Department of Energy: Further Actions Are Needed to Strengthen	 
Contract Management for Major Projects (18-MAR-05, GAO-05-123).  
                                                                 
The Department of Energy (DOE) pays its contractors billions of  
dollars each year to implement its major projects--those costing 
more than $400 million each. Many major projects have experienced
substantial cost and schedule overruns, largely because of	 
contract management problems. GAO was asked to assess, for major 
departmental projects, (1) DOE's use of performance incentives to
effectively control costs and maintain schedules, (2) the	 
reliability of the data DOE uses to monitor and assess contractor
performance, and (3) the reliability of the Project Assessment	 
and Reporting System (PARS) data that senior managers use for	 
project oversight.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-123 					        
    ACCNO:   A19737						        
  TITLE:     Department of Energy: Further Actions Are Needed to      
Strengthen Contract Management for Major Projects		 
     DATE:   03/18/2005 
  SUBJECT:   Contract administration				 
	     Contract oversight 				 
	     Contract performance				 
	     Contractors					 
	     Cost control					 
	     Cost overruns					 
	     Data integrity					 
	     Performance measures				 
	     Schedule slippages 				 
	     Program management 				 
	     Internal controls					 
	     Incentives 					 
	     DOE Project Assessment and Reporting		 
	     System						 
                                                                 

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GAO-05-123

United States Government Accountability Office

GAO	Report to the Committee on Government Reform, House of Representatives

March 2005

DEPARTMENT OF ENERGY

Further Actions Are Needed to Strengthen Contract Management for Major Projects

                                       a

GAO-05-123

Highlights of GAO-05-123, a report to the Committee on Government Reform,
House of Representatives

The Department of Energy (DOE) pays its contractors billions of dollars
each year to implement its major projects-those costing more than $400
million each. Many major projects have experienced substantial cost and
schedule overruns, largely because of contract management problems. GAO
was asked to assess, for major departmental projects, (1) DOE's use of
performance incentives to effectively control costs and maintain
schedules, (2) the reliability of the data DOE uses to monitor and assess
contractor performance, and (3) the reliability of the Project Assessment
and Reporting System (PARS) data that senior managers use for project
oversight.

GAO recommends that DOE strengthen its contract management for major
projects by, among other things, (1) developing a chapter in DOE's
Acquisition Guide that specifies a systematic contracting approach for
major projects; (2) reducing DOE's overreliance on unvalidated contractor
data in awarding contract fees; and (3) developing a schedule for
assessing the reliability of contractors' project management systems,
giving priority to systems that DOE believes are deficient. In commenting
on the draft report, DOE generally concurred with all of the
recommendations.

www.gao.gov/cgi-bin/getrpt? GAO-05-123.
.
To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Robin Nazzaro
at (202) 512-3841 or [email protected].

March 2005

DEPARTMENT OF ENERGY

Further Actions Are Needed to Strengthen Contract Management for Major Projects

DOE could use performance incentives more effectively for controlling
costs and schedules if it developed performance incentive guidance and
assigned responsibility for reviewing a contract's project management
provisions prior to award. DOE has awarded contracts for 15 of 33 major
projects that use a schedule or other performance incentive without an
associated cost incentive or constraint; thus a contractor could receive
full fees by meeting all schedule baselines while substantially
overrunning costs.

DOE has relied on unvalidated contractor data to monitor contractors'
progress in executing major projects and to award fees for performance. In
particular, DOE's self-assessment of contract administration in 2002 found
that field personnel overly relied on contractors' accounting systems and
contractor-collected data in assessing performance, without significant
validation of those data. No subsequent self-assessment has been conducted
to determine if this problem continues. Furthermore, DOE has not required
that its contracting officers receive the training needed to assess the
adequacy of contractors' project management systems that generate data
used to monitor progress.

Although development of PARS is a positive step, the reliability of the
project performance data that PARS provides to senior DOE managers is
limited by problems with accuracy, completeness, and timeliness. Regarding
accuracy, DOE has not assessed the reliability of contractors' project
management systems that feed data into PARS for 31 of 33 major projects,
even though DOE believes that some systems are deficient. Regarding
completeness, GAO identified 3 major projects that are not in PARS. As to
timeliness, cost and schedule data for 6 major projects in the June 2004
PARS report were significantly out of date because DOE has not required
contractors to submit timely performance data.

These contract management problems limit DOE's ability to effectively
manage its major projects and avoid further cost and schedule slippages.

Contractors' Performance Awards Relied on Unvalidated Data for 30 of the
33 Major Projects GAO Reviewed

Contents

  Letter

Results in Brief
Background
DOE Could Use Performance Incentives More Effectively for

Controlling Costs and Schedules
DOE Has Relied on Unvalidated Contractor Data to Monitor and

Assess Contractors' Performance for Major Projects
The Reliability of PARS Data Is Limited
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1 4 7

10

20 25 39 40 41

Appendixes

Appendix I:	The Department of Energy's 33 Major Projects That We
Reviewed 44

Appendix II: Scope and Methodology 47

Appendix III: Comments from the Department of Energy 51

  Related GAO Products

Table Table 1:	PARS Reports Assess a Project's Cost and Schedule
Performance against Only the Current DOE-Approved Baselines

Contents

Abbreviations

DOE Department of Energy
FAR Federal Acquisition Regulation
NNSA National Nuclear Security Administration
OMB Office of Management and Budget
PARS Project Assessment and Reporting System

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

March 18, 2005

The Honorable Tom Davis Chairman The Honorable Henry A. Waxman Ranking
Minority Member Committee on Government Reform House of Representatives

The Department of Energy (DOE) pays its contractors billions of dollars
each year to implement projects costing more than $400 million each, which
the department designates as major projects. These major projects include
environmental cleanup at its current and former nuclear weapons production
facilities, refurbishment of nuclear weapons, and construction of
specialized scientific facilities. Our previous reports have found that
many of DOE's major projects have experienced substantial cost overruns
and delays. As a result, since 1990, we have designated DOE's contract
management-broadly defined to include contract administration and project
management-as a high-risk area for fraud, waste, abuse, and mismanagement
because of the department's history of inadequate management and oversight
and failure to hold its contractors accountable. In recent years, we have
continued to find problems with DOE's contract management of its major
projects. (See the list of related GAO products at the end of this
report.) For example, our 2002 assessment of DOE's contract reform
initiatives found that 5 of the 16 major projects we examined had more
than doubled in cost-for billions of dollars in total cost overruns-and
experienced more than 5 years in delays.1

In response to these problems, DOE has instituted contracting and project
management reforms. To better align DOE functions with challenges to
improve the planning, execution, and management of its contracts, the
department established the Office of Contract Management in 2000 with
responsibility for assisting the field and other DOE offices in the
planning, implementation, and oversight of (1) the contract award process,
which involves those front-end activities necessary to ensure that
contracts are structured in a way that best fulfills DOE's needs, and (2)
the contract administration process, which encompasses all dealings
between DOE and its contractors from the time a contract is awarded until
the work has been

1GAO, Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure
Initiatives Have Improved Results, GAO-02-798 (Washington, D.C.: Sept. 13,
2002).

completed and accepted or the contract has been terminated, payment made,
and any disputes resolved. To improve the contract award process, the
Office of Contract Management has, among other things, developed updates
to DOE's Acquisition Guide, which amplifies upon the requirements
contained in the Federal Acquisition Regulation (FAR) that governs
governmentwide federal procurement activities. Each year, the Office of
Contract Management reviews a limited number of pending contract actions,
including any matters affecting a contract's deliverables, schedule, and
cost. To improve the contract administration process, the Office of
Contract Management issued, in May 2000, a Reference Book for Contract
Administrators, a consolidated reference tool for DOE's contract
administrators. The office also has performed periodic self-assessments of
contract administration practices.

As part of its project management reforms, DOE established the Office of
Engineering and Construction Management in 1999 to oversee the project
management process by developing project management policy, improving
project oversight systems, and implementing a career development program
for DOE project managers. In particular, the Office of Engineering and
Construction Management in 2001 implemented the Project Assessment and
Reporting System (PARS), a Web-based system for collecting and analyzing
current performance data for projects costing more than $5 million.
Although the department has other ways to communicate project status
information, including quarterly reports for some projects, PARS monthly
project status reports for the Deputy Secretary of Energy (hereafter
referred to as PARS reports) are DOE's primary tool for keeping senior
managers apprised of a project's performance. In August 2003, the office
initiated a certification program for contractors' project management
systems that assesses the accuracy of the cost and schedule performance
data that contractors generate by examining, in particular, whether each
contractor's system complies with private industry's standard for earned
value management-a systematic approach for integrating and measuring cost,
schedule, and technical (scope) accomplishments on a project.

You asked us to examine DOE's contract management actions designed to
control cost growth and schedule slippage for its major projects.
Specifically, you asked us to assess, for major departmental projects, (1)
DOE's use of performance incentives to effectively control costs and
maintain schedules, (2) the reliability of the data DOE uses to monitor
and assess contractor performance, and (3) the reliability of the PARS
data that senior managers use for project oversight. Our review focused
primarily on

the 33 major projects that had passed, as of March 2004, DOE's Critical
Decision 2 milestone-the point at which the department approves a
project's cost, schedule, and scope baselines on the basis of an approved
conceptual design report and acquisition strategy. (See app. I for the 33
major projects that we reviewed.) The projects we reviewed include 28
projects that cost more than $400 million each and 5 projects that our
2002 assessment defined as major projects because their total costs
exceeded $100 million. DOE's Office of Environmental Management
(Environmental Management), Office of Science, and National Nuclear
Security Administration (NNSA) are funding the 33 major projects.

To determine DOE's guidance for using different performance incentives for
major projects, we examined the contract provisions for the 33 major
projects that have DOE-approved performance baselines, reviewed various
recent contract-related documents associated with these 33 projects, and
discussed the contents of these documents with key DOE contracting
officials. We then compared the contract provisions with requirements in
the FAR; the DOE Acquisition Regulation; and DOE's contract-award
guidance, including the Performance-Based Contracting Guide and the
Acquisition Guide. To assess DOE's oversight of contract administration
activities, we reviewed DOE's Reference Book for Contract Administrators,
compared the findings made in DOE's various contract administration
self-assessment reports with the actions the department has taken, and
interviewed contracting officials at the Department of Defense and
administrators at the National Aeronautics and Space Administration
because DOE officials acknowledged their leadership in implementing such
project and contract management reforms as earned value management
principles. To evaluate the reliability of PARS data, we assessed the
data's accuracy, completeness, and timeliness by examining the underlying
data and the way data are reported to senior managers. For example, we
compared the information in monthly PARS reports from January through
September 2004 with project-specific data obtained from various DOE
program offices. When we identified discrepancies, we assessed whether the
discrepancies limited the reliability of data reported in PARS. Given our
review of the documentation provided by DOE and our discussions with DOE
officials, we have reservations about the reliability of PARS data. These
issues are discussed in this report. We conducted our work between January
2004 and January 2005 in accordance with generally accepted government
auditing standards, which included an assessment of data reliability and
internal controls. (See app. II for further information about the scope
and methodology of our review.)

Results in Brief	DOE could use performance incentives more effectively for
controlling costs and schedules if it developed performance incentive
guidance and assigned responsibility for reviewing a contract's project
management provisions. DOE has awarded contracts for 15 of 33 major
projects that use a technical, schedule, or other performance incentive
without an associated cost incentive or cost constraint, so a contractor
could receive full fees by meeting all schedule baselines even though the
contractor substantially overran baseline costs. For 13 additional major
projects, DOE has used cost-plus-incentive-fee contracts without
certifying that contractors' project management systems generate reliable
cost and schedule data for measuring performance and awarding incentive
fees. In addition, for 11 major projects that are components of the
environmental cleanup of a DOE facility, no award fee amount is directly
linked to the successful completion of the major project, generally
because the project is part of the contractor's larger cleanup
responsibility. As a result, the contractor may not give sufficient
attention to the completion of a complex major project and focus, instead,
on less critical activities that are easier to achieve. Furthermore, an
Environmental Management review found that the award fee incentives in its
contracts were not sufficiently focused on site cleanup activities. As a
result, Environmental Management decided that, beginning in fiscal year
2003, award fee determinations would consider only contractor activities
directly related to cleanup work, while excluding such indirect
work-related activities as providing timely and accurate reports to DOE
because they are basic expectations of any contractor. In contrast, NNSA
has not conducted a review similar to Environmental Management's and, for
at least 1 of its major projects, NNSA has considered a contractor's
indirect work-related activities in awarding incentive fees. DOE has not
issued guidance that specifies the indirect work-related activities to be
included in determining incentive fee awards.

DOE has relied on unvalidated contractor data to monitor contractors'
progress in executing major projects and to award fees for performance.
This reliance on unvalidated data limits the department's ability to
ensure it gets what it is paying for. Specifically, DOE's self-assessments
of contract administration in 1997 and 2002 found that field personnel
overly relied on contractor accounting systems and contractor-collected
project data in awarding fees, without significant validation of those
data. However, the 2002 self-assessment made no recommendation for fixing
the problem, and no broad self-assessment of contract administration has
been conducted since 2002. Without a specific recommendation,
implementation of that recommendation, and periodic self-assessments, DOE
lacks a mechanism

for ensuring that overreliance on contractor data and other contract
administration problems are corrected. DOE has begun to certify the
reliability of contractors' project management systems that generate the
performance data used to monitor contractors' progress; however, the
department has no time table for the completion of this certification
program. Furthermore, with the exception of NNSA, DOE has not required its
contracting officers to receive training in earned value management, even
though contracting officers are required to determine whether the
contractor's project management system, after contract award, meets
private industry's earned value management standard. In contrast,
administrators at the National Aeronautics and Space Administration told
us that their contracting officers need training to adequately assess
contractors' use of earned value management.

Although the development of PARS is a positive step toward improving DOE's
project oversight, the reliability of the project performance data that
PARS provides to senior managers is limited by problems with the data's
accuracy, completeness, and timeliness.

o 	The accuracy of the PARS cost and schedule data is uncertain for three
reasons. First, even though DOE believes that some of its contractors'
project management systems are deficient, the department has assessed the
reliability of systems for only 2 of the 33 major projects we reviewed.
Additionally, despite the department's goal of assessing all systems by
the end of fiscal year 2006, it has not developed a schedule for reviewing
other contractors' project management systems. As a result, senior DOE
managers cannot rely on PARS performance data for many major projects to
determine whether the projects are on cost and on schedule. For example,
DOE officials told us that they do not know if the $5.7billion Tank Waste
Treatment and Immobilization Plant project at Hanford, Washington, is
meeting its performance baselines, even though PARS data show that the
project is on track. Second, the cost and schedule variances reported in
PARS for many projects are small and do not accurately reflect the
considerable cost growth and schedule slippage that have occurred in the
past because DOE updates the PARS baselines when project changes are
approved. DOE officials told us that departmental project management
guidance does not require the reporting of life-of-project cost and
schedule variances; however, PARS cannot reflect prior cost overruns and
schedule slippages without such reporting. Third, most of DOE's project
directors have not received earned value management training, which is
needed to ensure that contractors' project management systems are
providing accurate

performance data to PARS, and DOE does not expect to complete this
training until May 2006.

o 	Regarding the completeness of these data, we identified 3 major
projects, as well as 2 smaller projects, that are not included in PARS. In
particular, while DOE stated in July 2003 that it intended to treat each
of its nuclear weapons refurbishment programs as projects, none of these
refurbishments have been added to the PARS database. Although DOE recently
asked its program offices to identify and enter additional projects into
PARS, implementation has been slow in part because key program office
officials lack project management training, which is necessary for
determining what activities are subject to PARS reporting, according to
Office of Engineering and Construction Management officials. For projects
that are being reported, PARS lacks forwardlooking trend data, such as the
projects' estimated cost at completion that, according to numerous
officials, are critical for PARS to effectively report possible
performance challenges. Although these data are available, they are not
included in PARS reports because Office of Engineering and Construction
Management officials want to minimize the amount of information that
senior managers review.

o 	Regarding timeliness, the June 2004 PARS report's performance data for
6 major projects were significantly out of date primarily because
contractors had not submitted more current performance data, according to
Office of Engineering and Construction Management officials. As a result,
the PARS monthly reports did not show senior DOE managers the need for
corrective actions in response to cost and schedule slippages. While some
minor lag is to be expected in reporting project performance, Office of
Engineering and Construction Management officials noted they are open to
exploring options to improve the timeliness of PARS data in those cases
where data is significantly out of date.

We are making several recommendations to the Secretary of Energy to ensure
the use of effective performance incentives, strengthen oversight of
contract administration, and improve the reliability of the project
performance data provided by PARS. DOE generally concurred with all of the
recommendations. DOE also provided a number of comments to improve the
report's accuracy, which we incorporated where appropriate.

Background	DOE is the largest civilian contracting agency in the federal
government; about 90 percent of its annual budget is spent on contracts
for carrying out its activities and operating its facilities. In
fulfilling their missions, DOE's program offices are responsible for
contracting for and overseeing the execution of the department's major
projects, many of which are first-of-akind efforts and thus involve
substantial risk and may also be separate line items in DOE's budget. For
example:

o 	Environmental Management's mission is to accelerate risk reduction and
cleanup of the environmental legacy of the nation's nuclear weapons
program and government-sponsored nuclear energy research. Environmental
Management has used a single sitewide contract that involves several major
projects costing billions of dollars for cleaning up some of its former
facilities. In addition, Environmental Management has undertaken many
large-scale individual projects. For example, the Hanford Tank Waste
Treatment and Immobilization Plant project is an important part of the
cleanup effort at Hanford, Washington. The project, which was initiated in
December 2000, is intended to treat and prepare for disposal 55 million
gallons of high-level radioactive waste by July 2011 at an estimated cost
of $5.7 billion.

o 	NNSA's mission is to meet national security requirements by, among
other things, maintaining and enhancing the safety, reliability, and
performance of the U.S. nuclear weapons stockpile, which includes
maintaining the capability to design, produce, and test nuclear weapons.
To fulfill this mission, NNSA undertakes such projects as refurbishing
W-80 nuclear warheads to extend their operational lives. The W-80
refurbishment project was initiated in September 1998 and is expected to
be completed in fiscal year 2017 at an estimated cost of about $2.45
billion.

o 	The Office of Science's mission is to deliver the remarkable
discoveries and scientific tools that transform our understanding of
energy and matter and advance the national, economic, and energy security
of the United States. To fulfill this mission, the Office of Science has
constructed specialized scientific research facilities, such as the
Spallation Neutron Source at the Oak Ridge National Laboratory. This
project consists of an accelerator system that delivers short
(microsecond) pulses to a target/moderator system where neutrons are
produced by a nuclear reactor process called spallation. This project is
designed to provide the next-generation spallation neutron source for

neutron scattering and related research in broad areas of the physical,
chemical, materials, biological, and medical sciences. The Spallation
Neutron Source project began in October 1998 and is expected to be
completed in June 2006 at an estimated cost of about $1.4 billion.

DOE's principal official responsible for the execution of a major project
is the federal project director, who is located at the project site and is
supported by project managers. The project director is responsible for
overseeing a project's design, execution, budgeting, and performance. For
contracts with award fee provisions, senior DOE program office managers
consult with contracting and project officers to assess a contractor's
performance and determine the appropriate award fees.

In addition to the contract management problems our prior reports have
identified, a recent series of reports by the National Research Council of
the National Academies identified weaknesses in DOE's project management.
The council's 2004 report cited several factors that have contributed to
the slow pace of project management improvements and resulted in
inconsistent project performance.2 These factors include the desire of DOE
site office personnel and contractors to be independent of oversight from
DOE headquarters, insufficient support for training, inadequate numbers of
DOE project managers to oversee contractors' performance, and the absence
of a champion for project managers and process improvement who has the
authority to ensure both adherence to policies and procedures and the
availability of necessary funding and personnel resources.

2National Research Council of the National Academies, Progress in
Improving Project Management at the Department of Energy: 2003 Assessment
(Washington, D.C.: 2004).

During the past year, DOE has continued to implement contracting and
project management reforms. In particular, in December 2003, the Secretary
of Energy appointed an Associate Deputy Secretary with responsibility,
among other things, for both contract and project management, addressing a
key National Research Council concern. DOE also entered into an agreement
with the Defense Contract Management Agency, within the Department of
Defense, to support the certification of contractors' project management
systems. More recently, DOE is developing an action plan in response to
the Civil Engineering Research Foundation's assessment of departmental
project management that recommended that DOE, among other things, develop
a core group of highly qualified project directors, require peer reviews
for first-of-a-kind and technically complex projects when the projects'
preliminary baselines are approved, and enhance PARS by making the data
more timely.3 Furthermore, to improve its contract award process, DOE
revised its Acquisition Guide by adding chapter 16, which lists the
various contract types available and discusses their respective advantages
and constraints. To address future skill gaps in its procurement
organization, DOE established an acquisition career development program
and has certified 90 percent of its procurement professionals as attaining
mandatory training and experience standards under this program. Within the
Office of Environmental Management, a series of contract and project
management improvements have occurred consisting of, but not limited to,
providing additional training and managing more of the cleanup work as
projects. Within the Office of Contract Management, a series of contract
award and administration initiatives have been completed. These
initiatives include, among other things, strengthening contract
competition policies and practices, improving acquisition workforce
effectiveness, increasing small business utilization throughout DOE, and
strengthening DOE management and fiscal effectiveness. For fiscal year
2005, the Office of Contract Management has multiple initiatives planned,
including identifying and implementing follow-on actions related to the
DOE management challenge pertaining to contract competition.

3Civil Engineering Research Foundation, Independent Research Assessment of
Project Management Factors Affecting Department of Energy Project Success
(July 12, 2004).

  DOE Could Use Performance Incentives More Effectively for Controlling Costs
  and Schedules

Because many of DOE's major projects are first-of-a-kind and thus involve
substantial risk, DOE's contracting decisions can be critical to the
successful completion of its major projects. However, DOE could use
performance incentives more effectively for controlling costs and
schedules for its major projects if the department developed criteria for
using different performance incentives and assigned responsibility for
reviewing a contract's project management provisions prior to award. For
example, DOE has used contracts that have a technical, schedule, or other
performance incentive without an associated cost incentive or cost
constraint (other than the annual funding level for the contract). DOE
also has used cost-plus-incentive-fee contracts without certifying that
contractors' project management systems generate reliable cost and
schedule data for measuring performance and awarding fees. In addition, we
found that the contract incentives for most of the 25 major environmental
restoration projects substantially differ from the "Gold Chart"
performance metrics that Environmental Management uses to assess its
performance and report its progress to the Congress. Furthermore, for 11
major projects that are components of the environmental cleanup of a DOE
facility, Environmental Management has not directly linked incentive fees
to the successful completion of the project, generally because the project
is part of the contractor's larger cleanup responsibility. Finally, while
Environmental Management has decided that incentive fee determinations
would consider only contractor activities directly related to cleanup
work, NNSA has, for at least 1 of its major projects, considered a
contractor's indirect work-related activities in awarding incentive fees.

    DOE Has Not Fully Developed Performance Incentive Guidance to Effectively
    Control Costs and Maintain Schedules

Despite efforts in recent years to improve contract and project
management, DOE has not fully developed performance incentive guidance to
effectively control costs and maintain schedules. DOE has issued the
following guidance, order, and manual that are applicable to the contract
award process for major projects and that supplement the FAR and the DOE
Acquisition Regulation:

o 	In the late 1990s, DOE issued its Acquisition Guide to, among other
things, supplement the FAR and the DOE Acquisition Regulation and be a
repository of best practices found throughout the department. Chapter 16
of the guide discusses contract types; however, the chapter notes that it
was not intended to provide a template for matching a contract type to
given contracting situations. While the guide's index shows that chapter

34 is reserved for guidance to contracting officials related to major
projects, DOE has never drafted the chapter, according to the DOE official
responsible for maintaining revisions to the Acquisition Guide.

o 	In October 2000, DOE issued Order 413.3, "Program and Project
Management for the Acquisition of Capital Assets," to ensure that capital
assets, including major projects, would be delivered on schedule, within
budget, and fully capable of meeting mission needs. To accomplish these
goals, the order states, in part, that DOE officials are to develop an
acquisition plan during the acquisition process that includes such
elements as contracting options and a contractor incentive process. The
order, however, does not elaborate on the possible contracting and
performance incentive options whatsoever.

o 	In March 2003, DOE issued manual 413.3-1, "Project Management for the
Acquisition of Capital Assets," to improve the implementation of DOE Order
413.3. The manual addresses various activities, including a chapter on
contracting that contains no direct reference to major projects. The
chapter states that the type of contract and incentives proposed should be
based on an overall view of the principal risks to the project and
provides a limited discussion of the types of contracts available. For
example, it states that fixed-price contracts are not appropriate for
research and development efforts or other complex projects where there is
a high degree of uncertainty in the execution or DOE requirements. While
the chapter mentions that DOE generally uses a cost-plus-award-fee
contract for contractors managing and operating DOE sites, it does not
address the other available types of contract.

Furthermore, DOE has not used its Acquisition Guide to identify best
practices, or lessons learned, based on its major project contracting
experiences. In our view, given DOE's long history with major projects,
considerable information could be added to this guide detailing those
major project contracting approaches that worked and those that did not.
Improved guidance could help DOE better control costs and maintain
schedules for its major projects.

    DOE Has Not Always Reviewed the Project Management Provisions of Its Major
    Contracts Prior to Award

Neither the Office of Contract Management nor the Office of Engineering
and Construction Management always reviews the project management
provisions of major project contracts prior to award to ensure that the
performance incentives are appropriately used. At the heart of this
problem is confusion over responsibility. The Director of the Office of
Contract Management and the Director of the Office of Engineering and
Construction Management each believe that the other office has
headquarters responsibility for reviewing the project management
provisions of contracts prior to approval.

The confusion exists because the chapter in DOE's Acquisition Guide on the
headquarters review of contract and financial assistance actions is silent
on the role of the Office of Engineering and Construction Management in
the review process. This chapter indicates that packages pertaining to
contract actions will be sent to nine different DOE offices for review,
none of which is the Office of Engineering and Construction Management. As
a consequence, if this office has a role in the contract review process,
it has not been clearly defined.

According to the Director, Office of Contract Management, the Office of
Engineering and Construction Management should be responsible for
reviewing the project management provisions in major project contracts
because of its responsibility for project management matters. The director
told us that his office typically reviews from 60 to 70 pending contract
actions each year, and these reviews follow a general approach looking at
any matters that might affect timing, delivery, and cost-but no specific,
formalized list is followed.

According to the Director of the Office of Engineering and Construction
Management, his office reviews certain documentation that could affect
which company is selected for a contract, but his office has no role in
reviewing the actual provisions of the contract. While the Office of
Contract Management sends contract proposals to the Office of Engineering
and Construction Management for review, the director noted that his office
has only one staff person with contracting experience. The director
believes the solution to improving the review of major project contracts
is for contracting officials within the Office of Contract Management to
become more familiar with earned value management, a DOE contracting
requirement for integrating and measuring a contractor's performance.

    Problems Have Developed Because DOE Has Not Effectively Used Performance
    Incentives

DOE's Implementation of Performance Incentive Provisions Does Not Enable
DOE to Effectively Control Costs

For many of the 33 major projects we reviewed, DOE has used performance
incentives that limit its ability to effectively control cost and schedule
performance. For example, almost all of DOE's cost-plus-awardfee contracts
for major projects have included a performance incentive without also
using an associated cost incentive or cost constraint (other than the
annual funding level for the contract). Also, DOE has used
costplus-incentive-fee contracts without certifying that contractors'
project management systems generate reliable cost and schedule data for
measuring performance and awarding fees. We also found that (1)
Environmental Management's contracts included environmental cleanup
performance incentives that differed substantially from its new Gold Chart
performance metrics; (2) DOE did not always link its fee awards to
contractors' performance on major projects; and (3) DOE's program offices
have treated indirect work-related activities, such as providing timely
and accurate reports to DOE, differently in determining the contractors'
incentive award fees.

For 15 of the 17 major projects that use a cost-plus-award-fee contract,
the contract contained a technical, schedule, or other performance
incentive without including an associated cost incentive or cost
constraint (other than the annual funding level for the contract). Under
such circumstances, the potential exists that a contractor could meet all
incentives and overrun baseline costs but still receive full fees. The
other 2 major projects used a cost-plus-award-fee contract that included
an associated cost incentive or cost constraint for each technical,
schedule, or other performance incentive.

The FAR, the DOE Acquisition Regulation, and DOE guidance preclude the
inclusion of a schedule or other performance incentive without also
including a cost incentive or cost constraint. FAR S: 16.402-1 states that
no incentive contract may provide for other incentives without also
providing for a cost incentive or cost constraint. Similarly, DOE
Acquisition Regulation S: 970.5215-3 provides that requirements
incentivized by other than cost incentives must be performed within their
specified cost constraint. DOE's Performance-Based Contracting Guide,
dated October 2003, states that (1) cost incentives should be included if
other incentives are included because a schedule or other performance
incentive may result in the contractor paying little attention to the cost
of achieving those incentives unless cost is also a consideration and (2)
DOE contracts, in developing incentives and incentive programs, must
comply with the

incentive contract provisions of the FAR and the DOE Acquisition
Regulation.

The Director of the Office of Contract Management told us that to
implement the FAR requirement to include a cost incentive or cost
constraint whenever a noncost incentive is in the contract, each noncost
incentive does not necessarily need an associated cost constraint
dedicated to that noncost incentive. According to the director, a single
cost constraint, which could be equivalent to the project's annual funding
level, would fulfill the FAR requirement.4

However, DOE contracting officials at Oak Ridge, West Valley, and Savannah
River believe that to implement the FAR and DOE Acquisition Regulation
requirements in a way that effectively controls costs, a contract with a
technical, schedule, or other noncost incentive should also have an
associated cost incentive to function as a constraint on the expenditure
of funds. One of these officials added that as the noncost incentives
become more objective and measurable, the cost constraint should be more
clearly defined in relation to each noncost incentive. Similarly, another
one of these officials told us that using the annual funding level or the
project's cost baseline as the constraint is too vague and unworkable, and
that some funding levels and cost baselines do not track down to the
performance incentive level. As a result, neither the funding level nor
the cost baseline would indicate whether the performance incentive was
accomplished within the cost constraint.

These views are consistent with the findings from DOE's 1997 assessment of
performance-based incentives, which found that DOE's and contractors'
financial systems generally are budget-based and do not segregate and
track costs at the performance incentive level. The assessment added that
this limits DOE's ability to establish meaningful cost baselines and to
monitor the cost of performance under specific incentivized work efforts
in relation to the total cost of the contract.

4DOE's management and operating contracts include the DOE Acquisition
Regulation clause providing discretion to the fee determination official
to reduce the contractor's fee by up to 75 percent when the contractor
fails to meet stipulated cost performance levels. (See 48 C.F.R. S:
970.5215-3.) In DOE's management and operating contracts, the cost
performance level for the contract, unless otherwise stipulated, is
typically the annual funding level for the contract.

DOE Has Used Cost-Plus-Incentive-Fee Contracts without Certifying the
Reliability of Contractors' Performance Data

For 13 of the 33 major projects we reviewed, DOE used a
cost-plusincentive-fee contract that provides the contractor with an
initially negotiated fee that is subsequently adjusted by a formula based
on the relationship of total allowable costs to total target costs. The
formula provides, within limits, for fee increases when total allowable
costs are less than target costs. In recent years, DOE has made a major
effort to move toward the use of cost-plus-incentive-fee contracts.

Because a cost-plus-incentive-fee contract provides higher fee awards to
the extent that actual costs are lower than anticipated, it depends upon
reliable cost estimating at the outset in the form of a target cost and
reliable cost reporting later. In July 1997, the Office of Management and
Budget (OMB) issued requirements regarding the acceptability of
contractors' project management systems. However, DOE has not certified
the reliability of contractors' project management systems that generate
the target cost data for the 13 major projects.5 As a result, a contractor
might receive a high fee payment because its project management system
generated an unreliable high initial cost estimate and subsequently
reported lower actual costs. A U.S. Army Corps of Engineers' report,
issued in May 2004, concluded that it was not appropriate to use a
cost-plusincentive-fee contract for the Hanford Tank Waste Treatment and
Immobilization Plant project, in part because reliable cost data could not
be generated in advance.6

Furthermore, DOE site personnel may not provide adequate surveillance of
the contractors' cost records for these 13 projects. According to DOE's
Performance-Based Contracting Guide, it is inappropriate to use a
costplus-incentive-fee contract if there is an overreliance on contractor
accounting systems and contractor-collected data without significant
validation of those data.7 In such situations, the guide states, any
potential cost savings reported might be the result of a poor estimate of
the amount of labor or material required, the approach planned, or the
associated costs. The Office of Contract Management's self-assessment of
contract

5DOE has assessed the contractor's project management system for the
Spallation Neutron Source project and plans to certify the system after
some minor changes are made.

6U.S. Army Corps of Engineers, Independent Cost & Schedule Baseline Review
Summary Report, Hanford Waste Treatment and Immobilization Plant (Walla
Walla, Washington: May 28, 2004).

7DOE developed the Performance-Based Contracting Guide as a reference
document for agency personnel involved in all aspects of performance-based
management contracting.

administration in 2002 found that most of the DOE field locations visited
relied almost exclusively on the contractors' data because they did not
have the staff resources capable of validating cost or technical
baselines. The report, however, did not identify the DOE field locations
visited, and, according to an Office of Contract Management official, no
individual field location reports were prepared.

Contracts' Performance For 16 of the 25 major environmental restoration
projects that we

Incentives Differed from the reviewed, the contracts' performance
incentives differed substantially from

Gold Chart Performance Metrics	the Gold Chart performance metrics that
Environmental Management uses to assess its performance and report its
progress to the Congress.8 Environmental Management developed the Gold
Chart performance metrics in October 2002 as a basis for clearly and
objectively showing the progress being made in the environmental cleanup
program. We found, however, that these Gold Chart metrics were not being
used to measure contractors' performance or award fees. Instead, DOE
measures performance and awards fees on the basis of information from the
contractors' project management systems, which DOE has not yet certified
as capable of producing reliable information.

For 4 projects at the Fernald Closure Site in Ohio, a lower performance
fee might have been appropriate if the Gold Chart metric had been used.
For fiscal year 2003, DOE awarded the contractor about $7.7 million of the
$8 million in available fee, or 97 percent, on the basis of acceptable
cost and schedule performance toward closure of the entire site during
fiscal year 2003. However, according to the fiscal year 2003 Gold Chart
metrics, the goal for the Fernald Closure Project was to accomplish four
radioactive facility completions and dispose of 2,568 cubic meters of
radioactive waste.9 According to Environmental Management information, the
contractor did not fully complete one of these tasks. Because the
contractor accomplished only three of the four radioactive facility
completions, Environmental Management might have given a different fee
amount if the two Gold Chart metrics had been used to determine award fee.

8The other 9 Environmental Management projects did not have associated
Gold Chart metrics.

9Environmental Management defines a radioactive facility completion as a
decommissioning, deactivation, dismantlement, demolishment, or transfer of
responsibility for the facility to another program or owner.

Conversely, a different fee amount might have been warranted for the Solid
Waste Stabilization and Disposition project at Hanford, Washington. For
fiscal year 2003, DOE awarded the contractor about $2.2 million of about
$3 million in available fee, or 73 percent, on the basis of the
contractor's disposal of radioactive waste in accordance with an approved
schedule that DOE determined the contractor had met. In contrast,
Environmental Management data for fiscal year 2003, using Gold Chart
metrics, show that the contractor actually disposed of 3,634 cubic meters
of waste as compared with a goal of disposing 2,320 cubic meters of waste,
or about 157 percent of the work intended. If the Gold Chart metrics had
been used to determine the award fee, the contractor might have received a
different fee amount.

For the Spent Nuclear Fuels project, at Hanford, Washington, the Gold
Chart metric and the contract's performance incentive were so dissimilar
that it was difficult to determine how to gauge the contractor's
performance. For fiscal year 2003, DOE awarded the contractor about $2.8
million of about $3.3 million in available fee, or 85 percent, on the
basis of the contractor's removing 777 metric tons, or 87 percent, of the
890 metric tons that had been planned. However, Environmental Management
data for fiscal year 2003, using the Gold Chart metrics, show the
contractor removed 805 units, or 94 percent, of the goal's 855 units.
Because the Gold Chart metric and the contract's performance incentive
were so dissimilar, we could not reconcile the information.

Environmental Management officials told us that the performance incentives
contained in environmental cleanup contracts and the Gold Chart metrics
should be aligned. In commenting on the draft report, Environmental
Management officials stated that the new Savannah River cleanup contract
incorporates Gold Chart metrics. They added, however, that the contract
renewals for the Oak Ridge, Fernald, and Rocky Flats facilities do not
contain the Gold Chart metrics because each is a cost-plusincentive-fee
contract that awards fee based on the final closure costs and date for the
site. It is unclear whether these cost-plus-incentive-fee contracts will
more effectively track contractors' performance because they rely on
contractors' project management systems that DOE has yet to certify. In
contrast, the Gold Chart metrics assess the accomplishment of discrete
amounts of work that is verifiable.

Incentive Fees Paid to Contractors Were Not Directly Tied to Performance
for Some Major Projects

DOE Program Offices Have Treated Indirect Work-Related Activities
Differently in Awarding Incentive Fees

In 1996, we reported that a key factor inhibiting the successful
completion of DOE's major projects was the lack of effective incentives.10
To the extent that incentives are properly applied, they can help achieve
agency goals. On the other hand, if incentives are nonexistent or not
effectively applied, a project may not be successfully completed.

Sixteen of the 33 major projects we reviewed had no incentive fees
directly associated with the successful completion of work. Nine of these
16 projects involve closure work at the Fernald and Rocky Flats sites,
where the payment of incentive fees is based on an overall average of the
cost and schedule status for all site closure activities, including major
projects and other site activities. Environmental Management officials
told us that rather than awarding incentive fees specifically for
completing any of the 9 major projects, or for other key interim
milestones, the Fernald and Rocky Flats contracts award provisional
incentive fees for meeting or exceeding overall targets for a fiscal year,
provided the contractors successfully achieve site closure on schedule.

However, it remains to be seen whether this approach will be effective in
completing major projects on time and within cost. For example, although a
major project at the Fernald site that we reviewed was experiencing cost
growth to the point where it was expected to exceed its cost baseline-the
total cost estimate to accomplish the project-DOE considered the overall
average of the cost and schedule status for all site activities at Fernald
to be acceptable and paid the contractor provisional incentive fees for
fiscal year 2003. Similarly, a major project at the Rocky Flats site had
overrun its estimated cost by about $42 million through fiscal year 2003.
However, this overrun was offset by an underrun of about $46 million in
activities such as general counsel work and planning and integration that,
according to DOE information, had historically been understaffed. The net
effect was that DOE paid the contractor provisional incentive fees because
the contractor's overall cost and schedule status for fiscal year 2003 was
considered to be acceptable.

In addition to these other contracting problems, we found that DOE program
offices treated indirect work-related activities differently in awarding
incentive fees. In late 2002, Environmental Management decided that award
fee determinations will consider only contractor activities

10GAO, Department of Energy: Opportunity to Improve Management of Major
System Acquisitions, GAO/RCED-97-17 (Washington, D.C.: Nov. 26, 1996).

directly related to cleanup work, while excluding such indirect
workrelated activities as providing timely and accurate reports to DOE,
providing support services to the government, and complying with the
contract because these activities are basic expectations of any
contractor. Environmental Management made this determination after its
review of contractors' authorized fee incentives identified numerous
examples of incentive fee payments for indirect work-related activities.
The review also found that Environmental Management was paying some
contractors additional fees for performing work safely that the review
concluded was a basic expectation, and not exceptional performance worthy
of additional fee.

NNSA has not conducted a review similar to Environmental Management's
assessing what, if any, indirect work-related activities are worthy of
incentive payments. The contractor for one NNSA major project received
incentive fee payments for providing timely and accurate reports to DOE
and other indirect work-related activities during fiscal year 2003.
Discrepancies in the treatment of various indirect work-related activities
have occurred because DOE's guidance does not address the appropriateness
of including a contractor's performance of indirect work-related
activities in determining incentive fee awards.

In commenting on the draft report, Environmental Management expressed
concern that it would be virtually impossible to develop meaningful
guidance that could be applied universally to DOE's diverse programs. We
disagree. We believe that all DOE programs should use incentive fees to
reward contractors for achieving work-related activities, as opposed to
such indirect activities as providing the DOE programs with timely
reports.

  DOE Has Relied on Unvalidated Contractor Data to Monitor and Assess
  Contractors' Performance for Major Projects

Because most of DOE's operations are carried out through contracts,
contract administration is a significant part of DOE's work. DOE has
relied on unvalidated contractor data to monitor contractors' progress in
executing major projects and awarding fees for performance.11 This
reliance on unvalidated data limits the department's ability to ensure it
gets what it is paying for. Specifically, DOE's self-assessments of its
contract administration in 1997 and 2002 both found that field personnel
overly relied on contractor accounting systems and contractor-collected
project data without significant validation of these data. However, unlike
the 1997 self-assessment, the one in 2002 made no recommendation to fix
this problem, and no subsequent self-assessment has been initiated to
determine if the problem has continued. DOE has begun to certify the
reliability of contractors' project management systems that generate the
performance data used to monitor contractors' progress; however, the
department has no time table for the completion of this certification
program. In addition, DOE has not required its contracting officers and
contracting officer representatives to receive training in earned value
management-a systematic approach for integrating and measuring cost,
schedule, and technical (scope) accomplishments on a project or task- even
though these officials are required to determine whether contractors'
project management systems meet the private industry's earned value
management standard.

    DOE Has Not Used Selfassessments to Correct an Overreliance on Contractor
    Data

Self-assessment is an important tool for evaluating organizational
effectiveness. By taking a comprehensive look at itself, an organization
can identify weaknesses and plot a course of corrective action. DOE
performed comprehensive self-assessments of its contract administration
practices in 1997, 1999, and 2002.

In 1997, DOE assessed 20 contracts to ensure that financial incentives
contained in those contracts were rational, linked to well-defined
performance objectives and measures, and properly administered. The
selfassessment reported both positive and negative findings. For example,
it found that the use of performance-based objectives generally had been
effective in directing contractors' management attention to desired

11In addition, DOE's project directors and support field staff assess
contractor performance by walking the site, evaluating work performed, and
periodically meeting with the contractor.

performance outcomes. However, it also found that field personnel overly
relied on contractor accounting systems and contractor-collected data
without significant validation of these data, and that DOE's approval of
fees earned by the contractors relied upon contractor-generated documents.
To correct this deficiency, the self-assessment recommended (1) that the
cognizant DOE heads of contracting at each field location, as part of
their overall contract administration plan, identify the mechanisms,
responsibilities, and authorities for ensuring that contractor performance
against established objectives is appropriately monitored and (2) that
performance achievements are verified.

In 1999, DOE's follow-up assessment of the effectiveness of the actions
taken in response to the 1997 self-assessment found that the
recommendation that contractor performance be monitored and achievements
verified had been implemented. Specifically, field offices reported that
their plans for administering contracts had been appropriately modified
and instituted. In addition, the follow-up assessment stated that (1)
early results indicated a substantial improvement in the way incentives
were being managed from DOE headquarters and administered at DOE field
contracting offices and (2) anecdotal evidence suggested that contractor
performance had improved.

In 2002, the Contract Administration Division again performed a
selfassessment that examined, in part, how contract administration
planning and execution was conducted at various DOE field locations. The
findings and conclusions of this review were somewhat inconsistent with
those of the 1999 follow-up assessment. The 2002 review, like the 1997
assessment, determined that few sites had the resources capable of
validating contractor cost or technical information and most sites must
rely almost exclusively on the contractor's data. The review noted, in one
instance, that financial data provided by the contractor were generally
accepted by DOE, not on the basis of reasonableness and allowability, but
on the basis of the contractor's "acceptable" self-assessment of the
procedures used to collect those data. However, unlike the 1997
assessment, the 2002 review contained no specific recommendation to
correct this overreliance on contractor data.

According to the Director of DOE's Contract Administration Division,
because of funding constraints and other factors, no broad self-assessment
of contractor administration has been done since 2002. The director added
that DOE now conducts individual site assessments as necessary rather than
conducting more comprehensive assessments. According to

information provided to us in April 2004, the last individual site
assessment was made in August 2003 and documented in December 2003. This
site assessment identified problems similar to those reported in the 2002
selfassessment. Specifically, the site assessment noted that, with respect
to one contract reviewed, there was no evidence of effective cost controls
and/or contract management. The site assessment contained no formal
recommendation to fix this problem. On the other hand, the site assessment
contained a recommendation to address the high rate of expenditure on this
contract over the remaining 2-year-option period. The assessment
recommended that the DOE site office review the scope and cost of its
current task orders for prioritization and inclusion in the remaining
option term.

In August 2003, DOE began to certify the reliability of contractors'
project management systems that generate the performance data used to
monitor contractors' progress. However, as of December 2004, the
department has assessed and certified project management systems for only
2 of the 33 major projects we reviewed and does not have a time table for
completing this certification program.

In commenting on the draft report, DOE noted that both Environmental
Management and the Office of Engineering and Construction Management have
been validating contractors' cost and schedule performance baselines for
several years. In our view, DOE validation of contractor baselines will
not fully address the problems that have been identified. Validating
baselines is just the first step in performing adequate contractor
oversight. After baselines have been validated, DOE must not overly rely
on contractor accounting systems in reporting costs and on
contractorcollected project data in awarding fees. That is the message
from two DOE self-assessments of performance-based contracting. With
respect to DOE's experience in baseline validation, the Civil Engineering
Research Foundation's July 2004 report for the Office of Engineering and
Construction Management found that some improvements in baseline
validation were needed. This report noted that many of the DOE projects it
reviewed were formulated with inadequate baseline estimates. In addition,
the report stated that periodic baseline changes were occurring that
masked the true status of certain projects. The report recommended that
DOE develop guidelines that appropriately control the rebaselining of
projects.

DOE further stated that the promulgation of contract management planning
guidance and the requirement for a contract management plan

addressed many of the issues that the 2002 self-assessment identified.
However, in our view, until a subsequent assessment is done, it remains
unclear whether this DOE action has adequately resolved the issues
identified in the 2002 self-assessment. For fiscal year 2005, DOE is
planning to examine the contract management plans and contractors'
purchasing systems.

    DOE Has Not Required Its Contracting Officers and Contracting Officer
    Representatives to Receive Earned Value Management Training

During the early 1990s, OMB issued several reports on civilian agencies'
contract administration practices that found that agencies frequently
experienced cost overruns and delays in receiving goods and services
because their contracting officials allocated more time to awarding
contracts than to administering existing ones. In response, OMB revised
its Circular A-11 to require that federal agencies assess and certify
contractors' project management systems for proper use of earned value
management principles. OMB also identified several other deficiencies,
including a lack of proper training for agency officials performing
contract oversight. According to administrators at the National
Aeronautics and Space Administration, earned value management training is
essential for their contracting officers to adequately assess whether a
contractor's project management system complies with the private
industry's standard.

We found that, with the exception of NNSA, DOE has not required its
contracting officers or contracting officer representatives to receive
earned value management training, even though they are responsible for
determining whether the contractor's project management system complies
with the private industry's earned value management standard after the
contract is awarded. The following three DOE documents contain the
contracting officer's responsibilities, the standards against which those
responsibilities are to be discharged, and the training requirements for
contracting officers:

o 	Chapter 1 of DOE's Reference Book for Contract Administrators, issued
in 2000 and in effect through October 2004, outlines the contracting
officers' many responsibilities, including a review of the adequacy of the
contractor's project management system.12 The reference book states

12In November 2004, DOE revised this chapter in the Reference Book for
Contract Administrators. Although the revised chapter does not mention
this specific responsibility, in at least 2 contracts we reviewed, we
found that the contracting officer had this responsibility.

that the system's adequacy must be confirmed by the contracting officer
with the support of other DOE headquarters and field office personnel, as
appropriate. The reference book also indicates that corrective action
plans resulting from DOE reviews of contractor project management systems
are to be tracked until the DOE contracting officer confirms that all open
issues are closed.

o 	DOE Order 413.3, "Program and Project Management for the Acquisition of
Capital Assets," also issued in 2000, specifies that contractors' project
management systems must comply with the American National Standards
Institute's standard on earned value management. The order states that
this requirement applies only to systems involved in controlling the
performance of projects costing more than $20 million in total. The order
also requires that contractors' systems provide cost and schedule
performance, milestone status, and financial status to DOE on a monthly
basis.

o 	DOE Order 361.1A, "Acquisition Career Development Program," issued in
April 2004, outlines the training and certification requirements for DOE
contracting officers and contracting officer representatives. The order
identifies a training curriculum for these officers by functional
area-including, among others, procurement contracts; interagency
agreements and sales contracts; grants and cooperative agreements; loans
and loan guarantees; and the government purchase card. The order, however,
does not require either the contracting officer or the contracting officer
representative to receive earned value management training.

The Director of the Contract Administration Division corroborated our
assessment of DOE's order for acquisition career development. The director
noted that the only reference to earned value management training in DOE
Order 361.1A requires that DOE project directors, not contracting
officers, complete a course on earned value management systems. Without
this training, however, it is unclear how DOE contracting officers and
contracting officer representatives can fulfill their responsibilities and
properly assess the adequacy of the project management systems of
departmental contractors. In providing us with exit conference comments,
DOE Office of Contract Management officials acknowledged that contracting
officers do have a responsibility in the area of earned value management
and will be receiving training on that subject in the future.
Subsequently, in December 2004, DOE provided contracting professionals at
DOE headquarters with a 1-hour course on earned value management.

DOE said that this training session, which was video recorded, is being
required nationwide for all DOE contracting officials. As opposed to this
1-hour course, we noted that NNSA requires its contracting officials to
participate in a 48-hour course on the fundamentals of earned value
management.13

  The Reliability of PARS Data Is Limited

The reliability of the project cost and schedule data that PARS provides
to senior DOE managers is limited by problems with the data's accuracy,
completeness, and timeliness. In general, the accuracy of PARS report data
is uncertain because DOE (1) has assessed the reliability of contractors'
project management systems for only 2 of the 33 major projects we
reviewed, (2) generally measures projects' cost and schedule performance
in PARS against the current DOE-approved cost and schedule baselines
without also tracking performance against the original targets, and (3)
has not provided most of its major project directors with the training
needed to ensure contractors are generating accurate performance data.
PARS report data are not complete because DOE program offices have not
submitted performance data to PARS for 3 major projects, as well as at
least 2 smaller projects, and PARS reports do not provide each project's
estimated cost at completion or other helpful, forward-looking data. In
addition, the Office of Engineering and Construction Management stated
that the June 2004 PARS report's performance data for 6 major projects and
5 smaller projects were significantly out of date, primarily because
contractors did not provide updated project performance information.
Senior managers have used PARS data to take actions that averted cost
increases for certain projects that were experiencing cost or schedule
challenges. Without reliable data, however, PARS has not provided senior
managers with information about cost increases and schedule slippages for
many projects, and the status of many other projects is uncertain.

The Accuracy of Most PARS Three factors impair the accuracy of cost and
schedule data reported in

Data Is Uncertain	PARS. First, DOE officials told us they have little
assurance that the cost and schedule data for most projects in PARS are
accurate because DOE has not assessed the reliability of contractors'
project management systems

13In addition, during fiscal year 2004, the Office of Environmental
Management offered five 5-day classes on earned value management to DOE
project directors and other individuals involved in project management.

that generate such data for data reliability, particularly those systems
believed to be using incorrect methods. Second, for almost all projects,
PARS reports compare cost and schedule performance against DOE's current
baselines, without identifying the extent of cost or schedule slippages
that previously occurred. Third, most DOE project directors lack the
necessary training to evaluate and verify the accuracy of the performance
data that contractors generate, according to DOE officials.

DOE Has Assessed Few OMB Circular A-11 and DOE Order 413.3 require that
DOE assess and

Contractors' Systems That certify contractors' project management systems
for proper use of earned

Generate Project Data 	value management principles in generating cost and
schedule performance data before the department approves a project's cost
and schedule baseline at its Critical Decision 2 milestone. Earned value
management, when used correctly, produces data that reflect a contractor's
progress toward completing a project within cost and schedule targets. In
essence, earned value management measures the value of work completed
against the cost and schedule of work planned, as opposed to comparing
actual with planned expenditures. To illustrate, assume a contract calls
for 4 miles of railroad track to be laid in 4 weeks at a cost of $4
million. After 3 weeks of work, assume $2 million has been spent. By
analyzing planned versus actual expenditures, it appears the project is
underrunning the estimated costs. However, an earned value analysis
reveals that the project is in trouble because even though only $2 million
has been spent, only 1 mile of track has been laid; thus, the contract is
only 25 percent complete. On the basis of the value of work done, the
project will cost $8 million ($2 million to complete each mile of track),
and the 4 miles of track will take a total of 12 weeks (3 weeks for each
mile of track) to complete instead of the originally estimated 4 weeks.

To ensure correct application of earned value management principles,
contractors must develop budgets and schedules based on measurable
components of a project, which include defined start points, end points,
and scopes of work. In addition, contractors must calculate the value of
work performed against the budgets and schedules for the measurable
project components. Experts in earned value management told us that
without defined start and end points and other measurable project
components, project performance data give little insight as to whether
cost and schedule performance are on track, and the data might mask more
serious problems.

DOE's Office of Engineering and Construction Management and the Defense
Contract Management Agency assess whether a given contractor's project
management system properly uses earned value management principles by
examining whether the contractor's system complies with the industry
standards and verifying that the contractor is using the system to manage
the project.14 Once a contractor has fully addressed the concerns
identified by the assessment, DOE is to certify the project management
system, attesting that project performance data-data that convey progress
toward the approved cost and schedule targets-are generated reliably.
Assessment and certification of contractors' earned value management
systems are critical components of DOE's management of its
performancebased contracting, according to DOE earned value management
training documents. While only three systems have been assessed since
August 2003, Office of Engineering and Construction Management officials
told us that they and the Defense Contract Management Agency, working
together, could assess the project management systems for about 10
contractors in a given year now that they are becoming more familiar with
the process.

In August 2003, the Office of Engineering and Construction Management and
the Defense Contract Management Agency began the process of assessing
contractors' project management systems as a basis for certifying that
they properly use earned value management principles. In September 2004,
DOE certified Sandia National Laboratories' project management system for
1 major project, the Microsystems and Engineering Sciences Applications
project, and 6 smaller projects. DOE also plans to certify Oak Ridge
National Laboratory's project management system for another major project,
the Spallation Neutron Source, once minor deficiencies are corrected.15
Overall, however, DOE has assessed project management systems for only 2
of the 33 major projects we reviewed-and 8 of the 73 projects in PARS-that
have passed Critical Decision 2 with DOE-approved

14The American National Standards Institute/Electronic Industries
Association-748-1998 established 32 criteria for use of earned value
management. Earned value management is widely employed by the private
sector as a means of ensuring reliable project performance information.
Contractor project management systems, which include earned value
management systems, may have been validated by other external validation
entities, but DOE's certification review in collaboration with the Defense
Contract Management Agency verifies not only that project management
systems have earned value management systems in place but that they are
used in a correct fashion.

15The Defense Contract Management Agency also has assessed the Washington
Group International's project management system for the Elimination of
Weapons Grade Plutonium project in Russia, which has not passed the
Critical Decision 2 milestone.

cost and schedule baselines. (The remaining 65 projects in PARS whose
systems have not been assessed have baseline costs of nearly $75 billion.)
According to an Office of Engineering and Construction Management
official, the first three contractors' systems were selected for
assessment on the basis of visibility, significance, and criticality to
the Department's success, but also because cognizant DOE officials were
confident that the contractors' project management systems would meet
certification criteria.

The National Research Council's 2004 report on DOE's project management
found that the quality of earned value management across the department's
projects was inconsistent and stated that senior DOE managers do not know
whether the reported data on cost and schedule performance are accurate
unless contractors' systems are assessed and certified. Because DOE has
only recently begun to assess contractors' project management systems that
feed data into PARS, DOE officials acknowledged to us that they lack
assurance regarding the accuracy of PARS performance data, adding that
they believe some of the project management systems not yet assessed have
important deficiencies. For example, a DOE expert in earned value
management noted that contractors for most Environmental Management
projects-about half of the projects in PARS that have passed Critical
Decision 2-have not properly implemented earned value management
principles because, among other things, many of the projects' components
lack defined start and end points. For example, the earned value
management expert believes, on the basis of his assessment of work
breakdown structures and other project components, that the contractor's
project management system for the $10-billion Yucca Mountain Nuclear Waste
Repository project does not properly use earned value management
principles and generates performance data that cannot be regarded as
accurate. Consequently, senior DOE managers have no assurance that cost
and schedule targets will be met, even if the data suggest they will.

Similarly, for several major projects we examined, the contractors'
project management systems do not seem to properly implement earned value
management principles to measure cost and schedule performance. For
example, the $2-billion East Tennessee Technology Park project at Oak
Ridge lacks measurable project components. In some instances, work is
categorized into activities such as "general operations" and "contractor
operations" that have no apparent defined start and end points. According
to the expert in earned value management, the categories of work for this
project make it difficult to accurately measure project performance
because there is no clear activity or time frame against which to measure
costs incurred or time spent. Instead, PARS data for this project seem to

measure only the project's expenditures, which can conceal information on
the project's cost and schedule status and progress toward completion. In
addition, the $5.7-billion Tank Waste Treatment and Immobilization Plant
at Hanford, Washington, lacks discrete, measurable project components
because work is categorized into activities such as "providing technology"
and "providing infrastructure" that lack defined start and end points.
While we recognize that it is appropriate, according to industry
standards, to categorize a small amount of work in this fashion, DOE
project management officials said the particular categories of work in
these instances reflected a poor comprehension of earned value management
and limited their confidence in the assessment of project performance.

Two Office of Engineering and Construction Management officials
acknowledged that the accuracy of data for these projects is uncertain
because DOE has not assessed whether the contractors' project management
systems properly applied earned value management principles. One of these
officials suggested that the contractors' project management systems for
such projects should be assessed as soon as possible to correct
deficiencies and improve the reliability of project performance data
provided to senior managers to oversee progress toward cost and schedule
targets. The Director of the Office of Engineering and Construction
Management agreed that DOE should develop a schedule that would give
priority to assessing these and other high-risk and high-cost systems. As
of January 2005, a schedule had not been developed, but the director told
us that he was in the process of doing so.

PARS Reports Generally Do Not The accuracy of the PARS report data is
further impaired because PARS

Show Total Cost Overruns and reports generally do not show total cost
overruns and schedule slippages,

Schedule Slippages	even though DOE requires each project team to estimate
life-cycle costs and assess project performance against established cost
and schedule baselines. Instead, a project's DOE project director updates
the cost and schedule baselines in PARS when DOE approves a contract
modification. As a result, PARS reports show relatively small variances
between a project's actual performance and its approved baselines, so that
many of the projects we reviewed appear not to have experienced problems
when, in fact, they did. For almost all projects, PARS reports do not
provide data that would enable senior DOE managers to assess (1) a
contractor's performance against the project's original DOE-approved
baselines to identify total cost overruns and schedule slippages or (2)
the effect of any DOE initiatives to control a project's costs. The Civil
Engineering Research Foundation's July 2004 report similarly found that
PARS cost and schedule data often do not convey the actual status of
projects since their inception

because of periodic revisions of cost or schedule baselines. Furthermore,
for most Environmental Management projects, PARS measures project
performance from arbitrary dates, such as the beginning of the fiscal
year, which do not necessarily correspond to progress toward DOE-approved
targets. The following examples illustrate how PARS has masked problems
with projects by giving an incomplete picture of project costs or project
performance:

o 	The January 2004 PARS report showed that the $1.6-billion Spent Nuclear
Fuels Stabilization and Disposition project at Hanford, Washington, was on
track to meet cost and schedule performance targets.16 However, by April,
total costs for the project increased by nearly $150 million. DOE
officials acknowledged that because the January 2004 PARS report to senior
DOE managers measured only project performance from the beginning of the
fiscal year, instead of against the DOE-approved baselines, the PARS
report concealed longer term problems that threatened the project's
completion within costs.

o 	In October 2002, the Tritium Extraction Facility at Savannah River,
South Carolina, had an approved total cost of about $400 million. Costs
for the project increased more than $100 million by September 2003, and
subsequent PARS reports showed that costs were on track to meet cost
targets, despite the 25 percent increase in the project's costs.

o 	In June 2004, Environmental Management restructured the PARS reporting
for 4 projects at Oak Ridge, Tennessee, by combining their respective
costs and schedules with those of other Oak Ridge projects.17 As a result,
Environmental Management stopped reporting project performance data for
each project, masking the fact that 2 of them, totaling about $300
million, were significantly behind schedule. Two Office of Engineering and
Construction Management officials believe the projects should be reported
separately because combining projects'

16The January 2004 total cost was about $1 billion more than DOE's
original projected total cost, as noted in our report entitled Nuclear
Waste: DOE's Hanford Spent Nuclear Fuel Storage Project-Cost, Schedule,
and Management Issues, GAO/RCED-99-267 (Washington, D.C.: Sept. 20, 1999).

17These 4 projects are the East Tennessee Technology Park Three Building
Deactivation and Decommissioning, K25/27 Buildings Deactivation and
Decommissioning Removal, Molten Salt Reactor Experiment, and Oak Ridge
National Laboratory Burial Grounds.

respective cost and schedule data can inhibit the correct use of earned
value management.

o 	The April 2004 PARS report showed that the total cost of the Soil and
Water Remediation project at Ashtabula, Ohio, would be $45 million,
although the performance data indicated the project would not likely meet
its baselines. However, this amount does not include about $109 million in
expenditures on this project by October 1, 2003. Environmental Management
reports this project's total costs to be about $157 million-more than
three times the amount reported in PARS.

o 	PARS reports that total project costs for the Nuclear Facility
Deactivation and Decommissioning project at Columbus, Ohio, will be about
$31.5 million. However, this amount does not include about $106 million in
expenditures prior to 2004. Environmental Management estimates that this
project's total cost will exceed $163 million-more than five times the
amount reported in PARS.

The June 2004 PARS report showed that 90 percent of the 63 projects with
approved baselines were expected to meet their cost and schedule
baselines.18 However, this percentage may reflect project managers'
efforts to keep the projects' baselines up to date rather than
improvements in project management performance because PARS generally
measures projects' performance against the most current DOE-approved
baselines. For example, as shown in table 1, the October 2002 PARS
report's assessment of 2 major projects was red because both projects were
expected to breach their cost/schedule performance baselines. However, the
September 2003 PARS report's assessment of these major projects was green
because total project costs were within the revised baseline that DOE had
subsequently approved. The September 2003 PARS report did not indicate the
extent to which each project's total costs had exceeded the costs that DOE
approved at Critical Decision 2 on the basis of an approved conceptual
design report and acquisition strategy.

18These 63 projects did not include 25 Environmental Management projects.
Nineteen, or 76 percent, of the 25 Environmental Management projects were
expected to meet cost and schedule baselines.

 Table 1: PARS Reports Assess a Project's Cost and Schedule Performance against
                    Only the Current DOE-Approved Baselines

Dollars in millions

  Project name Total cost Overall assessment PARS comments Waste Treatment and
Immobilization Plant Project (Hanford) Tritium Extraction Facility Project
                                (Savannah River)

    October 2002 PARS report  $4,746.9  Reda    Proposed baseline approval is 
                                                                   scheduled. 
                                               Unable to validate baseline;   
                                                          cannot              
                                                    recommend approval.       
September 2003 PARS report  5,781.0 Greenb           No comment.           

October 2002 PARS report  $401.0  Reda         This project has a baseline 
                                                             breach. Baseline 
                                           Change Proposal is being prepared  
                                                          for                 
                                                 Secretarial approval.        
      September 2003 PARS     506.4 Greenb            No comment.             
            report                         

Source: GAO compilation of data for selected projects from fiscal year
2003 PARS reports.

aRed indicates that a project is expected to breach its cost/schedule
performance baseline. bGreen indicates that a project is expected to meet
its cost/schedule performance baseline.

In addition to these projects, the 90 percent figure includes many
Environmental Management projects, whose performance is measured over time
frames that do not necessarily reflect performance against DOEapproved
baselines. Further, the 90 percent figure does not reflect the 4 Oak Ridge
projects whose performance data showed imminent performance problems
before being combined with the performance data of other projects at the
site.

DOE officials told us that the monthly PARS reports are the primary tool
for communicating project performance information to senior management.
However, for many projects-particularly those overseen by Environmental
Management-PARS does not report projects' life-cycle costs or performance
against original baselines, even though DOE requires each project team to
estimate life-cycle costs and assess project performance against
established cost baselines and schedule milestones. Office of Engineering
and Construction Management officials acknowledged that reporting
life-cycle costs and project performance against original cost and
schedule baselines in PARS would make cost or schedule challenges easier
to identify, and Environmental Management officials told us they plan to
report life-cycle costs and project performance against original baselines
in PARS reports beginning by December 2004.

In addition to Environmental Management's plans for PARS reporting, the
Office of Engineering and Construction Management intends to make several
upgrades to the PARS database, such as making the process for entering
monthly data more efficient and easier for users to understand and
ensuring that the correct data are being entered. Office of Engineering
and Construction Management officials reported that they are in the
process of implementing these improvements. However, these upgrades do not
address the limitations to reporting accurate data that we identified.
Furthermore, these improvements do not address limitations in the
reliability of data stemming from contractor's project management systems
that have not been assessed or data that have not been reviewed.

Most DOE Project Directors Project directors are DOE's focal point for
assessing the contractors' cost

Lack Certification in Earned and schedule performance data that feed into
PARS. However, most of

Value Management	DOE's project directors have not been certified in earned
value management, further reducing assurances that PARS data are accurate.
Because DOE believes that it is critical for project directors to
understand earned value management, the department informally designates
its project directors as "acting directors" if they have not completed the
project manager career development program, which includes training in
earned value management. Office of Engineering and Construction Management
officials told us that while some acting project directors are proficient
in earned value management and capable of evaluating the reliability of
contractor-generated data, other acting project directors are not.

DOE recently implemented the project management career development program
through which project directors are being trained in, among other things,
earned value management. However, DOE had trained only about 25 percent of
them through this program as of July 2004, with plans to train the
remaining 75 percent by May 2006. A DOE official told us that the
appropriate level of earned value management training for acting project
directors depends on their experience in using earned value management.
While DOE aims to assess project directors' capabilities in earned value
management to ensure that they are competent, validating the adequacy of
prior earned value management experience for acting project directors has
been time consuming. The lack of trained projects directors reviewing the
accuracy of a project's performance data may, in some cases, adversely
affect the ability of senior DOE managers to properly assess the status of
major projects.

    PARS Lacks Complete Information

In addition to reporting data of questionable accuracy, PARS provides
incomplete data, therefore senior DOE managers may not be aware of the
need to implement corrective actions to prevent cost overruns or schedule
slippages. We identified the following 5 projects-3 major projects to
refurbish nuclear weapons and 2 projects costing more than $100 million
each-that are not in the PARS database, despite DOE's requirement that
projects costing more than $5 million provide monthly reporting:19

o 	W80 Life Extension Program. NNSA recently increased the total cost of
this program, designed to extend the service life of the W80 nuclear
warhead by replacing components, from $1.3 billion to about $2.45 billion.

o 	W76 Trident Missile Life Extension Program. NNSA expects this project,
designed to extend the service life of the W76 nuclear warhead by
replacing components, to cost about $680 million over the next 4 years.

o 	B61 Alteration 357 Life Extension Program. NNSA expects this project,
designed to extend the service life of the B61 bomb, to cost nearly $500
million. Our July 2003 report recommended that DOE improve its oversight
of the life extension program's cost and schedule status.

o 	Purple and BlueGene/L Supercomputers under the Advanced Simulation and
Computing Program. NNSA expects this project, to cost about $290 million
and be completed in 2005.

o 	Enterprise Project. NNSA increased the total cost of this project,
which will replace the accounting and management systems at Los Alamos
National Laboratory, from about $70 million when it was initiated in 2001
to nearly $160 million.

19Our report entitled Nuclear Weapons: Opportunities Exist to Improve the
Budgeting, Cost Accounting, and Management Associated with the Stockpile
Life Extension Program, GAO-03-583 (Washington, D.C.: July 28, 2003)
recommended that DOE manage its weapons refurbishment programs as
projects. Although DOE agreed with this recommendation, NNSA has not
implemented it. DOE defines a project as a specific undertaking, with
defined beginning and end points, that supports a program mission.

The National Research Council's 2004 report found that DOE has not acted
in a timely fashion to include all projects costing more than $5 million
in PARS. Office of Engineering and Construction Management officials told
us DOE is still in the process of applying project management principles
to many of the department's operational activities. While DOE's program
offices are responsible for converting these activities to projects, many
of the program office personnel responsible for applying project
management principles do not have the necessary training, according to an
Office of Engineering and Construction Management official. While project
management training is available, DOE has required only project directors
and other senior-level employees to take this training. An Office of
Engineering and Construction Management official told us this training
would help expedite the application of project management principles to
DOE's operational activities.

In addition, for many projects included in the PARS database, PARS reports
do not provide important performance information that senior DOE managers
need to assess the projects' status. In some cases, project performance
data are not reported because the project is incorrectly listed as being
in the design phase when, in fact, it has passed Critical Decision 2. For
example, contractors have spent almost half of the approved funds for 2
projects at the Idaho National Engineering and Environmental Laboratory
projected to cost $4.3 billion without reporting performance data in
PARS.20 The PARS reports show that these projects are still in the design
phase and, therefore, are not subject to reporting performance data, but a
DOE official acknowledged that both projects have, in fact, passed
Critical Decision 3 and other subsequent milestones. As a result, senior
DOE managers cannot rely on PARS for accurate and current performance
information for these projects, nor can they rely on PARS to determine
whether these projects require corrective actions.

For these and other projects, PARS also lacks forward-looking data, such
as scheduled work to be performed, the projects' upcoming milestones, and
the projects' estimated cost at completion. Without such data, PARS cannot
provide information on projects' cost or schedule challenges and DOE
management does not have a basis for projecting progress or identifying
trends. While not in PARS, this information is available from acting
project directors. For example, although early cost savings for the

20These are the Solid Waste Stabilization and Disposition and the
Radioactive Liquid Tank Waste Stabilization and Disposition projects.

Microsystems and Engineering Sciences Applications project at Sandia
National Laboratories led to favorable performance data, DOE's project
director identified supply imbalances in the steel market that would
increase the estimated construction costs. Using this information, the
project director revised the project's estimated total cost. Currently,
PARS reports to senior DOE managers lack such forward-looking data that
could alert them to future cost or schedule challenges. The National
Research Council's 2004 report stated that PARS reports should display
forwardlooking data to notify senior managers of upcoming milestones. In
addition, several acting project directors told us that forward-looking
data, such as data on estimated costs at completion, should be included in
PARS to identify project performance challenges for senior DOE managers.

To further illustrate this need, the total costs of some DOE projects are
projected to increase dramatically in the future, despite PARS reports
showing that they are expected to be completed on time and within budget.
For example, PARS report data show that the Hanford's Tank Waste Treatment
and Immobilization Plant is projected to meet the DOEapproved baseline of
$5.78 billion. However, PARS does not show that DOE approved a
$1.4-billion increase above the project's original contract estimate of
$4.35 billion in April 2003, nor does it show that the U.S. Army Corps of
Engineers, in a May 2004 report, stated that project costs would probably
exceed the $5.78-billion cost baseline by $720 million.21

Even though the DOE project management teams knew of cost and schedule
performance problems for the Tank Waste Treatment and Immobilization Plant
project, PARS reports have shown that this project was on track for
meeting cost and schedule targets. An Office of Engineering and
Construction Management official told us that PARS monthly reports do not
include forward-looking data and trend data to minimize the amount of time
necessary for senior managers' review. As a result, PARS did not provide
senior DOE managers for this and other projects with important information
to analyze potential future challenges. Forward-looking performance
information, such as scheduled work to be performed and estimated cost at
completion, would better enable senior

21U.S. Army Corps of Engineers, Independent Cost & Schedule Baseline
Review Summary Report, Hanford Waste Treatment and Immobilization Plant
(Walla Walla, Washington: May 28, 2004). Also GAO, Nuclear Waste: Absence
of Key Management Reforms on Hanford's Cleanup Project Adds to Challenges
of Achieving Cost and Schedule Goals, GAO-04-611 (Washington, D.C.: June
9, 2004).

managers to address project management challenges and minimize cost
overruns or schedule slippages.

    PARS Lacks Timely Information

Further compounding reliability concerns, we identified problems with the
timeliness of PARS data that may limit the ability of senior DOE managers
to effectively identify and apply corrective actions. Specifically, we
found that cost and schedule performance data were significantly out of
date at some time during our review for 8 of the 33 major projects we
reviewed and 20 smaller projects in PARS that had passed Critical Decision
2. In these instances, data were out of date because DOE has not
effectively enforced requirements that contractors produce updated monthly
cost and schedule performance data, and that project directors ensure
current performance data are reported into PARS. For some projects, the
lack of up-to-date data masked problems that resulted in cost overruns and
schedule slippages. For instance:

o 	The September 2003 PARS report showed that the Spent Nuclear Fuels
project at Hanford, Washington, was on track to meet its DOE-approved
total project cost of about $1.6 billion and its schedule completion date
of 2007; however, these data were 3 months out of date. Subsequently, the
April 2004 PARS report (1) showed that total project costs had exceeded
the project's cost baseline by nearly $150 million and (2) indicated that
the project would exceed this revised total cost and the scheduled
completion date would slip. In June 2004, the contractor requested
additional funding from DOE because both cost and schedule performance
continued to worsen.

o 	The September 2003 PARS report showed that the K25/27 Buildings
Deactivation and Decommissioning Removal project at Oak Ridge, Tennessee,
was on track to meet its DOE-approved total project cost of about $265
million and its schedule completion date of 2008. However, the contractor
did not update the project's performance data until April 2004, when the
PARS report showed the project would still meet its cost baseline.
Environmental Management officials told us that although they knew for
several months that the K25/27 project's total cost would exceed its
baseline, the PARS cost data were not updated because the project was
being combined with 5 other Oak Ridge projects. The total cost of the
K25/27 project could exceed $400 million-more than 50 percent above the
DOE-approved total project cost.

o 	In June 2004, the Soil and Water Remediation project at Pantex, Texas,
had a DOE-approved total project cost of about $175 million, but the
Office of Engineering and Construction Management could not assess the
project's performance because data were not provided. Subsequently, the
September 2004 PARS report showed that the project was at risk of
exceeding its DOE-approved schedule target.

In addition to these timeliness problems, the monthly data in PARS reports
typically lag a project's actual performance by 2 to 3 months because of
the time contractors need to generate the data and the time DOE project
managers need to review and incorporate the summary data into the PARS
database. The 2004 National Research Council report stated that the lack
of timely data prevents senior managers from using PARS to assess the
performance of projects in real time. Similarly, Department of Defense
officials familiar with project management have said that using such data
to assess project performance is like "overseeing by looking through a
rear view mirror" because performance problems have usually gotten worse
by the time departmental managers become aware of them.

We found that the Department of Defense requires all of its newer
contracts to use electronic data interchange to provide more timely
information to department program managers.22 In addition, some acting
project directors told us that electronically linking PARS to contractors'
project management systems would improve timeliness because manually
entering cost and schedule data into the PARS database had often resulted
in delays of 2 to 3 months to complete the process. In some instances,
data were entered incorrectly, although in each instance the data were
corrected before being reported to senior managers. While the DOE project
directors we contacted uniformly agree that manually entered data are
correctly entered by the time PARS monthly reports are delivered to senior
managers, electronically linking PARS to contractor systems could
eliminate the potential for such errors and enhance senior managers'
ability to address potential cost or schedule challenges in real time.
Alternatively, DOE might include a provision requiring timely monthly
reporting in all applicable contracts.

When data can be relied upon, DOE senior managers have taken corrective
actions to address cost or schedule challenges while minimizing costs to

22GAO, Major Acquisitions: Significant Changes Underway in DOD's Earned
Value Management Process, GAO/NSIAD-97-108 (Washington, D.C.: May 5,
1997).

the government. For example, NNSA terminated the Sandia Underground
Reactor Facility project, which was intended to reduce the future
operational costs associated with securing a reactor, when management
learned that cost estimates had increased by more than 150 percent between
project conception and the final design phase. The project was terminated
before costs were incurred. In another instance, Environmental Management
approved a contractor's recovery plan to complete the Melton Valley
Closure project at Oak Ridge, Tennessee, whose schedule performance had
slipped dramatically and required corrective actions. The contractor
lengthened work hours and modified its approach for constructing a
subproject. As a result, the recovery plan showed that the scope of work
could be accomplished without increasing project schedule.

Conclusions	Since 1990, we have designated DOE's contract management,
which we have broadly defined to include contract administration and
project management, as a high-risk area for fraud, waste, abuse, and
mismanagement. Although DOE has implemented important contract
administration and project management reforms, problems persist and many
major projects continue to experience millions of dollars in cost overruns
and years of delays. Two deficiencies-the lack of contracting criteria for
major projects and the lack of reviews of the project management terms in
major project contracts-have resulted in questionable DOE contracting
decisions that limit its ability to effectively control cost and schedule
performance. For example, many of DOE's contracts for major projects have
used performance incentives that have used a technical, schedule, or
performance incentive without an associated cost incentive or cost
constraint, thereby giving contractors an incentive to pay limited
attention to costs when working toward meeting technical or performance
levels in order to earn a higher award fee.

Furthermore, for major projects, DOE has given insufficient emphasis to
the oversight of contract administration, which begins after contracts are
awarded and helps ensure that the department gets what it pays for. DOE
needs to give increased emphasis to reviewing how it administers
contracts; correcting previously identified weaknesses, such as
overreliance on contractor data; and providing training to its contracting
officers. Without such actions, the department is totally dependent on its
contractors' self-reports on their performance.

Because of problems with the accuracy, completeness, and timeliness of the
PARS data, senior DOE managers lack key project performance

information for assessing the progress of many major projects and making
decisions about corrective actions. In particular, because DOE has
assessed the reliability of only three contractors' project management
systems that feed data into PARS, senior managers cannot be certain that
the contractor systems are producing reliable data. Such data are critical
to good project management and affect DOE's assessment of contractor
performance. Absent reliable data from the contractor systems, DOE lacks
assurance that the fees it awards for a contractor's project management
actions are well deserved.

  Recommendations for Executive Action

To ensure the use of effective performance incentives for major projects,
we recommend that the Secretary of Energy direct the Associate Deputy
Secretary with responsibility for contract and project management to take
the following two actions:

o 	develop a major projects chapter in the DOE Acquisition Guide that
specifies a systematic contracting approach, including, for example,
criteria for (1) ensuring that incentive fee awards are based on reliable
performance data, (2) using appropriate cost and schedule incentives, (3)
better linking fee awards to performance for major projects that are part
of larger site cleanups, and (4) determining which indirect workrelated
activities should and should not be considered in awarding contractors'
fees, and

o 	clarify roles and responsibilities for reviewing contracts prior to
award to ensure project management consistency.

To strengthen departmental oversight of contract administration for major
projects, we recommend that the Secretary of Energy direct the Associate
Deputy Secretary with responsibility for contract and project management
to take the following three actions:

o 	conduct comprehensive self-assessments of contract administration at
least every 3 years,

o 	identify corrective actions to reduce the overreliance on unvalidated
contractor data in awarding contract fees that was identified in previous
self-assessments, and

o  train contracting officials in earned value management.

To improve the reliability and usefulness of project performance data in
PARS, we recommend that the Secretary of Energy direct the appropriate
managers to take the following seven actions:

o 	develop a schedule for assessing the reliability of the contractors'
project management systems, giving priority to major projects and those
projects with systems believed to be using incorrect methods to generate
PARS data;

o 	revise DOE manual 413.3-1 to provide guidance that enhances the
accurate reporting of total cost and project performance data into PARS,
such as the reporting of life-of-project cost and schedule variances;

o 	expedite training for major project directors in earned value
management concepts;

o 	ensure that program office officials receive currently available
project management training so that they can better identify the elements
of a project, and apply the project management concepts necessary for them
to report performance data in PARS;

o 	incorporate forward-looking trend data into PARS reports so that senior
managers can better identify negative trends and potentially take
corrective action;

o 	explore options for ensuring that contractors provide cost and schedule
performance data to PARS on a monthly basis, such as making monthly
submissions a requirement in all applicable contracts; and

o 	explore options for providing senior DOE managers with more timely
project performance data by, for example, electronically linking
contractors' project management systems to PARS.

  Agency Comments and Our Evaluation

We provided DOE with a draft of this report for its review and comment. In
written comments, DOE generally concurred with our recommendations but
provided clarifying comments on four of the recommendations. (See app.
III.) First, concerning our recommendation that DOE develop a major
projects chapter in its Acquisition Guide, DOE stated that the department
has already developed an extensive body of material that constitutes a
"systematic contracting approach" for the acquisition and management of
departmental major projects, but added that the department will develop

an overview and summary of this information in a major projects chapter in
its Acquisition Guide. We believe this chapter will further enhance DOE's
guidance, particularly if the department provides criteria that address
each of the four issues identified in our first recommendation. Second,
concerning our recommendation on DOE's comprehensive assessment of
contract administration, DOE stated that the department did not stop
conducting comprehensive assessments. In response, we have revised our
recommendation to state that DOE should conduct these assessments at least
every 3 years. Third, concerning our recommendation that DOE identify
corrective actions for reducing overreliance on unvalidated contractor
data, DOE stated that the department had already taken positive steps to
reduce its overreliance on contractor data by, for example, reviewing and
validating such data and project baselines. DOE added that the department
would continue to identify any corrective actions necessary to reduce
overreliance on contractors' data in awarding fees. While we agree that
validating project baselines is an important first step, we believe that
DOE's efforts to ensure that contractor performance data are reliable by
certifying contractors' project management systems is vital. Fourth,
concerning our recommendation that DOE link PARS and contractors' project
management systems, DOE stated that our recommendation is too narrowly
focused, particularly in light of DOE's efforts to implement a
departmentwide enterprise architecture solution. We agree, and we have
revised our recommendation accordingly. In addition, DOE stated that it
believes the draft report contained a number of inaccuracies and provided
detailed comments. We have revised the report, where appropriate, in
response to these comments.

As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter. At that time, we will send copies to the
Secretary of Energy and other interested parties. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions on this report, please contact me
at (202) 512-3841. Key contributors to this report were Richard Cheston,
Robert Baney, Nathan Anderson, Bernice Dawson, Cynthia Norris, Judy
Pagano, and Doreen Feldman.

Robin M. Nazzaro Director, Natural Resources and Environment

Appendix I

The Department of Energy's 33 Major Projects That We Reviewed

                                                    Schedule    
                                   Cost incentive               
                                               or  performance  
                                        cost      incentive for 
                                     constraint                 
                                   for individual  individual   Fee available 
                                                                          for 
                                     project in    project in    individual   
      Project name and                                                        
     construction line    Contract   contract?      contract?   
           number           type                                  project?

Fernald, Ohio

Non-Nuclear Facility Decontamination and   Cost plus incentive Yes Yes Noa 
Decommissioning (OH-FN-0050)               fee                         
Silos (OH-FN-07)b                          Cost plus incentive Yes Yes Noa 
                                              fee                         
Soil & Water Remediation (OH-FN-0030)      Cost plus incentive Yes Yes Noa 
                                              fee                         
Solid Waste Stabilization & Disposition                        Yes Yes Noa 
(OH-FN-0013)                               Cost plus incentive         
                                              fee                         
Hanford Reservation: River Protection                                  
Hanford Tank Waste Treatment and                               Yes Yes Yes 
Immobilization                             Cost plus incentive         
Plant (01-D-416)                           fee                         
Radioactive Liquid Tank Waste                                  No  Yes Yes 
Stabilization &                            Cost plus award             
Disposition (ORP-0014)                     fee                         
Interim Tank Retrieval System (94-D-407)c  Cost plus award     No  Yes Yes 
                                              fee                         
Tank Farm Restoration and Safe Operations  Cost plus award     No  Yes Yes 
(97-D-402)b                                fee                         

                  Hanford Reservation at Richland, Washington

Nuclear Facility Decontamination and            Cost plus award No Yes Yes 
Decommissioning-Fast Flux Test Facility Project fee                    
(RL-0042)                                                              
Nuclear Facility Decontamination and            Cost plus award No Yes Yes 
Decommissioning-Remainder of Hanford (RL-0040)  fee                    
Nuclear Facility Decontamination and            Cost plus award No Yes Yes 
Decommissioning-River Corridor Closure Project  fee                    
(RL-0041)                                                              
Nuclear Material Stabilization & Disposition -                  No Yes Yes 
PFP                                             Cost plus award        
(RL-0011)                                       fee                    
Soil and Water Remediation - Vadose Zone                        No No  Yes 
(RL-0030)                                       Cost plus award        
                                                   fee                    
Solid Waste Stabilization & Disposition-200                     No Yes Yes 
Area                                            Cost plus award        
(RL-0013)                                       fee                    
Spent Nuclear Fuels (RL-0012)                   Cost plus award No Yes Yes 
                                                   fee                    

Appendix I The Department of Energy's 33 Major Projects That We Reviewed

                         (Continued From Previous Page)

                                                    Schedule    
                                   Cost incentive               
                                               or  performance  
                                        cost      incentive for 
                                     constraint                 
                                   for individual  individual   Fee available 
                                                                          for 
                                     project in    project in    individual   
      Project name and                                                        
     construction line    Contract   contract?      contract?   
           number           type                                  project?

            Idaho National Engineering and Environmental Laboratory

    Advanced Mixed Waste Treatment Facility (97-PVT-2) Fixed price No No No

        Spent Nuclear Fuel Dry Storage (98-PVT-2)b Fixed price No No No

                     Lawrence Livermore National Laboratory

National Ignition Facility (96-D-111)	Cost plus award Yes Yes Nod fee

 Oak Ridge, Tennessee Rocky Flats Facility at Denver, Colorado Sandia National
                                  Laboratories

East Tennessee Technology Park             Cost plus incentive Yes Yes Yes 
Three-Building D&D                                                     
and Recycle Project (OR-0040)              fee                         
Facilities Capability Assurance Program                        No  Yes Yes 
(88-D-122-27                               Cost plus award             
& 88-D-122-42)c                            fee                         
Spallation Neutron Source (99-E-334)       Cost plus incentive Yes Yes Yes 
                                              fee                         

Nuclear Facility D&D/North Side Facility   Cost plus incentive Yes Yes Noa 
Closures                                                               
(RF-0040)                                  fee                         
Nuclear Facility D&D/South Site Facility                       Yes Yes Noa 
Closures                                   Cost plus incentive         
(RF-0041)                                  fee                         
Nuclear Material Stabilization &                               Yes Yes Noa 
Disposition (RF-0011)                      Cost plus incentive         
                                              fee                         
Soil & Water Remediation (RF-0030)         Cost plus incentive Yes Yes Noa 
                                              fee                         
Solid Waste Stabilization & Disposition                        Yes Yes Noa 
(RF-0013)                                  Cost plus incentive         
                                              fee                         

      Microsystems and Engineering Science        Fixed price     Yes Yes Nod 
                  Application                                             
                   (01-D-108)                                             
              Savannah River Site                                         
High-Level Waste Removal from Filled Waste                     No  Yes Yes 
                     Tanks                      Cost plus award           
                   (SR-0014C)                         fee                 
     Tritium Extraction Facility (98-D-125)   Cost plus incentive Yes Yes Yes 
                                                      fee                 
             West Valley, New York                                        
      Nuclear Facility Decontamination and      Cost plus award   Yes Yes Yes 
          Decommissioning (OH-WV-0040)                fee                 
         Nuclear Weapons Refurbishment                                    
          Life Extension Program-B61e           Cost plus award   No  Yes Nod 
                                                      fee                 

    Appendix I The Department of Energy's 33 Major Projects That We Reviewed

                         (Continued From Previous Page)

                                                    Schedule    
                                   Cost incentive               
                                   or              performance  
                                        cost      incentive for 
                                     constraint                 
                                   for individual  individual   Fee available 
                                                                          for 
                                     project in    project in    individual   
     Project name and    Contract                                             
     construction line     type      contract?      contract?     project?
          number                                                
      Life Extension     Cost plus       No            Yes           Nod      
       Program-W76e        award                                
                            fee                                 
      Life Extension     Cost plus       No            Yes           Nod      
       Program-W80e        award                                
                            fee                                 

Source: GAO compilation of DOE data.

aFee is based on reaching site closure, rather than on completing
individual projects.

bAlthough the September 2004 PARS report showed that this project would
cost less than $400 million, we included it in our review because it was
included in our 2002 review of DOE's major projects. (GAO,

Contract Reform: DOE Has Made Progress, but Actions Needed to Ensure
Initiatives Have Improved Results, GAO-02-798 (Washington, D.C.: Sept. 13,
2002).)

cThis project was designated as a major project when DOE's threshold was
$100 million.

dNNSA factors performance on these projects into each responsible
management and operating contractor's annual performance evaluation and
decisions on the amount of the fee awards.

eNNSA stated that each of these life extension projects involved multiple
management and operating contractors (not 1 contract) in multiple
locations, which is different from every other project that is listed in
this appendix.

Appendix II

Scope and Methodology

Our review focused primarily on 33 major projects that had passed, as of
March 2004, the Department of Energy's (DOE) Critical Decision 2
milestone-the point at which the department approves a project's cost,
schedule, and scope baselines on the basis of an approved conceptual
design report and acquisition strategy. The projects we reviewed include
28 projects that cost more than $400 million each and 5 projects that our
2002 assessment defined as major projects because their total costs
exceeded $100 million each. Our review did not include 46 major projects
that, as of March 2004, had not passed the Critical Decision 2 milestone.
Since March 2004, at least 6 major projects have passed the Critical
Decision 2 milestone and now have approved baselines. The remaining major
projects do not have approved baselines for measuring performance.

To assess DOE's use of performance incentives in contracts to effectively
control cost and maintain schedules, we reviewed relevant requirements in
the Federal Acquisition Regulation (FAR) and the DOE Acquisition
Regulation, as well as DOE Order 413.3, DOE manual 413.3-1, and DOE's
Acquisition Guide, to obtain information on the factors that should be
used in determining a contractor's fee. Through this effort, we identified
whether the department provided guidance on the appropriate circumstances
for using each contract type and the appropriate factors for determining a
contractor's fee. In particular, we examined requirements regarding
contract provisions for award fees; cost, schedule, and performance
incentives; and fee determination plans.

We then compared government and departmental requirements with
project-specific elements found in the contracts for each of the 33 major
projects that have DOE-approved cost, schedule, and scope baselines to
determine whether DOE has used appropriate (1) types of performance
incentives, such as cost or schedule incentives, and (2) fee determination
plans and fee payments. For instance, to assess whether DOE's contracts
used the appropriate incentives for each of three types of contracts, we
compared the types of incentives that DOE's contracts and relevant
modifications used for each of the 33 major projects with the types of
incentives that the FAR and the DOE Acquisition Regulation, as well as
departmental orders and guidance, require. We then interviewed cognizant
DOE officials to discuss reasons for the inconsistencies we found. In
addition, we examined various contract-related documents associated with
the 33 major projects we reviewed, such as the "Gold Chart" metrics that
Environmental Management uses to measure its progress in DOE's annual
budget submission to the Congress. Specifically, we compared the Gold
Chart's performance metrics for each of Environmental Management's 25

Appendix II Scope and Methodology

major projects with the performance measures in each projects' contract.
Where differences were identified, we discussed the contents of the Gold
Chart and the associated projects' contract with appropriate DOE
contracting officials. Furthermore, we interviewed officials in DOE's
Office of Contract Management and officials in the Office of Engineering
and Construction Management to determine the extent to which DOE had
reviewed, prior to award, the contracts for the 33 major projects to
ensure that they included appropriate project management provisions.

To assess the reliability of the data DOE uses to monitor and assess
contractor performance, we reviewed the Office of Management and Budget's
(OMB) directives, DOE's Reference Book for Contract Administrators, and
other DOE documents and studies to identify relevant requirements and
departmental guidance. We identified the roles and responsibilities of
contract administration officials and examined the extent to which these
officials adhered to their responsibilities. More specifically, we
reviewed the department's recent contract administration self-assessments
and the frequency with which they were conducted. In so doing, we examined
the department's recommendations for improving contract administration and
determined whether the recommendations were followed. If they were not
followed, we discussed the reasons with cognizant officials in the
Contract Administration Division. We also examined DOE's order for
acquisition career development, and other related DOE directives, to
assess training requirements for DOE's contracting officers and
contracting officer representatives, particularly regarding training in
earned value management principles.

To determine the reliability of Project Analysis and Reporting System
(PARS) data used by senior managers for project oversight, we assessed the
accuracy, completeness, and timeliness of PARS data. To assess the
accuracy of the project performance data in PARS, we did the following:

o 	Reviewed DOE Order 413.3, "Program and Project Management for the
Acquisition of Capital Assets," and its implementing guidance; OMB
Circular A-11, part 7, "Planning, Budgeting, Acquisition, and Management
of Capital Assets"; and various documents outlining the requirements in
American National Standards Institute/Electronic Industries
Association-748-1998, which defines the requirements for earned value
management-the component of contractors' project management systems
critical for producing reliable project performance data.

Appendix II Scope and Methodology

o 	Interviewed cognizant DOE officials in the Office of Engineering and
Construction Management, the Office of Environmental Management, the
Office of Science, and the National Nuclear Security Administration on the
extent to which the performance data that DOE contractors' project
management systems produced for PARS met earned value management
requirements. These officials included a DOE expert in earned value
management, who is responsible for assessing the accuracy of the data that
various projects' systems produce. Where specific deficiencies in a
contractor's project management system were identified, we obtained
relevant documents from the appropriate acting DOE project director and
analyzed whether the contractor generated project performance data in
accordance with the industry standard. We also interviewed officials in
two other major contracting agencies-the Department of Defense and the
National Aeronautics and Space Administration-about their experience in
implementing earned value management requirements.

o 	Compared data in monthly PARS reports provided to senior DOE managers
from January through September 2004 with project-specific cost and
schedule data obtained from earlier PARS reports, cognizant program
offices, project status reports, Inspector General reports, and external
reviews. When we identified total cost or project performance data
discrepancies between PARS and these other sources, we contacted relevant
project officials to determine their cause.

o 	Identified the extent to which contractor-generated data in PARS were
sufficiently reviewed and verified by DOE by (1) identifying requirements
in DOE Order 413.3 and its implementing guidance for the departmental
review and verification of contractor project performance data and (2)
interviewing DOE project management officials to determine whether the
current breadth of review was adequate and what plans, if any, DOE had for
increasing the rigor of its review and verification of contractor data.

To assess the completeness of PARS data, we determined whether the PARS
database included major DOE activities-those costing more than $400
million or that DOE management had designated-identified in our prior
reports, Inspector General reports, DOE press releases, and printouts from
DOE's Management Accounting and Reporting System. For projects that were
not included in PARS, we contacted headquarters project management
officials to determine if the projects met the criteria for PARS
reporting. For projects that were included in PARS, we examined the

Appendix II Scope and Methodology

completeness of reported data in various data fields by reviewing
printouts from the PARS database and by reviewing the reports of the
National Academies' National Research Council and the Civil Engineering
Research Foundation, which also examined the completeness of PARS data. In
addition, we reviewed a 2004 report by the U.S. Army Corps of Engineers on
a major project at Hanford, Washington. Moreover, we discussed options
with DOE officials for reporting additional data that would improve PARS'
ability to enable senior DOE managers to identify potential cost or
schedule challenges.

To assess the timeliness of PARS data, we reviewed PARS monthly reports to
senior DOE managers and identified projects whose performance data were
out-of-date. For many of these projects, we talked to headquarters and
project officials to determine the reasons for delay and explored options
with them on how timeliness could be improved. We also interviewed
numerous acting DOE project directors to learn how data from their project
management systems were summarized and incorporated into the PARS
database. In addition, we explored options with DOE headquarters and
project officials for improving the timeliness of all data reported in
PARS.

Given our review of the documentation provided by DOE and our discussions
with DOE officials, we have reservations about the reliability of PARS
data. These issues are discussed in this report.

We conducted our work from January 2004 through January 2005 in accordance
with generally accepted government auditing standards, which included an
assessment of data reliability and internal controls.

                                  Appendix III

                     Comments from the Department of Energy

Appendix III
Comments from the Department of Energy

Appendix III
Comments from the Department of Energy

Appendix III
Comments from the Department of Energy

Appendix III
Comments from the Department of Energy

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