[Senate Hearing 113-294]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 113-294
 
            CONTRACT MANAGEMENT BY THE DEPARTMENT OF ENERGY 

=======================================================================

                                HEARING

                               before the

          SUBCOMMITTEE ON FINANCIAL AND CONTRACTING OVERSIGHT

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 27, 2013

                               __________

                   Available via http://www.fdsys.gov

       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs


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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                  THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

                   Richard J. Kessler, Staff Director
               Keith B. Ashdown, Minority Staff Director
                     Trina D. Shiffman, Chief Clerk
                    Laura W. Kilbride, Hearing Clerk


          SUBCOMMITTEE ON FINANCIAL AND CONTRACTING OVERSIGHT

                  CLAIRE McCASKILL, Missouri Chairman
CARL LEVIN, Michigan                 RON JOHNSON, Wisconsin
MARK L. PRYOR, Arkansas              JOHN MCCAIN, Arizona
MARY L. LANDRIEU, Louisiana          MICHAEL B. ENZI, Wyoming
MARK BEGICH, Alaska                  KELLY AYOTTE, New Hampshire
TAMMY BALDWIN, Wisconsin
                     Margaret Daum, Staff Director
                 Rachel Weaver, Minority Staff Director
                      Lauren Corcoran, Chief Clerk



                            C O N T E N T S

                                 ------                                
Opening statement:
                                                                   Page
    Senator McCaskill............................................     1
    Senator Johnson..............................................     3
    Senator Begich...............................................    16

                               WITNESSES
                        Thursday, June 27, 2013

Hon. Gregory H. Friedman, Inspector General, U.S. Department of 
  Energy.........................................................     4
Hon. Joseph F. Bader, Board Member, Defense Nuclear Facilities 
  Safety Board...................................................     6
J.E. ``Jack'' Surash, Deputy Assistant Secretary, Acquisition and 
  Project Management, Office of Environmental Management, U.S. 
  Department of Energey..........................................     8
Michael Graham, Principal Vice President, Bechtel National, Inc..    26
Michael McKelvy, President and Division Chief Executive, 
  Government, Environment and Infrastructure Division, CH2M HILL.    28
Frank Sheppard, Jr., Vice President and Deputy Project Manager, 
  Parsons Corporation............................................    30

                     Alphabetical List of Witnesses

Bader, Hon. Joseph F.:
    Testimony....................................................     6
    Prepared statement...........................................    47
Friedman, Hon. Gregory H.:
    Testimony....................................................     4
    Prepared statement...........................................    39
Graham, Michael:
    Testimony....................................................    26
    Prepared statement...........................................    73
McKelvy, Michael:
    Testimony....................................................    28
    Prepared statement...........................................    78
Sheppard, Frank Jr.:
    Testimony....................................................    30
    Prepared statement...........................................    83
Surash, Jack J.E.:
    Testimony....................................................     8
    Prepared statement...........................................    66

                                APPENDIX

Statement submitted for the Record by Bechtel National Inc.......    89
Responses to post-hearing questions for the Record from:
    Mr. Friedman.................................................    90
    Mr. Bader....................................................    95
    Mr. Surash...................................................   117
    Mr. Graham...................................................   158
    Mr. McKelvy..................................................   160
    Mr. Sheppard.................................................   165


            CONTRACT MANAGEMENT BY THE DEPARTMENT OF ENERGY

                              ----------                              


                        THURSDAY, JUNE 27, 2013

                                 U.S. Senate,      
 Subcommittee on Financial and Contracting Oversight,      
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:30 a.m., in 
room 342, Dirksen Senate Office Building, Hon. Claire 
McCaskill, Chairman of the Subcommittee, presiding.
    Present: Senators McCaskill, Begich and Johnson.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. Good morning. This hearing will now come 
to order.
    Today's hearing will focus on contract management by the 
Department of Energy (DOE). This is an area of contract 
management that has not received enough attention from 
Congress. I expect that this will only be the first in a series 
of hearings by this Subcommittee that will look at how other 
agencies are managing taxpayer dollars.
    This hearing will focus on the Department's Office of 
Environmental Management (EM). The Office of Environmental 
Management is responsible for cleaning up the nuclear waste 
that is a legacy of America's nuclear weapons work in World War 
II and the Cold War. No one questions the need to do this work, 
but when hundreds of billions of taxpayer dollars are at stake, 
we need to make sure that those dollars are not just being 
squandered.
    EM's environmental cleanup is currently estimated to cost 
$270 billion and to continue beyond 2087. Since 1990, EM has 
received nearly $150 billion to carry out its mission, and all 
the work of cleanup--managing the sites, developing the 
technology, building the facilities and processing the waste--
is done by contractors.
    This heavy reliance on contracting is troubling because the 
Department of Energy's contract management has been on the 
Government Accountability Office's (GAO) High Risk List since 
1990--the year the list began.
    In 2003, over a decade ago, GAO identified the Department's 
choice of contract type, use of competition, measurement of 
contractor performance, cost overruns and schedule delays as 
major problems for the Department's contracts. Today, 10 years 
later, little has changed.
    EM relies on cost-based contracts for most of its 
environmental remediation work. This is an improvement over the 
large management and operations contracts the Department used 
to use.
    However, the government bears the risk for all cost 
overruns on a cost-based contract, making these vehicles very 
risky for the government. The cost overruns on just one 
project--the waste treatment plant at Hanford--now total almost 
$10 billion since the contract was awarded.
    Using cost based contracts is especially risky for EM 
because up until just a few months ago EM did not even have a 
requirement that there be a cost estimate. There is still no 
requirement that the estimate be well documented or accurate. 
As one GAO official told the Subcommittee staff last month, 
``You can just write a number on a piece of paper, and that 
would meet the requirement.''
    EM also has failed to adequately consider safety during the 
design phase of the planning process. When these issues are 
finally discussed, these projects are already in the 
construction phase, which then requires extensive contract 
modifications and billions more in dollars to be spent.
    For example, the cost of a Salt Waste Processing Facility 
(SWPF) at the Savannah River site has increased from an 
original cost estimate of $340 million to $1.2 billion in part 
because of numerous modifications that had to be made to the 
design.
    EM also relies on the same contractors for all of its 
projects. These contractors even refer to themselves as 
``competimates,'' meaning that they may be competitors for one 
project but joint venture teammates on another. This lack of 
competition does not do the taxpayer any favors.
    The real beneficiaries of these large cleanup contracts are 
the contractors. From 2002 to 2012, the Department awarded its 
major contractors nearly $4 billion in award and incentive 
fees. The contractors received these fees despite poor 
performance and, in some cases, received fees even before the 
required work had been completed.
    For example, from 2009 to 2012, the Department paid 
Bechtel, the contractor on the Hanford Waste Treatment Plant 
(WTP), $24.2 million of its $38.6 million incentive fee based 
in part on Bechtel's adherence to cost and schedule targets and 
its resolution of technical challenges associated with waste 
mixing.
    In 2012, after these monies had been paid, GAO found that 
the project was at ``serious risk'' for cost overruns and 
schedule delays, and the Department concluded that the waste-
mixing technical challenges had not been, in fact, resolved.
    Unfortunately, for the taxpayer, for EM's large contracts, 
cost overruns, schedule delays and technical failures are the 
rule, not the exception. We need to find a better way to do 
this because we cannot just afford the status quo anymore.
    I hope we can have a constructive dialogue today with both 
the government witnesses and the contractors on the second 
panel on how to improve contract management at EM. The cleanup 
of nuclear sites has to happen, but the contracts to manage the 
cleanup can be done better and smarter.
    I thank the witnesses for being here today, and I look 
forward to their testimony.
    Senator Johnson.

              OPENING STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Madam Chairman.
    I think it is easy in a situation like this to come into a 
hearing with a bias one way or the other. In a situation like 
this, where we have an incredibly complex problem, we are 
seeing these huge cost overruns, and we are seeing hundreds of 
billions of dollars spent by the Federal Government, there has 
to be some bad actor here.
    You can have a bias that, of course, has to run to the 
contractor side, or you can have the bias that, well, boy, the 
government is really screwing things up again here.
    As I was preparing for this hearing and reading the history 
of this, sometimes you have problems described as once in a 
lifetime, once in a generation.
    The problem we are facing here with cleaning up the nuclear 
waste from our weapons programs is literally a once in the span 
of human history problem. It is not an easy issue at all.
    So I am certainly approaching this hearing with a very open 
mind, understanding the incredible complexity and the 
difficulty of what we are trying to deal with here.
    So, again, from my standpoint, I come to this hearing with 
no bias whatsoever, really looking to ask questions.
    Certainly, what can we do to potentially improve the 
process?
    What can we do to clean up these sites--because in the end 
that is what we are trying to do. We are trying to really take 
care of prior mismanagement back when the environment was not 
even considered, back in the 40s and 50s. Now, a generation 
later, we are having to grapple with this problem, and it is an 
incredibly difficult problem.
    So, again, I am looking forward to hearing all the 
witnesses and really with no bias at all but a very open mind.
    So thank you, witnesses, for appearing and thank you, Madam 
Chairman.
    Senator McCaskill. Thank you.
    We will have votes beginning at 11:30.
    So what our plan is, is we will go until about 10 minutes 
into the first vote. So I expect that we will be here until 
about 11:40. Then we will pause the hearing so that Senator 
Johnson and I can go vote and then come back and complete the 
hearing as soon as we have had those three votes.
    So I just wanted to give everybody that heads-up before we 
begin.
    Let me introduce our first panel.
    Gregory Friedman was named Inspector General (IG) of the 
U.S. Department of Energy in 1998. His Federal career has 
included serving as the Vice Chair of the President's Council 
on Integrity and Efficiency and as a member of the Advisory 
Council on Government Auditing Standards. Mr. Friedman has 
received numerous public awards, including the Department of 
Energy's Meritorious Service Award, the Meritorious 
Presidential Rank Award and the Presidential Rank Award for 
Distinguished Executive.
    Joseph Bader was appointed as a member of the Defense 
Nuclear Facilities Safety Board (DNFSB) on November 29, 2004. 
Previously, Mr. Bader held several executive and senior 
management positions in the nuclear weapons and nuclear power 
sectors. Mr. Bader, through his work at Fluor Daniel, was also 
involved in the Department of Energy's Weapons Complex 
Reconfiguration Program. Mr. Bader has a Bachelor's degree in 
Mechanical Engineering from Villanova University and a Master's 
in Nuclear Engineering from the University of Virginia.
    J.E. ``Jack'' Surash--am I saying that correctly, Mr. 
Surash?
    Mr. Surash. Yes, ma'am.
    Senator McCaskill. Great--is currently the Deputy Assistant 
Secretary for Acquisition and Project Management (APM) at the 
U.S. Department of Energy's Office of Environmental 
Remediation. Mr. Surash joined the Department of Energy as a 
member of the Senior Executive Service (SES) in 2005 as 
Director of the Office of Infrastructure and Facilities 
Management at the National Nuclear Security Administration 
(NNSA). Mr. Surash also has had a distinguished 27-year Navy 
career and retired at the rank of Captain from the United 
States Navy's Civil Engineer Corps in 2003.
    It is the custom of this Subcommittee to swear in all 
witnesses that appear before us. So, if you do not mind, I 
would like to ask you to stand.
    Do you swear that the testimony that you will give before 
this Subcommittee will be the truth, the whole truth and 
nothing but the truth; so help you, God?
    Mr. Friedman. I do.
    Mr. Bader. I do.
    Mr. Surash. I do.
    Senator McCaskill. Let the record reflect the witnesses 
have all answered in the affirmative.
    You will be using a timing system today. We would ask that 
your oral testimony be no more than 5 minutes. Of course, your 
written testimony will be printed completely in the record.
    And we will begin with you, Mr. Friedman.

    TESTIMONY OF THE HON. GREGORY H. FRIEDMAN,\1\ INSPECTOR 
               GENERAL, U.S. DEPARTMENT OF ENERGY

    Mr. Friedman. Chairman McCaskill, Ranking Member Johnson 
and Members of the Subcommittee, I am pleased to be here at 
your request to testify on the Office of Inspector General's 
(OIGs) perspective on contract management by the Department of 
Energy's Office of Environmental Management.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Friedman appears in the Appendix 
on page 39.
---------------------------------------------------------------------------
    Frankly, my testimony, at least the opening part of the 
testimony, Chairman McCaskill and Ranking Member Johnson, 
parallels your opening statements in large part.
    As you pointed out, the Department is responsible for 
disposing of large volumes of radioactive, hazardous and mixed 
waste resulting from more than 50 years of nuclear defense and 
energy research work. Although largely centered at sites where 
essential components of the U.S. nuclear weapons program 
existed--such as Richland, Washington; Savannah River, South 
Carolina; and Oak Ridge, Tennessee--the effort involves 2 
million acres of land located in 13 States and employs more 
than 30,000 individuals, the vast majority of whom are 
contractors.
    According to the Department's own statistics, EM activities 
are being coordinated through more than 40 prime contracts 
having a total value of over $90 billion. The current projected 
cost of completion is about $270 billion, as the Chairman 
referred to in her opening remarks.
    EM has been part of the Management Challenges List prepared 
by the Department of Energy's Office of Inspector General for 
the last decade or more. Our reviews of the Department's 
performance in this area have highlighted concerns in contract 
management, project management, cost estimating and project 
baseline control.
    My full statement includes several examples of our recent 
reports which reflect these findings. Today, I would like to 
focus on just one of the reports concerning the cleanup of the 
K-25 building in Oak Ridge, Tennessee.
    As a historical note, K-25, completed in 1945, contained 
about 2 million square feet of space. It was one of, if not 
the, largest buildings under one roof ever constructed in the 
United States to that date. K-25, using the gaseous diffusion 
method, was a major uranium enrichment facility--a complex but 
critical part of the U.S. weapons program.
    In July 2011, we reported that due to contracting project 
management weaknesses the Department was not in a position to 
fully grasp the ultimate cost and time required to complete the 
environmental cleanup at K-25. Specifically, the Department had 
not recognized that the total project costs could increase to 
as much as $1.2 billion, almost double the original baseline.
    We found the Department had not first confirmed that the 
contractor reports on cost and schedule performance were 
accurate and reliable, conducted analysis necessary to fully 
understand the scope and severity of the outstanding technical 
issues, organized K-25 as a standalone project to give it the 
necessary management visibility, adjusted its approach to 
managing the K-25 cleanup effort despite numerous events that 
should have prompted such a reassessment and ensured that 
consistent Federal leadership to oversee the project existed 
throughout its entirety.
    There have been a number of successful remediation efforts 
at select Department sites and facilities. However, significant 
problems with contracting project management have adversely 
impacted the Department's ability to achieve program goals.
    The Department's EM program faces significant technological 
challenges. Its magnitude is unprecedented. And the maze of 
contracts, contract types, subcontracts and consulting 
agreements is extremely complex.
    Yet, there are several common threads which appear to be 
among the root causes of the problems facing the program. 
Specifically, improvements are needed to ensure that:
    Project scopes are realistic and manageable;
    Change control management is adequate and project 
baselines, a primary management tool, are updated on a real-
time basis;
    Contract terms are kept current so they track with project 
events;
    Contractor performance is measured against established 
metrics, including realistic and reliable cost estimates;
    Federal staffing is sufficient in terms of size and 
expertise to provide effective contracting project oversight 
and ensure the crucial safety requirements are adhered to;
    And, finally, the projects have focused, empowered and 
consistent Federal project manager leadership throughout their 
life cycle.
    When problems do arise, it has certainly been our 
observation--and I think most would agree with this--that early 
detection is key. Prompt and candid reporting by contractors 
and timely, responsive action by Federal officials allow for 
thoughtful consideration of alternative courses of actions, 
expedited implementation of corrective measures, and 
maintenance of an effective baseline for evaluating contractor 
performance and project progress.
    Recognizing the national importance of an effective and 
efficient EM program, the Department's efforts continue to be a 
prime focus of the Office of Inspector General. Notably, we are 
completing, as we speak, a review of alleged design quality 
problems at the Department's $12.2 billion waste treatment 
plant at the Hanford, Washingtonsite.
    Madam Chairman and Members of the Subcommittee, this 
concludes my statement. I will be pleased to answer any 
questions you may have.
    Senator McCaskill. Thank you, Mr. Friedman.
    Mr. Bader, thank you for being here.

TESTIMONY OF THE HON. JOSEPH F. BADER,\1\ BOARD MEMBER, DEFENSE 
                NUCLEAR FACILITIES SAFETY BOARD

    Mr. Bader. Thank you, Chairman McCaskill and Ranking Member 
Johnson.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bader appears in the Appendix on 
page 47.
---------------------------------------------------------------------------
    I am Joseph Bader, Board Member of the Defense Nuclear 
Facilities Safety Board.
    I submitted a written statement for the record that 
describes the Board's mission and discusses our role in safety 
oversight of the Department of Energy's design and construction 
projects, particularly the ones needed for cleanup activities. 
It provides a fair amount of detail on our initiative to ensure 
that DOE considers safety early in the design of its 
facilities, and it summarizes some of DOE's successes and 
failures in this regard.
    I will provide a brief summary of my written testimony for 
your consideration today.
    The DNFSB was established by Congress in 1988 to provide 
safety oversight for DOE's defense nuclear facilities. We are 
the only agency that provides independent safety oversight of 
the facilities. We are statutorily mandated to review the 
design of new DOE defense nuclear facilities before 
construction begins, to monitor construction and to make 
recommendations to the Secretary of Energy as needed, to ensure 
adequate protection of public health and safety.
    The Board constantly emphasizes the concept of safety in 
design to DOE. Failing to consider safety early in the design 
of a complex facility will lead to surprises and costly changes 
later in the process.
    DOE's directives and guidance for managing major projects 
now spell a sound strategy for integrating safety into the 
design for new facilities. A comprehensive approach to 
assessing safety risk and project risk throughout the life of 
the project is also central to DOE's approach to new design and 
construction projects.
    The Board is committed to the early resolution of safety 
issues with DOE. To that end, we publicly document significant 
unresolved technical differences between the Board and DOE 
concerning design and construction projects in periodic reports 
to Congress.
    Right now, the most significant design and construction 
projects for DOE's defense nuclear cleanup program are the 
waste treatment and immobilization plant at Hanford and the 
Salt Waste Processing Facility at the Savannah River site. Both 
of these projects are massive. SWPF has a project cost of about 
$1.7 billion, and WTP is likely to exceed $12.3 billion.
    They are also incredibly important to DOE's cleanup 
mission. Millions of gallons of high-level waste liquids and 
solids have been stored for decades in tanks that are beyond 
their design life. This waste has no path to disposal or 
treatment unless these projects are successfully completed.
    Since its conception in 2000, the WTP has been a fast-track 
design-build project. This approach set the project up for 
technology problems, and the problems were compounded by safety 
issues that arose when DOE and its contractors began a 
significant technical redesign in 2009.
    That changed safety aspects of the design without 
sufficient basis. The redesign proceeded even though the 
project had not resolved key technical issues dealing with 
pulse jet mixing, hydrogen generation and erosion and 
corrosion.
    In 2012, former Secretary Chu undertook a comprehensive 
review of the plant's design and formed expert teams to address 
outstanding technical issues.
    DOE's path forward on this project is in a state of flux 
and is exacerbated by the discovery of new leaks in the tanks 
at Hanford.
    SWPF is a simpler facility, and it avoided the major 
technical uncertainties that have plagued WTP. However, both 
projects have struggled with quality assurance, particularly in 
control of work by their suppliers and subcontractors. Quality 
assurance problems led to significant rework and delays at 
SWPF, in particular.
    DOE's quality assurance requirements for its defense 
nuclear facilities are fundamentally sound, but a lack of rigor 
in implementing the requirements has been problematic.
    Safety culture plays a critical role in the ability of 
designers and workers to raise and resolve technical issues and 
safety concerns on these major projects. The hazards posed by a 
failed safety culture are real and have led to costly disasters 
in industry.
    Because of the problems on the WTP project, DOE leaders 
understand that they need to constantly assess and reinforce 
the safety culture throughout the DOE defense nuclear complex. 
The in-depth assessments of safety culture that DOE is 
undertaking across the complex are part of a long-term effort 
that will be needed to improve the culture that exists today.
    That ends my statement. I will be happy to answer any 
questions you may have.
    Senator McCaskill. Thank you very much, Mr. Bader.
    Mr. Surash.

    TESTIMONY OF J.E. ``JACK'' SURASH,\1\ DEPUTY ASSISTANT 
  SECRETARY FOR ACQUISITION AND PROJECT MANAGEMENT, OFFICE OF 
      ENVIRONMENTAL MANAGEMENT, U.S. DEPARTMENT OF ENERGY

    Mr. Surash. Good morning, Madam Chairman and Ranking Member 
Johnson.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Surash appears in the Appendix on 
page 66.
---------------------------------------------------------------------------
    My name is Jack Surash. I am the Deputy Assistant Secretary 
for Acquisition and Project Management in the Department of 
Energy's Office of Environmental Management. I am a registered 
professional engineer. I have been with the Department about 7 
years.
    And thank you for pointing out that I served in the U.S. 
Navy Civil Engineer Corps for almost 28 years and achieved the 
rank of Captain before I retired.
    In my position, I am responsible for the effective and 
efficient operation of the acquisition functions within 
Environmental Management. My office ensures compliance with 
acquisition statutes, regulations and DOE policies, as 
necessary, to achieve the Department's mission. My office also 
provides project management assistance, project oversight and 
performance evaluation by working closely with senior 
Department of Energy officials, external stakeholders and major 
contractors.
    As the largest environmental cleanup program in the world, 
EM's mission is to complete the safe cleanup of 107 sites 
across the country brought about from 5 decades of nuclear 
weapons development and nuclear energy research. Since its 
creation in 1989, EM has made substantial progress. As of 
September 2012, we have completed cleanup at 90 of these sites, 
many of which supported nuclear weapons through the production 
of plutonium, uranium and tritium.
    EM accomplishes its mission through contracts, which 
account for 90 percent of our budget. As such, it is critical 
that EM carry out an effective and efficient process for 
acquiring services and managing contracts.
    EM transitioned from the historically large site management 
and operating contracts by unbundling them, and by that, I mean 
using smaller scope-specific contracts that use clear metrics 
and incentives to complete work within cost and schedule.
    EM has had some notable successes at Rocky Flats in 
Colorado, Fernald in Ohio and, most recently, in executing over 
133 projects under the American Recovery and Reinvestment Act. 
Cleanup at many of these sites was completed ahead of schedule 
and billions of dollars below initial estimates.
    We have made many improvements in project and contract 
management, and I believe we are on the right track. 
Acknowledging the progress we have made in managing smaller 
efforts, GAO, in its February 2013 High Risk List update, 
stated it would further narrow the focus of its high risk 
designation to major contracts and projects with values of at 
least $750 million.
    But we know we have more work to do. Based on the lessons 
we have learned, the Department has put in place policies and 
guidance to improve our contract and project management, some 
of which are already showing success.
    First, we require proper up-front planning so that the 
project requirements have been clearly identified and the 
appropriate design maturity and technology readiness have been 
achieved. In particular, we require that 90 percent of the 
design for nuclear projects be completed prior to establishing 
the project baseline.
    Second, we engage our internal and external oversight 
organizations at every critical stage of project development to 
ensure their expertise is incorporated early in the process.
    Third, we consider the use of firm-fixed-price contracts to 
complete work requirements in order to cap the government's 
cost liability. We have also put in place objective performance 
measures to incentivize contractor performance and reduce 
costs.
    And, finally, we have expanded the use of project peer 
reviews, following a process similar to the Department's Office 
of Science. We have partnered with the U.S. Army Corps of 
Engineers (USACE) to obtain cost estimating services as well as 
resources for project peer reviews.
    But, please, let me be clear. We have a responsibility to 
taxpayers to ensure that we apply lessons learned in the future 
and strive to achieve our mission as efficiently and 
effectively as possible.
    Two projects--the Waste Treatment Plant at Hanford, 
Washington and a Salt Waste Processing Facility at Savannah 
River in South Carolina--have proved especially challenging. 
Applying the lessons learned over the past decade, the 
Department would have taken a different approach on these 
complex, first-of-a-kind nuclear projects.
    While these projects have not lived up to our expectations, 
these projects, in addition to our entire portfolio, have 
benefited from new contract and project management policies and 
guidance. This is part of our conscious campaign to maintain 
discipline throughout our processes, to improve our ability to 
meet cost and schedule targets.
    As I have said in the past, I treat this as a journey and 
not a destination. We must work to continually improve our 
contract and project management.
    Thank you for the opportunity to appear before you today, 
and I will be happy to answer any questions you may have.
    Senator McCaskill. Thank you very much.
    Let me start with Mr. Friedman.
    Mr. Friedman, the numbers of employees at the Department of 
Energy--15,671 Federal employees; 92,419 contractors, according 
to our estimate; one of the most lopsided agencies as it 
relates to employee-to-contractor ratios.
    Some of my colleagues have advocated doing away with the 
Department of Energy.
    What would happen to those contractors' employees if we did 
away with the Department of Energy as it relates to the 
function we are talking about today?
    Mr. Friedman. Chairman McCaskill, you could do--obviously, 
there have been a number of proposals over the years to do away 
with the Department of Energy. It was created after the 1973-
1974 embargo, putting--piecing together a lot of disparate 
parts.
    The reality, as least from my perspective and our 
perspective as the Office of Inspector General, is that the 
functions that are represented by the Department of Energy's 
mission would have to continue. We have a moral obligation, for 
example, in the EM program to clean up the sites that are 
environmentally endangered as a result of the 50 years of 
nuclear work.
    Senator McCaskill. What percentage of those contractors--
the some 100,000 contractors that are employed at the 
Department of Energy--what percentage of those would you 
estimate are working on environmental cleanup and environmental 
management?
    Mr. Friedman. My understanding--it is 30,000.
    Senator McCaskill. Thirty thousand. So those 30,000 would 
have to be reassigned to another department of government, or 
we would just----
    Mr. Friedman. No. Perhaps I misunderstood your original 
question.
    The functions that they are carrying out--cleaning up the 
sites that have been talked about here today--from my point of 
view, certainly, we have a moral obligation to continue that, 
whether we do it with the same contractors, different 
contractors or Federalize it, if that is where we are heading.
    Senator McCaskill. Right. OK.
    Mr. Friedman. There is that possibility.
    Senator McCaskill. OK. I know you mentioned, Mr. Surash, 
that there have been some contracts that have come in on top 
and at budget. But, historically, what percentage of the 
contracts would you say have come in at or near the cost 
estimate that was given at the beginning of the contract?
    Mr. Surash. Ma'am, off the top of my head, I do not have 
that number, but I will be happy to provide that.
    Senator McCaskill. Well, can we do a ballpark?
    I mean, I would assume that most of the contracts in this 
area have not come in at estimate based on our research we have 
done.
    Mr. Surash. Well----
    Senator McCaskill. The nuclear cleanup contracts.
    Mr. Surash. If I go back, if I looked at the work--$6 
billion worth of work--done during the Recovery Act time, 2009 
to 2011----
    Senator McCaskill. I am looking at the $150 billion of work 
that has been done since 1990. How much of that?
    Let's take the stimulus out of it.
    Mr. Surash. OK.
    Senator McCaskill. And, good for you, that those contracts 
came in at estimate and on schedule.
    Let's take that $6 billion out and do the other $140-some 
billion. What percentage if you had to--and I will not hold you 
to this. I am just curious.
    Are you comfortable in saying that certainly more than 50 
percent of them have not come in on estimate, or more than 70 
percent?
    Mr. Surash. I am just guessing. I will provide the number 
for the record, but I was going to say approximately 50 
percent. It is not a number that I am happy with, and we are 
certainly on a path to improving that.
    Senator McCaskill. OK. And what percentage of those that 
came in over estimate got performance bonuses for doing a great 
job? Isn't it 100?
    Mr. Surash. No, ma'am.
    Senator McCaskill. Who has been denied a performance bonus?
    Mr. Surash. The question would be the fee for performing 
cost reimbursable work?
    Senator McCaskill. Yes.
    Mr. Surash. With the contractor----
    Senator McCaskill. I am very familiar with this concept 
because I found it in the Department of Defense (DOD)----
    Mr. Surash. OK.
    Senator McCaskill [continuing]. In Iraq and when we did all 
our work on war contracting. We were monogramming hand towels 
with cost-plus contracts. We were doing all kinds of things to 
drive up the cost.
    And the performance bonus was a rite of passage. It was not 
being based on how well they had performed under the contract.
    This area is rife with examples of how badly these 
contracts have been scoped, how badly they have been estimated, 
and yet, it appears to me, in looking at the research we did 
for this hearing that there was never a question that everybody 
got their performance bonus, sometimes before they even 
performed.
    Mr. Surash. But let me, if I may, give you one very large 
example--the Salt Waste Processing project down in South 
Carolina--the work completed to date is in excess of $1 
billion. That is what we have spent on the project. The 
contractor has earned less than $20 million of fees. So, on 
that one, on that particular contract, that particular project, 
I think we have--and that--to be very clear, that was fee 
earned during the design portion of that contract.
    So, once construction started, essentially, we actually 
paid the contractor, I believe, about an additional $20 
million. We then clawed that back.
    The contractor actually was obviously not happy with that 
and submitted a claim, but we denied that, and we clawed that 
back. So, $1 billion of work, less than $20 million of fees.
    So, in that particular case, for this very large, complex 
project, I am happy with the--with what we are doing, with 
holding this contractor accountable.
    Senator McCaskill. And I think that is a great example, and 
certainly I know that if I were sitting where you are sitting I 
would try to find an example that would kind of push back 
against the question I am asking.
    But don't you think what I am saying is--if you look at the 
scope of work that has been done and the monies that have been 
paid, don't you think the assertion I am making today--when I 
have looked at all these contracts, there has been contract 
after contract where the estimates were low, where safety was 
not even taken into consideration before the contract began, 
when there was not even a timely notification of as much as a 
half a billion dollars overrun in cost until 18 months after it 
was due.
    I can go through contract after contract after contract, 
billions and billions and billions of dollars, and in every 
single one of those contracts, they got their performance 
bonus.
    Mr. Surash. If I may, ma'am, I would point out a couple of 
items. First, a number of years ago, we moved away from 
qualitative award fee. So almost all of our fee is 
quantitative. So we pay a fee for preestablished milestones.
    Now I know that the IG did find a case out at the Waste 
Treatment Plant. I believe it dates back to 2003. It was 
several million dollars where the fee was paid, and the work 
was not done correctly. That was a mistake, and we have since 
put in a very rigorous process across the board, including the 
Waste Treatment Plant, to keep that from happening.
    But if I may give a second example, this is the K-25 
project that Mr. Friedman's office reviewed. And we agree; we 
definitely had problems. There were problems on the contractor 
side with performing at Oak Ridge on that very complex nuclear 
demolition and decontamination of a gaseous diffusion plant.
    It is huge. A couple of golf courses would fit within this 
building--the largest plant, the largest building built in the 
1940s or 50s when it was constructed.
    We also had some problems on the Federal side. I actually 
remember this fairly well. This is one of the first major 
issues that I uncovered after arriving at the Office of 
Environmental Management.
    So what we did is that contract had been restructured once 
already. We restructured the contract again from a cost-plus-
award-fee to a cost-plus-fixed-fee--relatively low fixed fee--
and we did that because we were just having management problems 
in managing the work there.
    And, if I may go one step further, to talk about that 
particular contract, if I may--this is the K-25--this is the 
contractor that had the K-25 project.
    In about 2009, when we did this contract restructuring, the 
intent here was to put in place a cost reimbursable contract 
with a relatively straightforward fee design.
    About 6 or 7 months after we did this, I can remember a 
meeting where the contractor came in and told our assistant 
secretary that they were going to have an additional overrun of 
several hundred million dollars. This was in about 2009.
    We were not happy about this.
    So the action we took is we accelerated the reprocurement 
action that we had ongoing. We ended this contract when they 
hit the target cost. This contract included this K-25 facility 
plus a lot of other work.
    And so within about a 9-month timeframe after the 
competitive proposals--were received, we awarded a new 
contract.
    And I would say of our large contracts, this is about a 
$2.1 billion project and includes K-25, a couple other 
facilities down there.
    This is actually one of the best performing. We did a great 
job pre-award, getting a new contractor in there, and this is 
about the best performing large contractor. If you were to ask 
me, this is the example I would have provided you.
    The contractor is doing a bang-up job there. The Federal 
staff at Oak Ridge--I think they took to heart the IGs 
recommendations made several years ago, and they are managing 
and administering this contract in a tremendous fashion.
    This K-25 project is now going to come in several hundred 
million dollars lower than what it was rebaselined at. So it is 
still over cost from what we originally thought, but I think I 
am happy with what we were able to do when this happened.
    Senator McCaskill. OK.
    Senator Johnson.
    Senator Johnson. Thank you, Madam Chairman.
    First of all, Mr. Surash, thanks for your military service.
    And I would like to ask all the witnesses; do you think the 
Federal Government has any capability of doing this 
themselves--in other words, not using contractors? Can we hire 
the people?
    And, Mr. Friedman, I will start with you.
    Mr. Friedman. Senator Johnson, my view is that all options 
ought to be on the table.
    I am not sure I can sit here today and say the Federal 
Government could do it without the contractor assistance. I am 
not sure that is the case.
    There is a lot of very specialized expertise that is 
necessary--technicians with unique skills. And I am not sure 
that we have them, and I am not sure that it would be easy for 
us to get them at the pay scale that we can pay for most 
Federal employees.
    But I would not rule out any option to try and cure this 
problem. So I think the possibility of Federalization ought to 
be considered. We have not studied it, per se, but it is 
certainly an option that ought to be thought through.
    Senator Johnson. But, if we were to totally Federalize it, 
we would have to hire tens of thousands of employees. Is that 
correct?
    Mr. Friedman. That is absolutely correct.
    Senator Johnson. Twenty thousand plus?
    Mr. Friedman. That is absolutely correct, and people with 
experience in these very unique skill sets that would be 
necessary to do this sort of work.
    Senator Johnson. So, from what you have seen as an 
Inspector General in the Federal Government, do you think the 
Federal Government--what is the likelihood that we would be 
able to hire those 20,000 very specialized employees and be 
able to pull this thing off?
    Mr. Friedman. Well, I started my career as a careerist, 
Senator Johnson. So I have confidence that you could do it if 
you set your mind to do it, but I do not have a high confidence 
level.
    Senator Johnson. OK.
    Mr. Bader, do you believe the Federal Government has the 
capability of hiring these specialized individuals and doing 
this themselves?
    Mr. Bader. I would think it would be difficult but not 
impossible.
    Senator Johnson. Sir?
    Mr. Surash. Sir, this is not something that I have 
actually, frankly, thought about before. I think it would be 
very challenging.
    I mean, some of the great successes that we have seen, like 
out at Rocky Flats--we had almost a $4 billion project brought 
in at a half a billion dollars and years ahead of time.
    I am not confident that a Federal workforce could do that. 
I think a properly managed and incentivized contract work 
force----
    Senator Johnson. Let's talk about the available contractor 
base. My guess is you are using the Federal employees to 
basically manage the general contractor who then potentially 
manages some subcontractors, correct?
    How many general contractors in the world exist that could 
actually handle this really once-in-a-span-of-human-history 
problem that we are trying to solve here?
    Mr. Surash. Sir, this is very complex, specialized work. 
The nuclear safety background and requirements are a heavy 
lift. So I would say about a couple of handfuls at most today.
    This seems to be----
    Senator Johnson. So you have maybe got about 10 general 
contractors?
    Mr. Surash. Yes, sir, prime. Contractors that can function 
as a prime contractor to do this work, yes, sir.
    Senator Johnson. Do you feel it is essential to have those 
prime general contractors to also supervise the subcontractors, 
or do you think the Federal Government could hire enough people 
to act as the general to work with the subcontractors?
    Mr. Surash. A lot of the work is actually performed by the 
prime contractors.
    Senator Johnson. OK.
    Mr. Surash. We have about 30,000 incumbent workers at our 
site that are highly trained and typically will remain there if 
it is a follow-on contract with the next contractor. And 
probably half of the work is done in that manner, and maybe the 
other half is subcontracted out.
    It is something I would be happy to look at. I think it is 
a great concept. It would be----
    Senator Johnson. Well, I am not suggesting. I am just 
asking about the possibility.
    Mr. Friedman, if we spent $100 billion, or 150--whatever 
the figure is we have spent to date--has anybody done an 
analysis in terms of what the contractor base has made in 
profits over that time period?
    Mr. Surash was talking about $20 million made on a billion 
dollars worth of a contract, which is not from a business guy's 
standpoint, I do not know why they do it.
    But do you have any feel for what has been contracted in 
the past, what the profit levels are for the contractors?
    Mr. Friedman. I do not know, but remember, Senator Johnson, 
you have to look at the investment and the capital that the 
contractors have put forward before you make that analysis. 
Twenty million on a relatively small investment may not be a 
bad return although I do not think it is a good return. But the 
returns have been considerable over time.
    Senator Johnson. Name considerable.
    I mean, are you talking percent? Are these guys making 50 
percent of sales?
    Mr. Friedman. No.
    Senator Johnson. And, by the way, percent of return really 
is based on sales because you are putting in all kinds of time 
and effort. It is not just simply you are investing in 
equipment in terms of how you evaluate your return.
    Mr. Friedman. Well, there are multiple ways. I do not want 
to debate with you about them----
    Senator Johnson. Sure.
    Mr. Friedman [continuing]. Because you are a business man, 
I know, but there are multiple ways of evaluating the efficacy 
of a particular project from a business point of view. 
Certainly, you have identified one.
    I do not have a number as to how profitable they have been 
over time, but I will tell you that the cadre of contractors 
that keep coming back for more work are not coming back because 
they are losing money. So it is pretty obvious that they find 
it reasonably attractive.
    Senator Johnson. OK. I guess that was the question I was 
going to ask you.
    Mr. Surash, are you concerned about losing contractors?
    Mr. Surash. Sir, I do not believe so.
    We are working to try to increase the contractor base. I 
mean, going from 12 prime contracts in the late 90s to almost 
40 contracts today has resulted in some expansion of that base.
    We also have a strong focus on trying to set aside work for 
small businesses, and we are executing about $300 million a 
year on some very complex work with small businesses, and--
knock on wood--they are doing very well on the work that they 
have.
    Senator Johnson. Just one more quick one?
    Senator McCaskill. Sure.
    Senator Johnson. You had mentioned in your testimony that 
at I believe it was the Savannah River site that you would have 
taken a different approach. Can you just briefly describe what 
approach was taken and how you would have done it differently?
    Mr. Surash. Absolutely. And I think Mr. Friedman and Mr. 
Bader have also commented on that.
    One of the problems, and a lesson learned the very hard 
way, is that we have a lot of very dangerous waste out there 
left over from the Manhattan site, Manhattan Project days and 
legacy of the nuclear weapons program. So, on one hand, we want 
to get on with the work; on the other hand, there is doing it 
the right way in a step-by-step fashion.
    And so a lesson learned is that we have not matured 
technologies; we have not let design get sufficiently mature; 
we have not worked on the nuclear safety aspects of our 
projects before trying to start to begin construction of them, 
and we are not going to do that again.
    We have learned that lesson, and that is why in my 
statement and in the actions we are taking now, we want to do a 
better job with up-front planning. We want to mature the 
technologies that are going to be used. We want to work very 
closely with the Defense Nuclear Facilities Safety Board and 
the other regulators.
    We want to advance the design because what happened on both 
the Salt Waste Processing project and out at the Waste 
Treatment Plant is actually construction was underway and we 
found that we had to change the design. At the Waste Treatment 
Plant, we have technology problems.
    So we would have gone in a step-by-step fashion if we had 
to do it over again. Mature the technologies. Get the design 
done. Then build.
    Senator Johnson. Two problems that really exist are just a 
one-time design as well and some of these tanks are already 
leaking, and there is some imperative to get going on these 
things. Is that also correct?
    Mr. Surash. You are absolutely correct, and that is the 
push-pull that we have. We want to get on with the work, but 
there is a proper way, if time was not taken into account, that 
we would want to proceed.
    Senator Johnson. OK. Thank you, Madam Chairman.
    Senator McCaskill. Thank you.
    Senator Begich, welcome.
    Senator McCaskill. We are glad you are here.

              OPENING STATEMENT OF SENATOR BEGICH

    Senator Begich. Thank you very much, Madam Chairman, for 
this Committee hearing.
    Mr. Surash, let me ask you the question; you had said on 
the stimulus money you received--those were all on--I am not 
sure I heard you properly, but they came in as you anticipated, 
price-wise.
    Mr. Surash. Ninety percent of all the work on just about 
six billion dollars worth of work were essentially on-cost.
    Senator Begich. And were those some of the contractors that 
we also have issues with on the other end?
    Mr. Surash. On many of them, not exactly, but I would say 
the majority of them, yes, sir.
    Senator Begich. OK.
    Mr. Surash. But I would also, if I may, say that with the 
Recovery Act, we needed work that was ready to go, and we 
actually implemented some of our lessons learned and new 
processes and procedures during the Recovery Act.
    Senator Begich. I guess I am leading to the question here 
that the Recovery Act money, which was probably the most recent 
kind of block that was significant--that had different 
procedures than some of the past?
    And let me ask you--it is a two-parter here--because we 
have a bad habit here in Congress of not telling agencies what 
their full amounts will be because we do continuing resolutions 
and we do lots of stuff here that really, to be frank with you, 
screw up the process.
    And so was getting the stimulus money in a known quantity 
helpful in getting those bids?
    Mr. Surash. Thank you, sir.
    On your first question, we implemented some of the 
improvements from lessons learned during Recovery Act, and we 
saw good results from that.
    But another very important thing which you bring up is the 
ability to have budget predictability.
    Frankly, in the past, on some of our large projects, we 
approved what is called a project baseline, which is our 
commitment to the Congress that we are going to deliver a 
certain project at a certain cost on a certain date without 
being able to properly carve out in our budget for the next 5, 
10 or 15 years, that money and have it absolutely reserved. So 
that has been an issue.
    Recovery Act--we, essentially, got the money----
    Senator Begich. You knew what you were getting.
    Mr. Surash [continuing]. More or less up front and--yes, 
sir.
    Senator Begich. Let me hold you there.
    Mr. Friedman, you just heard this conversation here. Do you 
agree with that or disagree with that?
    Mr. Friedman. I do not know which aspect, Senator Begich.
    Senator Begich. Whichever one you want to respond to.
    Mr. Friedman. Whichever one.
    Senator Begich. Because then I will do the others that you 
do not.
    Mr. Friedman. As Mr. Surash alluded to, I think the 
Department--the EM program received $6 billion under the 
Recovery Act, if I remember correctly. Its annual budget is 
$5.5 billion, which gives you some perspective.
    But what is interesting is that, as he alluded to, the 
Department as a strategy, chose projects that were sort of the 
low-hanging fruit, comparatively easy projects, less 
challenging projects.
    So that while----
    Senator Begich. So the risk was less.
    Mr. Friedman. The risk was less.
    And we issued a number of reports on the EM's expenditures 
under the Recovery Act. There were a number of positive 
attributes, and we reported those. There were some problems.
    But I think in part it was a function of the fact that 
these were by their own strategy, which I think we understand 
in terms of getting the money into the economy quickly--they 
were comparatively shovel-ready projects.
    Senator Begich. Understood.
    Let me ask, Mr. Surash, when these projects are scoped, how 
much of the Agency is part of that process at the front end?
    In other words, let me lead you to the next question so you 
know where I am going, and that is I know where Mr. Johnson was 
going. I agree; I would not want to see 20,000 Federal 
workers--I just did the math on how long it would take us to 
recruit them because our recruitment system is so efficient 
here in the Federal Government. It might be 10 years from now 
before we get the first 200. But how we use, the contrary is, 
the people we have working for us.
    I guess the question is I know when I was mayor, and we 
would scope projects. And there was a constant situation where 
we had someone who was scoping the project, and the bids came 
in much higher than the estimates. That person did not work for 
us after a little period of time.
    So how is internally your operation doing this?
    Mr. Surash. Yes, sir, let me try to give you a sense of 
that. I will talk about----
    Senator Begich. Let me pause you because I know one other 
issue Senator McCaskill and I had when I was on Armed Services 
was the F-35, which had questions of its scoping capacity. And 
it almost doubled, I think, per unit price, if I remember 
right.
    And they had to make some changes over there from the top-
down, if I remember right--general-down. But that had never 
been done before.
    So I am curious; how is it working?
    Mr. Surash. So let me try to answer it this way, if I may. 
I will talk about contracting authority and approval of a 
project.
    So, on the contracting side, our sites--and there are 
approximately 6 large sites----
    Senator Begich. Correct.
    Mr. Surash [continuing]. Have $25 million of change 
authority.
    So any contract action, whether it is a new contract or a 
change, up to $25 million, they can deal with. That is a lot.
    Senator Begich. Cumulative or individual change?
    Mr. Surash. Each item. That is a lot of----
    Senator Begich. Cumulative, it could be who knows what.
    Mr. Surash. Item by item.
    Senator Begich. OK. That is still a lot of money.
    Mr. Surash. Twenty-five million is a lot of money.
    Now, in the context of $5.5 billion, it is a relatively 
small amount.
    Senator Begich. Right, but if it is cumulative and so you 
start adding up items.
    Mr. Surash. Absolutely. My authority is $50 million.
    Senator Begich. Mm-hmm.
    Mr. Surash. Above me, it goes into a Department of Energy 
Office of Acquisition and Procurement Management.
    So, at that point, definitely, the rest of the Department 
and our General Counsel, et cetera, have this ability.
    Senator Begich. But how is the project originally scoped--
because I saw when you mentioned the K-25 it was $100 million 
below the rebaseline.
    Mr. Surash. Right.
    Senator Begich. I am just curious; from the original to the 
rebaseline, how much difference in cost increase was that?
    Mr. Surash. If I----
    Senator Begich. Because you are basically saving off of an 
increase.
    Mr. Surash. That is true, and that is why I wanted to be 
fair when I said that.
    Senator Begich. How much is that increase?
    Mr. Surash. If I may, sir, can I tell you about the project 
approval and then answer that, if that would be OK?
    Our sites for a project, to approve the baseline--the 
baseline is what we are committing to the Congress that we are 
going to deliver on.
    Our site managers have $100 million of authority. My 
Assistant Secretary has $400 million. Anything above $400 
million is above him. We have an Undersecretary. We have a 
Deputy Secretary.
    And so they have----
    Senator Begich. OK.
    Mr. Surash. They are involved in that.
    If I may, I will give you very rough numbers, but I can, 
for the record, give you the exact numbers.
    Senator Begich. That would be great.
    Mr. Surash. For that K-25 project, I believe it was about 
$500 million original baseline cost, circa 2008.
    Senator Begich. Mm-hmm.
    Mr. Surash. And the rebaseline was approximately $1.3 
billion.
    So I mean, again, to be fair, I said that we are three or 
four.
    Senator Begich. Let me pause you there.
    Mr. Surash. Yes, sir.
    Senator Begich. Who did the original baseline?
    That is what I am trying to get to because here is my 
question; we do not have a good habit in the Federal 
Government.
    I mean, I will not get on my Congressional Budget Office 
(CBO) rant, but they are always off 20 percent, which--I do not 
know--is a couple hundred billion a year on the deficit.
    But, it seems around here $200 billion seems to be small 
change according to some people, not to me, who does the 
original scoping to develop the baseline? Is that internal?
    Mr. Surash. The way this would work is it starts with the 
contractor. That is who is doing the work.
    So the contractor----
    Senator Begich. With your oversight?
    I mean, someone must look at these numbers----
    Mr. Surash. Sure.
    Senator Begich [continuing]. Within your organization and 
say these look good.
    Mr. Surash. It is, essentially, maybe three steps.
    So, step one, a contractor number comes through competition 
or through negotiation. So you have a number of, let's say, 
$400 million.
    Senator Begich. OK.
    Mr. Surash. And in the case I am giving you, it is the 
Deputy Secretary that is approving this project, or not.
    So, on top of the contractor's number, there would be a 
risk analysis done for the sorts of risks that the Department 
of Energy sees in the contractor's ability to perform this. And 
there are certain work elements that the contractor would not 
be responsible for.
    So, in this case, let's say that there is $100 million of 
Department of Energy risk.
    So what would be presented to the person called the 
Acquisition Executive, who in the example I am making up here 
is our Deputy Secretary, is: Here is the scope of the project. 
Here is when we are going to complete it. The price is $500 
million.
    And lots of different components in the Department are 
aware of this. There are external reviews done. We have a 
separate office that, in this case, would go out and do an 
external, independent cost estimate to make sure that we have 
this project in our sight.
    So let me just, if I can, say as an example of our 
improvements--I mean, I do not like the numbers here.
    But in 2008 we were kind of under the old system. In 2010, 
we were on the way to improving so we set a new baseline which 
is what we thought it was going to take to do the job. And all 
I can say now is partially through providing the right number 
up front and, No. 2, the contractor performing, we are going to 
come in below this higher amount.
    Senator Begich. OK. Thank you.
    I apologize, Madam Chairman. I went longer than I should 
there.
    But I am just trying to figure out--and I get now you have 
a new system, but how that baseline is developed is really the 
core. And if you are developing it and you are off--again, your 
old model--60 percent on the K-25, really what I am trying to 
figure out is how that happens. I think I got a sense.
    But also, I want to make sure--and we are part of the 
problem too because you are being asked to give us a number. We 
tell you it is too high because the budgets are so much. Then 
you have to fit it in.
    Is your system now to the point where you will be able to 
say, here is the amount; it is going to cost a hell of a lot of 
money, but that is what it is going to cost?
    Despite the pressures that may come from Congress and/or 
the Office of Management and Budget (OMB), which is a great 
sanitizer, are you going to be able to do that in the future--
because I just know the numbers are huge when you are off.
    So I will end on there. Maybe it is a rhetorical question. 
I do not know.
    Mr. Surash. I can try to give an answer, if that is OK.
    Senator McCaskill. Sure.
    Mr. Surash. And, again, this is from the acquisition and 
project management standpoint. There is a lot of other folks 
above me, including our Chief Financial Officer (CFO) and the 
Secretary, et cetera.
    I would just like to say that there are tremendous 
regulatory pressures. We have consent orders that if we do not 
get certain work done that we will be fined. So this is on the 
budget side, this is very difficult.
    And I would like to have, quite frankly, a better ability 
to project how much we are getting in the out years--not just, 
for instance, now what we are going to get appropriated in 
fiscal year (FY) 2014 but from the project management and 
acquisition side, 5, 6, 10 years out so that we can plan, so 
that today we can say, oh, that project fits our profile or it 
does not. And, if it does not, we really should not be trying 
to start it because that is part of how in the past we got in 
trouble.
    Senator McCaskill. Do not hold your breath on getting 
budget commitments 10 years down the line. We have a hard time 
getting budget commitments 10 minutes from now, much less 10 
years down the line.
    I understand the Department of Energy has some serious 
vacancies in its leadership and that, in fact, where you work, 
Mr. Surash, you have been without a confirmed Assistant 
Secretary since 2011. Is that correct?
    Mr. Surash. That is correct, ma'am.
    Senator McCaskill. Let me also ask about chasing 
technology.
    I want to talk about Hanford. The cost of this project has 
gone from $4.3 billion to $13.4 billion. That is how it has 
changed in terms of what the estimates were, and there is no 
guarantee that it is not going to cost even more than that. One 
of the problems has been the technology is not working.
    It concerns me in some of the information I read for this 
hearing that not only are we chasing technology; we have 
actually gone to a large-scale effort at technology when there 
has not even been a small-scale testing of the technology. And 
so we have spent--instead of spending $10 million or $20 
million, we have spent multiples of that to learn that the 
technology simply does not work.
    How are you dealing with this issue?
    Mr. Surash. OK. So I just would like to first say that we 
are dealing with very complex, first-of-a-kind plants. Nobody 
has ever built these before. Nobody has ever put the components 
together.
    So what we want to do better--what you stated is true, 
ma'am. Unfortunately, it is true.
    So, again, another lesson learned that I talked about 
before has to do with up-front planning.
    So what we need to do here is let the technology mature and 
work out the bugs, work with the regulators, work with the 
Defense Nuclear Facilities Safety Board, make sure that we are 
meeting or addressing the requirements, make sure that our 
budget--and what I was talking about before is really planning 
authority--is in line and can support the project, and then let 
the design mature.
    So, if I may give an example of where this has worked 
relatively well--the Salt Waste Processing project. Yes, we 
have a large cost overrun going on there, but what we did there 
is we actually have a pilot-scale plant that has been in 
operation for several years that is using the exact technology 
that this much larger, billion-dollar-plus plant is going to 
use.
    So that is an example of the sorts of things that we should 
do.
    Senator McCaskill. OK. So you understand this is a problem, 
and you understand this is an issue, and you understand the 
investment in small-scale will pay for itself multi-times over 
rather than abandoning something that you go to large scale 
without the proper small-scale test.
    Mr. Surash. Absolutely, and this is part of this tug on 
getting on with work versus doing it right.
    A pilot plant will actually cost a little bit more money up 
front. It will take more time. But we have learned the hard way 
for the first-of-a-kind nuclear, very complicated projects that 
we really need to do this or else we are asking for trouble and 
we are rolling the dice down the road.
    Senator McCaskill. Do you believe, Mr. Friedman, that they 
are doing better on this front?
    Mr. Friedman. I think, frankly, there have been a number of 
actions which I think are admirable and which we certainly 
agree with in seeing from our history, but I think the jury is 
out. We are going to have to wait and see. At this point, I 
cannot give you confirmation of that.
    Senator McCaskill. The number of prime contractors--I want 
to make sure I understood your testimony correctly. We are not 
seeing a shrinkage; we are actually seeing an increase?
    Mr. Surash. We have seen a little bit of an increase, and I 
would say mainly on the smaller contractors. Off the top of my 
head, I cannot think of a very large new firm that has entered 
the picture.
    If I am mistaken, I will provide----
    Senator McCaskill. And what about subs?
    Mr. Surash. Ma'am, our privative contract, as you are 
aware, is with the prime contractors. There seems to be--I am 
not aware of issues with lack of subcontractors or lack of 
competition. So that seems to be going OK.
    In some cases, for instance, the Oak Ridge project I was 
talking about before, the way we structured that is we wanted 
60 percent of the work to be done by subcontractors, and that 
seems to be working out relatively well.
    Senator McCaskill. You know what is interesting to me is, 
having spent so much time in the defense space, you have a 
wealth of competitors compared to some space at DOD. A wealth 
of competitors.
    But it appears to me that in many instances you have not 
been as robust as DOD in seeking new contracts, new bids, 
rather than just extending existing contracts.
    Would you say, is that an accurate statement, Mr. Friedman, 
from your perspective?
    Mr. Friedman. I do not have a specific report to support 
that, Senator McCaskill, but I do believe that is the case. I 
think they could be more aggressive in seeking out 
alternatives.
    Senator McCaskill. If you had to--and my time is coming to 
a close, and I want to make sure that we get a second round 
with my colleagues if possible before we go vote.
    But if you could crystallize where you think the most 
challenges remain--we are not even halfway yet. I do not think 
Americans have any idea the amount of money that has gone out 
the door with relatively little oversight.
    I mean, has there been a hearing like this that you are 
aware of, ever?
    Mr. Surash. Not focusing on contract management, ma'am.
    Senator McCaskill. Yes. I mean, we have been doing this for 
23 years and spent $150 billion, and there has been very little 
overlooking the shoulder on this. And that never is good for 
the taxpayers.
    So, could you crystallize, Mr. Friedman, the two or three 
biggest challenges that have not yet fully been embraced by 
this area of contracting in our government?
    Mr. Friedman. Well, let me break it into two buckets if I 
can.
    One is the Federal side. We need the right people with the 
right expertise who feel empowered to handle the government's 
perspective on contract oversight. That has been lacking in the 
past.
    The right numbers are important, but people with the right 
skill sets at the right place at the right time and, again, 
empowered.
    And, second, to get back to a point which I think all of 
you have raised, is the question of baselining and a change 
control system. This is the second bucket, if you will. The 
contractors' side is making sure that we have the quality 
estimates that are validated by the government, by Federal 
folks, and that becomes the line--against which we evaluate 
contractor performance going forward and project performance 
going forward.
    Senator McCaskill. Thank you very much.
    Mr. Johnson.
    Senator Johnson. Thank you, Madam Chairman.
    Mr. Surash, I was kind of gleaning from your testimony that 
one of the directions you are moving to in terms of contracting 
is breaking these contracts down into more manageable, bite-
sized pieces. Is that correct?
    Mr. Surash. Absolutely. If you went back to the late 1990s, 
you would have seen approximately 12 very large, very general 
scoped contracts that were management and operating type of 
contracts.
    A very different sort of contracting mechanism today--we 
have approximately 40 contracts, and all but 2 of these are 
what I would call traditional cost-plus types, a couple small 
fixed-price type of contracts.
    So, absolutely, we have done that.
    Senator Johnson. OK. To me, that makes sense.
    In the Hanford site, it is also my understanding that $4.3 
billion original cost estimate--that was for a phase I, and it 
was always contemplated there is going to be a phase II. And 
now, when we are talking about the $12.3 billion or $13 
billion, that includes both phase I and phase II. Is that 
correct?
    Mr. Surash. Absolutely.
    Senator Johnson. And, by the way, has that been broken down 
to smaller bite-sized pieces as well?
    Mr. Surash. If I may first mention that the $4.2 billion 
number that keeps getting mentioned--that was for a contract 
awarded in 2000. And what I want to point out there is that was 
for a plant that would operate for 40 years and treat about 40 
percent, by volume, of the radioactive waste out there.
    The plant today will treat 100 percent of the high-level 
waste, 40 percent of the low-level waste and operate for 50 
years. So that is partially the reason for this cost growth. We 
actually are increasing the scope of what can be provided.
    To answer your question on the waste treatment plant, that 
is currently a single contract still today. It was originally 
awarded in 2000.
    Senator Johnson. OK. It is Hanford where we are actually 
getting leakage right now, too, isn't it?
    Mr. Surash. That is correct. Actually, there is a separate 
contractor that is managing the underground tanks where we have 
some suspected leaking tanks.
    Senator Johnson. That is definitely heightening the concern 
in trying to speed this process up to address that fact.
    Mr. Surash. Yes, sir, absolutely.
    Senator Johnson. Let's go to the Safety Board a little bit 
in terms of its impact on cost and scope and those types of 
things.
    Mr. Bader, in the Safety Board's recommendations, is there 
any cost-benefit analysis done to your recommendations?
    Mr. Bader. There is not.
    Senator Johnson. What guides your recommendations then? 
Strictly, public safety?
    Mr. Bader. First of all, we look at the public safety and 
try and be sure that there is adequate protection. In doing 
that, we consider the technical and economic feasibility but do 
not do a cost-benefit analysis.
    Senator Johnson. Mr. Surash, has any recommendation from 
the Safety Board ever been turned down or pushed back, or let's 
say first, turned down?
    Mr. Surash. Sir, that is a little bit out of my area of 
expertise, but I can provide that for the record. There may 
have been.
    Mr. Bader may----
    Senator Johnson. Mr. Friedman, are you aware of any 
recommendations from the Safety Board being turned down?
    Mr. Friedman. I do not know specifically, Senator.
    Senator Johnson. So----
    Mr. Friedman. I do not know one way or the other.
    Senator Johnson. OK. It would be my concern if you have a 
Safety Board--again, I think we are all concerned about 
safety--but if they are operating outside any kind of cost-
benefit analysis, one of my concerns--I know in Idaho one 
project was the Idaho National Laboratory.
    I know a Safety Board recommendation was to take into 
account a seismic event, and so that project was stopped dead 
for at least a year and a half to basically redesign a plant 
that was scheduled, I think, to operate for 18 months.
    Now I believe those were tanks that were there, that have 
been sitting there for decades, also certainly at risk in terms 
of seismic events, but now we are going to clean it up, 
hopefully, in the span of about 18 months.
    And then the Safety Board recommends, no, we have to 
include all this rebar, all these construction codes, 
construction techniques, to really prevent damage in a seismic 
event.
    Is that part of the problem there?
    Mr. Surash. Sir, if I can answer, that actually happened at 
the integrated waste treatment plant in Idaho that you were 
mentioning. We came across that on the Salt Waste Processing 
project and also the waste treatment plant.
    The root of all this has to do with this proper up-front 
planning. We really need to mature the design, work with 
regulators and oversight organizations before we start 
building. But we did not, and what happened is accurate.
    Senator Johnson. Do you know what the cost of that was in 
terms of reinforcing that building for seismic events?
    Mr. Surash. I will provide a very accurate number for the 
record, sir. It was----
    Senator Johnson. Ballpark?
    Mr. Surash. Just a wild guess, maybe $20 million or $30 
million.
    Senator Johnson. OK. Well, unfortunately, in the scheme of 
things, that is not that big a number in terms of what we are 
spending.
    Mr. Bader, do you want to comment on that?
    Mr. Bader. We did not make a recommendation. We had a 
letter, which we would call a project letter, which was issued. 
And, actually, if you would like us to submit it for the 
record, I have a copy here.
    And we were actually largely in agreement with the project 
through DOE on the seismic requirements.
    Senator Johnson. OK. I guess maybe I should ask you this 
question; are there any safety recommendations that you made 
that DOE has either pushed back on or simply declined to enact?
    Mr. Bader. There was one recommendation which was partially 
rejected by the Secretary but which he said he would actually 
respond in his implementation plan in a manner that would meet 
our concerns.
    Senator Johnson. Out of how many recommendations have you 
put forward since your establishment--a ballpark?
    Mr. Bader. I will have to get back to you, but it is 40 or 
50 over the years.
    Senator Johnson. OK. That is all I really have, Madam 
Chairman. Thank you.
    Senator McCaskill. I want to thank all of you for being 
here.
    I thank all of you for the efforts you are making to tackle 
a problem that--I agree with you, Mr. Friedman. We have a moral 
obligation to clean this stuff up, but this, I do not think, is 
ever going to be anybody's poster child for the most efficient 
and effective use of taxpayer money in terms of how we have 
gone about this challenge. But all of you, I know, are serving 
the public, and we appreciate it very much.
    And we will take a recess now to have three votes. I 
believe we are at the end of the first vote. So, by my clock, 
we should be able to reconvene in approximately 30 minutes with 
the second panel. Thank you very much. [Recess.]
    I will get started. I know that my Ranking Member is right 
behind me because we walked over together. He just got waylaid 
in the hall for a minute.
    And we have to be out of here by 1. I know you all are 
heartbroken at that--that we cannot go on for hours, but---- 
[Pause.]
    If you all would do the best you can in terms of the length 
of your oral testimony today.
    I am sure that I speak for my colleague in that we have 
obviously had an opportunity to review a lot of the information 
that you have provided us already, but we do not want to 
minimize your opportunity to speak today. Since we are under a 
time constraint of about 30 minutes, we want to make sure we at 
least have an opportunity to ask some questions.
    Michael Graham is the Principal Vice President at Bechtel 
National, Inc. and is a Manager of Bechtel's U.S. Environmental 
Operations. Previously, Mr. Graham was the Associate Director 
of Environmental Programs at Los Alamos National Laboratory in 
New Mexico. He has held key management positions at the Idaho 
National Laboratory, the Hanford site and the Pacific Northwest 
National Laboratories.
    Michael McKelvy is President of CH2M HILL's Government, 
Environment and Infrastructure Division. Mr. McKelvy has served 
as President and Group Chief Executive for the Industrial 
Client Group and President for the Manufacturing and Life 
Sciences Business Group. Mr. McKelvy also serves as the 
Chairman of the Board for CH2M HILL's Environmental Remediation 
joint venture companies at the Hanford and Idaho sites. 
Previously, Mr. McKelvy worked as a project manager and project 
architect in Oklahoma.
    Frank Sheppard is Vice President and Deputy Project Manager 
of Parsons Governmental Services. Mr. Sheppard also serves as 
the Deputy Project Manager of the Salt Waste Processing 
Facility at Savannah River, where he is responsible for project 
costs and scheduled performance. Previously, Mr. Sheppard 
served as a Salt Waste Processing Facility contracts manager 
and business manager. Prior to his work at Parsons, Mr. 
Sheppard worked at the Departments of Defense and Energy, the 
Nuclear Regulatory Commission (NRC) and the United Nations.
    If you all would stand in order to take the oath that is 
customary in this Committee--do you swear that the testimony 
you will give before this Subcommittee is the truth, the whole 
truth and nothing but the truth; so help you, God?
    Mr. Graham. I do.
    Mr. McKelvy. I do.
    Mr. Sheppard. I do.
    Senator McCaskill. Thank you very much.
    We will begin with you, Mr. Graham.

   TESTIMONY OF MICHAEL GRAHAM,\1\ PRINCIPAL VICE PRESIDENT, 
                     BECHTEL NATIONAL, INC.

    Mr. Graham. Madam Chairman, Senator Johnson, Members of the 
Subcommittee, I am Michael Graham, Principal Vice President at 
Bechtel National--a contractor to the DOE for environmental 
management work and the lead contractor for the Hanford Waste 
Treatment and Immobilization Plant.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Graham appears in the Appendix on 
page 73.
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    Bechtel is a global engineering and construction company 
with more than 115 years in the business. Our company has a 
long history of working in the private sector, but we have also 
worked on some very large government projects, including the 
Hoover Dam, building Liberty Ships during World War II and now 
the Washington Metro Silver Line in our back yard.
    We have successfully designed, managed and constructed 
hundreds of large-scale projects around the world, including 
putting out the oil fires in Kuwait, constructing major 
motorways and high-speed rail lines in Asia and Europe, 
including the Chunnel, and designing and building nuclear power 
plants in the United States. Some of our largest endeavors have 
been design-build projects.
    Bechtel National began operations in 1977, and among its 
first contracts were response efforts at Three Mile Island in 
1979.
    To be sure, DOE projects are often complex and challenging. 
They are often one-of-a-kind endeavors, but they also present 
an opportunity to solve some of our country's greatest 
problems, many that owe their legacy to the Manhattan Project.
    We are proud of our accomplishments for DOE. I have 
personally worked at four of the major DOE sites--Hanford, 
Idaho, Savannah River and Los Alamos. For example, I led the 
Hanford Groundwater-Vadose Zone Integration Project to evaluate 
the impacts of Hanford waste on the groundwater in the Columbia 
River, and that included tank waste.
    To date, DOE's Environmental Management program reports 
that it has completed cleanup of 90 of their 107 waste sites--a 
testament to strong industry support that works together, in 
partnership with DOE, to solve challenging problems.
    Yes, we have successfully completed tough jobs, but the 
very toughest ones are now upon us.
    The largest and most complex DOE project is the waste 
treatment plant in Washington State. This one-of-a-kind project 
includes a complex of facilities being designed and built to 
immobilize a highly radioactive waste in 177 aging underground 
tanks. Some of these tanks date back to World War II. Sixty-
seven are reported to have leaked.
    In December 2000, when we entered into the contract to 
design and build the Hanford Waste Treatment Plant, we knew 
this job, which is the size of at least 2 commercial nuclear 
power plants, would be a challenge. Working closely with DOE, 
we have managed the challenges of new technologies, uncertain 
waste streams from the tanks, evolving requirements and the 
need to sustain a complex supply chain during periods of 
funding uncertainties.
    The waste treatment project today is a very different 
project than when we signed up for it in 2000. Back then, DOE 
described it as a pilot project and one that was much smaller 
in scale and capability. DOE directed it be a fast-track 
design-build effort to address the real risk of high-level 
waste leaking into the groundwater from those aging tanks. 
Glass was scheduled to be produced by 2007, with 10 percent of 
the waste being treated by 2018. A multi-billion-dollar phase 
II facility would be built later.
    Since then, the plant capacity has been significantly 
increased to enable DOE to eliminate that second phase. 
Pretreatment capacity was increased by 40 percent, and the 
high-level waste facility glass production was increased by a 
factor of 4. These and other increases in scope were 
substantial factors addressed in the revised project baseline 
in 2006.
    We are very proud of Bechtel's performance on this design-
build contract overall, but like any project, we have learned 
many lessons along the way.
    Our conservative design-build approach approved by DOE has 
significant built-in margin. For example, implementing the 
revised seismic criteria in 2006 did not require any major 
construction rework.
    Nevertheless, Bechtel, with DOE, has taken several steps to 
improve the design-build concept and execution. After the 
project was rebaselined in 2006, we deployed an earned value 
management system to track and manage our progress. This system 
has been certified and revalidated by DOE as recently as 2012. 
Utilizing this system, the WTP project performed to that 
baseline until 2011, when DOE requested that decisions 
regarding the waste treatment processing requirements be 
revisited.
    Last year, Secretary Chu put some parts of the project on 
pause while he assembled a team to take another look at a 
number of critical technical decisions. Many of these decisions 
are related to what would happen if WTP receives waste outside 
of its waste acceptance criteria. Resolution of those decisions 
to everyone's satisfaction could have impacts on cost and 
schedule.
    We are confident we can complete the job and put WTP into 
operation as we work our way through these decisions. We, and 
other contractors involved in this critical national mission, 
remain fully committed to complete the project.
    WTP is currently designed to safely treat most of the tank 
waste. We simply must get on with it. As you know, the 
situation with the tanks continues to deteriorate. That is the 
real risk.
    Thank you for the opportunity for me to make these remarks.
    Senator McCaskill. Thank you very much, Mr. Graham.
    Mr. McKelvy.

 TESTIMONY OF MICHAEL MCKELVY,\1\ PRESIDENT AND DIVISION CHIEF 
EXECUTIVE, GOVERNMENT, ENVIRONMENT AND INFRASTRUCTURE DIVISION, 
                           CH2M HILL

    Mr. McKelvy. Good afternoon, Chairman McCaskill and Ranking 
Member Johnson. Thank you for the invitation to appear here 
today to discuss contract management by the Department of 
Energy's Office of Environmental Management.
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    \1\ The prepared statement of Mr. McKelvy appears in the Appendix 
on page 78.
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    I will quickly summarize my written statement and ask that 
it be included in the record.
    CH2M HILL is an employee-owned global engineering firm 
founded in 1946 and headquartered in Colorado. We have been 
recognized as an industry leader as judged by Engineering News 
Record.
    CH2M HILL was the first firm in the heavily male-dominated 
engineering and construction industry to receive the 
prestigious Catalyst Award for our commitment to recruit, 
develop and advance women in the workplace.
    And, most important to me, CH2M HILL was judged for the 
fifth year in a row as one of the world's most ethical 
companies by the Ethisphere Institute--the only U.S. firm 
selected from the construction industry.
    Our success as a contractor can be attributed to our safety 
focus, our exceptional people and continually refined project 
delivery processes. Safety is always the first and foremost 
consideration for any CH2M HILL project or endeavor.
    In the invitation letter, you outlined several areas for 
today's discussion. I will do my best to address those areas, 
the first being the management of environmental remediation 
contracts.
    CH2M HILL has a successful record of performance managing 
and operating nuclear facilities and providing innovative 
cleanup and environmental remediation for the DOE since 1994. 
We have been responsible for the successful delivery of two of 
DOE's three largest closure projects--the Miamisburg Project 
and the Rocky Flats Project.
    Not unlike some of the work we do for other Federal 
agencies, we typically set up joint ventures or special purpose 
entities to help provide diversity in skill sets and allow 
greater corporate reach-back for project support.
    CH2M HILL's work at the Hanford site dates back to the 
early 70s. Over the last 2 decades, CH2M HILL has had several 
large contracts at the Hanford site, including the Tank Farms 
Contract from 1999 to 2008 and, currently, the Central Plateau 
Remediation Contract which we have had since 2008.
    DOE's use of cost-plus-award-fee contracts on the Hanford 
Plateau Remediation Company (PRC) project has allowed the DOE 
to meet specific objectives and standards, and make adjustments 
for changes in funding the work priorities, which provided us 
the flexibility as to best accomplish the work.
    On the Idaho Cleanup Project, CH2M HILL is currently 
managing the safe cleanup of the Idaho National Laboratory. To 
achieve the cleanup goals as part the cost-plus-incentive-fee 
contract, our scope includes the treatment of 900,000 gallons 
of highly radioactive sodium-bearing waste currently stored in 
underground tanks.
    As part of the contract, we have designed and constructed a 
first-of-a-kind facility--the Integrated Waste Treatment Unit 
(IWTU), to treat and prepare liquid radioactive waste for 
permanent disposal.
    Early on, several issues hindered progress during the 
design-build phase that increased the complexity of the 
construction, resulting in push-back in startup of the 
facility. The most significant issue was the way in which 
seismic analysis has been conducted. This issue resulted in the 
DOE decision, at the urging of the Defense Nuclear Facilities 
Safety Board, to upgrade the hazards classification of the 
facility after preliminary design had already been completed.
    Last, in 2008, a further 1-year delay in the project 
completion was the direct result of fiscal funding limitations. 
IWTU was originally estimated at $379 million. However, due to 
the directed design and operational changes, we provided the 
government with a revised estimate of $600 million to complete 
the project.
    The contract was adjusted in 2010, and subsequently, a cost 
cap of $533 million was established for IWTU, less than the 
validated estimate, and at which point we would pay for any of 
the additional costs over the 533. In addition, schedule 
incentives and penalties were established for the project 
completion date.
    Last April, construction was completed at a final cost of 
$621 million, with the parent companies of our joint venture 
contributing more than $88 million to complete the 
construction. In addition, we earned no fee and incurred 
schedule penalties for not having the facility online by the 
contract period.
    Despite these setbacks, we are extremely proud of the Idaho 
Cleanup Project's workforce and the great work accomplished 
over the years. And even with the issues at IWTU, the Idaho 
Cleanup Project contract was delivered in phase I over $500 
million below cost and to the satisfaction of the State of 
Idaho and the Department of Energy.
    Our employees accepted great challenges and were empowered 
to come up with innovative solutions, resulting in this 
unprecedented success and a stellar record of safety. The 
safety of our workers, the public and the environment is our 
foremost value on the challenging and dangerous work across the 
EM complex.
    Success has been possible because of the cooperative 
agreements between the three principal parties--Congress, the 
Department of Energy and the contractor community.
    I would like to thank the Subcommittee for their time 
today, and with that, Madam Chairman, I would be pleased to 
answer any questions.
    Senator McCaskill. Thank you very much, Mr. McKelvy.
    Mr. Sheppard.

TESTIMONY OF FRANK SHEPPARD, JR.,\1\ VICE PRESIDENT AND DEPUTY 
              PROJECT MANAGER, PARSONS CORPORATION

    Mr. Sheppard. Good afternoon, Madam Chairman, Senator 
Johnson. Thank you for having me here today to discuss the 
subject of contract management by the Department of Energy.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Sheppard appears in the Appendix 
on page 83.
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    My name is Frank Sheppard. I represent Parsons and the Salt 
Waste Processing Facility currently being constructed at the 
Savannah River site near Aiken, South Carolina. I am the Deputy 
Project Manager for SWPF and have been with Parsons since 
September 2011.
    SWPF is a large, complex, first-of-a-kind radioactive waste 
treatment facility. The mission of SWPF is to safely and 
efficiently segregate radioactive salt waste into products 
suitable for processing at the Defense Waste Processing 
Facility and the Saltstone Processing Facility, both of which 
are currently in operation. The SWPF facility is the last 
component needed in the liquid waste system at the site and is 
on the critical path for completion of DOE's cleanup mission at 
Savannah River.
    When operational, this facility will process 100 million 
gallons of radioactive waste. The construction of the facility 
is currently over 72 percent complete, and we recently finished 
enclosing the facility with completion of the roof in February 
2013, just 1 week past our contractual target milestone.
    In 2001, the DOE issued a Critical Decision-0 (CD-0), cost 
range of $673 million to $2.6 billion. Although there have been 
cost increases for a number of reasons, the current Parsons 
contract is valued at $1.7 billion, which is still just 
slightly above the median cost of the 2001 original CD-O cost 
estimate.
    Our focus throughout the project has been on safety, 
quality, schedule and cost. Parsons's safety performance on 
SWPF is good and is improving. The construction recordable 
injury rates are roughly half the industry average. Parsons 
believes in investing to continually improve safety as a core 
value and a fundamental principle of our business.
    SWPF is unique for DOE or NNSA first-of-a-kind construction 
projects in that we have no major outstanding technical or 
regulatory issues in the design or construction of the 
facility.
    Our contract requires a through-put of approximately 6 
million gallons per year, and we are confident we will be able 
to process 9 million gallons a year. Parsons has tested a Next 
Generation Solvent that can increase the through-put capacity 
to more than 12 million gallons per year. This could 
dramatically reduce the operational life of the facility, save 
significant life cycle costs for the Department and accelerate 
major risk reduction at Savannah River.
    There are several factors that have led to the cost 
increases associated with the SWPF project:
    Changes in throughput capacity from 3 million gallons at 
the initial start of the contract to now 6 million gallons per 
year.
    At Critical Decision-1, the contract required a performance 
Category 2 facility design.
    In January 2006, DOE directed Parsons to begin preparation 
of an enhanced preliminary design to meet more stringent PC-3 
seismic requirements.
    The initial quality standard for SWPF was the International 
Organization for Standardization (ISO) 9001. In June 2009, DOE 
directed compliance with the Nuclear Quality Assurance (NQA-1) 
as the primary quality standard. The overhead associated with 
establishing and maintaining an NQA-1-compliant program carries 
significant cost implications.
    For example, the cost of a piece of equipment can be 5 to 
10 times higher than an identical piece of equipment 
manufactured to a less rigorous standard. The same cost burden 
is realized again on the constructionsite through extensive 
documentation, inspection, layers of oversight and testing.
    The diminished ability of most nuclear-qualified vendors 
and suppliers to effectively meet NQA-1 on a consistent basis 
has caused significant cost growth on SWPF as well as many 
other DOE/National Nuclear Security Administration (NNSA) 
construction projects.
    The most significant delay on the SWPF project was related 
to the manufacturing and delivery of our 10 large American 
Society of Mechanical Engineers (ASME) vessels. After initially 
awarding one subcontract, it became apparent the vendor could 
not provide the quality necessary for the large vessels. The 
contract was terminated, and a subsequent contract was awarded 
with the tanks delivered in June and July 2012, over 2 years 
later than originally planned.
    This is not an isolated issue affecting just nuclear vessel 
manufacturers and persists with items such as pipes, bulk 
materials and valves.
    Parsons has consistently worked to mitigate any scheduling 
and cost impacts while maintaining the high degree of safety 
and quality necessary on a DOE project. Given the extensive 
delay in delivery of the large vessels, Parsons effectively 
built the facility around the area of the vessels and then 
safely lifted and placed the vessels into the facility.
    We recently signed a contract modification with DOE that 
incorporates all of the additional costs associated with the 
challenges and the impacts I have spoken to earlier. This 
modification establishes a cost cap type of contract for 
completion of construction. Parsons has assumed significant 
liability with this type of contract where we are committed to 
deliver construction complete on or ahead of schedule and at or 
below the target cost.
    In conclusion, we have no outstanding technical or 
regulatory issues relative to resolve at SWPF. Parsons and DOE 
have agreed on a path forward to complete construction no later 
than December 2016.
    We are working with DOE to negotiate the path forward for 
the remainder of the contract.
    We will continue to propose new and innovative concepts to 
DOE that can potentially reduce overall life cycle costs.
    We are confident that we will deliver a facility that will 
successfully complete startup, will provide a safe operational 
environment for the workers, will significantly outperform the 
contractual capacity requirements and will provide significant 
risk reduction at the Savannah River site.
    Thank you for the opportunity to speak with you today. I am 
happy to answer any questions you have.
    Senator McCaskill. Thank you so much.
    We only have about 12 minutes, I am afraid. So I am going 
to try to just briefly get in the questions in about half that 
time and turn it over to my colleague.
    And, obviously, there will be more questions we will ask of 
you for the record since our time has been curtailed with the 
unfortunate timing of votes this morning.
    First, let me say I really appreciate that you are here. 
This Committee has run into trouble with some companies that do 
business with the government not wanting to come in front of 
this Committee. So I appreciate that you are here and willing 
to answer questions.
    And I also appreciate the fact that doing business with the 
government is no walk in the park. I understand that this is a 
complex area. If the government was not involved--and you layer 
in the involvement of not just the Department of Energy but all 
the regulatory layering you have both at the State level and at 
the national/Federal level, and I am appreciative of that.
    Let me see if I can get a yes or no answer from all three 
of you to this question. Do you believe that EM has the 
necessary internal expertise to oversee your contracts, yes or 
no, Mr. Graham?
    Mr. Graham. Yes, I do.
    Senator McCaskill. Mr. McKelvy.
    Mr. McKelvy. Yes, I do.
    Senator McCaskill. Mr. Sheppard.
    Mr. Sheppard. Yes, I do.
    Senator McCaskill. OK. Briefly, on contractor 
whistleblowers, I have worked very hard to expand the 
protection of whistleblowers beyond government employees to 
employees of contractors who do primarily government work. We 
have successfully done this in the 2013 Defense Authorization 
Act.
    This is kind of a yes or no question, too. Have you 
received any direct guidance from the Department of Energy in 
terms of how potential whistleblowers should be handled?
    Do you know, Mr. Graham?
    Mr. Graham. I do not recall.
    Senator McCaskill. You do not know.
    Mr. McKelvy. No specific direction.
    Mr. Sheppard. Not since I have been on a project, since 
2011.
    Senator McCaskill. We will take care of that because we 
want to make sure that you are getting some specific guidance 
on that.
    Earlier this year, CH2M HILL entered into a settlement with 
the Department of Justice (DOJ) for a timecard fraud at 
Hanford. For years, employees falsified timecards. Under the 
settlement, HILL admitted not only did certain members of 
management know this timecard fraud was ongoing, but some 
supervisors actively helped to conceal it.
    Are any of the employees, supervisors or management who 
participated in, or who were aware of, this fraud still working 
at Hanford?
    Excuse me. I looked at the wrong one. Sorry.
    Mr. McKelvy. Yes, that is for me. Thank you.
    To my knowledge, the employees who were directly affected 
with that issue have terminated or are no longer with CH2M HILL 
or under disciplinary action.
    Senator McCaskill. And does that include the supervisors 
who were aware of this and did nothing to stop it or just the 
ones who were doing it?
    Mr. McKelvy. I believe it is both.
    Senator McCaskill. OK, if you would followup with that----
    Mr. McKelvy. Yes.
    Senator McCaskill [continuing]. And make sure. I think this 
is something that obviously people who were responsible for 
that--I certainly understand that you can have wrongdoers in a 
business operation and have the head of operation not know 
about it. But, when they are discovered, we want to make sure 
that the head of the organization, the head of the company, 
takes care of it----
    Mr. McKelvy. Absolutely.
    Senator McCaskill [continuing]. Particularly in working 
with the government.
    Mr. McKelvy. It is how you respond that makes the 
difference.
    Senator McCaskill. That is exactly right.
    And, finally, for me--and then I will turn it over to 
Senator Johnson and I will have a number of questions for you 
for the record--would it be worthwhile for DOE to obtain more 
independent cost estimates of its projects? [Pause.]
    Anybody can jump in here.
    Mr. Sheppard. Well, I think, if I could, since we just 
concluded contract negotiations, DOE does have not only 
internally, but they contract out to firms like Project Time 
and Cost that do independent government cost estimates on the 
government side.
    I think for unique, first-of-a-kind projects, the challenge 
is trying to get the right factors and the right historical 
costs on one-of-a-kind type projects to do an adequate job of 
predicting costs in the future.
    Senator McCaskill. Well, you know, I am glad you jumped in, 
Mr. Sheppard, because the example that piqued my interest in 
this area was, in fact, the facility where you are working. The 
current estimated cost was $1.2 billion, and GAO said an 
independent estimate by DOE's cost analysis said that it was 
$2.7 billion. But, yet, it is still currently estimated at 
something much closer to $1.2 billion.
    So it is almost as if they are doing some of this but 
paying no attention to it.
    Mr. Sheppard. They do that. There are certain elements of a 
cost estimate, mainly the contingency piece, that takes into 
account the unknown risks that are frequently experienced on 
first-of-a-kind projects--some of the things that are directed 
changes through design and seismic requirements. The others are 
things associated with the NQA-1 atrophy of the supply chain 
that are just unknown, unanticipated and very hard to bound.
    So I think you will see a broad range. Even when you look 
at the CD-0 estimate, the initial estimate by DOE was between 
$673 million to $2.6 billion back in 2001. That includes a 
large part of contingency, some of which we have experienced on 
SWPF.
    Currently, our recent mod to the contract--Parsons is at 
$1.7 billion. So we are right about the mid-range of the 
original 2001 estimate, but a large part becomes how much of 
the contingency is realized during the execution of the 
project.
    Senator McCaskill. Wouldn't we be better off to go with the 
higher estimates, though, than the lowest?
    It seems like to me that what we have done on a consistent 
basis, if you look at the history of these contracts, is we 
have low-balled all of them.
    Mr. Sheppard. I think it would----
    Senator McCaskill. And then come back and----.
    Frankly, it makes contract oversight look shoddy. It makes 
it look like that somehow you all are not doing your best work 
when I am sure that you are trying to estimate costs 
accurately.
    Shouldn't we be trying to influence this process in terms 
of an oversight function, to say, hey, quit low-balling these 
estimates and let's be honest up front what this stuff is going 
to cost?
    Mr. Sheppard. I think you would be in a much better 
position to take a more conservative estimate up front, 
particularly on first-of-a-kind nuclear construction projects.
    Senator McCaskill. OK. Senator Johnson.
    Senator Johnson. Thank you, Madam Chairman.
    Senator McCaskill. Just call you, right?
    Senator Johnson. Right. I appreciate your holding this 
hearing. This was very informational, and I think important.
    And I certainly want to thank the witnesses for coming 
forward as well.
    I will quickly give you an opportunity--I believe you were 
sitting through the first panel. Anybody want to comment on 
anything said that was just burning at you, just listening to 
it, or not? [Pause.]
    That is fine.
    Is there one thing in dealing with the EM in this regard--
the Department of Energy--that you think would dramatically 
improve project management?
    Mr. Graham, I will start with you.
    Mr. Graham. I think we talked about it earlier, in terms of 
meeting these regulatory milestones and establishing regulatory 
milestones that are years in front of us, somehow being able to 
work a regulatory framework and a funding certainty framework 
that will allow us to better work with the regulators to 
deliver their requirements.
    Senator Johnson. Mr. McKelvy.
    Mr. McKelvy. As was said by Mr. Surash in the panel, it 
would be wonderful if there was a 5-year funding stream 
identified because often the projects are directed to clean up 
one area; then all of a sudden the funding is attained for 
another area, and then everyone has to change and move to a 
different area. And it is not quite systemic or under some kind 
of order.
    You couple that with other regulatory agencies--the 
Environmental Protection Agency (EPA), et cetera--that seem to 
sometimes have a different strategy and a different goal from 
the DOE EM has.
    And there could be better partnership with all the 
regulatories, the other agencies as well, in terms of what the 
end goal is.
    Senator Johnson. Mr. Sheppard.
    Mr. Sheppard. I think we touched upon some of that, mainly 
with finding the true scope of what the project is and what you 
want--in this case, capital--large construction projects to 
achieve in the end and then having a bounding cost estimate 
that is realistic and accounts for all of the contingencies 
that may happen on these types of projects.
    The thing that was not discussed this morning that you have 
to consider is the overall life cycle costs. Although we are 
focused on the cost of these projects, as with SWPF, it is a 
critical element to significant reduce overall life cycle 
costs--so not only consider the costs associated with the 
initial project but how it fits into the overall mission at 
Savannah River and the overall life cycle costs, which are 
substantial on an annual basis.
    Senator Johnson. With these one-of-a-kind projects, is it 
possible to properly define the scope of the project, Mr. 
Graham?
    Mr. Graham. I think it is quite the challenge. And I think, 
again, we have gone into these with phases where you fund a 
phase of the work, get that locked down and then move ahead.
    But my point I made earlier--in terms of trying to meet the 
regulatory framework, I think DOE often gets themselves 
ratcheted into--as Jack Surash put it, you are trying to 
deliver; you are trying to make commitments.
    And, again, we are dealing with, I think, our toughest 
problems right now in DOE.
    Senator Johnson. Mr. McKelvy.
    Mr. McKelvy. I think that there could be a better job done 
of scoping and costing the facilities with all of the factors 
that could be encountered up front.
    The IWTU facility, for example, at the time that the 
baseline cost was determined, there was not the input from the 
Defense Board that increased the seismic requirements, and then 
there were other inputs from previous DOE management that 
wanted the facility to have structural integrity for future 
calcine processing. If those things had been known at the very 
beginning, before the construction had started and before the 
design was done, then the baseline would have been much more 
accurate.
    Senator Johnson. Was it possible to know that ahead of 
time? In defense of the government, I mean.
    Mr. McKelvy. There could have been earlier involvement from 
the Defense Board, certainly, and perhaps the longer-scale plan 
for the calcine process could have been factored in.
    Senator Johnson. OK. Mr. Sheppard, do you want to comment?
    Mr. Sheppard. I think it is basically the same thing. It is 
just the timing of the changes, whether they are DOE directed 
changes or throughput changes.
    And, if you look at the larger, complex facilities--the 
Parsons contract was awarded in 2002, and construction started 
in 2008.
    So, when you have a span of 6 years, things are going to 
change. People are going to want to have facilities designed 
and built safer. But, whenever you have major changes in the 
middle of design, it causes significant impacts that usually 
are not felt and realized until much later down the road.
    Senator Johnson. Who primarily drives those changes?
    Is that from the Safety Board?
    Is that the government?
    Is that, as you are going through the design phase, you are 
raising red flags?
    Or, all of the above?
    Mr. Graham.
    Mr. Graham. I think it is all of the above.
    Senator Johnson. OK
    Mr. Graham. Yes, I think. Again, if you look at the waste 
treatment plant, for example, there was a change in the seismic 
requirements after we got started.
    And so, again, as we talked about, anytime you are adding 
new requirements when you are in the middle of the job, whether 
you are building one of these complex factories or whether you 
are building a house, if you have to change the insulation and 
go back rework things, it is an expensive trip.
    Senator Johnson. From the first panel, it seemed like the 
direction we were moving was trying to bring these contracts 
into smaller bite-sized pieces. Would that be helpful or 
harmful, Mr. Graham?
    Mr. Graham. I think that it--you have to weigh whether 
cutting it into smaller pieces makes it more manageable for the 
pieces. But then how do you integrate the pieces that have to 
come together?
    And so I think that----
    Senator Johnson. That kind of speaks to really defining the 
scope of the project. We really need something pretty large on 
the front end, and then maybe--so define the scope, take a 
little more time on the scope of the project and then break it 
down into bite-sized pieces?
    Mr. Graham. You could break down into some pieces. But 
again, at the end of the day, if you look at a facility like 
the waste treatment plant, where there is major, large 
facilities that have to interact together, it does not lend 
itself, I think, to splitting it into small parts.
    Senator Johnson. OK. Mr. McKelvy, it looked like you wanted 
to weigh in.
    Mr. McKelvy. Yes, sir. On the projects that are design-
build projects, construction projects, that is one--usually one 
contractor, one piece, one budget.
    When you look at the overall cleanup of a 500-square-mile 
site, there are various, discrete pieces of the work that are 
all budgeted and costed in. Whether they were contracted 
separately or not, they are still identified and funded by the 
DOE on a per-project basis.
    So, the other aspect of this is that, sure, the scope can 
change on a building--a first-of-a-kind building. But often we 
will get into some remediation, and we will have thought from 
the information from the 40s and 50s that there are 1,000 drums 
of waste buried 40 feet underground, and when you dig it up you 
find that there is 2,000 or 3,000.
    And so it is the dynamic scope change of the circumstance, 
of the complexity of the work.
    Senator Johnson. OK. Again, thanks for your testimony.
    And thank you, Madam Chairman.
    Senator McCaskill. We really appreciate your being here. We 
will get some questions to you for the record since our time 
was curtailed today.
    And I am glad that we had this hearing. I think it was very 
helpful.
    I hope you found it helpful and not, you know, as somebody 
accused us of always trying to shoot fish in a barrel. I hope 
you did not feel like you were fish, and I hope you did not 
feel like you were in a barrel.
    Thank you very much.
    [Whereupon, at 1:02 p.m., the Subcommittee was adjourned.]



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