[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
DOE'S FIXED-PRICE CLEANUP CONTRACTS: WHY ARE COSTS STILL OUT OF
CONTROL?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JUNE 22, 2000
__________
Serial No. 106-137
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
65-911CC WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Oversight and Investigations
FRED UPTON, Michigan, Chairman
JOE BARTON, Texas RON KLINK, Pennsylvania
CHRISTOPHER COX, California HENRY A. WAXMAN, California
RICHARD BURR, North Carolina BART STUPAK, Michigan
Vice Chairman GENE GREEN, Texas
BRIAN P. BILBRAY, California KAREN McCARTHY, Missouri
ED WHITFIELD, Kentucky TED STRICKLAND, Ohio
GREG GANSKE, Iowa DIANA DeGETTE, Colorado
ROY BLUNT, Missouri JOHN D. DINGELL, Michigan,
ED BRYANT, Tennessee (Ex Officio)
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Glauthier, T.J., Deputy Secretary, accompanied by Carolyn
Huntoon, Assistant Secretary for Environmental Management,
U.S. Department of Energy.................................. 11
Jones, Gary L., Associate Director, Energy, Resources, and
Sciences Issues, accompanied by William Swick, Assistant
Director, U.S. General Accounting Office................... 25
Miskimin, Paul A., President and Chief Executive Officer,
BNFL Inc................................................... 68
Material submitted for the record by:
Glauthier, T.J., Deputy Secretary, U.S. Department of Energy,
responses for the record................................... 85
Miskimin, Paul A., President and Chief Executive Officer,
BNFL Inc. letter dated August 4, 2000, enclosing response
for the record............................................. 82
(iii)
DOE'S FIXED-PRICE CLEANUP CONTRACTS: WHY ARE COSTS STILL OUT OF
CONTROL?
----------
THURSDAY, JUNE 22, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:07 a.m., in
room 2322, Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Burr, Bilbray,
Bryant, Bliley (ex officio) and Stupak.
Staff present: Dwight Cates, majority investigator; Anthony
Habib, clerk; and Edith Holleman, minority investigator.
Mr. Upton. Good morning, everyone. We're going to get
started. I know Chairman Bliley has a very busy schedule this
morning, as we all do, but in deference to that, I'm going to
let him make the opening statement first, and I will follow.
Chairman Bliley. Thank you very much, Mr. Chairman. Thank
you for holding this important hearing to review the Department
of Energy's efforts at fixed-price contracting.
Throughout the 1990's, the Clinton-Gore administration
initiated several important contract reform initiatives,
including fixed-price contracting. Unfortunately, we are here
to assess why another good reform effort has failed.
In October 1998, the subcommittee held a hearing to review
the Department's fixed-price contract with BNFL to clean up
radioactive waste at Hanford. At the hearing the subcommittee
heard from BNFL's CEO Mr. Tom Crimmins, who made a series of
important commitments regarding BNFL's future performance under
this contract. Surprisingly on the same day of the hearing,
just 2 hours after his testimony, Mr. Crimmins was informed by
the BNFL board of directors that he should resign effective
immediately. We later found out that the BNFL board voted to
seek his resignation well before the hearing, but did not
inform him until after his hearing testimony.
Given BNFL's conduct on the Hanford Project since that
hearing, I am concerned that BNFL board allowed Mr. Crimmins to
make what now seem to be empty commitments to the subcommittee.
Secretary Richardson recently stated that BNFL's recent
proposal at Hanford was outrageously expensive and inadequate
in many ways. What is more outrageous, however, is that DOE
failed to monitor the company's performance or to determine
that BNFL was off the mark from the very beginning. Clearly if
DOE were properly overseeing this contract, termination would
have occurred much, much earlier.
I am concerned that many of the mistakes made by DOE and
BNFL at Hanford may also be repeated on other fixed-price
contracts at the Oak Ridge site, the Idaho site, and I'm also
concerned that these troubled projects may signal the end of
fixed-price contracting.
We expect the Department will select reliable contractors,
negotiate sound contracts, and effectively manage major cleanup
projects once they begin. The Department is ultimately and
directly accountable for cost overruns or schedule delays
whenever they occur. As a result of continued poor management
and a lack of leadership from the Department, fixed-price
contracting is experiencing serious problems. However, we
cannot afford a return to the old cost plus gravy train
contracting methods, but we also cannot afford to waste
hundreds of millions of dollars and several years of poorly
managed reform efforts. We need management consistency,
meaningful contract reform, and a track record of cost control
and successful cleanups at DOE sites.
I am interested in today's testimony, and I thank the
Chairman for this hearing, and I thank him for deferring to me
for this opening statement.
Mr. Upton. Thank you, Mr. Chairman.
Welcome, everyone.
Approximately 80 percent of the Department of Energy's
annual budget flows directly to its site contractors, which
employ more than 100,000 personnel across the DOE complex.
Historically, the Department has relied on cost plus contracts
which provide full reimbursement for its contractors' incurred
cost plus a profit regardless of the contractor's performance.
Cost-plus contracting seemed to work during the cold war
when the government demanded the aggressive buildup of
increasingly complex weapons systems. However, today the
Department's largest budgetary responsibility is, in fact,
environmental cleanup. Unfortunately, cleanup work under the
Department's cost-plus contracts has resulted in a dismal and
predictable record of cost overruns and schedule delays on
several major cleanup projects. Many of the DOE's more costly
mistakes, including the spiraling cost overruns at Hanford
Spent Nuclear Fuel Project, have been well documented by this
subcommittee in the past.
In an attempt to turn the tide on DOE's cost-plus
contracting problems, in 1995, former Secretary O'Leary
introduced fixed-price contracting as a central contract reform
initiative. Fixed-price contracts were intended to shift more
of the risks associated with technical cost and schedule
performance to the contractor. Many fixed-price contracts
require the contractor to privately finance the cleanup work,
and the contractor is paid only after successfully cleaning up
the waste.
Unfortunately, many of the Department's fixed-price
contracts are experiencing the same problems experienced under
cost-plus contracts. Today this subcommittee will review the
Department's largest fixed-price contracts to assess why DOE
has failed to control spiraling cost growth and contractor
performance problems.
This hearing is not the subcommittee's first hearing on
fixed-price contracting. In the June 1997 oversight hearing,
the subcommittee revealed the terrible outcome of the
Department's first fixed-price-cleanup contract, the famous Pit
9 disaster. Announced in 1995 with great fanfare by former
Secretary O'Leary, the Pit 9 fixed-price contract with Lockheed
Martin was supposed to cost a total of $200 million to complete
cleanup of radioactive waste stored in thousands of barrels
buried underground at the Idaho site. Due to a dispute
regarding technology in waste characterization issues, Lockheed
Martin stopped work at Pit 9. Nothing got cleaned up. DOE
terminated the contract, and today Lockheed Martin is suing DOE
for $271 million. A $200 million fixed-price contract with
Lockheed Martin resulted in zero cleanup and a $271 million
lawsuit against DOE.
The purpose of the subcommittee's Pit 9 hearing was to
highlight the Department's management problems so that other
fixed-price contracts would not fail. At the hearing Secretary
Pena promised the Department had learned from Pit 9's mistakes,
provided a list of valuable lessons DOE would apply to its
portfolio of new fixed-price contracts, including a $6.9
billion Hanford tank waste contract, $1.2 billion advanced
mixed waste contract at Idaho, and $238 million Oak Ridge
Metals Recycling Project. Unfortunately when Secretary Pena
left the Department in 1998, he took these valuable secrets
with him because each of these fixed-price contracts are still
experiencing schedule delays, cost overruns, and performance
problems.
The subcommittee held its second hearing on fixed-price
contracting in October 1998 to review the Hanford tank waste
contract. DOE's contractor, BNFL, originally proposed a total
fixed price of $6.9 billion in August 1998 and began a 2-year
design phase that would have been completed this summer, and at
the 1998 hearing the subcommittee raised serious questions
about the technical and financial risks associated with this
first-of-its-kind effort.
GAO called for DOE to closely oversee BNFL's work. The
Department and BNFL assured the subcommittee then that all the
bases were covered. However, just a few weeks ago, BNFL decided
to revise its $6.9 billion fixed price a little bit and double
it to $15.2 billion. BNFL's announcement shocked the
Department. Secretary Richardson quickly decided not to proceed
with BNFL. Unfortunately, DOE's oversight failed to anticipate
these events and now the Department is scrambling to figure out
how to proceed with the cleanup of Hanford's radioactive waste.
DOE is also having trouble with its fixed-price contract
with BNFL at the Oak Ridge site as well as the Idaho site. At
Oak Ridge, BNFL agreed in 1997 to a $238 million contract to
decontaminate and recycle metal from three buildings in the Oak
Ridge complex. Last month DOE informed the committee that BNFL
had formally requested an additional $116 million for the
contract. DOE also told us BNFL plans to submit a request for
another $54 million. Additionally, DOE may have to pay BNFL $40
million to cover the cost of Secretary Richardson's decision to
prevent BNFL from recycling contaminated nickel. In all, these
cost increases could nearly double the price of the original
$238 million contract, and that's nothing fixed about the price
of the contract.
At the Idaho site, the $1.2 billion advanced mixed waste
contract is also headed toward some trouble. According to the
GAO, the project is falling behind schedule due to difficulties
associated with obtaining environmental permits which are the
result of changes in the technical scope of the contract. The
delayed environmental permits have delayed construction of the
treatment facilities resulting in cost increases of at least
$44 million above the original contract price, and these costs
continue to increase, particularly if additional schedule
delays are experienced. Technical uncertainties remain
regarding the significant portion of the waste, up to 22
percent of the waste, that raise additional questions about
whether the project will meet future schedule and cost
milestones.
Today we are looking for answers, continue to look for
answers as to why the Department's fixed-price contracts have
failed to control cleanup costs or improve contract
performance. All indications are that the Department has again
failed to follow through on yet another important contract
reform effort. Taxpayers always deserve better from DOE and its
contractors in this particular mess. I look forward to hearing
from today's witnesses on how we can fix these fixed-price
contracts.
I yield to the gentleman from the great State of Michigan
Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman. For more than a
decade, and particularly after the end of the cold war, this
committee, the General Accounting Office, and others have been
dissatisfied with the cost and progress of cleanup work at our
nuclear weapons productionsites. There was a general consensus
that the Department was not capable of managing these contracts
in a cost-effective manner, and that it should turn them over
to industry, which would compete for these contracts in the
same manner they do in the private world.
One of the most recent and worst examples of what could
happen under the old cost-plus system was the in Tank
Precipitator Project at Savannah River. This project began in
1982 by the then prime contractor at the site. Problems with
the technology that surfaced in 1983 were hidden. By 1992,
there were warnings from the GAO, DOE red teams and others that
the technology might not work, but the project went on and on
through many administrations and many Secretaries as the
contractors made continuous promises that the technology could
be fixed, and DOE accepted them. Over $500 million was spent on
a technology that produced so much benzene that it could not be
operated. The lack of a precipitator delayed a larger project.
There was no congressional oversight because the site contract
hid the costs in its operation budget.
Finally in 1999, GAO did a report for Mr. Dingell of this
committee laying out the financial wasteland that this project
had become. To his credit, Secretary Richardson, within days of
learning of the report, removed the contractor.
I must point out that by 1991, before this administration
came into office, Congress and the General Accounting Office
and the Department were more than ready to try something else.
Various private contractors said they could complete cleanups
faster and cheaper if they had more control. Pit 9, a small
site in Idaho, was chosen as a pilot for using a fixed-price
contract with all the risk on the contractor. The idea was no
cleanup, no payment.
We all know what happened. The waste wasn't fully
identified. The technology did not work the way it was supposed
to, and the price skyrocketed to the point where the contractor
begged for a cost-plus contract. When denied, the contractor
stopped work and was declared in default by DOE. The contractor
and DOE are in court trying to settle their disputes about who
is going to pay for what. The cleanup has not occurred, but
this was not Savannah River. At least DOE had not spent money
for years on a project that did not work.
Projects that we will look at today each have a different
story. Unlike Pit 9, these projects all have some level of
success and forward movement. More importantly, taxpayer
dollars have not been mindlessly spent for years on
nonperforming contractors. When the cost estimates for the
Hanford Tank Remediation Project came in, that was in April, at
$15.2 billion, double the goal price set by BNFL in 1998,
Secretary Richardson again moved quickly to terminate the
contract and establish an alternative approach to cleaning--
alternative approach to contracting for cleanup. The contract
itself established this off-ramp.
It appears that the design completed at this stage is
acceptable, but the government is not willing to accept the
large contingencies that BNFL built into its financial
projections. At Oak Ridge, BNFL is requesting significant
contract price adjustments at Oak Ridge. There is dispute over
the recycling of radioactive materials, but the cleanup of the
site is not in question. It appears, moreover, that BNFL will
absorb the majority of these additional costs and not the
government, particularly if this committee maintains its
oversight. That is exactly what a good fixed-price contract
that puts the risk on the contractor should achieve.
Another project, Mr. Chairman, the Advanced Mixed Waste
Project in Idaho, is moving forward successfully at the design
phase. Although State construction permits have not yet been
received because of the contract provisions, DOE has spent very
little money on this project to date while the contractor has
spent over $100 million. It is too early to tell if the long-
term cleanup schedule in the budget will be met, but BNFL is
not taking all the risk here. The contract contains a 5-year
adjustment provision that will allow an increase in the price
paid for treatment by DOE if BNFL's actual costs are greater
than anticipated.
The question for us today, Mr. Chairman, is not whether
these contracts have gone forward without a single bump in the
road, but whether this approach to contracting will result in
smaller government outlays and more successful cleanups over
the long run. What adjustments in approach should be made? I
look forward to hearing positive suggestions from all the
parties present today, including those on the dais, but perhaps
we will finally admit that there is no silver bullet when it
comes to cleaning up a 50-year legacy of our nuclear weapons
production.
With that, Mr. Chairman, I yield back the balance of my
time.
Mr. Upton. Mr. Bryant.
Mr. Bryant. I thank the Chairman. I appreciate our panel of
witnesses for coming. I know it's been a very difficult period
of time for the Department of Energy recently, and not to make
it too light, but I am pleased that the hard drives were
recovered behind the Xerox machine. My only concern is I hope
the scientists weren't trying to copy it. It's supposed to be a
little bit of humor there. You all can loosen up a little bit.
I did want to, as I sat and listened to our full committee
Chairman's statement, and our subcommittee chairman's
statement, say that I couldn't agree more, and I want to adopt
both of those gentlemen's statements as well as my friend from
Michigan Mr. Stupak's statement. It just seems to me as I read
through the materials yesterday in preparation for this
hearing, this is one of those just terribly frustrating things
that I heard about before I came to Washington. Things that you
can turn on the TV and expect to see on 60 Minutes or Dateline
or something like that, and it is--I know it has to be
frustrating to you and to the contractors, but it's terribly
frustrating to us in Congress who have to go back home and go
in front of people at town meetings and explain to them why
this happens. Because there will be a story about this, and
probably at some point one of the networks will pick it up and
make an example out of it, as they should.
I just cannot imagine this type of situation being allowed
to exist in the private sector where all parties are in the
private sector. I cannot accept that fact that more care is not
taken in drawing up the specifications, the bid specifications,
and letting the people bidding on that contract know precisely
what you need, what you want. That way you avoid all these
subsequent changes and things that are so expensive. And it
just seems like if a better job was done on the bid
specifications, and maybe that takes more work to decide what
we want out of this and not end up with things like this $40
million overrun because we can't allow BNFL to recycle this
material in Oak Ridge.
The second phase, negotiations of this contract. If you
have good bid specifications out there, know what you want to
do, both sides understand that, they don't come in after the
fact and say, well, we didn't understand that, or we couldn't
see this or that and we underbid, but negotiate. Good
negotiations, arm's-length, in terms of what's out there,
whether it's a bid process or negotiations, I don't know. And
then importantly, as all speakers will talk about today,
clearly better oversight is needed to make sure these overrides
don't occur.
I think in the past, particularly through the cost-plus
contracts, again, you just have the opportunity to make all
kinds of money there by running up the costs. We are trying to
go to a better system. I think the fixed-price contract is the
way to go, but the way it is being handled through this process
I just described is not working either, and I think many people
have grown in the government sector to rely upon the generosity
of the government and knowing well if there is an overrun, they
are going to pay for it. They have deep pockets.
Again, I have a difficult time imagining something like
this happening in a truly private-sector situation where they
know big government is not back there to stand behind whoever
made the mistake in the process. We seem to be in here always
whining and moaning and groaning about these kinds of things,
but there's a reason we do it, and we just hope for better. And
I would yield back my time.
Mr. Upton. Thank you.
Mr. Burr.
Mr. Burr. Thank you, Mr. Chairman. I have a superb opening
statement, but I would like to ask that it be entered into the
record and just make some general comments.
Mr. Upton. It has to be unanimous consent.
Mr. Burr. The gentleman would ask unanimous consent that
his full opening statement be listed in the record.
Mr. Bryant raises a very important question. Is this really
the movie Groundhog Day, and do we just go over and over and
over? I know the Secretary is tired of us drilling him on the
same thing, but the fact is that the tool that we used to gauge
our success or our failure is the General Accounting Office and
their assessment. If they are not the appropriate ones, then we
need to determine who is, and we need to bring them in and
serve as a referee and try to tell DOE, you've done a good job
or a bad job, or, contractor, you've done a good job or a bad
job.
But there's absolutely no substitute under a fixed-price
contract for not being specific in the contract for what it is
you want done, and it seems like every fixed-price contract
that this committee has looked at allows tremendous
opportunities for the unknown, and for the unknown to be later
billed for, and for DOE to at that time make an assessment as
to whether they want it done or don't want it done. That's not
fixed price. That's not clearly defined.
And I think the GAO made a very valid statement in their
testimony, and that is, we're applying fixed-price contracts to
things that you can't do it on, because if you don't know what
needs to be cleaned up, how in the world can you ask somebody
to bid with accuracy. And in the absence of being able to do
that and to bid with accuracy, we say, there's a fudge factor
over here, and then we are amazed when new numbers begin to
come in.
If, in fact, the Secretary was shocked, surprised, angered,
whatever the description is, that Hanford moved from a $6.9
billion to a $15 billion cost--I'd like to have the line
manager from DOE who is over that site come in and tell me he
didn't know that it was going to increase. I believe he would
probably tell us in all honesty he knew it. I don't believe it
was a surprise to the Secretary. If it was, somebody ought to
be fired.
But the fact is we're not performing in a fashion that the
taxpayers deserve. We understand this is very, very difficult
work. We have a very small pool of people we can turn to for
the type of cleanup that we're asking the DOE to undertake. But
I would stress on you, Mr. Secretary, today, and to the entire
Department, the GAO has been very specific every time they've
come to us, and they've said, we can't tell you for sure
something can or can't be done, but we can make you this
assurance: Without proper oversight anything can fail. And I
would tell you that as you look at the experiences with the
majority of the cleanups we looked at, we can't judge whether
they could have succeeded or they were doomed to fail, but we
can tell you that oversight doesn't exist because with
oversight there are not surprises, and this committee responds
to the surprises that you expressed that happened from your
contractors and from fixed-price contracts.
I'm hopeful that if this is the movie Groundhog Day, that
we'll bury this one and we won't revisit it again.
With that, I yield back, Mr. Chairman.
Mr. Upton. Thank you.
Mr. Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
Let me clarify. I haven't seen Groundhog Day. If it doesn't
show on United Airlines between San Diego and Washington, I
don't see it. But I--let me just say to my colleagues, and I
know you get tired of hearing the years of administration
experience that this one member keeps harping about, but I
think we need to be sensitive to the fact that as we see these
horrendous problems, we don't just focus on the agency or the
bureaucracy that administrates it, but also of the universe in
which they operate in.
First of all, let's admit it: When government funds are
being spent, inherently there's a lack of accountability
because it's nobody's money. It's everybody's money. I know
that may sound absurd until you try to administer public funds,
and people just don't seem to get that hot and heavy about the
fact that there was a few dollars lost here, a few million
here. After a while it starts adding up to a few dollars. But
that happens in cities, counties, and Federal agencies. I know
there are some people here would be outraged at me making that
statement, but 25 years in government, you just don't have the
sensitivity of one person saying, this is my money that you've
blown.
I guess that's our job sitting here. We represent the
people whose money is being not utilized to its maximum extent.
On the other side, especially when we're talking about
environmental issues, and I want my colleagues on both sides to
really hear this, there tends to be a mentality that money
should not be a major factor with a lot of people who work on
environmental issues. As if--it's almost sacrilegious to talk
about--worrying about how much money it costs for a cleanup or
for doing a certain strategy because it's wrapped in this
environmental blanket, and thus make it is sacred and holy, and
it's as bad as trying to look at how much somebody is giving or
not giving at the collection plate at church.
I think we've got to watch out, that there are people out
there that I call environmental Jimmy Swaggerts that wrap
themselves in a green blanket and say, give me more money
because the Lord above says this is what is needed, and you are
not going to care about the environment if you don't give me
all the money I want on this issue. Then you've got the agency
that is sitting there saying is it cost-effective with constant
pressure to do overkill. You never see an agency being attacked
by, quote/unquote, oversight groups for doing too much cleanup,
for--you never see them from that side of saying, why did they
spend more money on this?
That's our job is to go the other way, but you've got huge
pressure from the other side, from a bureaucracy's point of
view, that you catch hell for not spending enough money and not
doing enough and everybody saying you should have covered every
base even if it would have cost $30 million more. And I've been
guilty of that, too, I admit it.
So I just ask that we take a look at this. When we talk
about cost-effectiveness, if we talk about common-sense
approaches to cleanup and environmental strategies like this,
that it's not just an abstract word. When you look the common
sense, when you lose the sensitivity to the bottom line, when
you lose the fact that we have a trust to use the public's
funds to its best use, then that is part of protecting the
public from environmental problems. That's part of cleanup
using every dollar effectively.
I think that we need to say that maybe there needs to be
some mindset changes that are outside the agency that is
administering this fund. I think all of us are influencing this
mindset, but at the same time that doesn't give an excuse for
those who are being paid higher and administered for the good
of the agencies.
So I would close by saying, Mr. Chairman, this is not just
a thing of dollars and cents. For every dollar that's wasted on
one of these contracts, that's a dollar that could have been
used somewhere else to clean up the environment. I think we've
got to remember that again and again, and those of us who want
to claim to be environmentalists have got to be as serious
about the waste and environmental cleanup as we are of the lack
of environmental cleanup, because they both equate to the same
thing in the long run.
I yield back, Mr. Chairman.
I would ask unanimous consent that all members that have
opening statements, particularly those that are not here, will
have a chance to enter that into the record, and without
objection, that will be the case.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Ron Klink, a Representative in Congress from
the State of Pennsylvania
Mr. Chairman, thank you for holding this hearing. In August of
1997--over the protest of the minority--this Committee signed off on a
reprogramming request to allow the Department of Energy to sign the
sole-source contract with British Nuclear Fuels, Ltd. (BNFL) to clean
up the gaseous diffusion plant at Oak Ridge that we are going to
discuss today. It was a fixed-price contract, but not a competitively
bid contract. Staff was told at the time that the Committee's decision
to go forward was made because of political influence. We asked the
Committee to look at this project in 1997, and we are pleased to see
that our request has finally been granted.
The contract has been a disaster. It was a sole source contract
with a questionable procurement history that has never been
satisfactorily explained. Its unusual financial structure was
completely dependent upon the release of a continuous stream of
volumetrically contaminated radioactive metal into national and global
commerce through a non-public permitting process in the State of
Tennessee. Thousands of tons of metal were involved. Despite all of its
public statements that this metal would be very clean, DOE's contract
has absolutely no clean-up standards in it. Despite all of DOE's
representations to Congressional staff that, in England, BNFL had
previously cleaned up and recycled volumetrically contaminated nickel
in follow-up interviews with staff, DOE and BNFL both admitted that
they had not done so. That metal sits in a building in England. The
technology then selected to clean the nickel at Oak Ridge had never
been used commercially.
Moreover, notwithstanding statements from DOE and BNFL at that time
that the recycled nickel will be used only in motorcycle batteries sold
in Europe and Asia, there was no requirement that this be done. The
expected battery factory with 500 'ohs in Oak Ridge disappeared almost
as soon as the contract was signed.
Mr. Chairman, it is well known that the American public has a
visceral negative reaction to having radiation deliberately inserted in
its products. The Nuclear Regulatory Commission has no standard for the
free release of radioactively contaminated materials. This contract
represented the first time that the Department of Energy had
transferred knowingly contaminated materials to a contractor before
cleaning it up to what are known as ALARA--or ``as low as reasonably
possible'' standards. It violated DOE's own order for releasing
volumetrically contaminated materials. And because the license for
release was granted by the State of Tennessee, it was done secretly
without notice to or input from either the scrap metal dealers and the
steel industry which would process this material or the public which
would use it. No one can track free released metal once it is put into
commerce. Would it be in our silverware, our batteries, our teeth, our
buckles, our soda cans? If this metal resulted in the contamination of
even one steel mill, tens of millions of dollars in cost would be
shifted to an unsuspecting party.
We have come a long way since that time. After many meetings with
the steel industry, labor unions, environmental groups and others,
Secretary Richardson has halted the recycling of radioactive metal from
the DOE complex contemplated in this contract and is looking at ways to
use it within the complex. He set up a task force to review the
Department's policies concerning the release of all radioactively
contaminated materials, not just metal. I must thank him for the
personal attention and the departmental resources that he has given to
this issue.
Recently, I introduced H.R. 4566, the Steel and Metals Consumers
Radioactivity Protection Act, or the SCRAP Act, to protect steelworkers
and the American public from excessive radioactivity in the products
they make and use. The bill provides that scrap metal will not be
recycled until a standard is set--through an open and public process--
to control the release of radioactively contaminated scrap across state
and international boundaries.
But we also have more routine problems in the Oak Ridge contract.
There are cost overruns and the usual disputes over who knew what when
the contract was signed. BNFL wants significant cost adjustments that
would add 50 percent or more to the final price. As Lockheed Martin
learned at Pit 9, it is extremely difficult for a contractor to
successfully complete a fixed-price contract for cleaning up DOE's
radioactive waste. The technological and other unknowns are too large.
These projects are never as they appear to be.
The question we must answer today is whether the problems would
have been even worse under the traditional cost-plus contract. We
cannot answer that question, although my inclination is to believe that
the costs would have been even greater under the old system. Perhaps we
in Congress must face the reality that these projects are much more
complex, much more risky and much less certain than almost any other
clean-up projects we have undertaken. They are not the same as building
an office structure. Perhaps these contracts should be broken down into
parts that can be accomplished with a fixed-price contract and those
that cannot. I look forward to a further discussion on these matters.
Mr. Upton. Our first two witnesses today include the
Honorable T.J. Glauthier, Deputy Secretary of the Department of
Energy; Ms. Gary Jones, Associate Director, Energy Resources
and Sciences Issues, from the U.S. General Accounting Office.
Welcome. You both have been before us before. You know our
subcommittee rules, and it has been a long-standing tradition
to take testimony under oath. Do either of you have objection
to that? And if you would also perhaps identify the folks that
are next to you.
Ms. Jones. I have with me William Swick, who is an
Assistant Director with GAO, and who is responsible for the
direct work on the three projects that we're talking about
today.
Mr. Glauthier. I have with me Carolyn Huntoon, who is the
Assistant Secretary for Environmental Management at the
Department of Energy.
Mr. Upton. Thank you. Committee rules also allow you to be
represented by counsel if you wish that. I didn't think so.
If you'd stand and raise your right hand.
[Witnesses sworn.]
Mr. Upton. You are now under oath. I would just like to
note that we'll have a number of members, I'm sure, come and go
during this hearing, and I know for myself I have a couple of
amendments on the floor with my name on them that I'm going to
be needing to participate on the House floor. So your
statements are made in their entirety as part of the record,
and at this time we'd like you to take some time, up to 5
minutes or so, to summarize that.
Mr. Glauthier, we'll start with you. Welcome.
TESTIMONY OF T.J. GLAUTHIER, DEPUTY SECRETARY, ACCOMPANIED BY
CAROLYN HUNTOON, ASSISTANT SECRETARY FOR ENVIRONMENTAL
MANAGEMENT, U.S. DEPARTMENT OF ENERGY; AND GARY L. JONES,
ASSOCIATE DIRECTOR, ENERGY, RESOURCES, AND SCIENCES ISSUES,
ACCOMPANIED BY WILLIAM SWICK, ASSISTANT DIRECTOR, U.S. GENERAL
ACCOUNTING OFFICE
Mr. Glauthier. Thank you very much, Mr. Chairman and
members. I was struck by the opening comments of Mr. Bryant and
Mr. Burr. I have seen the Groundhog Day film and lately have
felt that that's what we're in with the security hearings that
we've been talking about. It is good we found the disks, and
hopefully we'll have more answers very shortly. It is nice to
come before you today and talk about a different subject.
Actually, listening to the opening comments, it seems that
we have a lot of agreement on these issues. This is not a
partisan issue, nor does it divide the Congress or the
administration. It is an issue that we all care about: the
response management of these programs and finding the best
contracting forms, the best management forms for all of the
work that we are doing. So, I appreciate your holding the
hearing and having us here today.
As I mentioned, I have Carolyn Huntoon, our Assistant
Secretary with me, as well, to make sure that you have as much
information as you can on these topics.
Let me make a few remarks, and, as you indicated, the full
testimony is in the record.
I'd like to put these issues in perspective, if I may. The
Department's environmental management program, as you've noted,
is responsible for managing the enormous legacy of radioactive
and hazardous contamination left over from 50 years of nuclear
weapons production and research. We're responsible for storing,
treating, and disposing of large volumes of liquid and solid
nuclear wastes, safeguarding materials that can be used to make
nuclear weapons treating and storing corroding nuclear spent
nuclear fuel, and remediating extensive surface and groundwater
contamination.
Our Environmental Management Program manages about 30
percent of all the Department's fixed-price contracts; that is,
37 of the 132 fixed-price contracts in the Department, that are
each over a half million dollars, and then, of course, many
more subcontracts. The value is about $1.5 billion worth of
fixed-price contracts in the Environmental Management Program.
And we'll focus especially on 4 of these 37 in my comments
today.
The administration has made significant progress in
cleaning up the legacy of waste. We've actually completed
cleanup at 69 of 113 sites in the program. We've opened the
Waste Isolation Pilot Project in New Mexico for the disposal of
transuranic waste and have completed 59 shipments to the WIPP.
At Hanford, we've removed the highly radioactive liquids from
121 of the 149 old single-shell tanks, and we're on schedule
for this fall to begin moving corroded spent nuclear fuel from
wet storage near the Columbia River to safer dry storage
farther away from the river, the K-Basins Project.
Since 1996, at the Savannah River site, we've been
operating the Nation's first vitrification facility for defense
high-level liquid waste. By the end of this year, we'll have
produced over 900 canisters of waste solidified in glass. At
Idaho, we began transferring Three Mile Island spent nuclear
fuel from wet storage into a new dry storage facility. Last
year, overall, throughout the complex, we deployed over 120 new
technologies developed over the years through the Environmental
Management Program.
This administration inherited a contracting method that was
developed during the Manhattan Project and institutionalized
during the cold war. Under the old management and operating, or
M&O contracts, the Department reimbursed the contractors for
all costs and assumed all risks. There was no competition for
most of these contracts. Only a few private sector firms
participated.
This administration has taken the initiative, consistent
with GAO's recommendations in the early 1990's, to reform the
Department's old contracting and management practices. The
increased use of fixed-price contracts is only one of a number
of improvements that we have made in recent years. In the last
6 years, we've increased the number of competitively awarded
contracts for the management and operation of our major
facilities by nearly an order of magnitude, as compared with
the Department's record during the previous years. We've
recruited contractors with environmental expertise rather than
continue to rely on the traditional nuclear weapons production
firms. Performance-based contracting as opposed to the previous
practice of pay for effort has become the standard.
Last year Secretary Richardson also strengthened project
management by simplifying and clarifying the responsibility and
accountability of line management for performance, by creating
the Office of Engineering and Construction Management to
establish baseline cost control processes and quarterly project
reviews, by conducting independent external reviews, and by
establishing the Deputy Secretary's Watch List for critical or
troubled projects. More recently, the Secretary has taken
additional actions to strengthen the Department's ability to
sanction poor contractor performance and to reward outstanding
performance, including allowing the Secretary to direct a
contractor to remove its top manager for failure to perform.
As the GAO has reported, the Department has successfully
managed a number of our fixed-price contracts. For example, at
the Hanford site, Bechtel Hanford alone has awarded 16 major
fixed-price contracts for projects, including the construction
and operation of the environmental restoration disposal
facility for the safe long-term storage of the C reactor and
for the deactivation of the N reactor. At the Savannah River
site, the Department estimates it avoided over $25 million in
costs as a result of utilizing fixed-price contracting for the
M Area Mixed Waste Tank Remediation Project. And, another
example at Oak Ridge, the Department may avoid up to $45
million in costs through the use of a fixed-price contracting
approach for the construction and operation of the
Environmental Management Waste Management Facility.
Of course, not all the projects for which we have awarded
fixed-price contracts have met our objectives. In making the
necessary changes, we've worked hard to act on the observations
and findings of independent reviewers, including the National
Academy of Sciences and the GAO. I'd like briefly to review our
experience with some projects, namely, the four key projects
referenced by the GAO in the subcommittee.
First is the Pit 9 Project that you mentioned. In 1991, the
Department conceived of this project as a pilot to change the
way the Department acquired environmental services. The
underlying objective was to shift the risk of performance away
from the government, as under the traditional M&O approach, to
the contractor who controlled the elements of the project
necessary to get the job done. Pit 9 cleanup called for
contractor-owned facilities and equipment, a fixed price for
completed work, and a guarantee of performance. A number of
companies, including the ultimate contractor, Lockheed
Corporation, argued that existing technologies could be applied
to remediate Pit 9 on a fixed-price basis without any further
research and development. The proposed project also would
demonstrate characterization, removal, and treatment
technologies.
Ultimately the contractor selected, Lockheed Martin
Advanced Environmental Systems, failed to perform the contract
under its terms and conditions and, as noted, has made claims
against the Department through litigation for more than the
amount of the original contract.
The Department believes the fundamental difficulties
encountered by the contractor resulted from the company's
failure to apply sufficient technical and management skills to
the project and from its own management, business, and
technical decisions rather than from the Department's actions.
Had this been set up as a cost-reimbursable contract, the
government would have paid millions of dollars for Lockheed
Martin's unsuccessful efforts rather than the corporation
bearing the financial responsibility as it does now.
Another case is the Hanford Project privatization, the Task
Waste Remediation System, which has recently been renamed the
River Protection Project. It's one of the largest environmental
cleanup projects in the world. Approximately 54 million gallons
of highly radioactive waste have been stored in 177 underground
storage tanks, many of which are single-shelled and known to
have leaked radioactive waste into the soil. The Department
entered into an enforceable agreement with the State of
Washington and with the EPA which includes requirements to
remove the waste from the tanks, immobilize those wastes
through the process of vitrification, and dispose of them. This
contract was initially structured to provide strong financial
incentives to achieve project schedule and performance goals
and to provide project finance.
Applying a lesson from the Pit 9 experience, and with the
support of the Congress, the Department set up the project with
interim phases and milestones to enable course corrections
based on new information as the complex project evolved.
Additionally, the Department established a number of project
controls, including a variety of internal and external reviews.
After BNFL's successful performance on the first phase of
the contract in 1998, DOE authorized them to proceed with a 24-
month extended design period for a facility to treat the tank
waste. At that time BNFL represented that it could produce,
with 90 percent confidence, a project whose costs would not
exceed $6.9 billion and was willing to stake $300- to $500
million of their own equity on the outcome. However, in April
of this year, the company produced a formal bid of $15.3
billion. This bid was unacceptable from a financial,
managerial, and cost perspective, a decision supported by our
independent cost estimate.
I might add, we thought as recently as February of this
year that the costs were still going to come in close to the
original number. Those were the reports that we were given from
the company. Mr. Burr indicated someone should be fired, and
someone has been. The contractor has been fired from this
project. We're not going ahead with that contractor.
Some cited the cost increases in the BNFL proposal as
evidence of our managerial deficiencies regarding complex
projects. We strongly disagree. BNFL first informed the
Department of significant cost increases of the project at an
informal briefing in early April, just 3 weeks before their
formal bid was delivered. At no time prior to this briefing did
we have any indication that the cost would escalate by anything
close to this magnitude. At that briefing, the Department
requested that BNFL identify options for reducing its costs
when submitting its formal bid. The company, however, did not
do so.
Fundamentally, the Department was unable to enter into a
privatization contract for the next phase of this project,
because the contractor was unwilling to assume the financial
risks originally envisioned by both parties. This unwillingness
to assume risk was translated into increased costs and
excessive conservatism in the contractor's proposal. We've been
forced to restructure the project in order to meet our
agreements with the State and to have a realistic overall cost.
In part because the design was only 13 percent complete instead
of the target level of 30 percent, we're not even able to seek
fixed-price bids. We are seeking a strong competition and
intend to select a new design construction firm by January 1.
Mr. Upton. Mr. Glauthier, if I could just stop you there.
We've gone a little bit beyond the 5 minutes, as you know. We
also have a vote on. I think we'll have to stop temporarily,
and we'll come back in about 10 or 15 minutes. Thank you.
Recess.
[Brief recess.]
Mr. Upton. We're okay from votes for at least an hour they
say.
Mr. Glauthier, if you could briefly wrap up, and then we'll
go to Ms. Jones.
Mr. Glauthier. Thank you. I appreciate it. I will do this
quickly and wrap it up and turn it over to your other witness.
I would like to comment briefly on the fixed-price contract
at Oak Ridge, the one that was signed in 1997 with BNFL to
decommission three buildings and to recycle or dispose of the
materials within them and to make them available for commercial
reuse. Considerable progress has been made on this project. The
cleanup is actually now over 22 percent complete. Nearly 16
million pounds of material have been dismantled, and much of
the waste has been disposed. However, it's not been pain-free
and, as was noted earlier, the contractor has submitted a
number of requests for equitable adjustments, adding up to a
significant amount of extra money.
We share the subcommittee's concern that this raises a red
flag, calling for very close attention. We're concerned that
contractor's management or control or change control systems
were not well run. We believe that very few of the costs in
these requests are justified and, ultimately, very little of it
will finally be approved.
Going forward, we're urging the contractor to improve the
management system and we believe that that is happening. The
current estimate to complete that project is about 5 percent
higher than when the contract was awarded in 1997, although we
may have to increase that as a result of specific policy
changes we've made recently on recycled material. I'd be happy
to discuss that more in the question period.
I will not comment on the Advanced Mixed Waste Treatment
Project at Idaho, but we'd be happy to discuss that in the
question period. I will note, though, that our current estimate
to complete that project is within 2 percent of the original
contractor award in 1996.
And then finally, I would like to present the lessons
learned out of these experiences. Our feeling is that many of
the lessons learned are very similar to the lessons or
principles in the GAO reports over the years and in the
comments that the committee has offered earlier. For one thing
we agree that fixed-price contracts are not appropriate for all
situations. Many factors, including the waste characteristics,
the complexity of the project, the number of contractors
willing to compete, the financing mechanisms available, the
optimum allocations of risk, must be considered in determining
the appropriate type of contract.
Having said all that, we do also believe that fixed-price
contracts are appropriate in a number of cases if we can define
those characteristics well enough and we can get real
competition, we can use fixed-price contracts effectively for
faster program completion and better cost to the government.
Thank you, Mr. Chairman. I'd be happy to answer questions.
[The prepared statement of T.J. Glauthier follows:]
Prepared Statement of T.J. Glauthier, Deputy Secretary, U.S. Department
of Energy
Mr. Chairman and members of the Subcommittee, I appreciate the
opportunity to testify about the Department of Energy's (DOE)
experience with fixed-price contracting for environmental management
projects. In recent years both the Department and the Subcommittee have
recognized the need for the Department to strengthen its project
management capabilities, to reform its contracting practices, and to
better integrate the two.
Under this Administration, the Department has incorporated many
state-of-the-art private sector contracting and project management
practices and principles into all of our operations. For example, in
the last six years we increased the number of competitively-awarded
contracts for the management and operation of our major facilities by
nearly an order of magnitude, as compared to the number that had taken
place in the previous ten years. This year alone, the Department is
competing seven management and operating contracts, more than double
the number of contracts competitively awarded between 1984 and 1994.
Performance-based contracting, as opposed to the previous practice of
pay-for-effort, has become the standard. The Department now routinely
uses external independent reviews for major projects. In addition, we
created an office within the Department to be the focal point for
improving our project management practices for all DOE programs.
Moreover, the Office of Environmental Management has created its own
Office of Project Management to aid its field offices in the management
of major projects.
We recognize that there is still much work to be done--changes in
old practices and work cultures take time to be fully implemented. We
also recognize that not every attempt at fixed price contracting has
met our objectives. However, we believe that we have applied the
lessons learned from those situations to improve our contracting
practices.
Environmental Legacy of the Cold War
Understanding the contracting issues we face requires an
understanding of the context for our contracting. The Environmental
Management (EM) program is responsible for managing and cleaning up the
environmental legacy of the nation's nuclear weapons production program
and government-sponsored nuclear energy research. The scope and
challenge of this task is enormous, involving managing large volumes of
nuclear wastes, safeguarding materials that could be used in nuclear
weapons, and remediating extensive surface and groundwater
contamination. For example, the EM program is are responsible for:
remediating 1.7 trillion gallons of contaminated ground water,
an amount equal to approximately four times the daily U.S.
water consumption;
remediating 40 million cubic meters of contaminated soil and
debris, enough to fill approximately 17 professional sports
stadiums;
safely storing and guarding more than 18 metric tons of
weapons-usable plutonium, enough for thousands of nuclear
weapons;
managing over 2,000 tons of intensely radioactive spent
nuclear fuel, some of which is corroding;
storing, treating, and disposing of radioactive and hazardous
waste, including over 160,000 cubic meters that are currently
in storage and over 100 million gallons of liquid, high-level
radioactive waste;
deactivating and/or decommissioning about 4,000 facilities
that are no longer needed to support active DOE missions;
implementing critical nuclear non-proliferation programs for
accepting and safely managing spent nuclear fuel from foreign
research reactors that contain weapons-usable highly enriched
uranium; and
providing long-term care and monitoring--or stewardship--for
potentially hundreds of years at an estimated 109 sites
following clean up.
Despite the complexity and size of its mission, EM has made
substantial progress:
Active cleanup is complete at 69 of 113 sites as of the start
of fiscal year (FY) 2000.
The Waste Isolation Pilot Plant (WIPP) is open and disposing
transuranic waste. To date, WIPP has received 59 shipments of
transuranic (TRU) waste from Los Alamos National Laboratory,
Rocky Flats, and Idaho National Engineering and Environmental
Laboratory (INEEL), with the Hanford and Savannah River sites
expected to begin shipping this year.
In FY 1999 alone, we disposed of 49,000 cubic meters of low-
level waste, 14,000 cubic meters of mixed low level waste, and
282 cubic meters of transuranic waste at disposal facilities at
DOE sites and at commercial disposal facilities.
Cleanup of all 22 large uranium mill tailings sites is
complete, as well as 5,300 ``vicinity properties,'' including
elementary schools and homes.
At Rocky Flats, we continue to make great strides towards
meeting our 2006 closure goal, including removing all plutonium
pits from the site, beginning shipments of highly-enriched
uranium to other sites, and demolishing a major plutonium
research facility.
At the Idaho National Engineering and Environmental
Laboratory, we completed the new dry storage facility for spent
nuclear fuel and began transferring Three Mile Island spent
nuclear fuel from wet storage to the safer new facility.
In support of non-proliferation goals, we have now completed a
total of 14 shipments of spent nuclear fuel from foreign
research reactors from 23 countries since the beginning of the
Foreign Research Reactor (FRR) Spent Nuclear Fuel (SNF)
Acceptance Program in 1996--two joint combination shipments
from South America and Europe, seven shipments from Europe, one
from South America, one overland truck shipment from Canada,
one shipment from Australia, and two shipments from Asia.
At the Hanford Site, we restarted plutonium stabilization
activities to reduce the risks posed by unstabilized plutonium
materials; we have resolved three of the four high-priority
safety issues for the high-level waste tanks, such as the
generation of high heat in one tank and a rise in the surface
level in another; and we have removed liquids from 120 of the
149 old, single-shell tanks.
At the Savannah River Site, we are successfully operating the
nation's first defense high-level waste vitrification facility
for stabilizing over 34 million gallons of liquid wastes stored
in underground tanks. By the end of FY 2000, we expect to have
produced over 900 canisters of high-level waste ``glass''--
approximately 15% of the total number of cans estimated to be
produced during vitrification operations.
We continue to increase on-the-ground use of new innovative
technologies. During FY 1999, DOE sites used innovative
technologies 218 times in cleanup activities--129 of which were
used for the first time at a site. Moreover, since the
inception of the EM Science and Technology program, we have
seen over 500 deployments of over 200 new cleanup technologies.
The deployment of these technologies is yielding significant
benefits to the cleanup of the DOE complex, including: more
efficient removal of highly-radioactive tank waste; containing
and treating subsurface contamination; enhancing in situ
bioremediation of organic contaminants; treatment of mixed low-
level waste; and better methods to deactivate, decontaminate
and dismantle facilities while ensuring worker safety and
minimizing risk to the surrounding environment.
Historical DOE Contracting Practices
The Department and its predecessor agencies have historically
managed a sizeable number of wide-ranging and high-dollar-value
contracts to conduct its nuclear weapons production and environmental
cleanup missions. Presently, the Department manages 132 active, multi-
year, fixed-price prime contracts each valued over $500,000, for a
total contract value of more than $5.2 billion. Of these, the EM
program manages 37 fixed-price contracts, valued at a total of nearly
$1.5 billion. In turn, our prime contractors manage a large number of
fixed price subcontracts.
From the Manhattan Project during the Second World War through the
Cold War, contracting practices of the Department and its predecessor
agencies remained essentially unchanged. The management and operating
(``M&O'') contract in common use at Department of Energy sites was a
non-competitive, cost-reimbursable arrangement in which the government
paid virtually all contractor costs and relieved the contractor of all
risk. During this period, M&O contracts were typically awarded or
renewed on a five-year basis without any competition. The pool of
private contractors with nuclear weapons production expertise was
limited and operations were shrouded in secrecy.
Reviews by the General Accounting Office (GAO), the DOE Inspector
General (IG), this Subcommittee as well as other Congressional
Committees in the 1980s and the early 1990s identified numerous
weaknesses in these historical contracting practices. For example, in
testimony before this Subcommittee in 1993, GAO stated that ``At the
core of the DOE's problems is a contracting philosophy dating back to
the Manhattan Project'' in which ``contractors operate largely without
oversight or financial risk.''
A major area of criticism related to the Department's practice of
accomplishing all site work on a cost-reimbursable basis. This ``cost-
plus'' approach provided little incentive to contractors to control
costs or improve the quality of performance because the contractor's
costs were routinely reimbursed--even if the contractor's performance
was unacceptable and work had to be redone.
Additionally, after the Cold War ended, much of the Department's
mission shifted from the production of nuclear weapons to management
and cleanup of the nuclear wastes and materials that were left from the
nuclear weapons production era. In many instances, the contractors that
had historically operated the DOE sites did not possess the
environmental expertise to clean-up this legacy of contamination. The
old practice of renewing and awarding contracts without open
competition was not suited to the changing missions and needs at the
Department's sites.
Recent DOE Reforms
The Clinton Administration immediately recognized and responded to
these contracting problems in 1993 by initiating comprehensive contract
reform. The 1994 report, entitled Making Contracting Work Better and
Cost Less, recommended a number of specific actions to make the
Department's contracting practices more cost-effective. Among the key
recommendations was to increase the use of fixed-price contracts at
both the prime and subcontract levels, where appropriate. The report
also recommended that work performed by non-competitively awarded M&O
contractors be critically assessed to determine whether it could be
more efficiently accomplished through competitively awarded contracts.
Additionally, the report recommended that performance goals and
indicators be developed for major site contracts to increase the use of
performance-based contracts.
Since that report, the Department has worked diligently to
implement these reforms. The Department has:
significantly increased competition, recompeting, since 1994,
28 M&O contracts worth over $40 billion. Indeed, over 94% of
our new (non-M&O) contracts were competitively awarded in FY
1999 (up from 93% in FY 1998). This exceeds the total number of
M&O competitions in the entire previous history of DOE and its
predecessor agencies. Of the eleven major facility management
contracts for the Environmental Management program, five of
these (for the Idaho, Miamisburg, Oak Ridge, Richland, and
Rocky Flats sites) were awarded to non-incumbents;
spurred participation in DOE contracting by firms that had not
generally participated in DOE procurements for traditional M&O
contracts;
brought in contractors with environmental expertise rather
than relying on traditional nuclear weapons production
contractors to perform cleanup and encouraged more contracting
out by facility management contractor to apply niche expertise
to defined projects;
encouraged the use of fixed-price contracting, where
appropriate, both at the prime contract level and at the
subcontract level. For example, at Savannah River, from FY 1996
through FY 1999, an average of 97% of our total subcontracting
commitments have been awarded as fixed-price contracts--
amounting to a total dollar value in excess of $1.25 billion.
Similarly, during the same period at the Hanford site, 100% of
the subcontracts awarded by the M&I contractor (Fluor Hanford,
Inc.) and the Environmental Restoration Management Contractor,
or ERMC (Bechtel Hanford, Inc.), have been awarded on a fixed-
price basis--for a total contract value of $661 million;
made performance-based contracting, rather than level of
effort, the norm;
instituted an innovative, performance-based ``closure''
contract at Rocky Flats; and
worked to tailor the contracting mechanism to the job at hand.
To further improve contractor performance, last year Secretary
Richardson strengthened project management by:
simplifying and clarifying the responsibility and
accountability of line management for program and project
performance;
creating the Office of Engineering and Construction Management
in the Office of the Chief Financial Officer to improve project
management throughout DOE, including establishing baseline
change control processes, and quarterly project performance
reviews;
conducting external independent reviews by highly experienced
project management professionals in the early planning stages
of a project (with additional reviews as appropriate in later
stages of design and construction), followed by the development
and tracking of corrective action plans, if needed, in order to
correct management, technical, or regulatory deficiencies prior
to any significant cost and schedule impacts;
establishing a Project Engineering and Design (PED) funding
line and authorization to design projects for future years new
starts, which will enable a more credible baseline, derived
from 35 percent design, to be used for Line Item project
approvals;
making greater use of the National Academy of Sciences in
reviewing projects; and
establishing the Deputy Secretary's ``Watch List'' of critical
or troubled projects that will be subject to intense oversight
at the highest levels within the Department until identified
problems have been corrected.
This year, the Secretary has taken additional actions, including:
requiring all major systems critical decisions, baseline
change proposals, or site selections for all new missions to be
approved by the Deputy Secretary before proceeding to the next
acquisition phase; and
strengthening the Department's ability to sanction poor
contractor performance and reward outstanding performance,
including allowing the Secretary to direct a contractor to
remove its top manager for failure to perform;
The Office of Environmental Management (EM), under Assistant
Secretary Carolyn Huntoon, has similarly improved program and project
management, including establishing the Office of Project Management
within EM. This new office supports our field offices in their project
management efforts and assists Headquarters staff with their oversight
of project implementation. Additionally, the office coordinates
internal and external reviews of our projects and critical decisions
for significant projects not reviewed by the Deputy Secretary.
Beginning in 1996, EM also began to apply privatization, an
innovative extension of traditional fixed-price contracting. Under
privatization, the contractor would finance the project and would not
receive the contractually specified payments from the government until
the projects or services were delivered according to the terms of the
contract. EM viewed the concept as an important means of taking
advantage both of market forces and private industry expertise to
improve technical and schedule performance and reduce the costs of some
of its major cleanup projects. Moreover, shifting substantial
performance risk to the contractor provides greater incentives to the
contractor to complete the mission on schedule and within cost. Also,
privatization facilities could be initiated earlier through reliance on
private financing. Finally, the Environmental Management program had
reason to believe that cost and schedule efficiencies could be achieved
because of its outsourcing experience between fiscal years 1992 and
1995, which showed substantial cost savings compared to the traditional
M&O approach. The Congress supported this approach through authorizing
legislation and the establishment of a separate appropriation account
for privatization projects.
A key attribute and advantage of EM's privatization approach is
that it requires full life cycle planning of a project up front. This
is a distinct advantage over traditional M&O approaches which often
plan consistent only with the budget windows, which too often has given
rise to rework as the full scope of the project is realized and after
potentially considerable expense has been incurred.
In accordance with the authorizing legislation for the Department,
DOE has worked with the Congress in developing privatization projects.
At present, Congress has authorized and appropriated funds for the
Department to proceed with six privatization projects. These are the:
Hanford Tank Waste Remediation System; Idaho Advanced Mixed Waste
Treatment Project; Oak Ridge Transuranic Waste Treatment Project; Oak
Ridge Environmental Management Waste Management Facility Project; Idaho
Spent Nuclear Fuel Dry Storage Project; and Remote-Handled Transuranic
Waste Transportation Project. (The Hanford TWRS privatization contract
will be changed to a different contract type, as discussed later in
this testimony. In addition, a Contact-Handled Transuranic Waste
Transportation Project which was originally funded under the EM
privatization account has been canceled by the Department as a
privatization project, and is now being funded out of traditional
operating funds.)
DOE Experience with Fixed-price Contracting
EM has implemented various forms of fixed-price contracting as a
means of improving performance, sharing risk with the contractor, and
reducing costs. The results have generally been good, but, as would be
expected when dealing with new approaches and complex issues, not
devoid of problems.
In its 1998 report, Alternative Financing and Contracting
Strategies for Cleanup Projects, GAO found that the Department has had
success with fixed-price contracting, noting that the Department is
most successful when there is: a clearly defined work scope; a low
probability of major changes to the work scope; sufficient price
information and/or multiple contractors bidding to minimize the cost to
the government while providing a fair profit to the contractor; and
appropriate risk sharing between the parties.
As the GAO has reported, the Department has been successful in the
implementation of numerous fixed-price contracts. For example,
at the Hanford site, Bechtel Hanford, Inc. alone has awarded
16 major fixed-price subcontracts with a total dollar value of
over $104 million, for projects including the construction and
operation of the Environmental Restoration Disposal Facility
(ERDF); the safe long-term storage of the C-Reactor; and the
deactivation of the N-Reactor;
at the Savannah River Site, the Department estimates it
avoided over $25 million in costs (from an initial planned
expenditure of approximately $46 million through the M&O
contractor) as a consequence of fixed-price contracting for the
M-Area Mixed Waste Tank Remediation project; and
at Oak Ridge, the Department may avoid up to $45 million in
costs (from an initial estimate of $81 million) through the use
of a fixed-price contracting approach for the construction and
operation of the Environmental Management Waste Management
Facility.
The Department also has corrected previously identified
deficiencies. For example, in 1998, this Subcommittee reviewed the
contract and management problems with the Department's Hanford Spent
Nuclear Fuel Project. At the time of the Subcommittee's review, the
project was over budget and behind schedule, in large part due to an
innovative but high risk project management strategy to accelerate the
project that intentionally included only minimal cost and schedule
contingency. GAO has expressed doubt that we would be able to meet the
November 2000 date for beginning to move the spent fuel into safer
storage. Due to increased management attention, placement on the Deputy
Secretary's Watch List, strengthened project management by both DOE and
the contractor, inclusion of realistic contingency to deal with
problems that might be encountered, and increased use of incentives,
the project is on track with our revised baseline to begin moving the
spent fuel from the Hanford K-Basin into safer dry storage beginning in
November of this year. A fixed-price contract is being successfully
used to procure multi-canister overpacks for the project. To date, four
hundred overpacks have been delivered on budget and ahead of schedule.
Our new closure contract at Rocky Flats illustrates how strong
project management and the appropriate use of contractual incentives
can support the Department's efforts to accelerate cleanup and reduce
costs. Prior to our effort to accelerate the closure of Rocky Flats,
cleanup was estimated to cost over $31 billion and take longer than 50
years. This Administration's accelerated closure goal is to close the
site by 2006. The new performance-based contract includes performance
incentives to motivate the contractor to complete cleanup of the site
within budget and the target date of 2006. Specifically, the contract
provides additional fee if the contractor delivers ahead of the 2006
completion date, and significantly reduces that fee if the date is not
achieved. Although it is premature to declare this project a success,
it is clear that the innovative contractual approach at Rocky Flats
represents a cornerstone of our management strategy to complete cleanup
by 2006.
Not all of the projects for which we have awarded fixed-price
contracts have met our objectives. The Subcommittee and the General
Accounting Office have focused on several of these projects. I would
like to briefly review our experience with each of these projects, and
describe the lessons we have learned. As we review these projects, it
is important to distinguish between issues that are attributable to the
particular contracting approach and those that are attributable to
other factors.
Pit 9
Pit 9 is one acre of 88 total acres of buried waste at the Idaho
National Engineering and Environmental Laboratory (INEEL). The Pit
contains plutonium-contaminated transuranic waste from Rocky Flats and
low-level waste from INEEL. Remediation of this buried TRU waste is a
significant issue in Idaho because the waste is over one of the largest
aquifers in the nation--the Snake River Plain Aquifer.
The Pit 9 project pre-dated this Administration's current contract
reform and privatization initiative. In 1991, the department then
conceived Pit 9 as a pilot for introducing fundamental changes in the
way the Department acquired environmental services. The underlying
objective of these changes was to shift the risk of successful contract
performance to the contractor who controlled the elements necessary to
get the job done--technology, facilities, equipment, and workforce. The
Pit 9 cleanup project called for contractor-owned facilities and
equipment, a fixed price for completed work, and a guarantee of
performance. In undertaking the Pit 9 project, the Department was
responding, in part, to comments from private industry and others that
its traditional approach of relying on the M&O workforce for
remediation on a ``cost-plus'' basis was inefficient and costly. A
number of companies, including the contractor ultimately selected,
argued that existing technologies could be applied to remediate Pit 9
on a fixed-price basis without any research and development. The
Department viewed the Pit 9 project as a market test to determine the
capabilities and desire of the private sector to join the Department in
this new contracting approach. In addition, the Department stood to
benefit greatly from successful use of the proposed melter system and
treatment system. If used successfully, these technologies could have
been used to solve many of the Department's mixed waste problems at
other sites.
The project was also designed to demonstrate technologies for
nuclear waste retrieval and treatment systems and stabilize Pit 9
contamination, as well as to develop characterization data that could
be used in making the remediation decisions for other burial pits and
trenches at INEEL.
The Pit 9 project was effected by the DOE management and operating
contractor responsible for the management of INEEL through the award of
a subcontract. Ultimately, the subcontractor failed to perform the
subcontract under its terms and conditions. The prime contractor
concluded that the performance difficulties encountered by the
subcontractor resulted both from the subcontrator's failure to apply
sufficient technical and management skills to the project and from its
own management and technical decisions and terminated the subcontract
for default. Had this been set up in the traditional manner as a cost-
reimbursable contract, the government would have paid millions of
dollars for the subcontractor's unsuccessful efforts. Notwithstanding
the subcontractor's performance failure, it remains the Department's
responsibility to complete the cleanup. Because of the default on the
subcontract, the Department is now pursuing an alternate cleanup path
using a different contracting method.
Although the Pit 9 subcontract did not achieve its ultimate
objective, it did serve as a learning experience for the Department
when it began to develop privatization and more traditional fixed-price
contracts. Some of the key lessons learned include, among others:
establishing interim milestones for early detection of non-
performance;
creating contractual off-ramps in the event that performance
expectations are not met;
minimizing project risks to avoid prematurely committing to
technical solutions and/or fixed price mechanisms;
improved waste characterization;
strengthening independent cost analysis;
enhancing DOE project management and oversight capability; and
conducting project quarterly reviews.
These lessons have been applied to subsequent projects such as the
Tank Waste Remediation System (TWRS) and the East Tennessee Technology
Park Decontamination, Decommissioning and Recycle Project (ETTP).
Hanford TWRS Privatization
The Tank Waste Remediation System (TWRS) privatization project,
recently renamed the River Protection Project (RPP), is one of the
largest environmental cleanup projects in the world. Approximately 54
million gallons of highly radioactive waste is stored in 177
underground storage tanks, many of which are known to have leaked
radioactive waste into the soil. The Department has entered into an
enforceable agreement (known as the Tri-Party Agreement) with the State
of Washington and the Environmental Protection Agency which includes
requirements for DOE to remove the waste from the tanks, then
immobilize, through the process of vitrification, and dispose of it.
We recognize the technical, financial, and management challenges
and risks inherent in the TWRS privatization project. From the
beginning, our approach has been to provide strong incentives to
achieve project schedule, cost, and performance goals and to minimize
the total project cost to the American taxpayer. We have been working
to establish a process that would lead to an appropriate contracting
structure for the project that would:
allocate risks to the party best able and motivated to manage
them;
reduce the life cycle costs compared to traditional
contracting approaches;
shift significant responsibility, accountability, and
liability for cost and technical performance to the private
contractor;
obtain the best mix of private and public financing; and
acquire products and services at a fixed price.
Our experience with Pit 9 taught the Department that, among other
lessons, interim milestones are required for early detection and
correction of non-performance or ``course correction'' based on new
information. This lesson is reflected in the fact that the TWRS
privatization contract was set up in phases. This lesson has stood us
in good stead on this project. As we have gained experience at each
phase of the project, we have adjusted the approach appropriately, each
time protecting the taxpayers' investment. Our experience with Phase I,
Part A made it clear that: project risks needed better definition to
attract third-party financing and to make the contractor willing to
invest its own capital in the project; safety and financing
considerations precluded building large pilot plants; and an equitable
risk allocation between DOE and the contractors was needed.
Consequently, we modified our approach in 1998 to optimize the
technical approach and reduce the likelihood of performance failure.
Specifically, we:
adopted a phased approach to Part B of the contract rather
than commit prematurely to the entire project;
authorized a 24-month period to complete up to 30 percent
design to minimize risks associated with design uncertainties;
changed to a full production facility that will allow for
greater operational throughput and duration; and
delayed the final price agreement to take advantage of
improved design and financial information.
Additionally, the Department implemented a number of internal
controls to better manage the project, including:
creating an Executive Board of the most senior-level managers
within the Department to review major project issues and
recommendations and advise on the appropriate course of action;
creating an independent Regulatory Unit which functions like
an external regulator, to ensure adequate safety and health
protection of workers and the public;
conducting external independent reviews of the project's
readiness to proceed at all levels (i.e., contractor, DOE
Field, and DOE Headquarters) to support the pending
authorization-to-proceed decision;
conducting external independent reviews of BNFL's safety
quality assurance and quality control at all DOE sites and at
its Sellafield, U.K., facility, to ensure that problems
experienced by the U.K. division of BNFL, Inc. have not carried
over to their U.S. counterparts;
hiring financial experts to review BNFL's financial approach;
obtaining an Independent Cost Estimate for the project; and
instituting rigorous quarterly performance assessments of all
aspects of the contractor's performance--including cost,
schedule, and technical approach.
In 1998, when DOE authorized BNFL to proceed with a 24-month design
period for a facility to treat the Hanford Tank waste, BNFL represented
that it could produce, with 90 percent confidence, a project whose cost
would not exceed $6.9 billion and was willing to stake $300 to $500
million of their own equity on the outcome. However, in February 2000,
BNFL indicated that its cost estimate had grown to approximately $8
billion, and, in early April, BNFL indicated that the price estimate
had grown again--to approximately $13 billion. On April 24 of this
year, the company produced a formal bid of $15.2 billion, which can not
be supported based on our independent cost estimate. Additionally, the
proposal provided only about 15% of the design for the facility. This
bid was unacceptable from a financial, managerial and cost perspective,
and we are moving aggressively to address the problem. We are now
modifying our approach based on the lessons learned from all the
preceding steps and are breaking the project into smaller, more
discrete parts.
Fundamentally, the Department was unable to enter into a
privatization contract for the next phase of this project because the
contractor became unwilling to assume the significant financial risks
originally envisioned by both parties. This unwillingness to assume
risk was translated into increased costs and unnecessary conservatism
in the contractor--s proposal. This shift of risk onto the government
was unacceptable to the Department, and so we will re-bid the project
with a new contracting approach to seek a better deal for the taxpayer.
Even with the new contract, we are committed to meeting the key Tri-
Party Agreement milestones for plant operation.
Some cited the cost increases in the BNFL proposal as evidence of
Departmental managerial deficiencies regarding complex projects. We
strongly disagree. BNFL first informed the Department of the
significant cost increases in the project at an informal briefing in
early April, three weeks before the formal bid was delivered. At that
briefing, the Department requested that BNFL identify options for
reducing its costs when submitting its formal bid. BNFL, however, did
not do so. In addition no time prior to this briefing did BNFL provide
the Department with any indication that the costs would escalate by
this magnitude.
It is important to note, however, that this 24-month period did
advance the project. The design that the BNFL/Bechtel team produced is
technically sound and is being carried forward. Perhaps the single
biggest benefit of this period is that the full life-cycle of this
project has now been systematically estimated, even if design is not
yet complete. We have a sound technical approach. And we have pilot
scale operational experience with the low-level and high-level waste
melter that showed they worked better than anticipated.
We recognize that the Department still faces many challenges with a
project of this complexity and magnitude and that those challenges must
be managed. But this would be true no matter what contracting strategy
we pursue.
With respect to the path forward for the River Protection Project,
the Department has committed to two key targets at this time: (1) by
August 15, 2000, DOE will release a Request for Proposal to design and
construct a vitrification facility; and (2) by January 15, 2001, a new
contractor will be selected. Vitrification operations are still
scheduled to begin in December 2007. In terms of estimated project
costs, prior to receipt of BNFL's proposal, the Department
independently prepared a Government Fair Cost Estimate (GFCE) using
design information from BNFL. The Department's estimate process was
structured to ensure that both DOE and BNFL were estimating the same
scope of work and technical solution, but shared no cost information.
DOE's GFCE is approximately 30% less than the BNFL estimate for
comparable work scope.
ETTP
Constructed as part of the Manhattan Project, the five massive
uranium enrichment buildings at East Tennessee Technology Park (ETTP)
in Oak Ridge, Tennessee, are extensively contaminated with hazardous
and radioactive substances. In August 1997, the Department entered into
an innovative, fixed-price contract with BNFL to decommission three
buildings, recycle or dispose of the materials within them, and make
them available for commercial reuse. This approach was expected to
avoid approximately $500 million in additional costs anticipated by the
government's cost estimate.
Conducting this project as a fixed-price contract was attractive to
the Department for a number of reasons:
the project cost was significantly below the previous
estimates for the scope;
the private contractor was responsible for financing much of
the initial work;
the fixed-price contract limited the Government's risk and
uncertainty;
the direct contract with the Department eliminated additional
layers of contractor management and overhead costs; and
as the largest decommissioning project that EM has undertaken,
the contract served as a useful learning tool for the other
massive ``process'' buildings that will require cleanup and
dominate the D&D Fund appropriation, and ultimately drive the
``critical path'' for the ongoing Oak Ridge cleanup program.
Applying lessons learned from Pit 9 to this BNFL contract, the ETTP
contract includes interim milestones to facilitate needed course
corrections, and minimizes up front payments. Our Oak Ridge office is
conducting regular project reviews and has strengthened the management
capability for this contract by hiring additional construction managers
to oversee activities in order to ensure that requirements are being
met. In addition, DOE Oak Ridge has also contracted for additional
legal support so that we can expeditiously review and address claims.
Considerable progress has been made on this project; but that
progress has not always been without problems. The contractor
represents that costs incurred by the contractor and estimated costs
for completion are in excess of the contractor's bid price. The
contractor has submitted a number of Requests for Equitable Adjustments
(REAs) to the contract price based on its belief that the Government
bears some responsibility for cost increases. To date the Department
has recognized responsibility for extra costs associated with one REA,
that is, costs associated with roof damage for the decontamination
facility caused by an Act of God. Similarly, changes in Departmental
policy, such as instituting a moratorium on the release of metals that
formerly had been volumetrically-contaminated, could give rise to a
valid REA. It is our joint expectation to have all the REAs submitted
to date addressed by August 1, 2000.
The mere submission of an REA by a contractor does not mean that
the Department is responsible for increased costs incurred. The
Department is reviewing the remaining REAs and has no intention of
granting them unless they are factually and legally supportable. As in
the case of Pit 9, where the subcontractor attempted to recover the
excess costs of its performance problems, this Department will not
financially bail out fixed price contractors from risks that they have
assumed under the contract.
Despite the contractor's request for contract price adjustment, a
considerable amount of work has been completed by the contractor. For
example:
cleanup of the three-building decontamination and
decommissioning project is over 22 percent complete;
nearly 16 million pounds of clean material has been shipped to
off-site scrap recyclers; and an additional 14 million pounds
of metal was decontaminated prior to release (none of which was
subject to the Secretary's moratorium on the release of
formerly volumetrically-contaminated metals); and
more than 10.5 million pounds of low-level waste and almost 23
million pounds of ``mixed waste'' pond sludge has been disposed
of, mostly at off-site commercial facilities.
The Department is committed to completing this project in a manner
that meets our expectations, is fair to the contractor, and effectively
and efficiently utilizes the funds provided by Congress. BNFL is
presently scheduled to complete the ETTP three-building project in
March 2004, or six months longer than the original completion date of
September 2003. The current estimated cost to complete the project is
$249.4 million (unescalated), which is approximately five percent
higher than the value of $237.8 million at the time of contract award.
The project is being performed as a ``CERCLA Non-Time Critical Removal
Action'' and thus has no regulatory milestones. The earliest critical
project milestone (i.e., completion of dismantlement, removal of all
material, and decontamination of 90% of Building K-33) is currently
scheduled in the contract for June 2001; due to dismantlement and
material processing delays, BNFL currently estimates that completion of
this milestone cannot be achieved until July 2002. However, the
contractor has changed management and methodology for work execution in
an effort complete the project within the original overall schedule.
Advanced Mixed Waste Treatment Project
The Subcommittee requested the General Accounting Office to examine
the Advanced Mixed Waste Treatment Project (AMWTP), a fixed-price
privatization project being undertaken at the Idaho National
Engineering and Environmental Laboratory. The AMWTP would retrieve,
sort, characterize, store, treat, certify, and load transuranic waste
for transportation to off-site disposal. The project supports an
enforceable agreement on mixed waste treatment and the 1995 Idaho
Settlement Agreement requirement to ship the 65,000 cubic meters of
waste to the Waste Isolation Pilot Plant, or other such facility
designated by DOE, no later than December 31, 2018 . In December 1996,
DOE awarded a contract to BNFL to provide the required services to
prepare 65,000 cubic meters of this TRU waste for disposal. Again,
learning from the Pit 9 experience, the contract was developed with
three phases. The first phase--environmental, safety and health
permitting and preliminary design--is nearly complete.
The GAO has noted that the AMWTP is experiencing delays due to the
delays in issuance of permits by the State of Idaho. GAO states that
the schedule that the Department and the contractor adopted for the
project anticipated that the necessary environmental permits would be
issued in one year, whereas the State of Idaho predicted that two years
would be necessary for the requisite permits to be issued.
We do not believe that this is evidence of poor project management.
Certainly, had DOE adopted a permissive schedule the project might not
be ``behind''. The schedule which was adopted by DOE that included one
year for permit issuance was chosen to ensure that the Department would
be able to meet the milestones for the project set forth in enforceable
agreements. The Department considered it reasonable to expect that the
State of Idaho would work to issue permits to enable DOE to remain in
compliance with those agreements. The delays in permit issuance are in
large measure attributable to forces outside either the control of the
Department or the State of Idaho--namely, the challenge to the
incinerator portion of the project that emerged from citizens in
Jackson, Wyoming.
Moreover, we do not agree that schedule delays mean that a fixed-
price contract is inappropriate for this project. The issues regarding
the appropriate schedule to set for attaining permits for this project
would appear to be independent of the type of contract chosen.
Although external events beyond the control of the contractor have
affected project schedules, the current estimated cost to complete the
AMWTP is $889.2 million, which is less than two percent higher than the
contract award value of $876.1 million. The lawsuit has been settled,
and the State of Idaho has provided a schedule for issuing the permits
in July 2000. Impacts of the permit delays and the incinerator re-
evaluation on the project schedule and cost are being assessed. As a
condition of the lawsuit settlement agreement, the Secretary decided to
put the incinerator portion of the project on hold until a Blue Ribbon
panel reviews alternative treatment technologies.
Contract performance continues to be satisfactory, as indicated by
the contractor's timely and high-quality technical work. With the
settlement of the lawsuit over the incinerator portion of the AMWTP,
and the expected issuance of the environmental permits in July 2000,
facility construction should be able to proceed in August or September
2000. Despite the delays, DOE believes it is probable that BNFL Inc.
will complete facility construction and begin processing waste in time
to meet the Idaho Settlement Agreement milestones. Phase II facility
design is 72% complete.
With respect to financing issues, BNFL may choose to self-finance
through its corporate parent or obtain commercial financing, or may
pursue some combination of self- and commercial financing, to fully
implement the next phase of the project. To date the contractor has
self-financed its activities.
Lessons Learned
In general, we agree with many of GAO's observations. First, fixed-
price contracts are not appropriate for all situations. Many factors,
including the waste characteristics, the complexity of the project, the
number of contractors willing to compete, the financing mechanisms
available, the optimal allocation of risks, all must be considered in
determining the appropriate type of contract for a particular scope of
work.
Second, full private financing may not be viable. The Department
has learned from the Hanford tank waste project that the initial
concept of full private sector financing may impose too much risk upon
the private contractor, which will then be reflected in a higher price
for the government. We have learned that we need to adopt a balanced
approach, whereby the risks are appropriately shared between the
contractor and the government. Just as the M&O approach, where the
government assumed all of the risks, may be inappropriate, so too may
be the approach where the contractor assumes all of the risks. In the
future we will be looking for the optimal allocation of risks among the
parties.
Third, we agree that effective project oversight is essential.
Although we do not agree with certain statements that attribute each
and every cost and schedule issue with our fixed-price contracts to
Departmental managerial deficiencies, we agree that we can improve our
project management abilities and this can help avoid similar issues in
the future. We believe that over the past several years we have
instituted a number of improvements in our management practices that
will do just that.
Finally, we agree the complexity of the project should be
considered when determining whether a fixed-price contract is
appropriate. We agree that we have had more difficulty with complex
projects than with the more straightforward projects. However, by
definition, these projects present more technical, cost, and schedule
complexity and can be expected to be more difficult to manage than less
complex projects. A key lesson that we have learned from these complex
projects, therefore, is that a more flexible, phased contracting
approach may be the most appropriate, with continuing oversight and
check points.
Although our contract and management reform efforts are beginning
to bear fruit, we recognize that there is still room for improvement.
We must continue to be vigilant managers, to continue to strengthen our
project management and work to effect the necessary changes in the
Department's culture that will make these kinds of contracting
practices second nature to all employees. The Department spent 50 years
building and living with one kind of contracting culture; it is
unreasonable to expect that a culture so long in the making will be
changed overnight.
Conclusion
The Secretary and I are committed to strengthening our management
systems to ensure we can address contract and project problems as they
arise. We have already demonstrated our willingness to take decisive
action quickly when contracting problems arise. The Secretary's
contract and management reforms to date lay a good foundation for
strengthening the Department's contract management practices. But it is
too soon to see the full impact of these changes. As GAO itself noted,
``. . . problems are expected in the weapons complex, given the
technical risks and complexities involved . . . Changing DOE's contract
management approach will not come easy . . . Changing that culture,
which has lead to so many problems, will take time and a significant
commitment on the part of DOE's leadership.'' We have made that
commitment and share your interest in continuing to consider new ideas
for improving contractor performance. We look forward to working with
you to make those changes.
Mr. Upton. Ms. Jones.
TESTIMONY OF GARY L. JONES
Ms. Jones. Thank you. Good morning, Mr. Chairman. Thank you
for the opportunity to be here to discuss DOE's privatization
initiative.
DOE began considering aspects of privatization in the early
1990's and formalized this approach in 1995. The focus of my
remarks this morning is on what DOE has accomplished with
privatization of complex cleanup projects and our observations
on the lessons that can be learned from these efforts.
We have reviewed three of DOE's privatization projects for
this committee, the Pit 9, and Advanced Mixed Waste Projects in
Idaho and the Tank Waste Project at Hanford. DOE's goals for
privatization were straightforward. Reduce project cost, speed
the cleanup, and improve contractor performance. On these
projects DOE had little success in achieving estimated cost
savings, although there is still a chance for the Mixed Waste
Project in Idaho. All three projects have or will likely incur
schedule delays, and DOE has not been satisfied with the
performance of the contractors for two of the three projects we
reviewed. So the simple answer is, although DOE adopted
privatization as a solution to its contracting difficulties, it
has not been a successful alternative in all cases.
Let's talk about what lessons can be learned from these
efforts. DOE's experience indicates that the two strategies
that underpin the privatization initiative, fixed-price
contracting and private financing, will not work effectively
for all cleanup projects. Federal Acquisition Regulation
Guidelines note that the conditions most conducive to fixed-
price contracting include a well-defined scope of work, low
probability of major changes to work scope, the existence of
proven technologies, sufficient price information to determine
a fair price, and appropriate allocation and sharing of risks.
In contrast, the three projects we reviewed had changes in
scope, uncertainties about waste characteristics and technical
approach, unrealistic project schedules or unresolved technical
issues. Therefore these projects may not have been good
candidates for fixed-price contracts.
With regard to the other component of privatization,
private financing, it is not clear whether it's achievable for
complex projects. None of DOE's privatized cleanup projects has
secured commercial financing to date, although a few have been
financed internally by the contractors. For example, on the
Hanford Project BNFL planned to use both equity and debt
financing. However, DOE agreed to pay BNFL for its commercial
debt in the event of contract termination in order to make
commercial financing more viable. DOE will terminate the
contract before BNFL obtains commercial financing.
Another goal of private financing was to provide incentives
for good contractor performance. However, DOE has not been
satisfied with the performance of contractors on two of the
projects we've reviewed because of concerns about their ability
to successfully complete the projects. Sharing the risk by
using different mixes of public and private financing as well
as using incentive fee contracts could also help ensure that
contractors will perform effectively.
A thorough analysis of financial alternatives is an
important part of structuring a successful cleanup project.
When DOE initiated each of the three projects we reviewed, it
limited its analysis of contracting and financing alternatives
to a comparison between a privatized approach and a cost
reimbursement contract without performance incentives. In the
past we have criticized such a narrow approach to making
important contracting decisions.
Based on this committee's questions, DOE analyzed other
financing options for the Hanford Project. However, we have
some concern about DOE's analysis. DOE assumed that a
privatized approach would have no cost growth because the
contractor would have incentives to control costs. In contrast,
the DOE assumed that other options would have cost growth that
would more than offset the higher cost of private financing.
However, DOE has no convincing evidence to support these
assumptions. In fact, its experience contradicts them.
Also, DOE did not fully analyze the risk associated with
assuming the responsibility for BNFL's debt in the event of
contract termination. This decision has shifted significant
performance risk from BNFL to DOE. A more complete evaluation
of the actual risk assumed by the government may have resulted
in a different financing alternative being more cost-effective
for the government.
In summary, Mr. Chairman, DOE cannot rely on privatization
alone to fix contracting problems. It must look at
privatization as just one of the many strategies that it can
use to get the most out of the Federal cleanup dollars. In the
future DOE must more carefully evaluate a complex matrix of
factors, including how much of the waste has been
characterized, the number of contractors willing to compete,
financing options, and project risks and who is best prepared
to assume them.
Because effective DOE management and oversight are critical
to selecting the appropriate contract type and financing
mechanism as well as to successfully implementing the contract,
DOE needs to continue to improve its technical, financial, and
managerial oversight capabilities.
Thank you, Mr. Chairman.
[The prepared statement of Gary L. Jones follows:]
Prepared Statement of Gary L. Jones, Associate Director, Energy,
Resources, and Science Issues, Resources, Community, and Economic
Development Division, General Accounting Office
Mr. Chairman and Members of the Subcommittee: We are here today to
discuss the Department of Energy's (DOE) privatization initiative as it
has been applied to DOE's nuclear waste cleanup program. DOE oversees
some of the most highly radioactive and polluted sites in the United
States, primarily the consequence of over 50 years of producing nuclear
materials for weapons. Cleaning up radioactively contaminated
buildings, soil, and groundwater within the weapons complex and safely
storing wastes is a major mission for DOE. The Department estimates
that for the years 2000 through 2070, it will cost between about $150
billion and $195 billion (1999 dollars) to complete this mission and
provide long-term monitoring of the remaining sites. DOE primarily
contracts with private companies to accomplish the cleanup. In the
past, this effort was generally performed under cost-reimbursement
contracts by contractors that managed and operated many of DOE's
facilities. DOE financed the operations, owned the facilities, and paid
the contractors regardless of what was accomplished.
DOE started its privatization initiative in 1995 as a way to reduce
the cost and speed the cleanup of its contaminated sites and to improve
contractors' performance. The initiative was primarily an alternative
contracting and financing strategy to foster open competition for
fixed-price contracts; require the contractors to design, finance,
build, own, and operate the facilities necessary to meet treatment
requirements; and pay the contractors only for products or services
delivered in accordance with the contracts. Since the initiative began,
DOE has managed several of its complex and expensive cleanup activities
as privatization projects.
Concerns have surfaced about whether DOE's privatization initiative
has yielded significant results when applied to the Department's more
complex cleanup projects. Our testimony discusses (1) what DOE has
accomplished by privatizing such projects and (2) our observations on
the lessons that can be learned from these efforts. It is based on our
past reviews of DOE's privatization initiative, including reviews of
three complex cleanup projects requested by this Committee--two at
DOE's Idaho Falls Site and one at the Hanford Site in Washington State.
Collectively, the estimated contract prices for these three projects
were about $8 billion. We have included a list of products at the end
of this statement that we have issued on various aspects of DOE's
privatization initiative.
In summary:
For the complex cleanup projects we reviewed, DOE's
privatization initiative has had little success in achieving cost
savings, keeping the projects moving forward on schedule, or getting
improvements in contractors' performance. For example, on the Hanford
tank waste project, DOE estimated savings of from $2.1 billion to $3.5
billion by using the privatization approach. However, after dramatic
growth in the project's estimated cost and concerns about the
contractor's performance, DOE decided to terminate the contract.
Similar problems on the Pit 9 project in Idaho led DOE to terminate
that contract without achieving expected cost savings. Although DOE
adopted privatization as a solution to its past contracting
difficulties, recurring cost, schedule, and performance problems
demonstrate that privatization has not been a successful alternative
for complex cleanup projects.
Several lessons can be learned from DOE's privatization
efforts. DOE cannot rely on privatization alone to fix its past
contracting problems; instead, it must carefully evaluate privatization
as just one of the many contracting and financing strategies that it
can use to get the most out of federal cleanup dollars. DOE's
experience indicates that the two strategies that underpin the
privatization initiative--fixed-price contracting and full private
financing--will not work effectively for all cleanup projects. Rather,
a complex matrix of decision factors must be analyzed before deciding
how to contract for and finance a cleanup. These factors include how
much is known about the characteristics of the waste, the number of
contractors willing to compete, the financing options, and the risks
posed by the project and the entity that is best prepared to assume
them. Our review of the Hanford project indicates that future analyses
of financing options need to (1) use more realistic assumptions about
cost growth for various types of contracts and (2) better reflect the
actual risks assumed by the government. Because effective DOE
management and oversight are critical to selecting the appropriate type
of contract and financing mechanism, as well as to implementing the
contract successfully, DOE needs to continue improving its technical,
financial, and managerial oversight capabilities.
Background
DOE spends nearly $6 billion each year to clean up the weapons
complex and provide long-term monitoring of the remaining sites. In the
past, DOE primarily approached this mission by signing cost-
reimbursement contracts, telling contractors how to perform waste
cleanup activities, and paying them for the amount of effort that was
expended, regardless of what was accomplished. Under this arrangement,
DOE financed the contractors' activities and owned the facilities. As
part of a broader contract reform effort, and in an attempt to reduce
costs and speed the progress of cleanup, DOE developed its
privatization initiative.
DOE's privatization initiative is primarily an alternative
contracting and financing strategy. For cleanup projects, privatization
means using competitively awarded, fixed-price contracts to purchase
cleanup services. The contractor agrees to design, finance, build, own,
and operate treatment facilities. DOE specifies the required end
products or services--for example, treating waste to meet disposal
requirements--and generally leaves the methods and technologies used to
achieve those requirements to the discretion of the contractor. The
contractor is expected to finance the project with private money
instead of using federal appropriations. This means that the contractor
must either use its own funds (equity) or borrow money (debt) in order
to proceed with design, construction, and related activities until the
project is operational and the contractor begins receiving payments
from DOE for successfully treating units of waste.
DOE expected that the competitive award process, the use of fixed-
price contracts, and the requirement for private financing would bring
contractors of a ``best in class'' caliber to its projects. With the
contractors' own equity and/or debt funding the projects, DOE also
expected that the contractors would have significant incentives to
complete the projects on schedule and within budget. Finally, DOE
expected that privatization would allow cleanup to move forward while
deferring the government's own budget outlays for several years until
the contractors constructed facilities and prepared them for
operations.
The three cleanup projects we reviewed involved constructing and
operating treatment facilities.1 (See table 1). The largest,
a project at Hanford with an estimated contract price of $6.9 billion,
involves treating highly radioactive liquid wastes. The two contracts
at Idaho Falls, totaling about $1 billion, involve treating less
radioactive solid wastes, some of which are mixed with sludges and
other hazardous materials, that are buried in the ground or stored in
drums or boxes. DOE has approved a total of eight privatization
projects involving the construction and operation of facilities to
treat wastes, although none have been approved since 1998. The eight
projects are listed in appendix I.
---------------------------------------------------------------------------
\1\ In its January 1997 report on privatization (Harnessing the
Market: The Opportunities & Challenges of Privatization), DOE
identified three different types of privatization initiatives that the
Department would implement--eliminating functions, transferring assets,
and contracting out. Eliminating functions involves eliminating from
the Department those activities for which a federal role is no longer
required--such as the transfer of the Elk Hills Petroleum Reserve to
the private sector. Transferring assets involves the sale or transfer
of real property or personal property, including disposing of surplus
assets such as precious metals in DOE's inventory. Contracting out
involves either the Department's directly contracting for services
previously provided by federal employees or site operating contractors,
or site operating contractors' subcontracting specific tasks to other
companies instead of performing the tasks themselves. The majority of
DOE's privatization efforts have involved contracting out. These
projects take three main forms--treating wastes at contractor-owned and
-operated facilities, removing existing contaminated facilities and
structures, and providing services using existing DOE facilities.
Table I: DOE Privatization Cleanup Projects Reviewed by GAO
----------------------------------------------------------------------------------------------------------------
Idaho advanced mixed
Idaho Pit 9 waste Hanford tank waste
----------------------------------------------------------------------------------------------------------------
Date of contract award............... Oct. 1994.............. Dec. 1996.............. Aug. 1998 \3\
Contractor........................... Lockheed Martin BNFL Inc............... BNFL Inc.
Advanced Environmental
Systems.
Wastes to be treated................. 250,000 cubic feet of 65,000 cubic meters of About 5 million gallons
buried transuranic \1\ mixed waste \2\ stored of highly radioactive
and hazardous wastes above ground in drums wastes stored in
and contaminated soil. and boxes. underground tanks
Contract price....................... $200 million........... $876 million........... $6.9 billion (est.)
----------------------------------------------------------------------------------------------------------------
\1\ Transuranic waste contains man-made radioactive elements with atomic numbers higher than uranium, such as
plutonium.
\2\ Mixed waste is a combination of radiological contaminants, such as plutonium, and hazardous but
nonradiological contaminants, such as degreasing agents or acids.
\3\ The original contract was awarded in September 1996. The contract was modified in August 1998 to reflect
DOE's revised approach to the project.
Source: GAO's presentation of data from DOE.
DOE's Objectives in Privatizing Complex Cleanup Projects Have Not Been
Met
DOE has not achieved the cost savings or the schedule and
performance improvements that it expected privatization would provide.
Specifically, DOE estimated significant cost savings for each of the
three projects. To date, however, none of these projects have achieved
savings. (See table 2.) Instead, DOE terminated the contract on the Pit
9 project, and intends to terminate the contract on the Hanford tank
waste project, after the contractors estimated significant cost
increases and experienced management problems. Savings on the advanced
mixed waste project are too early to determine, since construction has
not yet started. However, delays in starting construction are likely to
increase the estimated contract price.
Table 2: DOE's Estimated and Actual Savings to Date on Three Complex Privatization Cleanup Projects
----------------------------------------------------------------------------------------------------------------
Idaho advanced mixed
Idaho Pit 9 waste Hanford tank waste
----------------------------------------------------------------------------------------------------------------
DOE savings estimate................. $134 million (1996 $670 million (1996 $2.1 billion-$3.5
dollars). dollars). billion (1997 dollars)
Actual savings achieved.............. None--project None to date-- None--contract is being
terminated. construction has not terminated and
started; construction recompeted after
delays will likely significant growth in
affect costs and cost estimate
potential savings.
----------------------------------------------------------------------------------------------------------------
Source: GAO's presentation of data from DOE.
Contrary to DOE's expectations that privatization projects would
stay on schedule, all three of the projects we reviewed experienced
delays in meeting schedule milestones. In addition, a key feature of
DOE's privatization initiative was that contractors would receive
payments only for successfully treating waste. For two of the projects,
DOE was dissatisfied with the contractors' performance, but it is
unclear if DOE's dissatisfaction will prevent the contractors from
being paid.
The Idaho Pit 9 project was to start waste treatment
operations in August 1996 and complete treating the waste by February
1999. However, the contract was terminated in June 1998 because of
problems with the contractor's performance. Treatment of the waste is
now being considered as part of a future project at the site. Although
Lockheed Martin Advanced Environmental Systems (Lockheed Martin)
provided a corporate guarantee of performance under the contract, the
case is now in litigation. DOE is trying to recover the $54 million
already paid to Lockheed Martin, and Lockheed Martin is seeking
additional payments of $271 million for its work on the failed project.
DOE project officials said that it is unclear how the issues will be
resolved or how responsibility for the costs incurred on the project
will be assigned to the parties involved.
The Hanford tank waste project was initially to start
waste treatment operations in December 2002 and complete processing
about 6 percent of the waste by 2007. In 1998, DOE changed its approach
to the project and revised the schedule to start waste treatment
operations in February 2007 and complete processing about 10 percent of
the waste by 2018. In May 2000, DOE directed BNFL 2 to stop
work, and it is now in the process of terminating the contract because
of dramatically escalating costs and concerns about BNFL's performance.
DOE expects to pay BNFL for the allowable costs it incurred on the
project as well as negotiated termination costs. DOE has abandoned
privatization for this project and plans to recompete a contract for
the design/construction phase and compete a separate contract for the
operations phase. DOE hopes to keep the project moving forward in
accordance with the revised schedule, but DOE officials expect some
delays to occur as these changes are implemented.
---------------------------------------------------------------------------
\2\ BNFL Inc. is the U.S. subsidiary of British Nuclear Fuels plc,
a public limited company in the United Kingdom. The British government
is the sole stockholder of British Nuclear Fuels plc.
---------------------------------------------------------------------------
The Idaho advanced mixed waste project was to start waste
treatment operations in March 2003 and complete waste treatment by
December 2018. BNFL's February 2000 estimate shows that waste treatment
operations will begin in November 2003 and are to be completed as
scheduled in December 2018. However, several uncertainties may affect
the achievement of these milestones. First, the start of construction
has been delayed because BNFL has not obtained the construction permits
from the state and the Environmental Protection Agency. Second, to
resolve a lawsuit, DOE has agreed to pursue technical or regulatory
alternatives to incineration for up to 22 percent of the waste to be
treated. It is unclear how long the search for alternatives will take
or whether it will be successful. Finally, it is unclear if the
flexibility built into the operational phase of the project will be
sufficient to absorb these potential delays and allow the project to be
completed on time. However, at this early stage of the project, there
are no signs that DOE is dissatisfied with BNFL's performance.
The cost, schedule, and performance problems we found on
privatization projects are similar to problems found on other DOE
cleanup projects that involved more traditional contracting and
financing approaches. For example, our 1996 report on DOE's major
system acquisition projects (generally projects costing $100 million or
more), none of which were privatization projects, disclosed that at
least half of the ongoing projects and most of the completed ones had
cost overruns and/or schedule delays.3 Reasons for these
problems included inadequate project oversight and insufficient
attention to technical, institutional, and management issues. Although
privatization was an attempt to address these types of problems, it has
not yielded the desired results.
---------------------------------------------------------------------------
\3\ See Department of Energy: Opportunity to Improve Management of
Major System Acquisitions (GAO/RCED-97-17, Nov. 26, 1996).
---------------------------------------------------------------------------
Observations on DOE's Privatization of Complex Cleanup Projects
We have the following observations based on our past and current
reviews of DOE's privatization projects:
Fixed-price contracts may not work effectively in all
situations. DOE has had a strong preference for using fixed-price
contracts as a key component of its privatization program. Federal
Acquisition Regulation (FAR) guidelines note that the conditions most
conducive to fixed-price contracting include a clearly defined scope of
work, a low probability of major changes to the work scope, the
existence of proven technologies, sufficient price information to
determine a fair price, and an appropriate allocation and sharing of
risks. In contrast, the three projects we reviewed had changes in
scope, uncertainties about waste constituents and technical approaches,
unrealistic project schedules, or unresolved regulatory issues that
ended up affecting schedules or costs after the contracts were awarded.
For example, on the Pit 9 project, the contractor changed the design of
the chemical treatment system, a major component of the project, after
construction of the building had started. Eventually, the chemical
treatment system was modified so much that it no longer fit in the
building as constructed. These inconsistencies with the FAR guidelines
make it more likely that significant changes will occur during the life
of the contracts. Therefore, these projects may not have been good
candidates for fixed-price contracts.
DOE's guidance on privatization encourages the use of fixed-price
contracts for cleanup projects. In contrast, the U.S. Army Corps of
Engineers has guidance that appears to be more consistent with the FAR
guidelines for using fixed-price contracts. The Corps' general
contracting guidance for hazardous, toxic, and radioactive cleanup
projects states that fixed-price contracts are not the best contracting
vehicle for complex radioactive waste cleanup projects. The guidance
further states that the Corps increasingly relies on cost-reimbursement
contracts for the design and operations phases of such projects. The
primary reason the Corps has taken this position is that projects to
clean up radioactive wastes can have significant uncertainties,
including undefined amounts and concentrations of contaminants, which
can affect costs and schedules. These conditions are similar to the
uncertainties DOE has faced on its complex nuclear waste cleanup
projects.
DOE has been more successful using fixed-price contracts for
projects whose conditions have more closely matched those specified in
the FAR guidelines. Generally, those projects were not complex cleanup
projects that involved constructing and operating treatment facilities.
For example, DOE has used fixed-price contracts at Idaho Falls and
Hanford to purchase laundry services for such items as contaminated
workers' uniforms. DOE's operating experience under these contracts has
confirmed savings of several million dollars each year.
Full private financing for complex cleanup projects may
not be a viable approach. It is not clear whether full private
financing for complex projects is achievable or whether it will provide
needed assurance that contractors will perform effectively. According
to DOE officials, including the Director of the Office of Contract
Reform and Privatization, none of these privatized cleanup projects
have secured commercial financing to date, although a few have been
financed internally by the contractors. For example, on the Pit 9
project, Lockheed Martin financed project design and construction
activities from its own equity funds and government progress payments.
On the Hanford project, BNFL planned to use both equity and debt
financing. However, in order to make commercial financing viable, DOE
agreed to pay BNFL's commercial debt in the event of contract
termination. DOE decided it would terminate the contract before BNFL
obtained commercial financing. On the advanced mixed waste project,
BNFL is currently funding activities using its equity. However, in the
unlikely event that BNFL's financing is not sufficient for the entire
project, DOE may need to consider other options, such as making
progress payments or changing the contract to make financing the
project more attractive to lenders. These potential changes would also
affect the allocation of risk between the two parties.
Full private financing also has not ensured that contractors
perform satisfactorily. For example, the Pit 9 contract was terminated
and the Hanford contract is being terminated because of concerns about
the contractors' abilities to successfully complete the projects. On
the advanced mixed waste project, it is too early to tell if BNFL can
perform successfully.
Overall, full private financing of cleanup projects is only one of
several ways that DOE can encourage its contractors to perform. In
addition to using different mixes of public and private financing, DOE
could use an incentive fee structure in its contracts to tie a
contractor's performance more closely to its potential profits.
A thorough analysis of financial alternatives and risks is
an important part of structuring a successful cleanup project. When DOE
initiated each of the three projects we reviewed, it limited its
analysis of contracting and financing alternatives primarily to a
comparison between a privatized approach and a cost-reimbursement
contract without performance incentives. In our previous work on
privatization, we have criticized such a narrow approach to making
important contracting decisions. On the Hanford project, after this
Committee raised questions about the contract, DOE agreed to conduct a
more comprehensive analysis of its financial alternatives. We are
encouraged that DOE is considering a broader range of alternatives, but
we have some concerns about DOE's analysis, particularly its
assumptions about cost growth and its analysis of financial risks.
These assumptions led DOE to conclude that privatization would be the
least-cost alternative for the project.
In its March 2000 draft report, Hanford Tank Waste Treatment
Alternatives, DOE concluded that cost growth on federally financed
projects would more than offset the higher costs associated with
private financing. We have several concerns about this conclusion. For
example, DOE assumed that with the privatization approach, there would
be no cost growth once the project started because the contractor would
have incentives to control its costs. In contrast, DOE assumed that
with other options, cost growth would more than offset the higher cost
of private financing. However, DOE had no convincing evidence to
support the assumption that the privatization approach would have no
cost growth. In fact, its experiences contradict this assumption. We
also are concerned about DOE's use of point estimates of cost growth
rates. Since estimates of cost growth under the various options
considered are not precise, using one cost growth rate can lead to a
misleading conclusion about the most cost-effective approach. To
clearly show the uncertainty associated with the cost growth estimated
for various contracting and financing options, we believe it would be
more appropriate to represent the cost growth as a range of values
instead of a single point estimate.
DOE did not fully analyze or disclose the financial risks it
incurred when it assumed responsibility, in the event of the Hanford
contract's termination, for a large portion of BNFL's debt on the
project. With this action, which DOE took so that BNFL could obtain
private financing, significant performance risk shifted from BNFL to
DOE. By contrast, under a more typical privatization project, the
performance risk remains predominately with the contractor. Had the
Hanford contract continued, it is not clear that DOE would have
reflected this shifting of the risk in its cost analysis of financial
alternatives, as we suggested in our October 1998 report on this
project.4 A more complete evaluation of the actual risks
assumed by the government on this project could have shown that a
significant portion of the potential cost of the project shifted to the
government, since the government's liability for BNFL's debt has a cost
associated with it. Such an evaluation might have found a different
financing alternative more cost-effective for the government.
---------------------------------------------------------------------------
\4\ See Nuclear Waste: Department of Energy's Hanford Tank Waste
Project--Schedule, Cost, and Management Issues (GAO/RCED-99-13, Oct. 8,
1998).
---------------------------------------------------------------------------
Regardless of the contracting and financing mechanisms
used, effective oversight is essential to a project's success. In our
past work, we have raised concerns about the adequacy of DOE's
technical, financial, and managerial oversight capabilities, since
DOE's oversight has not been sufficient to prevent schedule slippages
or cost increases. For example, on the Pit 9 project, DOE was unable to
ensure that Lockheed Martin was addressing significant design, safety,
and performance problems, and the contract was finally terminated. On
the Hanford project, we reported in 1998 that effective oversight by
DOE, especially in the areas of project administration, technical
issues, and support activities, would be critical to the project's
success. DOE has invested considerable effort in establishing oversight
mechanisms for technical, health and safety, risk management, and
business and financial aspects of the project. Even so, DOE officials
said in April 2000 that they were not aware of the extent of the cost
increases that BNFL was estimating for the project until shortly before
BNFL submitted its proposal on April 24, 2000. This lack of awareness
raises questions about the adequacy of DOE's expertise to oversee this
aspect of the project. As DOE continues to explore ways to improve the
performance of its cleanup program, it will be especially important to
ensure the effectiveness of its technical, financial, and managerial
oversight capabilities, both in structuring contracts and in overseeing
them. DOE has an initiative under way to strengthen its capabilities in
this area. This initiative involves improved coordination and
accountability for project management teams and increased oversight of
critical projects by senior DOE management.
In summary, Mr. Chairman, privatization has not been a successful
approach for the complex cleanup projects we reviewed. In our view, DOE
has not given sufficient attention to a number of factors when deciding
how to contract for and finance such projects. These include (1) the
type of waste and how well its constituents are understood, (2) the
degree of competition available among private companies with the
necessary cleanup expertise, (3) the financing options available, (4)
the risks involved in the project and the entity that is best prepared
to assume them, and (5) the capabilities of DOE's project oversight
staff. In the future, DOE needs to more carefully evaluate these
factors when making decisions about some of its most challenging
cleanup responsibilities.
Thank you, Mr. Chairman and Members of the Subcommittee. That
concludes our testimony. We would be pleased to respond to any
questions that you may have.
Contact and Acknowledgments
For further information on this testimony, please contact Ms. Gary
L. Jones at (202) 512-3841. Individuals making key contributions to
this testimony included Carole Blackwell, Dwayne Curry, Doreen Feldman,
Nancy Kintner-Meyer, Mehrzad Nadji, Tom Perry, and Bill Swick.
Appendix I
Approved DOE Privatization Cleanup Projects That Involved Constructing
and Operating Facilities
------------------------------------------------------------------------
Status as of June
Project Location 2000
------------------------------------------------------------------------
Tank waste remediation system... Hanford........... Contract
terminated during
design; project
to be recompeted
Pit 9........................... Idaho Falls....... Contract
terminated;
parties in
litigation
Advanced mixed waste treatment.. Idaho Falls....... Ongoing--preconstr
uction
Low activity waste treatment.... Idaho Falls....... Project cancelled
Spent nuclear fuel dry storage.. Idaho Falls....... Ongoing--preconstr
uction
Transuranic waste treatment..... Oak Ridge......... Ongoing--preconstr
uction
Environmental management waste Oak Ridge......... Ongoing--preconstr
management facility. uction
Spent nuclear fuel transfer and Savannah River.... No longer a
storage. privatization
project--converte
d from private to
federal financing
------------------------------------------------------------------------
Related GAO Products
Nuclear Waste: DOE's Advanced Mixed Waste Treatment Project--
Uncertainties May Affect Performance, Schedule, and Price (GAO/RCED-00-
106, Apr. 28, 2000).
Nuclear Waste: Department of Energy's Hanford Tank Waste Project--
Schedule, Cost, and Management Issues (GAO/RCED-99-13, Oct. 8, 1998).
Department of Energy: Alternative Financing and Contracting
Strategies for Cleanup Projects (GAO/RCED-98-169, May 29, 1998).
Nuclear Waste: Department of Energy's Project to Clean Up Pit 9 at
Idaho Falls Is Experiencing Problems (GAO/RCED-97-180, July 28, 1997).
Nuclear Waste: DOE's Estimates of Potential Savings From
Privatizing Cleanup Projects (GAO/RCED-97-49R, Jan. 31, 1997).
Hanford Waste Privatization (GAO/RCED-96-213R, Aug. 2, 1996).
Mr. Upton. There was a bet up here that you would be
exactly 5 minutes, and it was won.
I would just ask unanimous consent that a number of
documents that we have be made part of the record. I know
they've been cleared with both sides, so that's without
objection. No one is here at the moment, but not a problem.
[The information referred to follows:]
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Mr. Upton. Mr. Glauthier, the Department stopped work on
BNFL's contract at Hanford because BNFL announced in March that
the cost had increased on the project from $6.9 billion to
$15.2, as you know. The Department, as I understand, was
unaware of the increases until the last minute, but according
to a December 1999 assessment by DOE, BNFL was already 9 months
behind in producing a pricing methodology for the project. Why
did they go so long?
Mr. Glauthier. Let me give you a current picture of things.
First of all, we have not actually stopped work. What we're
trying to do, in this transition period, is keep the design
work proceeding so that there will not be a complete break in
either the work or, especially, in the team. We want to keep
some of the technical----
Mr. Upton. I'll let you finish in a second, but I had
understood that DOE had planned to notice BNFL with a
termination earlier, in fact this month, but they've not done
so. Do you intend--does DOE plan to do that or not?
Mr. Glauthier. We are having discussions with them and
trying to finalize the details of the termination. We do need
to do that.
Mr. Upton. How much of the 6.9 have they actually been
awarded, all of it?
Mr. Glauthier. Oh, no. The question of how much we will pay
for the work they've done is one of the areas under
negotiation. We do need to pay them for work that they've done
that will be useful and is a legitimate cost to the government.
I said earlier that cost may be in the range of $200 or $300
million. We do not have a precise number, though. It will,
obviously, take time to go over with them what they've actually
done. We have stopped work on some aspects, such as the
financing, which we do not want them to do because we're not
going to proceed with that aspect of the project. The only
things we've asked them to continue on is some of the design
work while we carry out these negotiations.
We do intend to do this promptly. I know there were
statements earlier about dates that we might have actually
terminated the contract and the like. Those statements were
made by people working the project at the site, who are in
charge of trying to conduct the negotiations. Those were goals
which they've not been able to meet because of the complexity
of the issues. The decisions that the Secretary made were to
make sure that we have a transition here where we'll issue an
RFP to other firms in August, and that we'll make a selection
of a new contractor in January of 2001.
Mr. Upton. But don't you think that if they had done this
pricing methodology rate earlier, we would not have been in
this crisis?
Mr. Glauthier. Well, our discussions with them back in the
fall and in the winter were that we were very concerned about
their ability to come in with an effective cost for us and a
management plan that would show us they were really on top of
this project. As recently as February, though, the briefings
that our people received from BNFL still indicated that the
costs were close to the level of the earlier estimate. They
might have been--I guess we were expecting perhaps a 10 or 15
percent increase, instead of a $6.9 billion cost, a cost around
$8 billion. That would have been a range we thought we could
negotiate with them; we probably could come to something that
was workable. We were quite surprised when we got indications
later that the price was way, way above that.
Mr. Upton. I know that the Secretary indicated that he
was--I think in his words, he was surprised at the jump from
$6.9 billion to $15.2 billion. I just feel if you'd been on top
of them and had been working on the pricing methodology versus
letting it lag for 9 months, the surprise and the alarm would
have not been--perhaps you would have been able to get this
thing under control without allowing it to get out of hand
altogether and be forced really to try and seek yet another
contractor to clean up this mess.
Mr. Glauthier. I personally had the program give me a
series of briefings during the fall and then in the winter in
detail about the project, its cost, and what the critical
financial issues were going to be. The independent cost
estimate that we got from an outside engineering firm, was
carried out in the same timeframe. Whether it was completed----
Mr. Upton. Did they show the same? Did they show it to be
$6 to $8 billion versus $15?
Mr. Glauthier. Their cost was much closer to the original
$6.9 billion. It was way below $15- and gave us some confidence
that the technical work to be done here ought to come in closer
to the original estimates.
Mr. Upton. We're anxious to hear obviously from BNFL on the
next panel. I know, Ms. Jones, we're actually going to ask you
to stay a little bit longer if you're able to do that.
Ms. Jones, according to the BNFL statement, it said the
fixed-price approach at the Hanford tank waste contract served
the government and the taxpayer well. What is your reaction to
that statement?
Ms. Jones. In our testimony today, we talked about certain
criteria that we think are important for moving forward with a
fixed-price contract. In this particular case I'm not sure that
it was a good opportunity for using fixed-price contracting.
There was a lot that was unknown. The type of contract that
you're talking about was very large. The scope was not fully
defined. So this was not the best case for using fixed-price
contracting.
I know that BNFL points out that they have a good technical
approach. They have begun the design, and I think from a
technical standpoint they were moving in the right direction. I
can't say whether they would or would not have those things
under a different contracting approach.
Mr. Upton. The DOE reportedly told the Congress that it
expected savings using fixed-price controls in the magnitude of
25 to 50 percent as well as other benefits compared to a more
traditional contracting approach. Your testimony stated that
DOE privatization projects have not achieved those significant
results, and what is your--why do you think that is the case?
Ms. Jones. I think one point I'd like to make, Mr.
Chairman, is that we've reported in the past that the cost
savings estimates that DOE has done haven't always been well-
founded. Sometimes they compared apples to oranges, sometimes
they didn't have a lot of good cost data to estimate savings.
Sometimes they were using the wrong kind of base cost
information.
But to set that aside for a second, what we said in our
testimony today was that they really haven't achieved
everything that they hoped for out of privatization,
particularly for these very large, complex projects. Pit 9, as
we've all talked, that's in litigation. Certainly there will be
no cost savings from that project. The Tank Waste Project at
Hanford, DOE has already said they are not moving forward with
that as a privatized contract, so, again, as they defined it,
it has not worked. We have not seen cost savings there. For the
Idaho Project, we have seen some indications that delays could
affect the cost and the price, but there still is hope there
that we can get some cost savings from that project as you move
forward.
Mr. Upton. As you know, this morning we sort of looked at
Pit 9 and Hanford and a couple of others really, just a
handful. And Mr. Glauthier's testimony talked about, I think,
132 different sites that you've done, and 37, I think, you
indicated had been completed. Are we looking at it wrong; is
this just sort of a glaringly bad example, or is it--in general
do you think that it's working? Have we just picked the wrong
subset with tremendous increased costs because of this? What
kind of sample--what kind of draw do we have here?
Ms. Jones. GAO has always supported the kind of contract
initiatives that the Department has been going through, and we
supported fixed-price contracting, but the point is you have to
use it in the right circumstances. I think the very large,
risky projects that we're addressing here today probably were
not the best choices, but fixed-price contracting has and will
work in other situations.
Mr. Glauthier. Could I add to that, Mr. Chairman?
Mr. Upton. Go ahead.
Mr. Glauthier. I think it's natural that some of these
reviews will focus on the biggest projects and ones that seem
to be having some trouble. If we don't think of it as a
statistically representative sample, there are important
lessons to be learned here.
I think there is a lot of agreement in terms of why some of
these things haven't worked in some of these cases, but I did
want to point out in my comments earlier there are a large
number of these kind of contracts out there. If we looked at
some of those, I think you'd find there have been successes, as
well as these others.
Mr. Upton. One of the reasons I was a little bit late
coming back from the floor from the vote, I wanted to find Joe
Barton, who had chaired--I've not always been a member of this
subcommittee, and I know that Joe chaired--Mr. Barton chaired
these hearings as they looked at Pit 9 back in 1997, and as I
talked with Joe--he can't believe it's still coming up--but in
regard, one of the things we learned from that hearing was that
DOE lacked the experienced personnel and management ability to
manage and oversee the complex fixed-price contracts, and at
that particular hearing Secretary Pena committed to the
subcommittee that he would focus attention to Federal staffing
issues to address the problem. However, a recent independent
assessment of DOE's project management team at Hanford
identified, quote, significant corrective actions are required
before DOE can proceed even if BNFL had provided an acceptable
bid.
The question that I and other members of the subcommittee
have to ask is what's happened to that commitment to improve
the management capabilities, particularly in light of the fact
for 9 months no one really tracked when some of this data was
going to be available, and all of a sudden the cost doubled?
It's not a minor sum from 6.9--some of our appropriator
cardinals would like to have the amount of money that's the
difference between 6.9 and 15.2.
Mr. Glauthier. You're absolutely right, which is why we did
not go ahead with it. We organized ourselves last winter when
we first became concerned about some of this, so, when they did
give us a proposal, we were able to evaluate it quickly and
take action.
On the broad question of management and how we can improve
and strengthen our project management at the Department, we
agree that that is very important. I've only been here a little
over a year. One of my goals is to try and help improve that.
I'm a businessperson and not a lawyer. In this town, that's
unusual, but I think it is an indication of what we're doing.
Last June, Secretary Richardson launched an initiative on
project management, which applied to the whole Department, not
just the environmental cleanup area. We've set up a new office.
I mentioned the Office of Engineering Construction Costs, which
is staffed by people we've brought in from outside DOE. It's
staffed by General Clair Gill, who is a retired general of the
Army, who has a lot of experience in project management. We
brought in staff from the Corps of Engineers and from the Navy.
We borrowed staff from NASA to try to get experience from the
whole government on how to manage large, complex projects.
That's just one example. We're trying a lot of initiatives so
we can address this problem.
Mr. Upton. Do you think that new management team will, in
fact, prevent problems like this in the future? Will they have
the tools and the funding and proper oversight to do that?
Mr. Glauthier. We certainly hope that they'll help us
reduce these problems. I don't think we'll ever totally
eliminate them, but we're setting up a review system so that
every major project will be reviewed. We've put in place new
controls so that every project in the Department that's over
$400 million total cost, has to come to me and a board review
at four critical decision points. There will be a review before
the decision is made to go to each next step: to go into formal
design, to go into construction, to go into operation. Those
reviews will be a very disciplined way to make sure we take a
very careful look before we go to the next step. Those are the
new things that we haven't done.
Mr. Upton. I know my time has expired, but let me just ask
one more question before I yield. Have you worked with the GAO
hand and glove, particularly with some of the recommendations
that they've made, and what is their reaction to what you've
done?
Mr. Glauthier. I'm sure we can work more closely. We have
tried to take the recommendations and work with them. And, we
have benefited from the studies that have been done over the
last 10 years. We'll look for more opportunities to continue
doing that.
Mr. Upton. Ms. Jones, what's your reaction to the new team
that has a couple of offices in the hallway?
Ms. Jones. We haven't looked specifically at the new
initiatives, such as the new Office of Project Management at
headquarters. We think the Department is putting some things in
place that will help in the future.
One point I wanted to make is that we are talking about a
major culture change in the Department, a culture from totally
relying on the contractor to trying to be more proactive in
terms of management and oversight. This is going to take time.
But the other thing that I want to point out is that the
comments you made earlier about the independent group that came
in and looked at the Hanford project, they were talking about
the folks onsite and having the right people in place onsite,
not people back in headquarters. I think that the Department
needs to look at both of those issues.
There were also some comments in an independent report that
the roles and responsibilities were not clear between
headquarters and the site. These are the kinds of issues that
we've been raising with the Department for years; issues that
they still need to continue to work on.
Mr. Upton. Mr. Bryant.
Mr. Bryant. Thank you, Mr. Chairman. Again, I thank the
panel.
Ms. Jones, I have three questions for you. What I'm going
to do is read them to you and then let you acquire this record.
If you could answer those in writing as a late filed exhibit to
your testimony, I would appreciate it.
Ms. Jones. I'll be happy to.
Mr. Bryant. I have several questions for Mr. Glauthier that
I need answered today, if possible, so we can kind of move
through this quickly.
In terms of fixed-price contracting, it's been a key
element of DOE's privatization initiative. What concerns do you
have about DOE's use of fixed-price contracts for complex
nuclear waste cleanup projects?
No. 2, DOE expected that the private financing of cleanup
projects would shift the performance risk to the contractor and
create significant incentives for them to perform, yet this
appears not to have happened. And is full private financing a
valid strategy for cleanup projects?
Third question: GAO has frequently raised questions about
DOE's oversight of its contractors as to whether it's effective
or not, especially with fixed-price contractors. What are your
concerns about DOE's oversight capacities or capabilities?
If you could just file those in written response, and I
with like to move on and ask some questions.
Ms. Jones. We'd be happy to respond for the record.
Mr. Bryant. Thank you.
[The following was received for the record:]
Question 1. What concerns do you have about DOE's use of fixed-
price contracts for complex nuclear waste cleanup projects?
Response: DOE must carefully evaluate fixed price contracting as
just one of many contracting strategies that it can use to get the most
out of federal cleanup dollars. Complex cleanup projects typically have
significant uncertainties including undefined amounts and
concentrations of waste contaminants, which can affect costs and
schedules. DOE has been more successful using fixed-price contracts
when project conditions more closely match those specified in Federal
Acquisition Regulations (FAR) guidelines. Those conditions which are
most conducive to fixed-price contracting include a clearly defined
scope of work, a low probability of major changes to work scope, the
existence of proven technologies, sufficient price information to
determine a fair price, and an appropriate allocation and sharing of
risks. Therefore, fixed-price contracting may not be the optimum
contracting method for complex cleanup projects like the ones we
reviewed.
Question 2. DOE's expected that the private financing of cleanup
projects would shift the performance risk to the contractors and create
significant incentives for them to perform, yet this appears not to
have happened. Is full private financing a valid strategy for cleanup
projects?
Response: Based on DOE's experiences to date, full private
financing may not be a valid strategy for complex cleanup projects.
DOE's privatization approach has not been successful in shifting
performance risk to the contractor for complex cleanup projects like
the ones we reviewed. Thus far, none of DOE's privatized projects have
secured commercial financing, although some of them have been financed
internally by the contractors. Also, the government may have to accept
more of the risk than originally envisioned to ensure that the
contractor can obtain private sector financing. For example, on the
Hanford tank waste project, in order to make commercial financing
viable, DOE agreed to pay BNFL's commercial debt in the event of
contract termination. Consequently, much of the performance risk DOE
planned to shift to BNFL shifted back to the government. Given that
shift of risk back to the government, we question whether the high cost
of full private financing would have resulted in a ``best value'' for
the government on that project.
Question 3. What are your concerns about DOE's oversight capacities
and capabilities?
Response: Our concerns regarding DOE's oversight of fixed-price,
privatization contracts are similar to concerns we have reported in our
past work on other projects. In 1996, we raised concerns about the
adequacy of DOE's technical, financial, and managerial oversight of
large projects because DOE oversight had not been sufficient to prevent
contractor performance problems that resulted in schedule slippage and/
or cost increases. We identified the same kinds of concerns on the
complex privatization projects we reviewed. For example, DOE spent
considerable effort in establishing oversight mechanisms for technical,
health and safety, risk management, and business and financial aspects
of the Hanford tank waste project. However, the external independent
review panel that recently assessed the project's readiness to proceed
stated that DOE's project management systems were not fully
implemented, oversight positions were not fully staffed, and key
project risks were not defined and mitigation plans were not in place.
Not surprisingly, DOE officials said they were unaware of the cost
increases that BNFL estimated for the project until just before BNFL
submitted its contract pricing proposal in April 2000. This lack of
awareness raises questions about the adequacy of DOE's effort and
expertise to oversee this aspect of the project. As DOE continues to
explore ways to improve the performance of its cleanup program, it will
be especially important to ensure the effectiveness of its technical,
financial, and managerial capabilities, both in structuring contracts
and in overseeing them.
Mr. Bryant. In terms of this issue with Hanford, after BNFL
submitted its April 24 $15.2 billion proposal for cleanup of
the Hanford tank, Secretary Richardson said he would terminate,
as you have mentioned, BNFL's contract for tanks. Further, it's
my understanding that you were to submit options to BNFL's
contract in mid-May to the Secretary. What was the basis--his
basis to terminate their contract, basis of his decision, and
do you support that decision?
Mr. Glauthier. Yes, I certainly do support the decision.
The basis was a combination of cost, recognition that the cost
was completely out of the range of what we felt was reasonable
as demonstrated by both an independent cost estimate by an
outside engineering firm as well as by our own analysis, and
concern about the management team or lack of management team
that was proposed. The firm, for example, was supposed to
identify its project manager and the key management personnel
who would carry this project forward, and that was not done in
the submission that we received in April.
Mr. Bryant. What options were presented to the Secretary in
your report to him in May, and which did you recommend?
Mr. Glauthier. We actually made the report on May 8. We did
it a week ahead of schedule and felt that we'd been able to
complete the analysis well enough to do it then. We were
anxious to move quickly. We did not want to take all the time.
We discussed with the Secretary options that would have
included going ahead with one firm, trying to conduct basically
a sole-source negotiation with one company to take over the
contract and do the design and construction. We talked about
whether or not to simply terminate the contract, hold a
competition, and do nothing until we reached an appropriate
point for a break in the work that was going on. The course we
finally did decide on was to have a transition period of
several months until we could award a new contract in January,
try to keep the design process going so we make some more
progress on that, and keep the key technical people together
who would be available as a resource to whoever the successful
bidder is. But the goal is to get quickly to issuing a new RFP,
doing that in August, and trying to invite as much competition
as possible so we can select a firm who would be qualified to
do the work, technically sound, and give us a good competitive
price.
Mr. Bryant. One result of the termination of the BNFL
contract is that the work schedule is going to slip. Would that
be a fair statement?
Mr. Glauthier. Some dates, of course, will slip, like
beginning construction next summer probably won't be able to be
met. But this option that we've chosen has the possibility, and
the plan is, to still complete or meet the two major milestones
that we and the State are most focused on. One of those is to
have this facility actually constructed and ready to go into
construction by 2007. The other is 2018, to complete the
cleanup of the waste. We believe that we can meet those dates,
although there is less contingency in terms of time slack in
the schedule to do that.
It's going to be tight, but that's one reason we chose this
option. We could still meet the milestones that we've agreed to
with the State.
Mr. Bryant. Is it possible that in the future bidding that
the dollar figure by any new contractor could also reach that
same figure that BNFL proposed?
Mr. Glauthier. We certainly hope so. One of the things
we've done is restructure the contract as well.
Mr. Bryant. You hope it reaches the same number that BNFL
had proposed?
Mr. Glauthier. The original number.
Mr. Bryant. Just to be clear, that was not a very clear
question, I apologize, as to which number I was talking about.
Mr. Glauthier. One thing I did not mention as I described
the options earlier presented to the Secretary is that each of
those included a common element of restructuring the contract.
The original contract was to design, build, and operate this
facility for the whole 20-year period. What we've changed is to
have one contract to design and build the facility and another
contract to carry out its operation.
We did that for a couple of reasons. One is we want to find
a firm who has the best qualifications to design and build this
facility. There are many more firms who would consider doing
that than there are who would do that and also operate it----
Mr. Bryant. That was in the $15 billion proposal from BNFL.
Did that include operating it, building it and operating it?
Mr. Glauthier. Yes, it did.
Mr. Bryant. Actually you're restructuring it to lessen the
job requirements, take away the operation, and just go back to
the building, which possibly BNFL could do it cheaper than
$15.2 billion?
Mr. Glauthier. The cost estimate they've given us for that
portion was also higher than it should have been, and we felt
that it was not responsive either. So, we're comparing the
appropriate pieces of this as we go forward.
Mr. Bryant. Let me ask you another question. The BNFL
Company claimed in its testimony that will follow that it has
for the first time created a technical solution for the Hanford
tanks. Do you agree with BNFL's assessment of its technology?
Mr. Glauthier. We do think that the technical approach of
using the melters and the like is right. We are very puzzled,
frankly, that, with that assessment, they still came in with a
price that was so much higher than they had given us
originally. This is their technology. The reason they were
chosen originally is that they are the firm who should be in
the best position to give the government a good price and be
able to deliver this well.
There are two issues that cause us problems. One is their
design; the pace of design was very slow. Instead of getting to
30 percent design, which is where we really need to be to lock
in a cost estimate, they'd only gotten about 13 percent of the
design done. So there was a lot more uncertainty. They weren't
as responsive on working this as they should have been.
Another example involves one of the key elements of their
technology: the melter, the glass melter that will do the
vitrification work. The melter is part of their technology and
part of what they already have in other operations, in England,
for example. They projected in their original estimates that
the melter would be available 60 percent of the time, so, of
course, that affects your costs. They built a pilot here in
Maryland that operates better than expected. It was available a
larger percentage of the time. It actually produced at a higher
rate of output than expected. It was about a third--or, in the
end, about half of the output that we would have for the full-
size. So it was a pretty big pilot. It wasn't just a small,
little pilot.
Still, in the final estimate they gave us in April, they
reduced the availability assumption to 40 percent. We thought
they'd take it from 60 up to 70 or 80 percent, and it would
make more of an economic proposal. For some reason they made it
more conservative and assumed the melter to be less available
than before. This is one example, but it puzzles us why this
has come out the way it has.
Mr. Upton. If the gentleman would just yield.
Mr. Bryant. I'd be happy to yield.
Mr. Upton. Did they provide a line item--when they bumped
the cost from 6.9 to 15, did they--was that a line item in
terms of the increases? For that particular example that you
cited, what was the cost change?
Mr. Glauthier. They provided a whole detailed new cost
estimate. Essentially the original one was a preliminary
estimate, and then this new one was a complete one.
Let me defer to the Assistant Secretary here, Carolyn
Huntoon.
Ms. Huntoon. When they put in the proposal to us on April
24, it was the final delivery of a series of packages of
information, which had been coming in for several weeks, I
believe. The data was for the team to assess, and each item
that was to be specified was discussed, and the numbers were
given. In our immediate assessment that followed in the week or
so afterwards, before the Secretary made his decision, there
were many, many items that had increased in cost that were
delineated in that report.
Mr. Bryant. Mr. Chairman, I just have one follow-up
question and not necessarily on that point, but would like an
answer. In January of this year, the Secretary decided to stop
the sale of nickel from the BNFL Oak Ridge project. I think I
alluded to that in my statement. Initially it was envisioned
that BNFL would derive part of the funding for the contract and
potentially some of its profit from the recycling from the sale
of this clean material specific to nickel. What will be the
cost to the government of this decision, and what path from
here have you recommended on the nickel to BNFL?
Mr. Glauthier. We are still trying to make the final
decision on how to handle some of these materials. The decision
at that time was that because the material had only surface
contamination, it could be decontaminated and might be recycled
as long as it met standards that were consistent with the
Nuclear Regulatory Commission standards for other operations.
But material that was volumetrically contaminated, internal to
the material, could not be recycled. We clearly would have to
absorb some costs of storing that material until such time as
it might be able to be used or could be used in other
applications.
Let me refer this question in terms of detail cost to the
Assistant Secretary.
Ms. Huntoon. Again, that is one of the issues we are
discussing with BNFL right now: the cost of them not selling
the recycled nickel. The costs depend on what we would do with
the material, whether we would hold it or dispose of it or
what. But I think they are talking in terms of $30 to $50
million range in there. That was one of the assessments that we
made when the Secretary made the decision to put a moratorium
on the release of volumetrically contaminated materials, that
it would be at some cost, and we just haven't locked in that
number yet.
Mr. Bryant. Was the discussion as part of this specifically
saying, what we want you to do, BNFL. I talked about specific
proposals. Did that include their recycling not only surface-
contaminated, but volumetrically contaminated, everybody had
their eyes wide open as to what we were dealing with when the
contract was agreed to?
Mr. Glauthier. Yes, that's right. I wasn't there and don't
know the full assessment of this. But, this year, when the
Secretary made his decision, it was based on the question of
health; do we have an appropriate standard to be sure we're
protecting the public health and safety? So, we realize that
having made a change like this, and it is a change in the basic
ground rules of the contract, we have a responsibility to cover
that cost.
Mr. Bryant. I agree with that, and certainly health and
safety is a factor. My concern is the Secretary should have
concluded that before the contract was issued so that we
haven't, in effect, had to exhaust all this money correcting
that error. In other words, that determination should have been
made before the contract was issued that you cannot do this,
rather than allowing the BNFL to build this into their bid and
then come back after the fact and make this type of change,
albeit a good one, and cost the government between $30 and $50
additional million dollars.
Mr. Glauthier. The contract was signed in August 1997
before either Secretary Richardson or I was there and before
the Assistant Secretary was there as well. So I agree with your
point. It, clearly, should have been done originally, but at
this point we are presented with the information that raised
health and safety questions for us. What we can do is try to
deal with the issue at the time.
Mr. Bryant. I understand, but there was a Secretary there
before Secretary Richardson.
Mr. Glauthier. Yes. I think your point is right. We should
have considered all those things.
Mr. Bryant. Thank you. Thank you for your testimony. Thank
you for listening to us.
Mr. Glauthier. Thank you.
Mr. Upton. Mr. Burr.
Mr. Burr. Thank you, Mr. Chairman.
Who did the performances of the evaluations constantly of
the progress of contractors at Hanford?
Mr. Glauthier. The BNFL project we've been talking about?
Mr. Burr. Yes, sir.
Mr. Glauthier. The team there onsite at Richland,
Washington, has been there for about a year and has been----
Mr. Burr. Who does the performance reviews, DOE, or do you
let BNFL do their own?
Mr. Glauthier. Oh, no. The Department of Energy does those.
Mr. Burr. Is that somebody onsite?
Mr. Glauthier. We have our Federal staff there. The Office
of River Protection is doing those and then reporting to the
Environmental Management Office here at headquarters on a
regular basis.
Mr. Burr. Did they ever give DOE headquarters a clue that
we've got a problem; this is going to be much more expensive
than what we thought it was going to be?
Mr. Glauthier. Well, my understanding, and I'll let the
Assistant Secretary respond in a moment, is that as late as
February we were still asking the questions, and the answer we
were getting from the contractor was that the cost was going to
be in the $8-, maybe $8.5 billion total range, and we were
concerned at that level, but we thought we could probably
negotiate or work with them around the details. We had no clue
it was going to be that high until just a few weeks before the
bid.
Ms. Huntoon. I think in the evaluation of the contractor,
the Department of Energy staff that's onsite at the Office of
River Protection was working relatively closely and watching
and evaluating products from the contractor. We would get at
least quarterly status reviews back in Washington of what the
contractor was doing right and what they were doing not so
well, with red, green, and yellow lights on various issues
including----
Mr. Burr. On the cost schedule they had yellow lights in
November, they had yellow lights in February, and it wasn't
until we got to May that we switched from all yellow to all red
lights.
Ms. Huntoon. Well, that's right.
Mr. Burr. I'm looking at your chart, I guess.
Ms. Huntoon. Yes.
Mr. Burr. Does that display the surprise?
Ms. Huntoon. Yes.
Mr. Burr. Nobody at DOE knew there was a problem?
Ms. Huntoon. The initial indication that we had, as the
Deputy Secretary was saying, was in the February to March
timeframe, when Mr. French, who is the project manager out
there, was telling us that he got a feeling that the cost was
creeping up. So, how much are we talking about? Well, this is
when we were talking in the $8-ish--$8 billion range. Early
April we had a visit, informal visit, from BNFL both out at
Richland and here in Washington, and they indicated to us that
the costs had grown considerably. I know T.J. and I both
expressed our unhappiness with that information and the desire
to make sure that, when they came in, there were alternatives
with these cost numbers.
Mr. Burr. The 1st of May, the Secretary put out a press
release, and I quote, BNFL's proposal was outrageously
expensive and inadequate in many ways.
Share with us, if you will, where it was inadequate. I
think we can all agree it's outrageously expensive. I'm curious
as to where the other--because I don't pick up the ``inadequate
in many ways'' in the DOE evaluation of performance.
Mr. Glauthier. I think the most striking point for us was
the inadequacy of the management plan that they had. The key
question is this: you've got a project this complex, that is
going to be run for 20 years; it's going to involve design,
construction, and operation of this facility. Who is going to
run it, who is really the person in charge, and what is that
top team? That was one of the key points of evaluation for
whatever they gave us.
In April when they gave us a submission, they did not have
that project person identified. We didn't know who that project
manager was going to be. We don't see the ability of this firm
to carry out the project successfully, so, even if the price
had been what we originally expected, we would have had
questions about their ability to actually complete it.
So we were already concerned, and we were watching for what
they were going to give us to show that they were capable of
running this project effectively at any price.
Mr. Burr. Clearly you've made an evaluation of BNFL as the
contract is unfolding. The natural question would be--and I
think GAO probably suggested this in every review that they've
made--if you had a contract like this, why would there not be a
separation between design and construction and then go back and
look at a contract for operation?
Mr. Glauthier. Well, the idea originally was to take an
innovative approach. This firm already operates a similar kind
of technology, vitrification elsewhere, and instead of paying
them in the traditional way for each of these steps, if they go
out, raise the financing, design and build this facility, then
we'll pay for the product that they produce. As you provide
services and produce these glass logs, we'll pay you by the
log. And if you could have the freedom to design and build this
thing without all the complexity of the government procurement
system watching over your shoulder all the time and give you
more of the ability to operate as would you in the private
sector, then, the contention was that the costs would be lower,
that everything would go faster and be less expensive.
The concept is pretty good. If the technical side of this
was good enough, if the characterizations of the waste was good
enough, if the technical performance, the equipment was right,
the concept wasn't bad. That's why it was all lumped together,
why it was all one.
Mr. Burr. Ms. Jones, you want to comment on what he said?
Ms. Jones. I want to comment on a number of things that he
said, Mr. Burr. One is that I think innovation is terrific, and
I think that the Department is showing us some of that, but I
also believe that for this particular contract, they were
advised early on that maybe fixed-price and full private
financing might not work. You're talking about a very complex,
very, very costly project, and I think the risk involved for
the contractor maybe wasn't totally factored into the analysis
that was done. I think this committee and the GAO report that
we did in 1998 asked them to look at financing alternatives.
Mr. Burr. Would you not agree in the structure that we've
seen not only in this contract but other contracts under a
fixed price, that it is fixed price until you get to the
section of the contract that addresses unforeseen costs, where
it's a negotiation between the contractor and DOE, or the
incentive based upon the need to accomplish something by a
certain date, or performance bonus based upon evaluation? There
are lot of ways in the private sector this would not be
considered fixed-cost, would it?
Ms. Jones. Correct. And I also think DOE needs to determine
whether it should have a separate design phase, separate
construction phase, separate operations phase, and when looking
at each of those phases, what's the right contracting method to
use? Should it be fixed-price? There are different kinds of
ways to go about it, and the alternatives should be assessed
for each phase.
Mr. Burr. Let me move to another set of questions, if I
could, Mr. Secretary. I think we've discussed this 2-year
period of BNFL and their design of this treatment facility, and
that there was a B(1) contract for the construction, design and
construction. As part of the termination agreement--and you've
said that you've terminated this contract. Have you terminated
this contract, or do you intend to terminate this contract?
Mr. Glauthier. Our intention is to do it. We have already
indicated we are not going to carry out the full 20-year term
of this contract. We have only stopped work on a few selected
things so far, and the negotiations are going on right now in
Washington, Washington State, to actually complete its
termination. We need to take certain steps such as making sure
we have the appropriate rights to use the technology or the
design----
Mr. Burr. Let me get into some of those specifics, if I
could. As part of the termination settlement, DOE will pay BNFL
for the cost of design work so far completed plus profit. In a
recent interview DOE indicated that termination costs may be
$245 million. BNFL has asked for $290 million, which includes
$23 million in profit. However, BNFL's request for $290- does
not include the cost of the pilot melter program or its
intellectual property rights. If DOE decides to proceed with
BNFL's design with another contractor, DOE will also have to
pay BNFL for the pilot melter program and intellectual property
rights.
Now, clause h--25(h) of the contract clearly indicates that
the total termination costs for BNFL's Hanford contract should
not exceed the total funds obligated under clause (h)(2) of the
contract. According to (h)(2) of the contract, and I've got
that up here, the total obligated funds are $250 million. Why
then is BNFL asking for $290 million in its June 2, 2000,
letter to DOE's contract officer?
Mr. Glauthier. Well, of course, you'll have to ask BNFL why
they are asking for that much money.
Mr. Burr. Does DOE plan to obligate more funds to the
contract to meet BNFL's request?
Mr. Glauthier. Of course we can't obligate anything more
than we actually have authorized. It's possible, I suppose, if
we decide that some of these costs were appropriate.
Mr. Burr. You've already told us in your evaluation you've
determined that they underperformed or didn't perform, and
you've gone through an evaluation to come to a conclusion that
you're terminating the agreement, and I would have thought in
that thought process that you've looked at the contract, you've
seen what you are obligated for, and that you've probably at
this point made a determination as to what your obligations are
financially to terminate this contract. What are they?
Mr. Glauthier. We have our estimates, but there is a set of
legal negotiations that have to go on between the government
and the firm to actually establish the specific number, the
specific item-by-item responsibilities. I believe I said
earlier that we think the cost is going to be in this range of
a couple hundred million dollars. I don't have a specific
number that I'm willing to pinpoint, but given that kind of
cost, we need to be sure we're getting the right value for
that, that we are paying for work that has actually been done
that we're legally responsible for under the contract.
Mr. Burr. They are asking for $23 million in profits. Are
you legally responsible for that?
Mr. Glauthier. We might be if it's a termination for
convenience of the government.
Mr. Burr. Isn't that, in fact--aren't you terminating for
convenience?
Mr. Glauthier. That is what our intention is, that's right.
Mr. Burr. So you're obligated for the $23 million.
Mr. Glauthier. I don't know that specific number. We're
obligated for some fee that will be determined. As you
indicated, they have not performed all the things they've
agreed to perform.
Mr. Burr. BNFL has asked for another $34 million for the
pilot melter program. However, clause (h)(49) of their contract
specifically states that DOE can acquire the pilot melter data
for a total cost not to exceed $25 million.
I guess I would ask you does DOE plan to purchase the
melter program, and if so, why would BNFL ask for $34 million
if the contract says $25-?
Mr. Glauthier. I'll give you the Assistant Secretary.
Ms. Huntoon. I don't know why BNFL asked for $34-.
Mr. Burr. Has anybody asked?
Ms. Huntoon. I have not. I will.
Mr. Burr. Did we just reach a point where we've said, you
know, the most convenient thing for everybody is to end this
contract because we were unclear on the operational stage, so
the best thing we can do is part company, fight over what the
settlement is, even though it was specified in the contract,
and we'll give a little bit, as you said, Assistant Secretary,
in reference to Mr. Bryant's question on what additionally will
it cost in Oak Ridge, and you said some cost, $30- to $50
million. Thirty to $50 million when I go home is not some cost.
It's a hell of a lot of money.
Ms. Huntoon. May I respond?
Mr. Burr. Yes, ma'am.
Ms. Huntoon. I did not mean that $30- to $50 million wasn't
a lot of money. I hope it would be the lower number. What we
need to understand is the cost, and I think that's a
negotiation that has to take place with the contracting
officers and the contractor on this nickel issue.
Mr. Burr. Here's the trouble that I have. Before I was
here, I was in the private sector. I wasn't a lawyer, so I
didn't try to interpret what a contract said. I read this
contract in the layman terms that I could, and it says there is
a limit, $25 million. If X happens, you get $25 million. The
question I asked is very simple. They billed you for $34-. Are
you going to pay them $25-, or are you going to negotiate
something in between, or pay them $34- which they asked for? I
would hope that DOE's answer would be, we wrote a contract.
It's $25-. We're going to pay them $25-.
Mr. Glauthier. Congressman, our intention is to only pay
what we absolutely have to and what we are responsible for.
Mr. Burr. That doesn't answer my question. Is the contract
valid?
Mr. Glauthier. The reason I'm giving you the answer I am is
that I'm not a contracting officer. I don't know all the
elements there.
Mr. Burr. I would hope prior to your testimony here that
somewhere within the Department of Energy counsel has sat down
and tried to interpret that contract for the questions that you
expected that we would ask.
Mr. Glauthier. And the negotiation is actually going on. If
there is a limit like that, $25 million, then I certainly
expect our people to pay no more than that. I would hope we
will pay less, and we'll just have to do item by item.
Mr. Burr. What you've shared with me is that DOE is
currently in negotiations with BNFL to buy out of--to buy out
the termination of this contract, and that it's not necessarily
the numbers that were established up front that will be the
cost of our exit.
Mr. Glauthier. Even in the private sector, which is where I
spent most of my career, when you terminate a contract, there's
often some legal work that goes on to settle the final cost and
that's what we're involved in now.
Mr. Burr. You are also--you also must purchase certain
intellectual property rights from BNFL if DOE plans to use
their design. Pursuant to clause (h)(25) of the contract, these
costs will have to be negotiated with BNFL. One, will you use
their design, and if so, have you--can you estimate for us how
much you will have to pay for the intellectual property rights?
Mr. Glauthier. To answer the first part, we want to make
the design available to bidders who will bid on this. We are
not going to require that the bidders use their design or this
particular approach, but we do expect that many bidders will do
that. So we want to make sure that the rights are available for
us to use on the project.
As far as the second part of the question, Carolyn?
Ms. Huntoon. The second part being the intellectual
properties, paying for them again, I think that the discussions
with BNFL, what we owe them, are taking place right now out in
Washington or have been taking place and will continue until we
terminate this contract.
Mr. Burr. So we're negotiating the use of the intellectual
property rights? Don't feel bad about saying it, because even
in the contract we specified on other things what the amount
when negotiating those, so I wouldn't expect--given that there
wasn't a specific dollar amount on intellectual property
rights, I would expect that we would have to negotiate it.
Accepting the fact that there are intellectual rights, that you
will accept their design for the project is an acknowledgment
that, in fact, they were on the right track, and clearly the
evaluation period throughout the process suggested, but up 'til
May when the BNFL came in with a new number, their marks
weren't too bad throughout the evaluations that were done by
land management.
Let me ask one final question. The Chairman has been very
patient. How many people do you expect to bid on the new
contract?
Mr. Glauthier. I hope we can get as many as possible. We
certainly would hope to have at least four serious qualified
bidders, but I hope we can do better than that. I hope we can
get a higher number.
Mr. Burr. How many do you expect to bid, not hope to bid.
How many do you expect to bid?
Mr. Glauthier. I expect to see four bids, or more.
Hopefully more.
Mr. Burr. Do you expect those bids to be closer to the 6.9
minus design and--what you negotiate out of this contract, or
will they be closer to $15 billion?
Mr. Glauthier. I hope they are listening to us. We are
looking for a good, serious, tight design and for construction
cost. That's one reason we've broken it down this way. Design
and construction, that is what it's going to be for the next 7
years. It's a defined period, and people ought to be able to
get their arms around that and give us a good tight cost
estimate. If it's not closer to our original numbers for that
element of the project, then we're not going to be able to do
it. Our independent cost estimate gives us some confidence that
we will be able to get a bid that's in that range.
Mr. Burr. I would take for granted that since you're
hopeful that four people will bid, that you've probably talked
to the bidders already. Do you expect BNFL to be one of those
four?
Mr. Glauthier. In fact, we have talked to the bidders, and
we've a couple of different ways of approaching this. One is
that we had a number of the firms who are interested all meet
together to get some briefing, information on this out in
Washington State, and then about a week or 2 weeks ago, we had
firms individually come in and spend about 2 hours each with
Ms. Huntoon and her staff and the procurement people to speak
specifically about the project.
So we have been actively trying both to make the
information available and to encourage active support here.
I'm sorry, the second part of your question?
Mr. Burr. The second part is do you expect BNFL to be one
of those four bidders on the second part of the contract that
you're currently terminating?
Mr. Glauthier. We're not precluding them. If BNFL wishes to
bid, they may do so, but they would certainly have to address
the various concerns that we have about the ones I've
discussed.
Mr. Burr. Let me rephrase my question. In the four that
you've suggested to me, is BNFL one of them?
Mr. Glauthier. No.
Mr. Burr. Thank you. I appreciate both the Secretary and
Ms. Jones for another review of similar things that we've
looked at, and I yield back.
Mr. Upton. I yield to the patient Mr. Bilbray.
Mr. Bilbray. I have no questions at this time.
Mr. Upton. Mr. Bryant, do you have additional questions?
Mr. Bryant. No.
Mr. Upton. I just want to say in conclusion, as we look at
all the savings that are added up, could be added up for the
fixed-price contracts, this one particular one seems like it's
wiped them all away. To go from $6.9 to $15.2 billion is a very
large sum, and knowing that it still is 20 years away, when I
presume neither you or I will be in our present positions, and
we wish this subcommittee the very best in those days and hope
that this issue is put to rest. And we'll continue to oversee
it, and we appreciate your testimony this morning, and we'll
excuse you now. Look forward to seeing you probably next week,
Wednesday.
At this point, Ms. Jones, if you're able to stay and be
able to take some questions.
We will call Mr. Paul Miskimin, the CEO of BNFL, to the
table.
Mr. Miskimin, thank you for being patient. As you heard at
the beginning, we have a long tradition of taking testimony
under oath. Do you have any problem with doing so?
Mr. Miskimin. No, sir.
Mr. Upton. Committee rules allow you to be represented by
counsel. Do you wish to have counsel with you?
Mr. Miskimin. I have counsel here, yes.
Mr. Upton. Do you want them to be sworn in as well?
Mr. Miskimin. No, sir.
Mr. Upton. If you wouldn't mind standing and raising your
right hand.
[Witness sworn.]
Mr. Upton. Your testimony has been made part of the record.
I would note that we have gone beyond where we thought we'd be
at this point timewise. We're going to try to impose a 5-minute
standard and be strict with that. You may begin. Thank you.
TESTIMONY OF PAUL A. MISKIMIN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, BNFL INC.
Mr. Miskimin. Thank you for the opportunity to testify
today, sir. Good morning. I'm Paul Miskimin, president and
chief executive officer of BNFL Incorporated, based in Fairfax,
Virginia.
Mr. Chairman, in addition to my comments here today, I have
a written statement I would like added to the record.
BNFL is a U.S. subsidiary of British Nuclear Fuels plc. It
brings to the U.S. nuclear industry the full complement of
advanced technologies, management capabilities, record of
accomplishment, lessons learned of over 50 years of continuous
nuclear fuel cycle and waste management operating experience of
its parent company.
Incorporated in Delaware, based in Fairfax, Virginia, and
wholly owned by BNFL Nuclear Fuels plc, BNFL Incorporated
operates under its own board of directors consisting of three
citizens of the United Kingdom and seven citizens of the United
States. BNFL Inc. has about 1,000 employees, 93 percent of whom
are U.S. citizens.
As the committee is aware, as a result of difficulties
associated with traditional cost-type contracts, the Department
of Energy chose to award these projects that we're talking
about to BNFL either on a fixed-price or privatized basis to
transfer more risk and accountability to the contractor, us.
These contracts aggressively challenge existing practices for
accomplishing the work. BNFL Inc. was willing to bid on and
enter into these contracts and accept the associated risks
because we have the experience and technical capability to
deliver the projects consistent with the government's
aggressive schedule.
While each of these projects has had some areas of
difficulty, we are pleased to report in each case the
government for the first time is presented with the means of
accomplishing these major projects significantly within
government estimates and requirements.
I'd like to provide some details on the status of our three
contracts in Idaho, Hanford and Oak Ridge. Overall cleanup is
on track. BNFL has invested almost $500 million of the
company's money in these projects.
Oak Ridge, the ETTP Project. In Oak Ridge we are performing
a major decontamination and demolition operation of the
equipment and systems of three gaseous diffusion plant
buildings that cover 96 acres and contain 126,000 tons of
potentially reusable material. This job is being conducted in a
partially radioactively contaminated environment by a fully
trained and unionized work force of over 600 personnel. They
are challenged on a daily basis by the industrial and radiation
hazards associated with cleaning and dismantling these 50-year-
old buildings.
The project has had its share of problems, some of which
are our making. However, none of the costs associated with
these problems that are our responsibility will result in an
increase in cost to the government. Most of the contractual
difficulties with this project have to do with unforeseen
circumstances associated with the definition of the original
work scope that could only be discovered once the facility
began to be dismantled. We believe these changes to be
compensable under the contract. The total request for
adjustment that we have submitted for the Oak Ridge Project are
$110 million.
Mr. Chairman, the reality is under any contracting
mechanism, a project of this nature and complexity will have
numerous developments that call for contract changes. BNFL Inc.
will make sure its facility is cleaned up and the project
completed in accordance with the contract. This will occur
despite the fact that our initial poor performance will cost
BNFL Inc. almost $100 million which it will not recover from
the government.
Idaho, the Advanced Mixed Waste Treatment Project. In Idaho
we are managing a privatization contract to design, build and
operate the Advanced Mixed Waste Treatment Project at the Idaho
National Engineering Environmental Lab. The primary purpose of
this project is to process and prepare 65,000 cubic meters of
transuranic waste for disposal at the Waste Isolation Pilot
Plant in New Mexico. The project will help DOE meet court-
mandated milestones in the Idaho settlement agreement between
DOE, State of Idaho, and the Navy. The settlement agreement
requires that 65,000 cubic meters of waste be shipped out of
Idaho by December 31 of 2018.
Mr. Chairman, I'd like to say that the GAO's April report
on this project is a fair and reasonable representation of the
status of the project and is consistent with the status of the
project at the time of the review. However, there are some
significant points or impressions left by the report that I
have addressed in my written testimony.
I am pleased that to date, after 3\1/2\ years of diligent
efforts to optimize the approach to the project's projected
price, the government presently remains very close to that
agreed contract signature. While some changes are expected due
to government-directed changes, what is assured is that the
government will not be obligated to fund cost increases
regarding--arising out of our performance.
Last, the Hanford Waste Treatment Plant. Mr. Chairman, as
the American public is fully aware, the DOE's Hanford tank
waste presents the largest single environmental project in the
ongoing efforts to clean up the legacy of the cold war. In
August 1998, the BNFL commenced the B-1 Project design phase
leading to a final fixed price for service and decision on
whether to proceed in August 2000. This is a fixed-scope, self-
financed, but cost-reimbursable contract with a $250 million
ceiling to carry out this work.
We had already in 1997 invested in a long lead technology
program, about $25 million, with no DOE backing in order that
important technical data would be available and sufficient to
support the August 2000 decision date. At the commencement of
the B-1 phase, BNFL had completed about 1 percent of the
necessary design work. With so little design work done, no one
could offer firm assurances for such a complex and unique
project as to what the price for the project would be. Instead,
BNFL provided its best assessment based on currently available
information that $6.9 billion was an indicative price, and
proposed that as a result of work during the B-1 phase, a 90
percent confidence price would be proposed in April 2000. The
price to be proposed in April 2000 was to be the basis for
fixed-price contract that the parties contemplated entering in
August 2000.
In April 2000, BNFL Inc. submitted a fixed-price proposal
for waste processing services totaling $15.2 billion over the
20-year contract life, doubling the indicative price for the
project. As required by our contract, this incorporated a 100
percent private financing package backed by major financial
institutions and including a prospective equity commitment of
$400 million by BNFL to be committed for financial closing.
I'm going to skip to the end because I know you are in a
time crunch.
I'll just conclude there and open for questions.
[The prepared statement of Paul A. Miskimin follows:]
Prepared Statement of Paul A. Miskimin, President and Chief Executive
Officer, BNFL Inc.
Good morning. I am Paul Miskimin, President and Chief Executive
Officer of BNFL Inc., based in Fairfax, Virginia. BNFL Inc., the U.S.
subsidiary of British Nuclear Fuels plc, is a full service nuclear
waste management, decommissioning, engineering, and nuclear materials
handling company that provides services to both the U.S. Government and
the commercial nuclear industry. It brings to the U.S. nuclear industry
the full complement of advanced technologies, management capabilities,
record of accomplishment, and lessons learned of over 50 years of
continuous nuclear fuel cycle and waste management operating experience
of its parent company. In fact, the BNFL Group can provide the full
spectrum of services across all areas of the nuclear fuel cycle, which
it does with numerous customers throughout the world.
As background, BNFL Inc. is a U.S. company, incorporated in
Delaware, based in Fairfax, Virginia, and wholly owned by British
Nuclear Fuels plc. BNFL Inc. operates under its own Board of Directors,
consisting of three citizens of the United Kingdom and seven citizens
of the United States. BNFL Inc. has about 1000 employees, ninety three
percent whom are U.S. citizens.
We are proud of our technological and operational accomplishments
and have been working in the United States over the past 10 years on
nuclear cleanup activities to transfer our UK-based technology and
operations experience and capability to U.S. government and commercial
industry efforts. Three of the projects we are currently performing
represent some of the biggest environmental challenges in the United
States. These projects are located in the states of Idaho, Tennessee
and Washington, and are the subject of today's hearings.
As the Committee is aware, as a result of historical difficulties
associated with traditional cost plus award fee contracts, the
Department of Energy (DOE) chose to award these particular projects on
either a fixed price or privatized basis as an attempt to transfer more
risk and accountability to the contractors. These contracts
aggressively challenged existing practices for accomplishing the work.
BNFL Inc. was willing to bid on and enter into these contracts and
accept the associated risks because we were the only company with the
experience and technical capability to deliver the projects consistent
with the government's aggressive schedule. While each of these projects
has had its particular areas of difficulty, we are pleased to report
that in each case--even with the issues that are the subject of today's
hearing--the government for the first time is accomplishing or has a
plan and technologies to accomplish these major projects significantly
ahead of any previous government estimate. This is due in part to the
capability of the contractor, but also to the fixed price, incentivized
nature of the contracts that drive the contractor to develop and settle
on solutions to problems, versus continually reworking issues.
The nature of the these particular contracts seem to be the central
thrust of this hearing, in essence, that fixed price contracts could
end up costing the taxpayer more than advertised. In most cases in the
commercial environmental cleanup world, fixed price contracts do change
in price or cost. However, that does not mean they are a bad
contracting tool to deploy in progressing the cleanup of the cold war
legacy. The fact of the matter is that this work is challenging,
sometimes unpredictable, and often subject to change regardless of the
contracting mechanism. The recent General Accounting Office (GAO)
report DOE's Advanced Mixed Waste Treatment Project--Uncertainties May
Affect Performance, Schedule, and Price (GAO/RCED-00-106, April 28,
2000) points out that, ``. . . the Federal Acquisition Regulation
allows for price adjustment if, for example, the scope of work changes
drastically or BNFL encounters circumstances beyond its control.'' Even
with change, in our estimation fixed price contracts can be a useful
alternative to cost plus fee contracts. The DOE considers privatization
and fixed price contracts and important part of contract reform, which
has been generally endorsed as a positive and necessary effort.
What are the advantages? Typically, because much planning is
required prior to establishing fixed price contracts, significant
performance and cost risk get transferred to the contractor, and a more
rigorous process for justifying cost and other changes results. As the
GAO pointed out in its report Department of Energy: Opportunity to
Improve Management of Major System Acquisitions (GAO/RCED-97-17, Nov.
26, 1996), DOE's traditional method of contracting and managing capital
projects through cost type contracts resulted in cost overruns of
sixty-three percent in half of the projects completed. Additionally,
forty percent of its major projects were terminated after expending
over $10 billion. Should we expect that fixed price contracts would
never change in price or cost? Of course not, especially when dealing
with 50-year old contaminated buildings that operated in an era of
little regulation, or when dealing with first of a kind nuclear
projects. What it does mean, however, is that the process for changing
those contracts and in changing the cost basis of a project, must
always be rigorous but maintain an eye on the ultimate goal; getting
the job done at a fair price.
Having discussed fixed price contracts in general, let's take a
closer look at BNFL Inc.'s contracts at Idaho, Hanford and Oak Ridge.
I'd like to point out to the committee that while there have been price
increases due to increased scope or technical issues, there have been
no cost overruns associated with either the Hanford or Idaho project,
and BNFL Inc. has paid almost all project costs to date. In addition,
while a number of figures associated with the Oak Ridge project have
been used, the fact remains that any additional costs to the project,
not specifically approved through the rigorous change process
associated with our contract, will be borne by BNFL. In total, BNFL has
invested almost $500 million to date in these projects. I would also
indulge the committee, as a degreed nuclear engineer and a 38-year
nuclear industry professional, that comparing problems encountered on
the Oak Ridge project to decontaminate and dismantle 50 year old
process buildings, and projecting those to projects to design and build
new facilities, would be comparing apples to oranges. There is no
comparison.
oak ridge ettp project
On August 25, 1997, DOE and BNFL signed a $238 million contract for
the East Tennessee Technology Park (ETTP) Three Building
Decontamination, Decommissioning and Recycle Project in Oak Ridge, TN.
This is a six-year fixed-price contract to dismantle, remove, and
decontaminate the process equipment and support systems materials
within three gaseous diffusion plant buildings making them available
for commercial reuse by the end of 2003. The buildings, which cover a
mammoth 96 acres, contain 129,000 tons of potentially reusable metal
contained in the process equipment. At the outset, a major challenge
for the Project was to safely decontaminate, salvage and recycle this
metal--particularly nickel--which would then be credited back into the
project to offset costs to the taxpayer.
The project is a major dismantling and demolition operation being
conducted in a partially radioactively contaminated environment by a
fully trained and unionized workforce of over 600 personnel. They are
challenged on a daily basis by the known and unknown industrial and
possible radiation hazards associated with cleaning and dismantling
these 50-year-old buildings. The capital investments at ETTP originally
envisioned to conduct the project have been completed, with the
exception of a new massive super-compactor, to be completed this fall.
The nickel refining technology is fully developed and designed,
although construction of the nickel recycle plant is on hold due to
DOE's January 2000 nickel moratorium. In addition, sixteen percent of
the second floor and 34% of ground floor in K-33 is cleared; 17,000
waste drums have been removed from ETTP and shipped to Utah for
disposal; and material is being removed at about 1,400,000 pounds per
week.
The project has also had its share of problems that one could
expect with a job this size. Quite frankly, some of these problems were
caused by early difficulties on our part in managing the ``ramp up'' of
such a large workforce and project. In fact, my first major management
decisions when I joined the company was to reorganize and consolidate
our operations in Oak Ridge in September 1999, with a new management
team. This team is doing a great job in moving the cleanup forward.
Some of the difficulties were due in part to DOE having to work under a
new contracting mechanism. Most of the difficulties, however, have to
do with changes to or unforeseen circumstances associated with the
original work scope that could only have been discovered once the
facility began to be dismantled. However, the facts are that even with
these challenges, only costs associated with changes to the original
work scope and outside of the contractor's control will result in
increased price to the government. Any increased costs associated with
this project that are within the original parameters of the contract
will be borne by BNFL. Our current expected costs to complete the ETTP
project are still well below the governments estimate for this project.
Mr. Chairman, this project is being performed by a fully unionized
workforce represented by numerous unions that are doing a tremendous
job. Unfortunately, as you know, from the outset a single local union
that failed to get work on the project opposed this project. The union
later enlisted the help of environmentalists who opposed the metals
recycling aspect of the project. The labor union and the
environmentalists have filed a lawsuit against different aspects of the
project; however, the U.S. District Court summarily dismissed their
lawsuit. However, as is their prerogative, a decision was later made by
the DOE in December 1999 to halt at least one major portion of that
contract, the recycling of previously contaminated nickel. This
decision eliminated a significant revenue stream contemplated in the
contract from the sale of recycled nickel, which affects the financial
basis of the project and the contract. The ensuing adjustment that must
take place, which will require an increased cost to the government, has
been referred to as a cost overrun, however, it clearly is an
additional cost to the project resulting from a DOE change in policy
outside of the contractor's control. Thus, the contract must be
equitably adjusted and the contract clearly provides for that event. On
January 12, 2000, DOE issued a draft modification to the contract to
implement this decision. The modification ultimately negotiated will
have a cost increase of roughly $40-50 million. The final figure is
currently being determined through a negotiation between DOE and BNFL.
This is a fairly straightforward example of a change.
Summary of REA's
There are other examples in which the company has experienced
conditions and circumstances at the ETTP site that affect project cost
and schedule that we believe are compensable under the contract's
``Changes'' clause. This is accomplished through a very standard
government and commercial process in which a contractor submits a
Request for Equitable Adjustment (REA). The total requests for
adjustment that we have submitted for the Oak Ridge project are $110
million.
More specifically, on October 28, 1999, BNFL Inc. submitted six
REA's to DOE that addressed issues associated with Fire Protection,
Storm Damage, Material Quantity Overrun, Crane Delay, Housing Panels,
and the Radiation/Criticality Accident Alarm System, which BNFL Inc.
has experienced as part of contract performance. The combined value of
these REA's was estimated to be approximately $83 million, of which $11
million has been incurred and $72 million was estimated or projected
over the remainder of the project life. The REA's were submitted to DOE
under the terms of the parties' contract for DOE's review and
consideration and in order to allow DOE and BNFL Inc. to mutually
mitigate their impact over the remainder of contract performance.
On November 4, 1999, BNFL Inc. submitted three additional REA's
associated with nickel loss, chromate duct gaskets and aluminum blades.
These REA's are based on factual situations that were unknown to BNFL
Inc. at the time of contract negotiation and commencement. The combined
value of these three additional REA's was estimated to be approximately
$27 million based on estimates of work to be performed by BNFL Inc.
during the remainder of the contract.
BNFL Inc. verbally briefed DOE on all the REA's as submitted. On
December 9, 1999, DOE verbally accepted some liability for equitable
adjustment for the Storm Damage and the Material Quantity Overrun
REA's. BNFL Inc. and DOE had jointly performed a walk-down of the three
project buildings to verify that the material quantities in the
contract assumptions were accurate. The initial contract estimates were
based on DOE's previous contract work. However, BNFL Inc.'s experience
in removing material from the initial phase of K-33 indicated that
DOE's estimates of the quantity to be removed were significantly low.
All other REA's were verbally rejected.
In February 2000, DOE and BNFL Inc. established negotiating teams
to resolve the REA's. The Storm Damage REA was compromised and $1.9M
was paid on June 6, 2000. Extensive discussions have continued with DOE
regarding the Material Quantity Overrun REA. Agreement exists regarding
the excess quantities; however, DOE has been developing its own
independent estimate of the cost of this REA. Discussions on all these
issues are ongoing.
ETTP Summary and Path Forward
Mr. Chairman, as with any complex and hazardous technical project,
BNFL Inc. has encountered unforeseen difficulties, some significantly
affecting the workflow and schedule of the project. The original
contract defined contract payments in terms of areas cleared. BNFL Inc.
has determined that work can be performed more safely and efficiently
with minimal waste by using dedicated crews to clear the building by
systems and components rather than by areas. To this end, therefore,
BNFL Inc. is financing $150 million in project costs versus a planned
financing of only $50 million. On our own initiative and at our
expense, we are constructing the largest compactor ever used,
worldwide, in waste minimization. Of critical importance is that,
notwithstanding all of the known and unknown changes to the project,
the revised schedule--which adjusts some near-term milestones forward
in time--shows that the project completion date is within the original
contract completion date. The schedule takes into consideration the
expectation that the super-compactor will be operational in December
2000 and includes overtime and double-shift work. The schedule is
contingent upon DOE providing government furnished equipment in the
form of operational cranes and sufficient electrical power in K-31 and
K-29 when BNFL moves into those buildings.
Mr. Chairman, the reality is that under any contracting mechanism,
a project as large and complex as this will have numerous developments
that call for adjustments. While that does alter the overall price of
the project, by performing the project in a fixed price manner, only
changes that are outside of the contractor's control will affect the
overall cost to the taxpayer. As I stated earlier, all other costs
remain the liability of the contractor.
BNFL Inc. is committed to successfully completing this contract in
spite of unforeseen challenges and costs in its original fixed price
bid. BNFL Inc. will live up its commitment and make sure that this
facility is cleaned up and the project completed in accordance with the
contract, knowing that our initial poor performance will cost BNFL Inc.
almost $100 million, which it will not recover from the government. For
such fixed price bids, but more importantly, any nuclear cleanup
activity to be successful, the customer and the contractor must
mutually recognize changed or unforeseen conditions and make prompt
equitable adjustments. Trust and cooperation between the parties is
essential.
idaho--advanced mixed waste treatment project
I would also like to discuss the Idaho Advanced Mixed Waste
Treatment Project (AMWTP) based at the Idaho National Engineering and
Environmental Laboratory (INEEL). In December 1996, the DOE awarded
BNFL Inc. a privatized, fixed-price contract to design, construct, and
operate AMWTP. The primary purpose of the AMWTP is to prepare 65,000
cubic meters of transuranic and low-level mixed waste for disposal at
the Waste Isolation Pilot Plant (WIPP). The contract is designed to
help DOE meet court-mandated milestones in the Idaho Settlement
Agreement between DOE, the State of Idaho, and the U.S. Navy. The
Settlement Agreement requires that the 65,000 cubic meters waste be
shipped out of Idaho by December 31, 2018.
AMWTP Background
The AMWTP project is divided into three phases. Phase I consists of
successfully completing the necessary preliminary permits and
approvals, and continues through receipt of final permits expected now
in August 2000. Phase II includes the detailed design, equipment
development and manufacture, and facility construction, and runs to
2003. Phase III consists of waste retrieval and facility operations,
and runs from 2003 through 2018. Following completion of facility
operations, the facility will be closed, decontaminated and dismantled
within two years.
The project is based at the Radioactive Waste Management Complex on
the INEEL, which has received waste from other sites within the DOE
complex, principally Rocky Flats. This waste is currently stored above
ground, beneath earthen berms within a metal enclosure, and in RCRA-
permitted storage modules. The waste includes low level waste and
transuranic wastes. The waste has been characterized by the DOE and its
contractor's and is a mixture of physical forms, mostly organic,
inorganic and metal. Some of the material is in the form of sludges,
which is treated process waste. The waste is contained in drums and
boxes that appear to be predominantly in good condition.
AMWTP--Comments on GAO Report
Mr. Chairman, let me first say that the GAO's report, commissioned
by this committee, is a fair and a reasonable representation of the
status of the project, and is consistent with the status of the project
at the time of the review. However there are some significant points or
impressions left by the report that must be addressed. Most
importantly, there are no cost overruns to the government associated
with this project.
Second, even with the delay in the start of construction caused by
the delayed issuance of permits due to external factors, the project
will be constructed in accordance with our contractual milestones.
Third, while the permitting delays have caused a slip in our internal
milestones to have the facility commissioned in time to meet the
facility operational milestone, other efficiencies will allow for waste
shipments out of Idaho to begin ahead of schedule, and consistent with
our contractual requirements in support of the Settlement Agreement.
The GAO report also suggests that the DOE's recent decision to
defer the incineration of up to 22 percent of the wastes cast in doubt
the ability to complete the treatment of wastes on time. The reality
is, as a result of working closely with the Department and
appropriately amending the contract in certain regulatory areas, we
fully expect to complete preparing 97 percent of the wastes for
shipment out of the state of Idaho to WIPP significantly before the
2018 milestone. The remaining 3 percent will require some form of
treatment. This will be addressed by the Blue Ribbon Panel appointed by
DOE to review incineration alternatives, but our own studies suggest
that this too can be completed before 2018, even with a delayed start
date for this particular step.
AMWTP--GAO Comments on Price
Finally, the GAO states that ``the final contract price is
uncertain but will likely be higher,'' and identifies a number of
factors that could impact the cost of this project to the government.
However, as the report notes, the only effect to date has been a
reduction in price of $18 million negotiated as a result of the
reduction of regulatory requirements.
The report also notes that the effect on construction delays could
add roughly $44 million to the contract price in contract adjustment
due to permitting delays resulting from the decision to defer
incineration. BNFL Inc. does not disagree with that figure, although it
is important to note that the costs are not yet fully known, and the
consequences of this for price adjustment under the contract is still
to be determined. More importantly, the effect of deferral of
incineration will not be known until the report of the Blue Ribbon
Panel is available later this year and DOE's requirements are known.
However, BNFL believes that this potentially can be addressed without
increase in cost or price.
It is not possible to speculate how these different issues, and
others in the future, will ultimately affect the price of this project
to government. It should be noted that the cost of this project,
determined through a competitively procurement, is nearly $700 million
lower than the DOE estimate under the traditional M&O approach.
AMWTP Summary
BNFL is pleased that to date, after three and a half years of
diligent efforts to reappraise and optimize the approach to the
project, the projected costs to government presently remain very close
to those agreed at contract signature. Overall BNFL recognizes that
under a fixed-price contract in which risks are allocated between the
parties, there can be no certainty that the cost to government will not
increase, even in the absence of directed changes. However what is
assured is that the government will not be obliged to fund cost
increases arising out of the contractor's performance.
hanford--waste treatment plant (wtp)
Mr. Chairman, as the American public is fully aware, the DOE's
Hanford site presents the single largest challenge in the ongoing
efforts to cleanup the legacy of the cold war. In particular, the
Hanford tanks --177 underground tanks containing 54 million gallons of
highly radioactive waste, 67 of which are presently presumed to leak--
present an especially daunting challenge. Numerous initiatives over the
years were started (and stopped) in an attempt to address this
situation. The committee is fully aware of the history that led DOE to
compete and ultimately selecting BNFL Inc. to pursue a privatized
contract for the design, construction and operation of facilities to
treat and immobilize these radioactive wastes, known as the Hanford
River Protection Project, Waste Treatment Plant (WTP). This led to a
phased approach to this large project that has culminated in our
submittal of a compliant fixed price proposal of $15.2 billion, to
design, built and operate over the course of 20 years, the largest
processing facility in the DOE complex.
BNFL Experience--Applicability to WTP
WTP is a unique, major and complex nuclear processing project. BNFL
has completed 40 major nuclear processing projects in the past 20 years
including projects comparable in scale and complexity, at a total
historic cost of well over $15B. All these plants have operated
successfully, and this experience represents an enormous database from
which BNFL draws in approaching new projects.
The most critical lesson from this experience is that before costs,
schedule and performance can be confirmed sufficient development must
be completed to confirm the choice of technologies and the flow sheet.
Furthermore, the plant design must be sufficiently advanced,
integrating the requirements of the process flow sheet, nuclear safety,
regulatory requirements and operability.
WTP Contract Background
As part of a competitive procurement, BNFL Inc. carried out an
initial sixteen-month feasibility study for the treatment and
immobilization of Hanford tank wastes over the period October 1996--
January 1998. Early on in the course of that study, BNFL Inc. discussed
with DOE the need for considerably more project development work before
it would be possible for the parties to enter into a privatization
contract for fixed price treatment services. As this committee is fully
aware, BNFL Inc. proposed in January 1998 to DOE that this be done as
``an extended project development phase.'' This was negotiated with DOE
and eventually commenced in August 1998 as the ``B-1 Project Design
Phase'', leading to a final fixed price for services and a decision on
whether to proceed in August 2000.
BNFL Inc. estimated the cost of this phase at about $250 million,
and having proposed a fixed price contract to perform this work, agreed
to what is in effect a fixed scope, self-financed, but cost
reimbursable contract with a $250M ceiling to carry out this work. As
an incentive to minimize the cost of prospective services, incentive
fees payable under the B-1 contract were to be determined by the cost
estimate for those services that resulted from the B-1 work. BNFL Inc.
had already (in 1997) invested in a long lead technology program ($25
million) with no DOE backing, in order that important technical data
would be available and sufficient to support the August 2000 decision
date.
At the time of completion of the feasibility study in 1998 and the
commencement of the B-1 phase, BNFL Inc. had completed at most 1-2% of
the necessary design and development work. With so little design work
done, no one could offer firm assurances at such an early stage in such
a major complex and unique project, as to what the price for the
project would be. Instead, BNFL Inc. provided its best assessment,
based on currently available information, that $6.9 billion was an
``indicative price'', and proposed that as a result of work during the
``extended project development phase'', a 90% confidence price would be
proposed in April 2000. This indicative price and the corresponding
cost estimate then became the target cost against which incentive fees
would be paid for success in B-1. That price to be proposed in April
2000 would have been the basis for a fixed price contract that the
parties contemplated entering into in August 2000.
WTP--Part B-1 Deliverables
In April 2000, BNFL Inc. completed a major set of the deliverables
due under the contract. These included a large number of technical
deliverable: plans, reports, designs, cost estimate, schedule, etc. It
also included a fixed price proposal for waste processing services
totaling $15.2 billion over the 20-year contract life. This was based
upon the cost estimate and schedule developed, and as required by our
contract, a 100% private financing package backed by major financial
institutions, and including a prospective equity commitment of $400M by
BNFL to be committed at the financial closing scheduled for August
2000.
The price proposed to DOE by BNFL Inc. in April 2000 was based upon
the first detailed cost estimate performed for the project. That
estimate was recently completed in March 2000. With an estimate in
hand, the project team using the contractually specified pricing model
computed the project price. The contract terms set out in great detail
and specificity how the price should be developed; principally to
protect the government from unjustified price increases.
Each element of BNFL Inc.'s cost estimate and price is supported by
detailed technical data, or verifiable assumptions and contract terms.
It should be noted that BNFL Inc.'s proposed price was a fixed price
over the 20 year term of this contract, and was payable only for
completion of productive services, i.e. the delivery of waste processed
and immobilized safely and in accordance with the product quality
specifications. The increase in our fixed price proposal over our
earlier indicative price reflects the transition from an indicative
price based upon little information, to a substantiated price based
upon detailed plans and proposals, and over 500 vendor quotations. In
addition, the increase over the indicative price advised in 1998
corresponds to an annual increase of about 5% per year. This price is
fixed and cannot further escalate due to contractor performance.
WTP--Discussion of Current Status
As you know, the DOE has indicated its intent to terminate its
``privatized'' contract with BNFL Inc. I have discussed the contractual
background at some length, Mr. Chairman, because this background is
important to any conclusions you may draw about the applicability of
and success of the DOE's initiatives at ``fixed price'' contracting. In
addition, there has been much mischaracterization of these matters in
the trade and popular press.
I believe that the DOE contracting approach for the Hanford Tank
Waste Treatment and Immobilization project has been extremely
successful from the government's standpoint.The prospective
privatization of the facility, and the prospective contracting of waste
processing services at a fixed price, have provided BNFL Inc. with the
strongest possible incentives to develop a technically and commercially
robust solution. An effective integrated team of over 700 top flight
engineers together with supporting staff has been built up since 1998,
drawn from the best talent from BNFL and our partners, Bechtel
National, SAIC and GTS Duratek.
BNFL has permanently assigned over 70 of its very best and most
experienced specialist engineers, in the fields of technology, process
design, safety and operations, from the UK to form the technical core
of this team. These have been supported with over 100 other specialists
on short-term assignments, and access to BNFL's entire network of
experience, which includes at our expense about 1000 technologists,
engineers and scientists whose job it is to support the operation of
these plants and to find better ways of achieving our mission and
operating objectives. As I mentioned earlier, the discipline of the
prospective fixed price contract has also led BNFL to invest its own
money in developing the vitrification technology required for this
project. This was necessary almost a year ahead of entering into the B-
1 contract in August 1998, in order that there could be sufficient
confidence in the technology to support a decision to go forward in
August 2000. This, together with the investment of nearly $250 million
for the work in B-1 performed to date, constitutes a major corporate
investment by BNFL in the success of this program.
This allocation of corporate resources to support DOE programs is
without precedent in the conventional DOE contracting arena, and is the
product of the highly incentivized contractual form. Traditional M&O
type contracts result in no more than a handful of senior people being
assigned to the contract by an incoming contractor, and the investment
and assumption of risk is typically limited to the costs of mounting a
bid and proposal.
The merits of the privatized and fixed price contracting approach
may also be seen in the results produced over this period. All
deliverables have been provided in compliance with the contract. As a
result, the BNFL team has, for the first time in decades of government
spending to address this problem, set out a technically sound solution
to immobilizing the Hanford Tank wastes. We have provided a design, a
detailed cost estimate and a schedule that can be the basis for
proceeding, and that complies with the DOE and the Tri-Party Agreement
clean up schedule. This is a design that integrates the demands of
technology, process design, safety, operability and product quality
assurance. It is robust, and meets the criteria that BNFL has set to
merit investment against the disciplines of a fixed price contract for
services in a privatized facility. Mr. Chairman, I truly believe that
the costs we have derived for this project are soundly based, and
provide government for the first time an indication of the financial
liability represented by the tank wastes.
WTP Summary
In my view, Mr. Chairman, the fixed price approach to this contract
has served the government and the taxpayer well. What has been less
successful has been the contractual requirement for 100% private
financing, which has resulted in roughly doubling the cost to
government through the additional cost of private capital. This feature
has proved unaffordable to government. There are, however, other
contracting scenarios that could substantially reduce the project price
while maintaining a strong incentive structure.
Mr. Chairman, I have deliberately focussed on the beneficial effect
that the prospective fixed price terms have had on securing value for
the government during the extended project development phase. However,
I would like to add one further point: the fixed scope, ceiling price
approach to the present B-1 phase has in effect acted like a fixed
price. This has delivered the results that DOE has sought, and with
changes to the contract value of less than 1%. This is both a
recommendation for the contract form, and a tribute to the care with
which DOE and BNFL developed the scope prior to commencing work.
conclusion
Mr. Chairman and members of the Committee, thank you for your
attention to this matter, and for this opportunity to testify. Fixed
price contracting is the most common form of contractual approach used
worldwide. Project financing through financial institutions is also a
common industry practice. The challenge before the government and
industry is whether these useful techniques can be adapted and used to
benefit the government and the U.S. taxpayer. Despite problems with the
first few projects attempted, significant cleanup progress is being
made in many instances, at costs significantly below any previously
projected through traditional government contracting practices. After a
few short years, it is not yet time to give up on privatization or
fixed price contracting as one of many available contracting approaches
to address the legacy and challenges of winning the cold war.
Mr. Upton. Mr. Burr.
Mr. Burr. Thank you, Mr. Chairman.
Why did you bid on Hanford? I just heard your description
of the site and the challenges. I've read the contract. You've
probably read the contract. Why did the BNFL bid on it?
Mr. Miskimin. The BNFL bid on Hanford because it's a job
right in our strike zone. It is similar to work that we do for
ourselves on our own site in the U.K., and it was an
opportunity to do that type of work in the United States and
make a fair profit at it.
Mr. Burr. You described the contract as a fixed-price cost
reimbursed project.
Mr. Miskimin. No, sir. I was reading too fast. I was simply
talking about B-1, $250 million fixed-scope, cost-reimbursable,
but it's capped at $250 million. I wasn't talking about the
whole contract.
Mr. Burr. You agree it's capped at $250 million.
Mr. Miskimin. Yes, sir.
Mr. Burr. You billed for $290 million, right?
Mr. Miskimin. That is not the bill. That is the letter we
submitted asking for termination costs. Termination costs go
beyond----
Mr. Burr. Termination costs is higher than the bill?
Mr. Miskimin. There is no bill, sir. We paid for all this
ourselves.
Mr. Burr. Higher than the contract-specified amount?
Mr. Miskimin. It is higher than the contract-specified
amount, yes, because it would also include the cost of
preparing the termination package and negotiating another cost
not contemplated in the $250 million.
Mr. Burr. Does the BNFL have a contract with DOE where the
scope of the project that was agreed to under the contract has
never changed?
Mr. Miskimin. Yes. We operate as part of the Westinghouse
Savannah River company team at Savannah River site.
Mr. Burr. Subcontract?
Mr. Miskimin. Subcontract through Westinghouse to DOE.
Mr. Burr. That's a relationship you have with Westinghouse?
Mr. Miskimin. Yes, it is. They are the DOE prime
contractor.
Mr. Burr. Clearly with subcontractors we've done a much
better job of specifying the scope of work.
On page 17 of your testimony, you pointed out that the
merits of fixed-price contracting has served taxpayers well. I
think some of us would question that right now, by the way. But
you point out that the BNFL has provided all the deliverables
in compliance with the contract. But according to DOE, the
quality of many deliverables is simply very bad. DOE's recent
performance assessment of BNFL's deliverables under the
contract, four of the eight assessment criteria show serious
problems with your contractual work, business and finance work,
management and cost and schedule. Explain for us, if you can,
why the line management from DOE has come to that conclusion.
Mr. Miskimin. That is hard for me to explain on their
behalf, but I will explain it as I see it from my side, from
BNFL Inc.'s side.
Although our contract required us to deliver literally
thousands of sheets of deliverable to the Department of Energy,
there is an extensive list of deliverables that we had to
deliver by April 24. That proposal that went in was simply the
last of several thousand sheets of deliverable. There are no
deliverables that were not delivered.
The comments on the management plan that there was not a
senior person designated as the person who would be running the
project for several years to come is a view of the Department
of Energy, but the next phase of that project was not to start
until August, and we have--and there was no requirement in the
contract to name that individual. The person that's out at the
project now running the transition, the chief operating officer
for the company, Philip Strawbridge, was one of the candidates.
Also, we were about to turn over the design and build
responsibility to Bechtel. That person is not only named, but
onsite.
I would say it's a difference of opinion. We have had----
Mr. Burr. Sounds like it's going to be an expensive one for
DOE, though.
Mr. Miskimin. Will it be expensive for DOE?
Mr. Burr. Yes.
Mr. Miskimin. As the Deputy Secretary said, we have a
termination negotiations due, and that will be based on case
law and a fair negotiation. I hope that it turns out to be a
fair negotiation on both sides.
Mr. Burr. Let me ask you, the former CEO of your company
visited with us I think it was October 1998, and he committed
that the company would work with DOE to develop a fixed price
using, and I quote, an agreed-upon formula with our books
completely open to DOE, and all the data will be certified cost
data. According to recent DOE assessments of your performance,
and I think those documents have been put in the record, BNFL
has consistently failed to provide certified cost data for the
Hanford site. The company's cost documentation is so bad, the
Defense Contract Audit Agency has been unable to audit your
proposals.
One, have I accurately depicted the situation, and why has
BNFL continued to provide what they promised they wouldn't do 2
years ago?
Mr. Miskimin. Sir, I have no information that says that the
DCAA was unsatisfied with our proposals. In fact, the feedback
we have had from the Department of Energy is they liked the
product, and they think the estimate was sound and robust. That
doesn't say to me that the DCAA had comments. Possibly those
were not passed back.
Mr. Burr. This comes out of our packet of information that
I got, which was the DOE performance summaries, and on page 44
of the assessment, expectation 4.557.1, DCAA is having
difficulty auditing the BNFL cost documentation. Hopefully this
is something that they've shared with you, and it's an
evaluation of the performance of your company.
Mr. Miskimin. The cost data that we submitted in--with our
proposal was certified cost and pricing data. What you are
showing me is a document I have not seen on the B-2 decision,
the final BNFL assessment. I do not know if any BNFL people
have seen it.
Mr. Burr. I can appreciate your honesty there, and I'm just
sorry that DOE didn't--isn't still around so we could figure
out how an assessment of your performance, in fact, couldn't
have been shared with you prior to the termination of a
multibillion-dollar contract. Clearly we'll have to wait for
the next running of Groundhog Day before we get an opportunity
to ask what I think is a very vital question.
But it really doesn't answer my question to you, and that
is we had a promise, and I realize it was a former CEO, but
just like we shared with the Secretary today, we hold Secretary
Richardson committed to things Secretary Pena told us. So we
hold BNFL committed to the openness and accuracy of their data
reimbursement sheets, and if they are hard to understand, I
hope, in fact, you will look into the commitments that have
been made by prior CEOs and make sure that that commitment is
fulfilled.
Mr. Miskimin. Yes, sir, I am aware of many of those
commitments. I'm not sure what the basis for this is. This
would take some discussion. The comment is DCAA is having
difficulty auditing the BNFL cost documentation. We have
submitted literally thousands of sheets of cost estimate. That
by itself could create some difficulty. Also, there are more
than 500 vendor quotations that back up the cost information as
well as numerous calculations that would make it difficult for
anyone, including the DCAA.
Mr. Burr. I've learned in this town to be very specific
with my words, so let me take the opportunity to requote your
CEO: An agreed-upon formula with our books completely open to
the DOE, and all the data will be certified cost data.
And I would only tell you anything short of that would not
fulfill the commitment your company has made to this
subcommittee 2 years ago.
Let me ask you one last question. Does BNFL plan to bid on
the cleanup phase of the Hanford project?
Mr. Miskimin. We will not bid as a prime contractor on the
design/build phase. There are other options, and that is to go
as part of a team--the reason is we are not an engineer
constructor. We are not a design/build engineer constructor.
That would be companies like Fluor, Bechtel, Stone and Webster,
Jacobs and others. We are more of a management, technology and
operations company. The role that Bechtel plays on our team is
that of design/build contractor. We are--so we would not bid as
a prime on a design/build contractor.
Mr. Burr. Why did you bid originally then?
Mr. Miskimin. Because that was not a design/build contract.
It's a life cycle cost starting all the way with process design
and definition, technology through operations, and we hired
Bechtel to do the design and build.
Mr. Burr. I don't know the answer to this question. You
might not either, so if you sidestep it, that's fine. If you
bid for the cleanup, would that change in any way, shape or
form your negotiations on the use of the melter or on the price
tag of your intellectual property?
Mr. Miskimin. I don't have a good answer for that.
Mr. Burr. The likelihood is that it would be difficult for
DOE to pay you for the use of intellectual property if, in
fact, you were doing it, wouldn't it?
Mr. Miskimin. Yes, sir. If the DOE were to continue us,
there's no negotiation for termination.
Mr. Burr. I think a case could be made if they go through
with the termination of your contract, and you rebid under a
different contract, that they are obligated to the original
contract. I think probably the question of the use of your
intellectual property, if you were the one using it, might not
go very far though.
Mr. Miskimin. There's no intention to say charge the
Department of Energy twice for anything. If that would give us
a competitive advantage, I'd be proud to use it.
Mr. Burr. You have answered the question much more
succinctly than I could have. I thank you for your honesty.
Mr. Chairman, I yield back.
Mr. Upton. Thank you.
Mr. Bryant.
Mr. Bryant. Thank you, Mr. Chairman. I, too, need to leave
here about 5 minutes ago. I've just got one quick series of
questions, and then I will yield back my time after this.
Welcome, and I want to refer you to 1997. Your company
signed a $238 million fixed-price contract to clean up three
gaseous diffusion plant buildings in Oak Ridge. It recently
came to the attention of this subcommittee that you submitted
claims for equitable adjustment on a number of issues, thus
increasing the cost to the government. Could you explain what
mechanism in this fixed-price contract allows you to ask for
more money beyond the $238 million you initially signed up for?
And while you are at it, just the other two questions
quickly. Should the government have expected the price of a
fixed-price contract to increase, and what is the current
status of the project?
Mr. Miskimin. Yes, sir. I guess I have to take the
disclaimer that I'm not an attorney either, but I have dealt
with contracts for a long time. All contracts of the fixed-
price nature are subject to change when the scope changes.
That's--and that is allowed by the contract.
Would you ask me the second part of it again?
Mr. Bryant. Should the government have expected the price
in a fixed-price contract to increase?
Mr. Miskimin. Yes, sir, the government and BNFL should have
expected changes on this contract because of the nature of the
job. These buildings we're talking about are some of the
largest on Earth, half a mile a side on a square building. They
haven't been operated for many years. The records are poor.
Knowledge of the plant equipment and design is very poor. Most
people working today are not knowledgeable of those plants.
There are still a few around ready to retire.
We didn't--the Department gave us information based on
prior contractor evaluations to bid on. Some of the prior
contractor information that the Department provided to us was
not correct, such as material quantities. There were design
details that have come to light now that we've opened up
components and we've opened up systems that neither the
Department nor ourselves knew.
In an ideal world there should be no changes, but in a
practical world in a facility like this, one should expect
change.
Mr. Bryant. What's the current status?
Mr. Miskimin. Current status is that we have submitted a
total of nine requests for equitable adjustment totaling $110
million at face value. One has been settled for storm system
damages, which was a force majeure event, at $1.9 million. That
was settled on June 6. One has been withdrawn by us because it
relates to nickel. It's the presence of nickel fluoride in the
nickel we were to recycle. The other seven are all in
discussion and negotiation with the Department of Energy in
various stages.
Mr. Bryant. Thank you.
Thank you.
Mr. Miskimin. You're welcome, sir.
Mr. Upton. Thank you, Mr. Bryant.
I will try to be brief in my questions. You may have heard
another vote has been called. So we'll conclude unless Mr.
Stupak comes back.
Mr. Miskimin, according to DOE's assessment of your $15.2
billion fixed-price proposal on Hanford, BNFL made an error
related in its tax calculations for the project that created an
unnecessary $1 billion increase in the price. And accounting
for that mistake would lower it, in fact, from $15.2 to $14.2
billion. Are you aware of that billion-dollar error?
Mr. Miskimin. No, sir, I'm not, because we've not had a
formal evaluation and feedback by the Department on the
proposal.
Mr. Upton. In your testimony you stated that you formally
submitted $110 million in requests for equitable adjustment on
the Oak Ridge contract.
Mr. Miskimin. Yes, sir.
Mr. Upton. But according to the recent DOE response to
Chairman Bliley's May 12 letter, BNFL submitted a formal
request for $116 million. In addition, quote, the BNFL orally
advised DOE that it intends to submit additional REAs totaling
$54 million covering three other issues. What are the three
other issues?
Mr. Miskimin. We have no intent to submit additional REAs.
That might be old information. I have no explanation for the
$110- versus the $116- other than a typo.
Mr. Upton. Ms. Jones, do you have anything that you would
like to comment on regarding the testimony?
Ms. Jones. No, not at this point, Mr. Chairman. Thank you.
Mr. Upton. Well, I'd just might add I appreciate your
testimony today. We may have additional questions from both
myself and other members of the subcommittee that we'll send in
writing. If you could prepare a response within a limited
timeframe, that would be appreciated.
Mr. Miskimin. Yes, sir. Would be pleased to do it.
Mr. Upton. Thank you. The hearing is adjourned.
[Whereupon, at 12:37 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
BNFL Inc.
August 4, 2000
The Honorable Fred Upton
Chairman, House Commerce Committee
Subcommittee on Oversight and Investigations
U.S. House of Representatives
2125 Rayburn House Office Building
Washington DC 20515-6115
Dear Chairman Upton: Thank you for your letter of July 21, 2000 and
for the opportunity to answer your questions for the record in order to
complete the Subcommittee's hearing on the Department of Energy's (DOE)
fixed-price cleanup contracts.
Enclosed please find my responses to your eleven questions. I hope
this information, as well as that provided in my testimony before the
Subcommittee, has been useful in your efforts to provided oversight to
the DOE's programs.
If you have any further questions or need for information, please
contact me at (703) 4602000, or have your staff contact Richard Guay at
(202) 785-2635.
Sincerely,
Paul A. Miskimin
President and CEO
Enclosure
Answers to Written Questions
Question 1. Prior to termination, how many personnel did BNFL
employ on the Hanford tank waste project?
Answer: Prior to DOE's notice of the termination of our contract,
there were a total of 692 personnel on the Hanford project. Of this
number, 183 were employees of BNFL Inc. and its UK parent company,
British Nuclear Fuels, plc (``BNFL plc''). The remainder of the
personnel were employees of our subcontractors such as Bechtel, SAIC,
GTS-D or numerous staff augmentation companies.
Question 2. Of the personnel employed by BNFL on the Hanford tank
waste project, how many personnel will be transferred or relocated to
other BNFL projects? Also, how many personnel will continue on the
Hanford tank waste project with BNFL or with another tank waste project
contractor?
Answer: Of the personnel employed by BNFL Inc. and BNFL plc working
on the Hanford project, approximately 67--representing most of the
senior technical and all of the key managerial personnel--have been
reassigned or relocated to other BNFL projects and activities.
Approximately 94 were laid off or are resigning, but we believe that
many of these have found work with other contractors involved at the
Hanford site. Another 20 plus BNFL employees will continue working for
BNFL at Hanford on close out and termination responsibilities
associated with the HANFORD-WTP contract.
Question 3. Please estimate the costs BNFL will request from DOE to
pay for intellectual property rights pursuant to clause H.25.g of the
Hanford tank waste contract.
Answer: We are not able to provide an estimate of the value of the
intellectual property under clause H.25.g at this time. DOE and BNFL
are establishing a process whereby BNFL will provide DOE with a list of
the H.25.g. background intellectual property, DOE will inform BNFL
whether it wants to acquire such intellectual property, and the parties
will then negotiate the appropriate value that DOE must pay for the
H.25.g. intellectual property.
Question 4. According to DOE's assessment of BNFL's April 24, 2000
$15.2 billion proposal, BNFL erroneously requested $600-700 million to
pay for property taxes over the life of the project. Please explain why
this error occurred. Please also explain what steps BNFL had taken to
convince DOE and the State of Washington to reduce or eliminate
property taxes on this project, and whether those efforts were
successful.
Answer: As part of its efforts to minimize costs to the project,
BNFL Inc. sought relief from state and local property taxes through
revision to existing Washington State legislation. Under traditional
government contracts, the U.S. Government owns the waste treatment
facilities, and they are exempt from state and local property tax.
However, in a privatized contract, the Contractor owns the waste
treatment facilities and state and local property taxes apply. This
anomaly, not intended by DOE, BNFL or the state, would have imposed
substantial additional taxes on the cost of the project that would have
been ultimately reflected in the price and paid by DOE and the U.S.
taxpayer. Due the consequential high price of this tax burden,
continued DOE and Congressional support was brought into doubt, hence
putting the project in jeopardy.
BNFL Inc., with appropriate DOE support, was successful in getting
the State of Washington to enact legislation granting the vitrification
project a partial exemption from the state and local property taxes,
yielding what was felt to be an appropriate state and local county tax
structure in the early years of the project construction.
When BNFL developed its $15.2 billion fixed price proposal, the
detailed financial modeling inappropriately applied an annual tax levy
rate to the accreting quarterly capitalized costs of the facility for
sizing the property tax component of the price. This resulted in the
erroneous high value of the property tax found by DOE in their
assessment. When this was pointed out to us, BNFL immediately
recognized and acknowledged the situation.
Question 5. The Hanford tank waste contract at clause H.25.h limits
the maximum liability for DOE under termination for convenience to the
funds obligated under the contract, which is $250 million. Please
explain why BNFL's request for $290 million is consistent with this
clause, and the contract.
Answer: The contract is incrementally funded, which means that
funds are not obligated for the full amount of the contract, but are
obligated gradually as needed. H.25.h refers to the amount of funds
currently obligated under H.2. Prior to the termination announcement,
the government had obligated $250 million. However, the contractor had
given the required notice under clause H.2 that more funding would be
required in order to continue work and carry out a termination. (The
contractor has no obligation to incur costs or face liabilities in
excess of obligated funds.) Clause H.37.h.1, as amended, contemplates
that funding may be increased to as much as $316 million. As of this
date the funding obligated to the contract for Part B-1 work plus
termination, certain other costs, and fees is $302 million.
Question 6. Please explain whether BNFL has invested more than $250
million toward the work scopes defined in the `B-1 Project Design
Phase' contract (not including the pilot melter), and, if so, please
explain why BNFL has expended funds beyond the $250 million obligated
under the contract.
Answer: At this point, BNFL has invested approximately $220 million
in performing the Part B-1 Design Phase. However, when DOE issued the
termination, it triggered additional costs, such as the payoff and
termination of subcontractors, severance pay for and relocation of
employees, building and equipment lease termination costs and the loss
of the undepreciated value of tangible property. In addition,
termination triggers formal contract closeout activities and costs. All
of these costs, triggered by the termination, account for the
difference between the $220 and the $302 million currently obligated.
However, neither of these figures, include the value of the pilot
melter, the value of certain intellectual property and investment in a
project associated with the use of the pilot melter. These are
investments made by BNFL that are optional to DOE and therefore, are
not specifically required to be covered under existing obligation
authority,
Question 7. Of the $290 million in termination cost itemized in
BNFL's June 2, 2000 letter to DOE, please identify which costs are
associated with preparing the termination package. Please also identify
the cost of any other work not included in the scope of the contract,
to which you referred in your oral testimony.
Answer: The termination costs itemized in BNFL's letters include
three main elements: (a) the costs already expended by BNFL in
performing the contract over the last 2 years (approximately $220
million), (b) the costs that must be incurred by BNFL in order to
shutdown its operations and terminate subcontractors including the
costs of complying with DOE directions during the termination process
and (c) the costs of professional services and other work in preparing
and submitting the termination settlement proposal and associated
documentation, as required by DOE and the Federal Acquisition
Regulations. The third category--the costs of preparing the termination
package--is much smaller than any of the other elements. Also, as
stated in response to the earlier questions, none of these three
elements include the cost of the pilot melter, the value of certain
intellectual property and other BNFL investments in a project
associated with the use of the pilot melter.
Question 8. According to testimony from Deputy Secretary Glauthier,
BNFL's design pace was very slow. Please explain why BNFL had achieved
on a 13% design in its April 24, 2000 proposal, instead of a 30% design
which the contract called for.
Answer: There is nothing in BNFL's Hanford contract that requires
BNFL to achieve 30% design completion by April 24, 2000 or August 24,
2000. However, we believe that there was a DOE expectation to this
effect, based on 1998 conversations and estimates with the BNFL Inc.
project manager and BNFL Inc. Chief Executive Officer as a reasonable
benchmark for the project.
The DOE expectation was that the project would be at or near 30%
design by August 24, 2000. If BNFL Inc. had been allowed to continue
its design through this period, rather than being judged on a required
deliverable four months ahead of this schedule, we believe that the
project would have been very near that point, at roughly 20-25 percent.
From a technical perspective, we spent the projected number of design
man-hours in B-1 that we had estimated, but because of the increase in
the size of the project and facility, as a percentage of the total
project, it was less than the 30% we had estimated.
Question 9. BNFL has chosen the ``supercompactor'' technology to
use on the Idaho Advanced Mixed Waste Treatment project. Where has BNFL
used this technology and on what type of wastes? Can BNFL use the same
kind of equipment it developed in other locations for the Idaho project
or will adaptations be required?
Answer: BNFL uses supercompactor technology in processing wastes at
its Sellafield reprocessing facility in the U.K. This is used to
process plutonium contaminated wastes similar to those to be processed
at the Idaho Advanced Mixed Waste Treatment Project (AMWTP), and also
low level radioactive wastes. In order to provide maximum assurance of
project success, BNFL has minimized the design changes incorporated in
the AMWTP supercompactor, while incorporating some improvements that
have resulted from its U.K. experience.
Question 10. According to your testimony, BNFL's ``initial poor
performance will cost BNFL almost $100 million, which it will not
recover from the government.'' Please describe the specific elements
and causes of this poor performance, the costs associated with each
element of poor performance, and why BNFL believes these costs are not
recoverable under the contract. Please also indicate whether similar
costs would be recoverable under a cost-plus type of contract.
Answer: In my testimony before the Subcommittee I acknowledged that
BNFL's initial performance under the ETTP contract was poor and will
cost our company almost $100 million. This poor performance resulted
from a number of contributing factors, including unforeseen technical
challenges and early difficulties in managing the ``ramp up'' for such
a large workforce and project. The resulting costs will be borne by
BNFL rather than the government because the costs do not stem from any
change to the scope or requirements of the ETTP contract.
More specifically, the main contributing elements were in the areas
of contractually quantifying high-risk areas, initial project
management errors in ramping up the project, and failing to include
adequate contingency. Under a typical cost plus arrangement, DOE would
pay for all costs associated with these performance issues, and while
it is difficult to put a precise estimate on the cost breakdown of
their impact, a reasonable approximation would be $50 million, $30
million and $20 million, respectively.
Question 11. Please explain how Secretary Richardson's imposed
moratorium preventing the sale of potentially contaminated scrap metals
announced July 13, 2000, will impact BNFL's cost, schedule, and
performance under the Oak Ridge ETTP contract.
Answer: Based on DOE's plans, as we understand them, DOE will
simply purchase all decontaminated materials from BNFL, rather than
having us sell it to scrap dealers on the open market. Thus, BNFL will
continue releasing materials (but to DOE not the market) based on our
original contractual agreement and in compliance with the legal
standards. It is BNFL's understanding that DOE will monitor the
materials, segregate those that do not meet a Zero Detectable Limit,
and dispose of the materials once a DOE national standard is
established.
If this DOE plan remains in effect and is fully funded, then it
appears that the Secretary's decision will have little or no impact on
the ability of BNFL to perform the contract. However, there likely will
be increased cost adjustments to the government and some small
adjustments to deliver or package the material directly to DOE.
______
Responses for the Record of Hon. T.J. Glauthier, Deputy Secretary of
Energy
Question 1. Please explain how Secretary Richardson's imposed
moratorium preventing the sale of potentially contaminated scrap metals
announced on July 13, 2000, will impact the cost and schedule for the
Oak Ridge ETTP contract with BNFL.
Answer 1. As a result of the Secretary's July 13, 2000, decision,
we have directed the contractor to temporarily suspend the unrestricted
release for recycling of scrap metals from radiological areas at the
ETTP. In addition, the Department has indicated that it will buy and
store any of this scrap metal that would have been released for
recycling while the Department develops procedures through a public
process to improve existing policies and practices for managing and
releasing excess materials. The new procedures, to be completed by
December 31, 2000, will also ensure that there is no release of scrap
metals for recycling if contamination from DOE operations is detected
using appropriate, commercially available monitoring equipment and
approved procedures.
The Department is currently working with BNFL to modify their
contract to implement the Secretary's decision, and reflect the revised
approach for conducting work without impacting cleanup schedules or
workforce. Because the terms and conditions of the contract
modification are still being developed, we cannot be more precise about
any cost or schedule impact to the contract at this time.
Hanford BNFL Contract
Question 2. The Hanford tank waste contract at clause H.25.h limits
the maximum liability for DOE under a termination for convenience to
the funds obligated under the contract, which is $250 million. Please
explain why BNFL's request for $290 million is consistent with this
clause.
Answer 2. Contract Clause H.25.h limits DOE's liability to the
funds obligated to the contract under Clause H.2, Obligations of Funds.
Contract clause H.2 states that ``The Contractor will notify the
Contracting Officer in writing whenever it has reason to believe that
the amounts incurred, plus the estimated amounts to be incurred under
this Contract in the next 120 days, less all payments previously made
against those costs, if any, will in the event of termination for
convenience, or otherwise, result in an amount to be due from DOE which
exceeds the amount which has been obligated by DOE as specified in this
Clause H.2.'' Consistent with this contract clause, it is important to
note that the Part B-1 cost ceiling amount of $250 million (as modified
through Modification No. M014) is not the sum total of the Government's
funding liability under this contract for Part B-1. The Government is
obligated to also fund imputed interest on the $250 million cost of
Part B-1 performance, earned profit, plus allowable termination costs.
BNFL's June 2, 2000 letter, which requested that the amount obligated
to the contract be increased to $290 million, was submitted pursuant to
Clause H.2, as was its July 19, 2000 letter requesting that the amount
be increased to $308 million.
At the time of termination, the Contracting Officer had obligated
$250 million to the contract for Part B-1, and a total of $302 million
was obligated on the contract as of July 21, 2000. Of the amount
obligated, $100 million has actually been paid to the contractor (on
August 4, 2000).
BNFL Hanford tank waste contract
Question 3. If any of BNFL's deliverables are considered by DOE to
be non-responsive, is BNFL entitled to full reimbursement for the costs
of these deliverables under a termination for convenience?
Answer 3. Under a termination for convenience and subject to the
limitations set out in the contract, BNFL is entitled to recover 1) the
costs incurred in performing the work terminated; 2) the costs of
settling and terminating subcontracts; 3) a reasonable profit on the
terminated work; and 4) reasonable costs of the termination settlement
(including accounting and legal expenses). However, with respect to
contract deliverables, clause H.37.b. of the contract limits BNFL's
recovery in the event that rework is required to produce deliverables
which conform to the Statement of Work requirements. The cost of rework
must be separately accounted for and, to the extent such cost, when
added to the amounts which would be due BNFL in the event of a
termination for convenience, exceeds the Part B-1 ceiling amount ($250
million), then the excess cost of the rework is not allowable.
Accordingly, BNFL will recover the costs it incurred in producing the
contract deliverables as part of its termination settlement, subject to
the limitation on recovery for rework cost and any other limitations
set out in the contract.
Hanford BNFL Contract
Question 4. Please explain whether BNFL has in its $290 million
request any costs for work not included in the scope of the Hanford
tank waste contract. Please also explain what portion of BNFL's $290
million request is associated with termination costs outside of the
work scope of the contract.
Answer 4. All work performed under the BNFL contract is and has
been within the scope of work of the contract. There is no amount
obligated to this contract for work outside the scope of the Hanford
tank waste contract. The notice of termination for convenience issued
by DOE to BNFL on June 29, 2000, provided instructions to BNFL and
triggered a series of contract clauses and regulatory provisions that
required BNFL to perform certain activities related to contract
termination to preserve and protect property in which the Government
has or may acquire an interest.
BNFL's current estimate of termination costs submitted to the
Department on July 19, 2000 is:
------------------------------------------------------------------------
In Millions of
BNFL's Estimated Termination Costs Dollars
------------------------------------------------------------------------
Undepreciated Value of Tangible Property............. 7.0
Bldg Lease Termination Liability..................... 1.0
Subcontract Termination Costs........................ 9.0
Richland Closeout Costs*............................. 11.0
Professional Services for Closeout................... 5.0
BNFL HQ Termination Expenses......................... 8.0
Relocation BNFL UK................................... 2.0
Severance............................................ 0.3
BNFL G&A............................................. 3.0
BNFL HQ Support...................................... 3.0
Fee.................................................. 22.0
Interest............................................. 10.0
Facilities Capital cost of Money..................... 0.5
B&O Tax.............................................. 1.0
Total Estimated Termination Costs.................... 83.0
------------------------------------------------------------------------
*Reduced from the estimate submitted by BNFL on July 19, 2000 as a
result of discussions between BNFL and DOE.
While DOE believes that BNFL's termination costs have been over-
estimated by BNFL, during the contract closeout process the Defense
Contract Audit Agency will review the costs to assist in the
Contracting Officer's determination of BNFL's allowable termination
costs.
Hanford BNFL Contract
Question 5. According to DOE's assessment of BNFL's April 24, 2000
$15.2 billion proposal, BNFL erroneously requested $600-$700 million to
pay for property taxes over the life of the project. Please explain why
this error occurred.
Answer 5. In the months prior to the BNFL submittal, there were
discussions held between the State of Washington and BNFL regarding the
waiving of property taxes. These discussions finally resulted in State
legislative action to reduce taxes in the near-term (apparently based
upon BNFL's ability to meet Tri-Party Agreement Compliance milestones
regarding construction of the facility) and waive out-year property
taxes. The erroneous inclusion of the $600-$700 million (including
financing impacts) for payment of Washington State property taxes
appears to be the result of a quality assurance lapse at BNFL, and was
attributed by BNFL to a lack of understanding of Washington State
Property tax law, and the unavailability of a key individual during the
final review process for the document. When DOE brought the error to
BNFL's attention, the error was quickly corrected.
Oak Ridge ETTP Contract with BNFL
Question 6. Please describe BNFL's contract performance with
respect to submitting certified cost and pricing data during the period
of both the Hanford tank waste contract and the Oak Ridge ETTP
contract.
Answer 6. As part of an April 24, 2000 deliverable submittal, BNFL
provided cost and pricing data for the Hanford tank waste project.
While the data were presented in a format that made audit activities
more difficult than expected, the contracting officer considered the
data compliant with Federal Acquisition Regulation (FAR) requirements.
The Defense Contract Audit Agency (DCAA) audit was never completed due
to the termination of the BNFL contract.
For the Oak Ridge ETTP contract, BNFL submitted certified cost and
pricing data prior to contract award on August 25, 1997. Since that
time, the Department has negotiated a number of modifications to the
contract. BNFL has submitted certified cost and pricing data for all
modifications prior to the date the modifications were signed where the
price met the statutory and FAR threshold of $500,000 for submission of
such data.
DCAA is currently auditing a contract modification dated May 24,
2000, for which BNFL submitted certified cost and pricing data for a
negotiated price of $1.965 million for storm damage to the K-33
building. The contract modification provides that this negotiated price
may be adjusted upward or downward to reflect the results of the DCAA
audit.
Hanford BNFL Contract
Question 7. The Secretary has set an aggressive schedule of January
15, 2001, to bid and award a new contract for the Hanford tank waste
project. Given the problems experienced on this contract to date,
please explain why DOE must commit to a new path forward and select a
new contractor so quickly.
Answer 7. The Department of Energy remains committed to protecting
the Columbia River by moving forward with a new contract for design and
construction of a treatment and immobilization plant for Hanford Tank
waste. DOE has established this schedule to keep its commitments under
the Tri-Party Agreement to begin processing tank waste by 2007.
Pit 9 Litigation
Question 8. Please describe the current status of the ongoing Pit 9
litigation with Lockheed Martin.
Answer 8. The Pit 9 litigation arises out of a $180 million fixed-
price subcontract to remove and process, on a demonstration basis, all
of the radioactively contaminated waste buried in Pit 9, one of many
pits and trenches in the Subsurface Disposal Area. The subcontract was
awarded in 1994 by the predecessor of Lockheed Martin Idaho
Technologies Co. (LMITCO), and at the time, the management and
operating (M&O) contractor for Idaho National Engineering Environmental
Laboratory (INEEL) to Lockheed Martin Advanced Environmental Systems,
Inc. (LMAES), another wholly owned subsidiary of Lockheed Martin
Corporation (LMC). LMITCO subsequently replaced EG&G as the M&O
contractor at the INEEL. In 1998, after LMAES failed to perform, LMITCO
terminated the subcontract for default. LMC and LMAES then immediately
filed suit in the United States Court of Federal Claims alleging, inter
alia, that DOE had converted the Pit 9 subcontract into a prime
contract with the federal government and that the termination for
default was improper. In furtherance of its theory, LMC filed a
certified administrative claim with DOE for $211 million (later revised
for over $300 million). After an unsuccessful demand for repayment,
LMITCO filed suit against LMAES in the United States District Court for
the District of Idaho seeking return of $54 million which LMITCO had
advanced pursuant to that subcontract and for other remedies.
In the Idaho case, the parties are currently engaged in an
extensive discovery schedule which will not be completed until 2002.
This will involve the production of all non-privileged documents
concerning Pit 9 by both parties and DOE and the depositions of
numerous individuals who participated in the project.
In the case before the Court of Federal Claims, the United States
moved to dismiss the complaint for lack of jurisdiction because DOE was
not a party to the subcontract which was executed, administered, and
terminated by LMITCO. The Court initially denied that motion into a
motion for summary judgement on which the Court could make a
dispositive ruling. The parties subsequently agreed to that procedure
and the Court has ordered the parties to file cross-motions for summary
judgement on the threshold jurisdictional issue. While the government's
motion is currently due on September 1, 2000, Lockheed is presently in
the process of requesting an extension of the briefing schedule.
Fixed-Price Contracts
Question 9. According to your testimony, the Office of
Environmental Management manages 37 fixed-price contracts. Please list
each contract. For each contract, please also provide the original
contract value, the total funds spent to date, the DOE site where the
contracted work is located, the number of requests for equitable
adjustment (REAs) that have been requested on each contract, the total
costs to the contract agreed to by DOE as a result of REAs, the year
the contract was signed, the year the project was originally agreed to
be completed, and the current date for project completion.
Answer 9. Because of the extent of data requested and the need to
work with more than ten DOE Headquarters and Field Offices to compile
the necessary information, the Department requires additional time to
provide a complete response. We expect to provide a response within a
month.