Department of Energy

The Energy Department's environmental management program faces the monumental task of cleaning up environmental problems created by nearly 50 years of nuclear weapons production. This effort is being carried out primarily under cost-reimbursement contracts. The Office of Environmental Management, finding this approach to be very expensive and slow, has proposed a "privatization" approach with two key elements: fixed-price contracts and private financing to construct waste treatment facilities. This report discusses (1) the conditions necessary to successfully use fixed-price contracts for environmental management's privatized cleanup projects, (2) the alternative financing approaches that could be used for environmental management's privatization contracts, and (3) how alternative financing methods for environmental management's privatization projects might affect budget scoring.

GAO noted that: (1) fixed-price contracting, one key aspect of Environmental Management's privatization program, can successfully be used for environmental clean-up projects when certain conditions in the Federal Acquisition Regulation are met; (2) when these conditions exist, GAO found that the Office of Environmental Management has successfully used fixed-price contracts for a variety of activities ranging from cleaning up contaminated soils to decontaminating workers' uniforms; (3) however, when these conditions do not exist, GAO found instances in which clean-up projects being performed under fixed-price contracts encountered cost increases and schedule delays; (4) in addition, risks and issues that could affect the eventual performance of the contract must be clearly defined; (5) total private financing represents one end of a continuum of construction financing options; (6) private financing transfers performance risk from the government to the private contractor, but costs for this approach are significant because of the increased risk assumed by the contractor; (7) total government financing represents the other end of the continuum of options; (8) with government financing, financing costs are minimized, but performance risk which has also proven to be costly, remains with the government; (9) in between these two extremes, other financing options exist that attempt to strike a balance between performance risk and financing costs; (10) how Environmental Management's privatization projects are scored for budget purposes depends on the way certain key aspects of the scoring rules are interpreted; (11) Environmental Management's privatization projects are currently scored as service contracts; (12) the use of alternative financing methods may change the interpretation of the scoring guidelines for these projects; (13) as a result, under all of the alternative financing options that GAO analyzed, the Office of Environmental Management would need more budget authority earlier in the projects and would also incur outlays sooner than under the Office of Management and Budget's method; (14) a complex matrix of decision factors needs to be considered when deciding who to contract for and finance a cleanup project; and (15) once a contract type and financing method are chosen, DOE and the contractor would need to carefully develop a contract that clearly defines each party's roles and accountability through provisions that allocate the project's risks between parties.