San Francisco in order to test for existence of the assets
and accuracy of recording. Second, to test for completeness of
Bechtel's and the subcontractors' government property systems, we
selected a limited number of assets we observed at WTP and
subcontractor sites and determined whether they had been properly
tagged as government property and recorded in the respective property
systems. Third, we selected a limited number of transactions from
Bechtel's procurement, accounts payable, and purchase card databases
that appeared to be potential property purchases; reviewed the
supporting documents to determine whether they were in fact property
purchases; traced the items to the government property system where
possible to determine if they had been recorded; and physically
observed some of the items. For all items observed, we reviewed
supporting documentation, such as invoices, packing slips, and material
receiving reports; verified the assets' serial numbers, custodians,
locations, and other key identifying information; and compared this
information to the applicable property systems. Because we only
selected a limited number of transactions from each method in order to
test for different attributes, the results of our review cannot be used
to make inferences about the population.
* Contractor compliance with reporting requirements. We reviewed
reports on lost, damaged, and destroyed property that Bechtel provided
to DOE to assess the timeliness of the reports. We also queried the
property databases and reviewed subcontractor inventory records for
items indicated as lost or missing, and compared them against copies of
the lost property reports to determine whether Bechtel had reported
them to DOE. We requested and reviewed copies of the contractor's
audits and reviews of applicable subcontractors' property management
programs.
We provided DOE with a draft of this report for review and comment.
DOE's Assistant Secretary for Environmental Management provided written
comments, which are reprinted in appendix II. We also had subsequent
oral discussions with DOE officials to clarify the written comments. We
also provided key DCAA and DCMA officials with draft excerpts of the
report relating to their respective agencies, and incorporated as
appropriate oral and written comments we received from them. Our work
was performed from June 2006 through May 2007 in accordance with
generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
July 2, 2007:
Ms. Linda M. Calbom:
Director:
U.S. Government Accountability Office:
Financial Management & Assurance:
441 G Street, N.W.
Washington, D. C. 20548:
Dear Ms. Calbom:
Thank you for the opportunity to review the Government Accountability
Office (GAO) proposed report entitled, Hanford Waste Treatment Plant:
Department o f Energy Needs to Strengthen Controls over Contractor
Payments and Project Assets (GAO-07-888). The U.S. Department of Energy
(DOE) agrees with the recommendations by the GAO to perform an updated
risk assessment to ensure adequate oversight and accountability for
expenditures for the Waste Treatment and Immobilization Plant (WTP)
project. DOE believes the controls in-place at the time of the period
of the review, fiscal years 2005 and 2006, met the requirements and
intent of the applicable Federal Acquisition Regulation, Departmental
Orders, and terms of the contract.
For the contractor billing process, DOE assessed the risk of improper
payments at contract inception, and subsequently entered into an inter-
agency agreement with the Defense Contract Audit Agency (DCAA). DCAA
performs ongoing audits of the contractor, including annual audits of
costs charged to the WTP contract, and has assured DOE that the
contractor's processes are adequate to ensure interim billings are
proper. DOE has reviewed many of the contractor's invoices for cost
allowability. DOE believes the combination of the contractor's billing
systems, DCAA's ongoing audits, and the recurring DOE review of
selected invoices, are adequate to protect the Government's interest in
preventing unallowable or improper costs. Consistent with DOE's
endeavor for continual improvement and the GAO recommendations, DOE
will engage with DCAA to update the assessment of the risks, and revise
the current policies and procedures as necessary.
For the property management process, DOE established a dedicated
property management position for WTP and the position was filled in May
2006. The new DOE property administrator and the new contractor
property manager initiated an aggressive DOE and contractor assessment
process in June 2006. This assessment identified the need for improved
guidance and oversight by DOE and specific corrective actions by the
contractor. The programmatic weaknesses and corrective actions which
were self-identified by DOE and the contractor were shared with GAO and
are reflected in the GAO findings and recommendations. Additionally, we
will assess the adequacy of personal property staffing levels and
capabilities to ensure that adequate coverage is provided for oversight
of the WTP.
We request the following correction be made to the report: Page 5,
Under Background. Change: "DOE's current approach, the WTP, is intended
to stabilize and prepare approximately half of Hanford's 56 million
gallons of radioactive waste for permanent disposal: ." to "DOE's
current approach, the WTP, is intended to separate the waste into high-
level and low-activity fractions, immobilize 100% of the high-level
fraction, and immobilize approximately 40% of the low-activity fraction
of Hanford's 53 million (approximately) gallons of radioactive waste
for permanent disposal:..."
Also, we recommend on pages 30 and 31, the following change for
implementing the GAO recommendations: ".we recommend the Secretary of
Energy direct the Assistant Secretary for Environmental Management." to
".we recommend the Assistant Secretary for Environmental Management to
direct the following:"
If you have any questions or comments please contact Mr. James M.
Owendoff of my staff at (202) 586-8670.
Sincerely,
Signed by:
James A. Rispoll:
Assistant Secretary for Environmental Management:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Linda Calbom, (206) 287-4809 or calboml@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Doreen Eng, Assistant
Director; Jessica Gray; R. Ryan Guthrie; Mary Ann Hardy; Delores Lee;
Jenny Li; and Ting-Ting Wu made significant contributions to this
report. Others who made important contributions included Richard
Cambosos; Tim DiNapoli; and Wil Holloway.
FOOTNOTES
[1] A cost-plus-incentive-fee contract is a cost-reimbursement contract
that provides for payment of allowable incurred costs to the extent
prescribed in the contract. It also provides for the contractor to earn
a fee, or profit, based on the contractor's ability to meet established
cost targets.
[2] In this context, data mining refers to a search process applied to
a data set to identify trends, relationships, and data associations
that may indicate potential control weaknesses, noncompliance with
requirements, or improper activities.
[3] In an effort to accelerate cleanup, DOE has been developing a
supplemental technology outside the scope of the WTP to treat the
remaining half of the waste. See GAO, Nuclear Waste: DOE Should
Reassess Whether the Bulk Vitrification Demonstration Project at Its
Hanford Site Is Still Needed to Treat Radioactive Waste, GAO-07-762
(Washington, D.C.: June 12, 2007).
[4] See for example, GAO, Nuclear Waste: Absence of Key Management
Reforms on Hanford's Cleanup Project Adds to Challenges of Achieving
Cost and Schedule Goals, GAO-04-611 (Washington, D.C.: June 9, 2004),
and Hanford Waste Treatment Plant: Contractor and DOE Management
Problems Have Led to Higher Costs, Construction Delays, and Safety
Concerns, GAO-06-602T (Washington, D.C.: Apr. 6, 2006).
[5] DOE sometimes uses the terms contract administration and contract
management interchangeably to refer to tasks associated with the
administration of the contract.
[6] Contract clauses B.1 and G.4(b). FAR 31.201-2 specifies that to be
allowable, costs must also be reasonable and allocable to the contract.
[7] Contract clauses G.4(b) and I.68 incorporating FAR 52.232-25,
Prompt Payment (June 1997).
[8] "Subcontractor" means any supplier, distributor, vendor, or firm
that furnishes supplies or services to or for a prime contractor or
another subcontractor; see FAR 44.101.
[9] Contract clause I.19B incorporating FAR 52.216-7, Allowable Cost
and Payment (March 2000) and contract clause I.63 incorporating FAR
52.230-2, Cost Accounting Standards (April 1998). See also 48 CFR Part
9904, Cost Accounting Standards.
[10] FAR 31.105(c), FAR 31.201-2, 48 CFR Part 9904.
[11] Although DCAA performs the majority of Bechtel audits that apply
to WTP, DCMA has primary responsibility under FAR 42.302(a)(50) for
Bechtel's corporate-wide contractor purchasing system review described
in FAR 44.3. See also FAR Part 30, Cost Accounting Standards
Administration and FAR Part 42, Contract Administration and Audit
Services.
[12] Contract clause I.88 incorporating FAR 52.245-5, Government
Property (Cost-Reimbursement, Time-and-Material, or Labor-Hour
Contracts) (January 1986).
[13] FAR 45.504(b) and 45.502(d).
[14] FAR 45.104(a), (b).
[15] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[16] GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G
(Washington, D.C.: August 2001).
[17] GAO, Strategies to Manage Improper Payments: Learning From Public
and Private Sector Organizations, GAO-02-69G (Washington, D.C.: October
2001). This guide resulted from GAO's study of a number of private and
public sector organizations and the actions they took and considered
effective in reducing improper payments.
[18] GAO-02-69G.
[19] Contract clauses G.4(b) and I.68 incorporating FAR 52.232-25,
Prompt Payment (June 1997). See also 31 U.S.C. §§ 3901-3907. Contract
clause I.68 also specifies the information that must be included in a
proper invoice.
[20] Contract clause B.4. See also FAR 16.405-1 for a further
description of cost-plus-incentive-fee contracts.
[21] FAR 16.301-3(a)(2).
[22] Because more detailed information was available on labor costs, we
were able to perform selected data queries on labor charges and did not
identify any significant exceptions.
[23] Contract clause I.68 incorporating FAR 52.232-25, Prompt Payment
(June 1997).
[24] ORP M 131.7 R1, ORP Review of Bechtel National Inc. Semimonthly
Invoices, September 23, 2002. This was a revision of a previous version
issued November 15, 2001.
[25] While Bechtel's field locations use a variety of local accounting
systems, the accounting information from the local systems is uploaded
to the corporate system monthly.
[26] Bechtel bills the government for indirect costs during a given
year based on forward pricing rates that Bechtel calculates based upon
its estimate of the costs it will incur. After the year is over, it
prepares a final indirect cost rate proposal based on the actual costs
incurred. DCAA staff stated they usually require the contractor to
provide additional information or other changes to the final rate
proposal before it is considered acceptable for audit, and this further
adds to the delays. For example, for calendar year 2003 Bechtel
submitted its original final rate proposal in August 2004, but did not
submit its final revised proposal until January 2006.
[27] According to DCAA, in calendar year 2003, the WTP contract
accounted for about half of Bechtel's total federal contract dollars,
excluding its management and operating contracts. WTP makes up a
smaller portion in subsequent years, due largely to a significant
increase in Bechtel's total federal contract dollars beginning in
calendar year 2004.
[28] FAR 42.505(b)(1).
[29] We use the terms property and assets interchangeably throughout
this section to refer to all WTP property items (excluding real
property) for which the contractor is expected to maintain some level
of accountability.
[30] FAR 45.502(a),(b) and contract clause I.88 incorporating FAR
52.245-5, Government Property (Cost-Reimbursement, Time-and-Material,
or Labor-Hour Contracts) (January 1986).
[31] FAR 45.104.
[32] FAR 45.104.
[33] Department of Energy Acquisition Regulation 945.102-71.
[34] Contract clause I.88 incorporating FAR 52.245-5, Government
Property (Cost-Reimbursement, Time-and-Materials, or Labor-Hour
Contracts) (January 1986).
[35] FAR 45.502(a).
[36] In fiscal years 2005 and 2006, Bechtel used multiple databases to
track its property inventories. It used its government property system
to track its inventory of plant equipment and tools valued at $5,000 or
more (capital equipment) and sensitive items at various lower dollar
thresholds. It used its Toolhound database to track its inventory of
tools regardless of value; thus Bechtel tracked some items in Toolhound
that it also tracked in its government property system. As of September
30, 2006, Bechtel's government property system had $6.5 million in
tools recorded. It used the Bechtel procurement system to track its
inventory of construction materials.
[37] The construction materials amount is based on the most current
available materials inventory report as of the date of our inquiry.
[38] FAR 45.508.
[39] FAR 45.508.
[40] Bechtel's written procedures require physical inventories of plant
equipment every 3 years and of sensitive assets annually. However,
property management staff stated that in practice, they inventory all
items recorded in the government property system annually.
[41] FAR 45.504(b).
[42] FAR 45.510.
[43] FAR 45.506.
[44] For example, DOE's property administrator issued a memo directing
Bechtel to notify him by e-mail within 24 hours of the discovery of
lost, damaged, or destroyed property. It also requires Bechtel to
follow up such notification with a formal lost, damaged, or destroyed
property report within 7 calendar days after the discovery of an
incident related to sensitive property, 14 calendar days for property
valued at $5,000 or greater, and 45 calendar days for all other
property.
[45] Labor and other direct costs accounted for about 85 to 90 percent
of the total amounts billed to DOE in fiscal years 2005 and 2006. The
remaining amounts billed consisted primarily of indirect costs and
contract fees.
[46] Bechtel's purchase card system contains item descriptions for
purchase card purchases; however, only 1 percent of other direct costs
billed to DOE in fiscal years 2005 through 2006 came from that system.
[47] Instead, Bechtel staff manually enter data from the hard copy
vendor and subcontractor invoices into the accounts payable system,
which in turn feeds into the billing system.
[48] Bechtel officials stated that because Bechtel hires craft
employees through the labor unions, they are not considered permanent
Bechtel employees, and thus Bechtel does not maintain records on these
employees in its human resource database. Instead, it maintains limited
human resource data on these employees in its payroll system.
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