    Cooperative Threat Reduction: DOD Needs More Reliable Data to
    Better Estimate the Cost and Schedule of the Shchuch'ye Facility
    (31-MAY-06, GAO-06-692).

    Until destroyed, Russia's stockpile of chemical weapons remains a
    proliferation threat, vulnerable to theft and diversion. Since
    1992, Congress has authorized the Department of Defense (DOD) to
    provide more than $1 billion for the Cooperative Threat Reduction
    (CTR) program to help the Russian Federation construct a chemical
    weapons destruction facility (CWDF) at Shchuch'ye to eliminate
    about 14 percent of its stockpile. Over the past several years,
    DOD has faced numerous challenges that have increased the
    estimated cost of the facility from about $750 million to more
    than $1 billion and delayed the facility's operation from 2006
    until 2009. DOD has attributed the increase cost and schedule to
    a variety of factors. In this report, we (1) assess the
    facility's progress, schedule, and cost and (2) review the status
    of Russia's efforts to destroy all of its chemical weapons.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-692
        ACCNO:   A54980
      TITLE:     Cooperative Threat Reduction: DOD Needs More Reliable
    Data to Better Estimate the Cost and Schedule of the Shchuch'ye
    Facility
         DATE:   05/31/2006
      SUBJECT:   Chemical weapons
    	     Chemical weapons disposal
    	     Construction costs
    	     Cost analysis
    	     Facility construction
    	     Foreign governments
    	     International cooperation
    	     Schedule slippages
    	     Security threats
    	     Subcontractors
    	     DOD Cooperative Threat Reduction Program
    	     Shchuch'ye (Russia)

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    GAO-06-692

                     United States Government Accountability Office

    Report to the Chairman, Subcommittee on

        Federal Financial Management, Government Information, and International
     Security, Committee on Homeland Security and Governmental Affairs, U.S. Senate

    May 2006

    COOPERATIVE THREAT REDUCTION

      DOD Needs More Reliable Data to Better Estimate the Cost and Schedule of the
                                  Shchuch'ye Facility

    GAO-06-692

    COOPERATIVE THREAT REDUCTION

    DOD Needs More Reliable Data to Better Estimate the Cost and Schedule of
    the Shchuch'ye Facility

      What GAO Found

    Although DOD has made visible progress over the past 2 years in
    constructing the chemical weapons destruction facility at Shchuch'ye, it
    continues to face numerous challenges that threaten the project's schedule
    and cost. Primarily, key buildings on the site have fallen behind schedule
    due to difficulties working with Russian subcontractors. Such delays have
    been costing DOD more than $3 million per month since October 2005 and
    will continue until the award of a crucial subcontract, possibly in June
    2006. Uncertain progress of Russian construction on the site,
    unpredictable Russian regulatory requirements, and various technical
    issues, such as testing the facility, could cause further schedule delays
    and increase costs. Also, DOD lacks a reliable earned value management
    (EVM) system to record, predict, and monitor the project's progress. DOD
    allocated $6.7 million to the project's contractor in September 2004 to
    establish an EVM system and expected to have a validated EVM system in
    place by March 2005. DOD cannot use the current EVM system to assess the
    final schedule and cost for completing the Shchuch'ye facility because it
    contains flawed and unreliable data. In addition, the contractor has not
    yet conducted an IBR of the Shchuch'ye project.

    Furthermore, it remains uncertain whether the Russian government can
    destroy its entire chemical weapons stockpile by the Chemical Weapons
    Convention (CWC) extended deadline of 2012. As of March 2006, Russia had
    destroyed about 3 percent of its 40,000 metric tons of chemical weapons at
    two completed destruction facilities. To eliminate the remainder of its
    chemical weapons over the next six years, the Russian government must
    construct and operate five additional destruction facilities, including
    Shchuch'ye. The Russian government has indicated that it will need
    continued international assistance to destroy the remaining stockpile.

                     United States Government Accountability Office

    Contents

      Letter 1

    Results in Brief 2 Background 3 Construction Has Progressed, but Project
    Is behind Schedule and

    Faces Substantial Challenges 7 Russia Has Developed a Destruction Plan and
    Increased Funding

    but May Not Meet Its Destruction Deadlines 22 Conclusion 26
    Recommendations for Executive Action 27 Agency Comments and Our Evaluation
    27

    Appendix I Scope and Methodology

    Appendix II Lack of Reliable EVM Data Limits DOD's Ability to Estimate
    Schedule and Cost for Constructing the CWDF 31

    Appendix III Comments from the Department of Defense

    Appendix IV GAO Contact and Staff Acknowledgments

      Tables

    Table 1: Schedule for Russian CWDFs 23 Table 2: International Assistance
    for Russian Destruction, as of

    April 2006 25 Table 3: Examples of Accounting System Errors Understating
    the

    Variance at Completion from January 2006 Report 32

      Figures

    Figure 1: Russian Chemical Weapons Stockpile 5 Figure 2: Completed
    Firehouse at Shchuch'ye, November 2005 8 Figure 3:
    Administration/Cafeteria Building under Construction, November 2005 9

        Page i GAO-06-692 CTR Assistance to Shchuch'ye

    Figure 4: Construction Progress on Building 101 in November 2003
    and November 2005                                                       10
    Figure 5: U.S. Construction Status of Key Structures at Shchuch'ye,
    March 2006                                                              11
    Figure 6: Status of Key CWDF Milestones, as of May 2006                 13

    Abbreviations
    CTR                                 Cooperative Threat Reduction
    CWC                                  Chemical Weapons Convention
    CWDF                                 chemical weapons destruction facility
    DCAA                                Defense Contract Audit Agency
    DCMA                                    Defense Contract Management Agency
    DOD                        Department of Defense
    DTRA                               Defense Threat Reduction Agency
    EVM                                    Earned Value Management
    FAR                                Federal Acquisition Regulation
    IBR                                  integrated baseline review
    RFP                        Requests for Proposal
    Rostekhnadzor                      Federal Service for Ecological,
                                             Technological, and Nuclear Oversight
    VAT                        value added tax

    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
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office Washington, DC 20548

    (2)(2) review the status of Russia's efforts to destroy all its
    chemicalreview the status of Russia's efforts to destroy all its chemical

    Page 1 GAO-06-692 CTR Assistance to Shchu

                                    Results in Brief

    government auditing standards. (See app. 1 for details on our scope and
    methodology.)

    Since our last visit to the site in November 2003, DOD and Parsons have
    made progress in constructing the CWDF at Shchuch'ye. For example, several
    buildings are at or near completion, including the fire station, housing
    complex, and warehouse. However, DOD faces substantial challenges that
    could threaten the project's cost and schedule. First, the construction of
    key buildings is behind schedule. The construction of the main destruction
    building is delayed due to subcontractor bids that were incomplete or
    excessively high. The control building is behind schedule because a major
    Russian subcontractor went bankrupt. As of February 2006, DOD estimated
    that the construction of the entire CWDF was about 40 percent complete,
    compared with the more than 52 percent scheduled for completion at that
    time. Second, uncertain progress of Russian construction of utilities
    (electricity, water, and gas) required to operate the facility could delay
    the destruction process. Third, a new Russian regulatory agency has levied
    additional and unplanned safety and administrative requirements on the
    project. In addition, potential difficulties in implementing the next
    critical step-systemization-in which all of the facility's components
    (destruction, electrical, water, etc.) are tested to ensure
    interoperability and performance-could impact cost and schedule. While DOD
    estimates that it will turn over the Shchuch'ye facility to the Russian
    government in December 2009, such an estimate appears optimistic given the
    construction and other unknown delays DOD may encounter. Furthermore, the
    EVM system that Parsons is using to record, predict, and monitor progress
    contains flawed and unreliable data. Our analysis revealed serious
    discrepancies in the data, such as improper calculations and accounting
    errors. For example, we found that from September 2005 through January
    2006 Parsons' EVM reports did not capture almost $29 million in actual
    costs for the CWDF project. In addition, we found that DOD and Parsons
    have not yet conducted an integrated baseline review (IBR) for the
    Shchuch'ye project.

    To improve DOD's efforts to accurately measure progress on the Shchuch'ye
    project and estimate its final completion date and cost, we are
    recommending that the Secretary of Defense ensure that Parsons' EVM system
    contains valid, reliable data and that it reflects actual cost and
    schedule conditions. Until Parsons' system produces reliable EVM data, we
    are also recommending that the Secretary of Defense withhold a portion of
    Parsons' award fee. Finally, we are recommending that the

    Page 2 GAO-06-692 CTR Assistance to Shchuch'ye

    Secretary of Defense require Parsons to perform an IBR of the Shchuch'ye
    project once the contract for completing Building 101 has been awarded.

    DOD concurred with our recommendation regarding the improvement of
    Parsons' EVM system data and provided technical comments that we
    incorporated where appropriate. The Department of State did not provide
    comments.

    In addition to the Shchuch'ye project, the Russian government has
    ambitious plans to eliminate its chemical weapons stockpile. Since 2002,
    Russia has destroyed about 3 percent of its declared 40,000 metric tons of
    chemical weapons at two completed destruction facilities. To eliminate the
    remaining stockpile and meet the Chemical Weapons Convention (CWC)
    extended deadline of 2012, the Russian government will have to destroy
    about 38,000 metric tons of chemical weapons. The Russian government's
    destruction plan to eliminate all chemical weapons by 2012 may be
    unrealistic as it depends on the construction of seven destruction
    facilities-two have been built, two are under construction, and three have
    not been started. Furthermore, the Russian government's priority is to
    destroy nerve agents contained in large munitions, because destroying the
    larger-sized munitions first would allow Russia to meet its CWC
    destruction deadlines faster. Accordingly, the destruction of smaller
    munitions at Shchuch'ye may become less of a priority for the Russian
    government. In addition, the Russian government has indicated that it will
    need continued international assistance to destroy the remaining
    stockpile. Its destruction plan estimates that about $5.6 billion is
    needed to eliminate the entire Russian stockpile. Since 2002,
    international donors, including the United States, have committed almost
    $2 billion for Russian chemical weapons destruction efforts.

    Russia possesses the world's largest declared chemical weapons stockpile,

    which is stored at seven sites across the country (see fig. 1). When
    declared in 1998, the Russian stockpile included 32,500 metric tons of
    nerve agents and 7,500 metric tons of blister agents.1 As of March 2006,
    Russia had destroyed about 1,158 metric tons of blister agents, about 3
    percent of its stockpile. Under the CWC, Russia must destroy all of its

    1

    Nerve agents affect the transmission of nerve impulses in the nervous
    system. Nerve agents are easily dispersed and highly toxic when absorbed
    through the skin or via respiration. Blister agents, which can be lethal
    if inhaled, generally cause burns on contact with skin. The blister agents
    include mustard gas and lewisite.

        Page 3 GAO-06-692 CTR Assistance to Shchuch'ye

    chemical weapons by the extended deadline of 2012.2 The CWC is a
    multilateral arms control treaty that bans the development, production,
    stockpiling, transfer, and use of chemical weapons and requires the
    destruction of existing chemical weapons stocks. Until destroyed, chemical
    weapons remain a proliferation threat.

    The CWC requires the destruction of existing chemical weapons stocks and
    production facilities by 2007 with a possible extension to 2012.

    Page 4 GAO-06-692 CTR Assistance to Shchuch'ye

                      Figure 1: Russian Chemical Weapons Stockpile

    Sources: DOD (data); Nova Development and Map Resources (images).

    In 1992, the United States agreed to assist the Russian government in
    eliminating its chemical weapons stockpile. The United States has
    committed to fund the design, construction, equipment acquisition and
    installation, systems integration, training, and start-up of the
    Shchuch'ye facility. When completed, the facility will house about 100
    buildings and structures, including the destruction buildings where
    chemical munitions are destroyed; the administration building where the
    destruction process is controlled; and support buildings such as the
    boiler house, which provides heat to the entire facility. As originally
    planned, the facility's construction was expected to begin in March 2001
    and to be completed in 2005. However, a 2-year congressional freeze on
    funding postponed the start of construction until March 2003.

    DOD's Defense Threat Reduction Agency (DTRA) manages the implementation of
    the CTR program. To construct the Shchuch'ye facility, DTRA--through the
    U.S. Army Corps of Engineers, the contract manager for the project-has
    contracted with Parsons, which in turn subcontracts the design and
    construction work to Russian contractors. Contracts are executed, managed,
    and reviewed in accordance with DOD and Federal Acquisition Regulations
    (FAR). Subcontractors submit bids in response to Requests for Proposal
    (RFP) issued by Parsons. Parsons then awards the subcontract on the basis
    of safety records, past performance, quality of work, price, and other
    factors. After awarding these contracts, Parsons works with the
    subcontractors to conduct technical evaluations of the schedule and cost
    of the work. CTR assistance will finance the construction of all buildings
    and structures on site, except for one. The Russian Federation has agreed
    to fund the construction of a second destruction building (Building 101A)
    nearly identical to Building 101, the

    U.S. funded destruction structure. Russia is also funding the construction
    of utilities (gas, electricity, water) needed to operate the facility and
    to support the local community.

    Since 1992, Congress has passed 27 laws addressing the CTR program.3 The
    legislation includes various DOD requirements for CTR funding, conditions
    on CTR expenditures, and mandates to report on the implementation of the
    CTR program. Some legislative provisions apply to the entire CTR program;
    others are directed at the Shchuch'ye project, including a requirement for
    a presidential certification that the project is in the U.S. national
    security interest.4 The President's certification authority and the waiver
    of a prior prohibition on funding chemical weapons

    3

    For a summary of the legislation, see appendix II of GAO, Cooperative
    Threat Reduction: DOD Has Improved Its Management and Internal Controls,
    but Challenges Remain, GA0-05-329 (Washington, D.C.: June 30, 2005). Since
    publication of that report, Congress has passed two laws containing
    measures addressing CTR. Pub. L. 109-103, Div A (The National Defense
    Authorization Act for Fiscal Year 2006) and Pub. L. 139-148, Div A (The
    Department of Defense Appropriations Act of 2006).

    4

    Pub. L. 108-375, sec. 1303 (amending Pub. L. 108-136, sec. 1306).

      Construction Has Progressed, but Project Is behind Schedule and Faces
      Substantial Challenges

    destruction in Russia expire on December 31, 2006.5 In addition, Congress
    has conditioned funding for the Shchuch'ye facility on the Secretary of
    Defense's certification that, among other conditions, Russia has allocated
    at least $25 million to eliminating its chemical weapons and has developed
    a practical plan for destroying its chemical weapons stockpile.6

    Since our last visit to the Shchuch'ye site in 2003, we found that Parsons
    and DOD had made progress in constructing the facility. Several support
    buildings such as the fire station, worker housing, and warehouse had been
    completed; and many of the other structures, including the
    administration/cafeteria building, the processing building, and storage
    buildings were well under construction. However, key buildings had fallen
    behind schedule, affecting the facility's overall cost and schedule.
    Uncertain progress of Russian construction at the facility and on its
    infrastructure, an unpredictable Russian operating environment, and
    assorted technical issues could continue to impact the project's cost and
    schedule. Furthermore, the failure of Parsons to develop and implement a
    usable EVM system has limited DOD's efforts to oversee project schedule
    and cost.

        DOD Has Made Progress but Is Experiencing Delays

    During our visit to the Shchuch'ye site in November 2005, we observed
    substantial construction progress compared with our visit in November
    2003. In 2003, the site consisted mainly of concrete foundations for the
    destruction buildings, with only the specialist camp7 and warehouse under
    construction. By 2005, however, the support structures of many buildings
    had been built, and several buildings were at or near completion,
    including

    5

    See Pub. L. 106-65, sec. 1305.

    6

    See Pub. L. 107-107, sec. 1308. The Secretary of Defense must certify that
    there has been

    (1) information provided by Russia, that the United States assesses to be
    full and accurate, regarding the size of the chemical weapons stockpile of
    Russia; (2) a demonstrated annual commitment by Russia to allocate at
    least $25 million to chemical weapons elimination; (3) development by
    Russia of a practical plan for destroying its stockpile of nerve agents;
    (4) enactment of a law by Russia that provides for the elimination of all
    nerve agents at a single site; (5) an agreement by Russia to destroy or
    convert its chemical weapons production facilities at Volgograd and
    Novocheboksarsk; and (6) a demonstrated commitment from the international
    community to fund and build infrastructure needed to support and operate
    the facility.

    7

    The specialist camp is the building to house contractors working on site.

    the specialist camp, warehouse, gas rescue station,8 and fire station.
    (Fig. 2 shows the completed fire station.)

               Figure 2: Completed Firehouse at Shchuch'ye, November 2005

    Source: GAO.

    Also under construction were the boiler house and the
    administration/cafeteria building, seen in figure 3.

    The gas rescue station will serve as a training center and equipment depot
    for dealing with hazardous materials on site.

    Page 8 GAO-06-692 CTR Assistance to Shchuch'ye

     Figure 3: Administration/Cafeteria Building under Construction, November 2005

    Source: GAO.

    The concrete outer shells of Building 101 and the administration/control
    building had been completed. While Building 101 was still open to the
    elements and contained no inner walls, Russian subcontractors were
    installing outlets and control panels inside the drywall of the
    administration building. (See fig. 4 for a comparison of the construction
    work completed on Building 101 in November 2003 and November 2005.) We
    also observed piping and wiring being installed above ground for site wide
    electrical, heat, and water utilities.

      Figure 4: Construction Progress on Building 101 in November 2003 (left) and
                                 November 2005 (right)

    Source: GAO.

    Despite such progress, the CWDF project has not met scheduled milestones,
    primarily because of a delay in awarding the contract for the completion
    of the CTR-funded destruction building (Building 101), pictured in figure
    4. In January 2005, DOD estimated that the CWDF would cost $1.039 billion
    and be transferred to the Russian Federation by July 2009. However, in
    March 2006, DOD officials stated that they were unable to estimate when
    the entire facility will be completed and at what cost until they award a
    contract for the completion of Building 101. As of February 2006, DOD
    estimated that the construction of the entire CWDF was about 40 percent
    complete, compared with the more than 52 percent scheduled for completion
    at that time. As indicated in figure 5, the construction of certain key
    structures is behind schedule, including the destruction building
    (Building 101), the control building (administration building), the boiler
    house, and the water circulation building.

    Figure 5: U.S. Construction Status of Key Structures at Shchuch'ye, March
    2006

    Source: DOD.

    a

    Building schedule modified by Parsons to reflect longer timelines.

    Building 101 is on the "critical path", that is, delays in finishing the
    building will prolong construction on other parts of the Shchuch'ye
    facility. Although the exterior shell of Building 101 is on schedule, the
    award of the construction contract for the remainder of Building 101 is
    behind

    Page 11 GAO-06-692 CTR Assistance to Shchuch'ye

    schedule. Parsons had planned to award the subcontract for the balance of
    the building in June 2005, but it may not be awarded until summer 2006.
    Since October 2005, Parsons has incurred costs for personnel salaries,
    rent, and transportation of more than $3 million per month, which will
    continue until the subcontract is awarded. Where possible, Parsons has
    reduced or delayed recruitment of personnel planned for management of
    Building 101. Construction activity is still ongoing at other buildings
    throughout the site.

    The delay in awarding the contract for the remainder of Building 101 has
    impacted the overall schedule for completing the facility's construction.
    As part of its program management, DOD estimates dates for key project
    milestones at Shchuch'ye. These include a milestone schedule with
    objective (ideal) completion dates, threshold (latest acceptable) dates,
    and estimated completion dates for key activities. As of May 2006,
    however, DOD does not expect to meet key milestone dates for the CWDF.
    According to this schedule (as shown in fig. 6), construction of the
    facility will be delayed by about 1 year, testing using simulated nerve
    agent will begin some 15 months later than planned, and live agent
    demonstration will be delayed by about 8 months. While DOD estimates that
    it will turn over the Shchuch'ye facility to the Russian government in
    December 2009, such an estimate appears optimistic given the construction
    and other unknown delays that DOD may encounter in testing the facility
    with simulated and live nerve agent. DOD officials stated that these
    milestones may slip even further.

    Figure 6: Status of Key CWDF Milestones, as of May 2006

        Shchuch'ye CWDF Delayed Due to Difficulties Working with Russian
        Subcontractors

                                      Source: DOD.

    The delays in constructing key buildings at the CWDF result from problems
    Parsons and DOD have had with Russian subcontractors, including the
    bankruptcy of one major subcontractor, problems in soliciting adequate
    bids, and difficulty maintaining a competitive-bidding process.

    First, the 2005 bankruptcy of the Russian construction subcontractor
    Magnitostroy delayed construction of key buildings. This company was cited
    during the initial source selection process during 2000 to 2001 for its
    technical abilities, logistical capability, competitive pricing, and
    financial responsibility and was the first construction subcontractor to
    work on the Shchuch'ye project. According to DOD and Parsons officials,
    Magnitostroy enjoyed the strong support of the Russian government.
    However, it was discovered in 2005 that a senior executive embezzled
    millions of dollars from the company in 2003. As a result, the company was
    unable to afford sufficient labor to complete its work at the site,
    according to DOD and Parsons officials. The most serious delay involved
    the construction of the administration building-the command building that
    will control the

    Page 13 GAO-06-692 CTR Assistance to Shchuch'ye

    destruction process. Although scheduled to be complete at the time of our
    visit in November 2005, construction of the administration building was
    only about 36 percent complete. By January 2006, Parsons had assumed
    direct responsibility for the construction of the building and had divided
    most of the remaining work among Magnitostroy's subcontractors. Similarly
    at that time, two other Magnitostroy buildings were behind schedule,
    requiring Parsons to extend their completion dates. Given these delays,
    Parsons has not provided Magnitostroy with RFPs on any new construction
    packages.

    Second, DOD and Parsons officials stated that Russian subcontractors had
    not provided detailed cost and scheduling information in their bids.
    Although Parsons cited incomplete bids as the cause of the delay, DOD
    criticized Parsons for a "lack of urgency" in resolving the Building 101
    bid issue. Parsons had particular difficulty soliciting adequate bids on
    the construction package for the work remaining on Building 101.9 This
    construction package will complete the building's physical structure and
    install the equipment and processing systems needed to destroy the
    chemical munitions. According to DOD and Parsons officials, it is the
    largest, most complex construction package of the CWDF project. After
    Magnitostroy's bankruptcy, two other contractors, Spetztroy and
    Stroytransgaz, bid on the remaining Building 101 construction package.
    According to DOD officials, their bids arrived after the June 2005
    deadline and did not include adequate cost and schedule data. Despite a
    deadline extension, neither subcontractor submitted a complete bid until
    the end of December 2005. At that time, only Spetzstroy submitted a
    responsive bid. Its bid price, however, was $239 million over DOD's
    budget.

    Third, the small pool of approved Russian subcontractors has made it
    difficult to maintain a competitive-bidding process. According to DOD, the
    subcontractors for the CWDF are selected through a series of joint
    selection committees. The Russian government develops a list of approved
    companies that Parsons and a joint commission comprising DOD and Russian
    government officials examine. In the initial round of subcontractor
    selections in 2000 to 2001, Magnitostroy was the first CWDF subcontractor
    chosen. A second round of selections in 2003 added four more
    subcontractors: Promstroy, Spetztroy, Stroyprogress, and Stroytransgaz.
    According to DOD officials, before Magnitostroy's 2005

    Construction packages are "mini contracts" for completing specific tasks
    associated with buildings and infrastructure that are awarded to
    subcontractors on a competitive basis.

    Page 14 GAO-06-692 CTR Assistance to Shchuch'ye

        Cost and Schedule Subject to Uncertain Progress of Russian Construction, an
        Unpredictable Russian Operating Environment, and System Testing Issues

    Uncertain Russian Progress in Completing Facility and Infrastructure

    bankruptcy, Magnitostroy, Stroytransgaz, and Spetztroy were the only
    subcontractors that were capable of completing larger construction
    efforts. The small number of Russian contractors discouraged effective
    competition and limited the number of construction packages that could be
    awarded.

    In March 2005, DOD requested that the Russian Federation expand the
    subcontractor pool to ensure completion of the Shchuch'ye facility on time
    and within budget. The Russian government added one small specialty
    subcontractor, Vneshstrojimport, but did not restart the selection process
    to find a replacement for Magnitostroy. In December 2005, Stroytransgaz
    withdrew from competition, and the sole remaining contractor, Spetztroy,
    submitted a bid for $310 million to complete Building 101. However, DOD
    had budgeted only $71 million for the construction package. To reconcile
    the cost difference, DOD paid for an independent cost analysis that
    validated the original Parsons estimate of $56 million. Parsons and DOD
    also sought the assistance of the Russian government to negotiate with
    Spetzstroy to lower its bid. When negotiations failed to produce a
    compromise, Parsons canceled the RFP for the balance of Building 101 on
    March 2, 2006.

    In March 2006, DOD resubmitted a request for more subcontractors and
    provided the Russian government with a list of five potential companies,
    three of which were added to the pool. In April 2006, Parsons issued a new
    RFP for the remainder of Building 101. According to DOD officials, Parsons
    has and will continue to conduct weekly meetings with the bidders and make
    personnel available for questions and clarifications regarding the RFP.

    The cost and schedule of the Shchuch'ye facility are subject to continuous
    risks. The Russian Federation's uncertain progress in completing work on
    Building 101A and required utilities could delay the final system testing
    for the CWDF. The Russian government's failure to complete promised social
    infrastructure could generate local opposition to the CWDF. DOD and
    Parsons must also operate in an unpredictable Russian environment with
    changing legal and technical requirements that could directly affect
    schedule and cost.

    Russian Federation progress in completing Building 101A, as well as the
    industrial and social infrastructure surrounding the CWDF, remains
    uncertain. According to DOD officials, the Russian government's method of
    construction scheduling contains few itemized tasks, making it difficult

    Russia's Operating Environment Is Unpredictable

    to accurately gauge construction progress and uncover issues that could
    cause delays. Although DOD and Parsons monitor Russian Federation
    construction progress through monthly progress reports and project site
    visits, the Russian government has not always followed jointly agreed upon
    schedules. DOD and Parsons officials remain concerned that systemization
    timelines could be affected if both destruction buildings are not
    completed at the same time. Furthermore, Russian progress in constructing
    utilities for the CWDF and the local community has produced mixed results.
    For instance, we observed that the Russian government has installed only
    one of three power lines needed to operate the CWDF. According to Parsons
    and DOD officials, although the Russian government completed the new water
    line to the CWDF and the town of Shchuch'ye in 2004, the more water the
    CWDF uses, the less the town has available. This may lead to a competition
    for water when the facility begins consuming substantially more water when
    testing of the facility's systems begins, and during operation.
    Furthermore, when the Russian government constructed a new gas line to the
    CWDF and through the town of Shchuch'ye, it did not connect the line to
    local homes as promised. A local Shchuch'ye official stated that most
    local residents cannot afford to pay for connection to the main gas line
    and expressed concerns that the Russian government will not fulfill its
    obligations to the local population. To allay public concerns that may
    impact the CWDF, DOD uses public outreach offices to conduct opinion polls
    and educate the local populace on the CWDF.10

    DOD and Parsons must contend with an unpredictable Russian business
    environment that can affect cost and schedule through unexpected changes
    in Russian legal, technical, and administrative requirements.11 New
    regulatory requirements have impacted the CWDF; in one case, stopping work
    on a building until it could be redesigned to comply with new Russian
    electrical codes. In November 2005, a new Russian regulatory agency--the
    Federal Service for Ecological, Technological and Nuclear Oversight
    (Rostekhnadzor)--performed a surprise audit at the Shchuch'ye CWDF. The
    agency cited Parsons with noncompliance in several areas, including
    environmental and industrial safety reviews, permits, licenses, and
    certifications. While Parsons and DOD officials were not aware of these
    requirements, they agreed to implement corrective

    10

    The public outreach offices are located in Shchuch'ye, Chelyabinsk, and
    Kurgan.

    11

    According to its agreement with DOD, the Russian government must identify
    and obtain all legal permits, licenses, and certifications required to
    design, construct, equip, commission, and operate the Shchuch'ye CWDF.

    Page 16 GAO-06-692 CTR Assistance to Shchuch'ye

    Testing Issues Could Delay Destruction Process

    actions. As of March 2006, Parsons had resolved 82 percent of the
    Rostekhnadzor audit findings and was working to mitigate the remainder.
    DOD continues to negotiate with Rostekhnadzor to meet the requirements of
    Russian law and is working with the Russian government to identify
    feasible solutions. Additionally, Parsons has contracted with consultants
    that specialize in helping companies conform to Russian fire, ecological,
    and industrial safety regulations at the local and national levels.

    Furthermore, DOD and Parsons must review new technical requirements raised
    by Russian government officials. According to DOD officials, some new
    requirement requests are justified as they relate to the operation of the
    CWDF, while most others are attempts to transfer cost and risk from Russia
    to the United States. For example, as a result of code and space
    deficiencies, DOD accepted the Russian requirement for an additional
    laboratory building on site, construction of which will increase the
    project's cost by an additional $12 million. However, DOD officials have
    resisted approving Russian requests that they believe are unnecessary or
    that fall within Russian responsibilities at the site. DOD refused to
    allow the Russian government to incorporate a new machine into the
    destruction process, which would have required significant redesign and
    testing of the process, and led to schedule delays and increased project
    costs.

    Russian requirements for long-term visas and value added tax (VAT)
    exemptions for equipment have affected cost and schedule. The Russian
    government provides most DOD and Parsons personnel with only 6-month
    visas, requiring workers to temporarily leave the country while their
    visas are reissued. One DOD official estimated that transportation costs
    associated with this practice totaled approximately $3 million as of
    November 2005. However, DOD officials have noticed improvement in how
    quickly the Russian Federation processes visas. In addition, when the
    Russian government reorganized in early 2004, the office in charge of
    Russian customs was dissolved, leaving no agency able to approve the VAT
    exemptions for more than 6 months. During that time, all equipment shipped
    from the United States was halted, causing a 3-month slip in the CWDF
    construction schedule. In late 2004, the Russian Federation eventually
    reestablished a new VAT office, and equipment delivery was resumed. Since
    that time, DOD has encountered no VAT-related delays.

    Issues associated with the testing of the CWDF's utilities and automated
    destruction system (systemization) could further delay the schedule and
    increase costs. DOD officials identified systemization of the CWDF as the
    next major challenge after resolving the bid issue for Building 101.

    Systemization consists of a series of tests to ensure the safety,
    function, and interoperability of the CWDF internal systems-i.e., water,
    gas, electric, heat, and the chemical munitions destruction process. Such
    testing could be delayed if either destruction building (101 or 101A) or
    essential utilities are not completed on time. The automated destruction
    process is complex, involving the drilling, draining, and decontamination
    of various sizes and types of munitions, and the neutralization of the
    nerve agent they contain. Ensuring that this system works and interfaces
    properly with the rest of the facility will require the testing and
    calibrating of roughly 1,000 different processes, according to a DOD
    official. DOD officials noted that U.S. experiences with destroying
    chemical weapons found that systemization often encounters difficulties
    and delays and has the potential to increase costs. Furthermore, DOD and
    Parsons must compete the systemization contract between two Russian
    subcontractors, Redkino and Giprosintez, selected by the Russian
    government. Given previous difficulties working with subcontractors,
    Parsons may experience delays in obtaining adequate and reasonably priced
    bids.

    DOD is attempting to mitigate systemization risk by exploring options to
    test the CWDF's systems using Russian rather than U.S. methods. Although
    the Shchuch'ye facility is a Russian design, it is currently planned to
    undergo testing procedures similar to those DOD uses in the United States.
    According to DOD officials, Russian systemization methods are less
    involved than U.S. processes, which must adhere to stringent environmental
    and operating regulations and can take 16 to 18 months to complete. The
    Russian government, however, systemized its CWDF at Kambarka within 6 to 9
    months. While DOD officials caution that each CWDF is unique, given the
    types of munitions to be destroyed, they have begun exploring whether
    Russian methods may allow for streamlining and compression of the
    systemization schedule at Shchuch'ye, while still maintaining acceptable
    safety levels. Parsons and its subcontractors are also testing the
    automated destruction system equipment before it is installed in Building
    101.

        EVM System Has Not Been Effectively Implemented and Contains Flawed Data

    Parsons' EVM System Is Not Yet Useful to DOD Managers

    DOD policy and guidance12 require the use of EVM to measure program
    performance. EVM uses contractor reported data to provide program managers
    and others with timely information on a contractor's ability to perform
    work within estimated cost and schedule. It does so by examining variances
    reported in contractor performance reports between actual cost and time of
    performing work tasks and the budgeted or estimated cost and time. In
    September 2004, DOD modified its contract with Parsons, allocating about
    $6.7 million and requiring the company to apply EVM to the Shchuch'ye
    project. Parsons was expected to have a validated EVM system by March
    2005.13 As of April 2006, Parsons had not developed an EVM system that
    provided useful and accurate data to CWDF program managers. In addition,
    our analysis found that the project's EVM data are unreliable and
    inaccurate. According to DOD officials, these problems stem in part from
    Parsons' outdated accounting system. EVM guidance states that
    surveillance14 of an EVM system should occur over the life of the
    contract. DOD has not yet conducted an IBR15 for the Shchuch'ye project
    and does not plan to do so until after Parsons awards the subcontract to
    complete Building 101, possibly in June 2006.

    In December 2005 a Parsons' self-evaluation16 stated that the EVM system
    for the CWDF was "fully implemented." In contrast, DOD characterized
    Parsons' EVM implementation as a "management failure," citing a lack of
    experienced and qualified Parsons staff. DOD withheld approximately

    12

    Defense Contract Management Agency, Department of Defense Earned Value
    Management Implementation Guide, (Washington, D.C.: Apr. 7, 2005). See
    also DOD Memorandum: Revision to DOD Earned Value Management Policy,
    (Washington, D.C.: Mar. 7, 2005).

    13

    According to DOD, a validated EVM system was not required at the time the
    Parsons contract was awarded. A modified EVM system, implemented in
    September 1998, was maintained and used until December 2004.

    14

    Surveillance is the process of reviewing the health of the EVM system
    process. The purpose of surveillance is to focus on using an EVM system
    effectively to manage cost, schedule, and technical performance. An
    effective surveillance process ensures that the key elements of the
    process are maintained over time.

    15An IBR verifies the technical content of the baseline. It also ensures
    that contractor personnel understand and have been adequately trained to
    collect EVM data. The review also verifies the accuracy of the related
    budget and schedule to ensure that risks have been properly identified,
    and it also assesses whether the contractor meets the program's
    objectives.

    16

    Award fee contracts allow government agencies to adjust the amount of fee
    paid to contractors based on the contractor's performance. Parsons is
    required to do a self assessment of its performance at the end of each
    award fee evaluation period.

    Page 19 GAO-06-692 CTR Assistance to Shchuch'ye

    Parsons' EVM Data Are Inaccurate and Unreliable

    $162,000 of Parsons' award fee due to concerns over the EVM system. In
    March 2006, DOD officials stated that at that point in implementation, EVM
    was not yet a usable tool in managing the Shchuch'ye project. DOD
    officials stated that Parsons needs to demonstrate that it incorporates
    EVM into project management rather than simply fulfilling a contractual
    requirement. DOD expects Parsons to use EVM to estimate cost and schedule
    impacts and their causes and, most importantly, to help eliminate or
    mitigate identified risks.

    Parsons' EVM staff stated that they underestimated the effort needed to
    incorporate EVM data into the system, train staff, and develop EVM
    procedures. Parsons officials were also surprised by the number of
    manhours required to accomplish these tasks, citing a high level of staff
    turnover as contributing to the problem. According to the officials,
    working in a remote and isolated area caused many of the non-Russian
    employees to leave the program rather than extend beyond their initial
    tour of duty.

    Based on our review of Parsons' monthly EVM data for September 2005
    through January 2006, we found that the data are inaccurate and unreliable
    and that Parsons is exercising poor quality control over its EVM data.
    Specifically, we discovered numerous instances where data were not added
    properly for scheduled work; Parsons' EVM reports, therefore, did not
    accurately capture data needed by project management to make informed
    decisions about the Shchuch'ye facility. For example, we found that from
    September 2005 through January 2006, Parsons' EVM reports contained
    addition errors that did not capture almost $29 million in actual costs
    for the CWDF project. Such cost omissions and other errors may cause DOD
    and Parsons project officials to overestimate the amount of project
    funding available.

    Moreover, we found several instances where the accounting data were not
    allocated to the correct cost accounts, causing large cost over-runs and
    under-runs. This problem occurred because the accounting data were placed
    in the wrong account or Parsons' accounting system was unable to track
    costs at all levels of detail within EVM. A Parsons official stated that
    the company was taking measures to identify these inaccuracies and
    allocate the accounting data to the proper cost accounts. These problems,
    however, have led to numerous accounting errors in the EVM reports. Such
    mistakes underestimate the true cost of the CWDF project by ignoring cost
    variances that have already occurred. Cost variances compare the earned
    value of the completed work with the actual cost of the work performed.
    Until Parsons fixes its accounting system, manual

    Page 20 GAO-06-692 CTR Assistance to Shchuch'ye

    adjustments will have to be made monthly to ensure that costs are properly
    aligned with the correct budget. Such continuous adjustments mean that the
    system is consistently reflecting an inaccurate status of the project for
    Parsons and DOD managers. (For specific examples of our findings regarding
    Parsons' EVM data, see app. II.)

    EVM guidance states that surveillance of an EVM system should occur over
    the life of the contract to guarantee the validity of the performance data
    provided to the U.S. government. Initial surveillance activities involve
    performing an IBR of a project within 6 months of awarding a contract and
    as needed throughout the life of a project. DOD and Parsons have not yet
    conducted an IBR for the Shchuch'ye project. Program managers are expected
    to use EVM reports that have been validated by an IBR. Without verifying
    the baseline, monthly EVM reporting, which tracks project work against a
    set budget and schedule, is neither meaningful nor valid. Parsons and DOD
    officials explained that while an IBR has been discussed, one will not be
    conducted until Parsons awards a contract for completing Building 101. DOD
    officials estimate that the award process for this contract may not be
    completed until summer 2006, approximately a year later than planned.
    According to Parsons, as of January 2006, about $66 million of scheduled
    work has not been completed as planned, due to the delay in awarding the
    subcontract for the balance of Building 101. DOD officials stated that
    while they recognize the importance of conducting surveillance over an EVM
    system, they currently are focused on the immediate need of establishing a
    usable EVM system on which to perform surveillance.

    Furthermore, DOD requires all EVM systems to undergo a compliance audit or
    "validation" conducted by the Defense Contract Management Agency (DCMA)
    with assistance from the Defense Contract Audit Agency (DCAA). DCAA found
    that Parsons' accounting process was inadequate. A DCAA official on the
    validation team stated that Parsons is relying on an outdated accounting
    system that has difficulty capturing actual costs for the Shchuch'ye
    project and placing them into appropriate cost categories. The DCAA
    official stated that Parsons management should have discovered such
    accounting errors before the EVM report was released to DOD. DCAA
    therefore questioned whether Parsons can generate correct accounting data
    and recommended that Parsons update its accounting system. As of April
    2006, DCMA and DCAA had not yet validated Parsons' EVM system. (For more
    information regarding DCMA and DCAA's assessments of Parsons' EVM system
    see app. II.)

    Page 21 GAO-06-692 CTR Assistance to Shchuch'ye

      Russia Has Developed a Destruction Plan and Increased Funding but May Not Meet
      Its Destruction Deadlines

    Since our report in March 2004,17 the Russian government has approved a
    plan to destroy its chemical weapons stockpile and has begun financing
    significantly more of its own destruction activities. However, as of April
    2006, the Russian government's progress in destroying its chemical weapons
    stockpile has been limited, and the Russian government's destruction plan
    may be overly ambitious and reliant on international assistance.

        Russia Has Developed a Destruction Plan That May Prove Overly Ambitious

    We reported in early 2004 that Russia's lack of a credible chemical
    weapons destruction (CWD) plan had hindered destruction activities.
    However, in October 2005, the Russian government approved a plan for
    destroying its entire chemical weapons stockpile by the CWC-established
    deadline of 2012.18 The October 2005 plan calls for using seven
    destruction facilities to eliminate the entire chemical weapons stockpile.
    Destruction of the chemical weapons stockpile at Gorniy was completed in
    December 2005. As of March 2006, only the facility at Kambarka is
    operational. The plan outlines the construction of the remaining five
    sites, including Shchuch'ye, where nerve agent is to be eliminated.

    According to the Russian plan, the blister agents stored at Gorniy and
    Kambarka were to be destroyed first. In December 2005, the Russian
    government completed its destruction efforts at Gorniy and began
    destroying chemical weapons at Kambarka. In accordance with the plan,
    destruction will next be focused on nerve agents. The storage sites near
    Leonidovka, Maradykovskiy, and Pochep house large nerve-agent munitions,
    while those near Shchuch'ye and Kizner store smaller munitions. Table 1
    depicts the schedule for Russian chemical weapons destruction facilities.

    17GAO, Nonproliferation: Delays in Implementing the Chemical Weapons
    Convention Raise Concerns About Proliferation, GAO-04-361 (Washington,
    D.C.: Mar. 31, 2004).

    18

    The Government of the Russian Federation Resolution, No. 639 (Oct. 24,
    2005). On Amendments to the Federal Target-Oriented Program, "Chemical
    Weapons Stockpiles Destruction in the Russian Federation."

    Page 22 GAO-06-692 CTR Assistance to Shchuch'ye

    Table 1: Schedule for Russian CWDFs
                           Actual or estimated                          Amount of
                      Actual or     completion             Quantity of   declared
                                      date for             agent
    Russian         estimated destroying    Type of        to be     stockpile
    destruction       date of               chemical     destroyed
    facility site  operation  weapons       weapons         (metric    (metric
                                                                 tons)      tons)
    Gorniy          December  December 2005 Bulk                  0      1,120
                         2002                  blister
    Kambarka        December  2010          Bulk              6,347      6,360
                         2005                  blister
    Maradykovskiy  2006       2012          Large nerve       6,960      6,960
                                               munitions
    Shchuch'ye       2008     2012          Small nerve       5,440      5,440
                                               munitions
    Leonidovka       2008     2012          Large nerve       6,960      6,960
                                               munitions
    Pochep          2008      2012          Large nerve       7,520      7,520
                                               munitions
    Kizner         2009       2012          Small nerve       5,640      5,640
                                               munitions

    Sources: GAO analysis of Russian government and DOD data.

    While the Russian plan indicates that the CWDF at Shchuch'ye will be
    operational by 2008, DOD estimates that the facility may not be
    operational until 2009. Furthermore, the Russian government's priority is
    to destroy nerve agents contained in large munitions, because destroying
    the larger-sized munitions first would allow Russia to meet its CWC
    destruction deadlines faster. Accordingly, the destruction of smaller
    munitions at Shchuch'ye19 may become less of a priority for the Russian
    government.

    However, the Russian government's destruction plan to eliminate all
    chemical weapons by 2012 may be unrealistic. It depends on the
    construction of seven facilities, but only two have been built, two are
    under construction, and three have not been started. Although the CWDF at
    Maradykovskiy may be operational in mid-2006, the Shchuch'ye facility is
    still under construction, and only minimal work has begun at the three
    remaining sites of Kizner, Leonidovka, and Pochep. According to its CWC
    destruction schedule, Russia must eliminate 20 percent of its chemical
    weapons stockpile by April 2007. As of March 2006, it had eliminated about
    3 percent at Gorniy and Kambarka. Between April 2007 and April

    The nerve agents to be destroyed at the Shchuch'ye CWDF are stored at the
    Planovy arsenal located about 10 miles away.

    Page 23 GAO-06-692 CTR Assistance to Shchuch'ye

        Russia Has Significantly Increased Funding, but Destruction Efforts Need
        International Assistance

    2012, Russia must eliminate the remainder of its chemical weapons
    stockpile (about 80 percent) at five destruction facilities that have yet
    to be completed. It will be extremely difficult for the Russian government
    to complete and operate the last three facilities by its proposed schedule
    and meet its CWC commitment to destroy all stockpiles at these sites by
    the extended deadline of April 2012.

    Similarly, as of April 2006, DOD announced that the United States will not
    be able to meet the CWC extended destruction deadline of 2012. DOD
    estimates indicate that about 66 percent of the U.S. declared chemical
    weapons stockpile will be destroyed by April 2012. As of March 2006, the
    United States had destroyed about 36 percent of its declared stockpile. In
    the United States, DOD had five operating chemical weapons destruction
    facilities as of March 2006, and two additional facilities were being
    designed.20

    According to the Russian destruction plan, the estimated cost for
    eliminating the entire Russian chemical weapons stockpile is more than 160
    billion rubles-about $5.6 billion.

    Over the past 6 years, Russia has substantially increased its annual
    funding for its chemical weapons destruction efforts. In 2000, the Russian
    government spent about $16 million for chemical weapons destruction. By
    2005, it had spent almost $400 million. For 2006, the Russian government
    plans to spend more than $640 million. For chemical weapons elimination at
    Shchuch'ye, the Russian government has budgeted about $144 million since
    fiscal year 2000. Russian funding at the site supports construction of one
    of the two destruction buildings (Building 101A), as well as the
    industrial and social infrastructure (utilities, roads, schools, etc.)
    needed to support the facility's operations.

    The Russian government will need continued international assistance to
    complete destruction of its chemical weapons stockpile. The United States,
    Canada, Germany, Italy, United Kingdom, and other donors have committed
    almost $2 billion in assistance, with the United States

    20

    The U.S. facilities operational as of March 2006 include Umatilla, Ore.;
    Newport, Ind.; Deseret, Utah; Pine Bluff, Ark.; and Anniston, Ala. The
    facilities at Blue Grass, Ky.; and Pueblo, Colo., remain in the design
    phase. In February 2006, the facility at Edgewood, Md., began closing
    procedures. As of November 2003, all chemical weapons at Johnston Atoll
    were destroyed and the destruction facility dismantled.

    Page 24 GAO-06-692 CTR Assistance to Shchuch'ye

    committing the largest amount, about $1.039 billion. The Russian
    government estimates it will need about $5.6 billion to eliminate its
    entire stockpile. All U.S. assistance for destroying Russian chemical
    weapons is being provided to the CWDF at Shchuch'ye.21 As of March 2006,
    other international donors, such as Canada and the United Kingdom, are
    also providing significant assistance to Shchuch'ye to help fund the
    Russian destruction building (Building 101A) and the infrastructure needed
    to support the facility's operation.22 Although Italy is providing some
    funding for Shchuch'ye infrastructure, most of its contributions are
    committed to the construction of the CWDF at Pochep. Russia has been
    relying on German assistance to destroy its stockpile of blister agents at
    the Gorniy and Kambarka destruction facilities. Table 2 describes the
    commitments and types of assistance provided by international donors.

    Table 2: International Assistance for Russian Destruction, as of April
    2006
    Committed funding for
                          Russian destruction Areas to receive
    International                (U.S. dollars)a Types of projects being
    donors              international assistance funded
    Belgium            $100,000 Shchuch'ye       To be determined
    Canada            89,150,537 Shchuch'ye      Industrial infrastructure,
                                                    railway, and equipment for
                                                    Building 101A
    Czech Republic       232,458 Shchuch'ye      Industrial infrastructure
                                                    (electrical substations)
    Denmark          117, 970 Various locations  Public outreach efforts
    European Union            14,156,452 Gorniy, Equipment at Gorniy and
                                      Kambarka, and Kambarka, and industrial
                                Shchuch'ye          infrastructure at Shchuch'ye
                                                    (electrical substation)
    Finland             871,771 Gorniy and other Equipment at Gorniy and
                                          locations public outreach efforts
    France              7,077,976 Shchuch'ye     Environmental surveys and
                                                    other projects to be
                                                    determined
    Germany      233,573,198 Gorniy and Kambarka Equipment for the
                                                    construction and operation of
                                                    both facilities
    Ireland              94,376 Shchuch'ye       To be determined
    Italy      439,660,257 Shchuch'ye and Pochep Infrastructure (gas pipeline)
                                                    at Schuch'ye and the
                                                    construction of the Pochep
                                                    CWDF
    Netherlands         9,028,325 Shchuch'ye     Equipment for Building 101A

    21

    In addition to funds for destroying Russian chemical weapons, other CTR
    assistance is being provided to help eliminate former Russian chemical
    weapons production facilities at Volgograd and Novocheboksarsk.

    22

    The United States, the United Kingdom, and Canada, in conjunction with the
    Russian Federation, formed a working group in November 2003 to coordinate
    all international assistance to the Shchuch'ye site.

    Page 25 GAO-06-692 CTR Assistance to Shchuch'ye

    Committed funding for
                          Russian destruction Areas to receive
    International donors            (U.S. dollars)a Types of projects being
                              international assistance funded
    New Zealand             1,158,433 Shchuch'ye    Industrial infrastructure
                                                       (electrical substation)
                                                       Industrial Infrastructure
    Norway                  3,250,969 Shchuch'ye    (electrical substation)
                                                       and
                                                       other projects to be
                                                       determined
    Nuclear Threat          1,000,000 Shchuch'ye    Infrastructure (railway
    Initiative                                      bridge)
    Sweden                   952,988 Shchuch'ye     To be determined
    Switzerland                 6,984,707 Kambarka, Sanitary and hygiene
                                           Shchuch'ye, monitoring system at
                                   and other locations Shchuch'ye, equipment at
                                                       Kambarka, and public
                                                       outreach efforts
    United Kingdom       141,196,728 Shchuch'ye and Industrial infrastructure,
                                                 other equipment for Building
                                    locations          101A, and public outreach
                                                       efforts
    United States         1,039,200,000 Shchuch'ye  Construction of the
                                                       destruction facility
    Total                $1,987,807,145

                                       Conclusion

    Sources: GAO analysis of data from DOD, State, and international donors.

    a

    Donor commitments converted from foreign currencies to U.S. dollars using
    the annual 2005 exchange rate.

    To facilitate additional international contributions, the Russian
    government has provided potential donors a list of CWDF projects requiring
    assistance. Primarily, assistance is needed for the construction of the
    destruction facilities at Kizner, Leonikovka, and Pochep, as well as
    related infrastructure support. The Russian government is also seeking
    international funding to support operations at the Kambarka and
    Maradykovskiy facilities.

    Until destroyed, Russia's stockpile of chemical weapons-especially nerve
    agents contained in small munitions, such as those stored at Shchuch'ye-
    remain a proliferation threat, vulnerable to diversion and theft. Since
    1992, the United States has been providing CTR assistance for the CWDF at
    Shchuch'ye to help reduce the threats posed by these weapons. Originally
    designed as a pilot facility to "jump start" Russian chemical weapons
    destruction efforts, Shchuch'ye may no longer be a priority for the
    Russian government. Delays in implementing the Shchuch'ye project over the
    past 14 years led the Russian government to begin destruction efforts at
    other sites. Disagreements between the United States and Russia over the
    types of munitions to destroy and how to destroy them, negotiations to
    resolve outstanding issues, restrictions on U.S. funding, and difficulties
    with Russian subcontractors, among other factors, have delayed the
    Shchuch'ye facility's completion and increased its costs. Although
    progress has been made on the physical construction of the facility over
    the past 3 years, DOD continues to encounter numerous challenges that
    affect the completion of the Shchuch'ye CWDF. Furthermore, DOD currently
    cannot reliably estimate when the Shchuch'ye facility will be completed
    and at what cost. Parsons' EVM system, implemented to help manage the
    schedule and cost of the Shchuch'ye project, contains unreliable and
    inaccurate data; thus, DOD cannot use it as a management tool. Even with
    significant international assistance at Shchuch'ye and other destruction
    facility sites, the Russian government will likely fail to destroy its
    entire chemical weapons stockpile by the CWC extended deadline of 2012.

    Unreliable EVM data limit DOD's efforts to accurately measure progress

      Recommendations for

    on the Shchuch'ye project and estimate its final completion date and cost.

    Executive Action As such, we recommend that the Secretary of Defense
    direct DTRA, in conjunction with the U.S. Army Corps of Engineers, to take
    the following three actions:

         o ensure that Parsons' EVM system contains valid, reliable data and that
           the system reflects actual cost and schedule conditions;
         o withhold a portion of Parsons' award fee until the EVM system produces
           reliable data; and
         o require Parsons to perform an IBR after awarding the contract for
           completing Building 101.

                           Agency Comments and Our Evaluation

    DOD provided comments on a draft of this report, which are reproduced in
    appendix III. DOD concurred with our recommendation that DTRA in
    conjunction with the U.S. Army Corps of Engineers ensure that Parsons' EVM
    system contains valid, reliable data and reflects actual cost and schedule
    conditions, and require that Parsons perform an IBR after awarding the
    contract for completing Building 101. DOD partially concurred with our
    recommendation that a portion of Parsons' award fee be withheld until the
    EVM system produces reliable data. DOD stated that it had withheld a
    portion of Parson's award fee in a previous period. DOD further noted that
    an award fee must be based on the merits of the contractor's performance
    and until the performance period is completed, it cannot prejudge Parsons'
    performance and predetermine the withholding of award fees based on our
    recommendation. DOD also provided technical comments, which we have
    incorporated where appropriate. The Department of State was provided a
    draft of this report but did not provide comments.

    We are providing copies of this report to the Secretaries of Defense and
    State and interested congressional committees. We will also make copies
    available to others upon request. In addition, this report will be
    available on the GAO Web site at http://www.gao.gov.

    If you or your staff have any questions concerning this report, please
    contact me at (202) 512-8979 or christoffj@gao.gov. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on the
    last page of this report. GAO staff who made major contributions to this
    report are listed in appendix IV.

    Sincerely yours,

    Joseph A. Christoff Director, International Affairs and Trade

                           Appendix I: Scope and Methodology

    To assess the progress of the Shchuch'ye facility, we collected and
    analyzed Department of Defense (DOD) and Parsons Global Services, Inc.
    (Parsons) contractor documents and met with relevant officials.
    Specifically, we met with officials from the Cooperative Threat Reduction
    (CTR) Policy Office, the office of the Assistant to the Secretary of
    Defense for Nuclear and Chemical and Biological Defense Programs, the
    Defense Threat Reduction Agency (DTRA), and the U.S. Army Corps of
    Engineers. Within DTRA, we obtained information from the Director of the
    Cooperative Threat Reduction Directorate, as well as the program and
    project managers, for chemical weapons elimination. We also met with
    officials from the Threat Reduction Support Center in Springfield,
    Virginia. In addition, we met with officials from the DTRA office and the
    Chemical Weapons Destruction Support Office in Moscow.

    We traveled to the Russian Federation to observe construction of the
    CTRfunded chemical weapons destruction facility at Shchuch'ye. At
    Shchuch'ye and Chelyabinsk, we met with personnel from Parsons and the

    U.S. Army Corps of Engineers. In Moscow, we met with Russian government
    officials at the Federal Agency for Industry, the Ministry of Foreign
    Affairs, the Duma, and the Accounts Chamber of the Russian Federation. We
    also analyzed the reliability of the earned value management (EVM) data
    for the Shchuch'ye project. Specifically, we examined Parsons' EVM reports
    for a 5-month period from, September 2005 to January 2006, to assess the
    Shchuch'ye destruction facility's cost and schedule. We checked the EVM
    data to see if there were any mathematical errors or inconsistencies that
    would lead to the data being unreliable. We interviewed officials from the
    Defense Contract Management Agency (DCMA), the Defense Contract Audit
    Agency (DCAA), and Parsons officials to better understand the anomalies in
    Parsons' EVM data and determine what outside surveillance was being done
    to ensure the validity of the EVM data. We also used a data collection
    instrument to obtain detailed information from DOD on the Shchuch'ye
    project, including the contract, program management activities,
    independent cost estimates, risk analysis, and award fees.

    To obtain information on Russian elimination efforts and international
    donor assistance for Russian chemical weapons destruction, we met with
    U.S., Russian, and international donor officials and obtained copies of
    pertinent documents, including the Russian chemical weapons destruction
    plan. We obtained information from officials in the Bureau of European and
    Eurasian Affairs and the Bureau of International Security and
    Nonproliferation at the Department of State. At DOD, we met with officials
    and acquired documents from the Office of the Secretary of Defense for

    Page 29 GAO-06-692 CTR Assistance to Shchuch'ye Appendix I: Scope and
    Methodology

    Cooperative Threat Reduction Policy. In Moscow, we obtained information
    from Russian government officials at the Accounts Chamber, the Federal
    Agency for Industry, the Ministry of Foreign Affairs, and the Duma. At
    Shchuch'ye, we spoke with a local government official involved with public
    outreach efforts. We obtained data from the U.S., Russian, British,
    Canadian, and German governments as well as the G-8 Global Partnership on
    the assistance committed and provided for Russian chemical weapons
    destruction efforts. To assess the reliability of these data, we
    corroborated other nations' data wherever possible, comparing and
    cross-checking documents and information. We interviewed officials from
    the United States, Canada, Germany, the United Kingdom, and the Russian
    Federation. We determined that data on funding and assistance provided for
    Russian chemical weapons destruction were sufficiently reliable for the
    purposes of this report. We also determined that data on the status of
    Russian and U.S. chemical weapons elimination were sufficiently reliable
    for the purposes of this report.

    The information on Russian law in this report does not reflect our
    independent legal analysis but is based on interviews and secondary
    sources. We performed our work from June 2005 through May 2006 in
    accordance with generally accepted government auditing standards.

    Appendix II: Lack of Reliable EVM Data Limits DOD's Ability to Estimate Schedule
    and Cost for Constructing the CWDF

      GAO's Analysis Reveals Parsons' EVM Data are Unreliable and Require
      Surveillance

    Measuring and reporting progress against cost and schedule commitments is
    vital to effective program management. To measure program performance, DOD
    requires the use of EVM, a concept that has been used by DOD since the
    1960s for measuring program performance. Through EVM, program offices can
    determine a contractor's ability to perform work within cost and schedule
    estimates by examining variances between the actual and estimated costs
    and time to perform work tasks. EVM offers many benefits when done
    properly and serves as a means to measure performance and identify
    deviations from planned activities, allowing program managers to mitigate
    risks. Based on our analysis of Parsons' EVM data, and the findings of
    DCMA and DCAA, the data are inaccurate and unreliable. Without reliable
    schedule and cost estimates, DTRA has limited means to accurately assess
    when the Shchuch'ye facility will be completed and at what cost.

    In reviewing Parsons' monthly EVM data for September 2005 through January
    2006, we discovered numerous instances of data not adding properly for
    scheduled work. Further, Parsons' EVM reports are not capturing all of the
    data needed by project management to make informed decisions about the
    Shchuch'ye facility. Such errors may cause DOD and Parsons project
    officials to overestimate the amount of funding available to cover future
    risks, such as the systemization of the Shchuch'ye facility. Moreover, we
    found several instances where the accounting data were not allocated to
    the correct cost accounts causing large cost over-runs and under-runs. In
    these cases, the accounting data were placed in the wrong account, or
    Parsons' accounting system was unable to track costs at the level of
    detail EVM requires. Parsons officials stated that measures are being
    taken to identify these inaccuracies and allocate the accounting data to
    the proper cost accounts. These problems, however, have led to numerous
    accounting errors in Parsons' EVM reports.

    Furthermore, in reviewing Parsons' EVM reporting data, we found several
    errors that a Parsons' official attributes to the company's accounting
    system. For instance, current EVM period data are not accurate due to
    historical data corruption, numerous mistakes in accounting accruals, and
    manual budget adjustments. Such mistakes underestimate the true cost of
    the CWDF project by ignoring cost variances that have already occurred.
    For example, the Moscow project management task was budgeted at a cost of
    $100,000. According to the January 2006 EVM report, the work has been
    completed but the actual cost was $2.6 million, resulting in an overrun of
    approximately $2.5 million. The EVM report, however, fails to capture the
    expected $2.5 million overrun. Such data are misleading and

    Page 31 GAO-06-692 CTR Assistance to Shchuch'ye

    Appendix II: Lack of Reliable EVM Data Limits DOD's Ability to Estimate Schedule
                           and Cost for Constructing the CWDF

    skew the project's overall performance. As indicated in table 3, this is
    just one example of accounting system errors. In the case of the Moscow
    project management task, Parsons officials explained that this error
    occurred because the budget for this account was misaligned and,
    therefore, caused a false cost variance. Parsons officials stated they
    would be issuing an internal change order to correct this mistake.

    Table 3: Examples of Accounting System Errors Understating the Variance at
                          Completion from January 2006 Report

                                  Dollars in millions

    Work Work Actual scheduled performed costs

          GAO analysis of variance at Budget at Estimate at completion completion
                                                        completion understated by

    Design task (27); task management $2.1 $2.1 $5.5 $2.1 $2.1 $3.4

    Design task (27); project management, Moscow $0.1 $0.1 $2.6 $0.1 $0.1 $2.5

    Design task (27); construction packages $9.4 $9.0 $20.2 $9.9 $9.9 $10.3

    Source: GAO analysis of Parsons data.

    Until Parsons' management updates the company's accounting system, these
    types of manual adjustments will have to be made through monthly change
    orders to ensure that costs are properly aligned with the correct budget.
    Such continuous adjustments do not allow the EVM system to provide timely
    and accurate information to Parsons and DOD managers.

    In addition, DOD guidance and best practices require program managers to
    conduct an integrated baseline review (IBR) as needed to ensure that the
    baseline for tracking cost, technical information, and schedule status
    reflects (1) all tasks in the statement of work, (2) adequate resources in
    terms of staff and materials to complete the tasks, and (3) integration of
    the tasks into a well-defined schedule. Program managers are required to
    use EVM reports that have been validated by an IBR. Without verifying the
    baseline, monthly EVM reporting-which tracks project work against a set
    budget and schedule-is insufficient and invalid.

    Parsons and DOD officials explained that while an IBR has been discussed,
    one will not be conducted until the contract for completing Building 101
    has been awarded. DOD officials estimate that the contractaward process
    may not be completed until June 2006, resulting in a 1 year

    Page 32 GAO-06-692 CTR Assistance to Shchuch'ye Appendix II: Lack of
    Reliable EVM Data Limits DOD's Ability to Estimate Schedule and Cost for
    Constructing the CWDF

      DCMA and DCAA Have Concerns with Parsons' EVM Implementation

    delay. Such a delay not only prevents Parsons from holding an IBR, but it
    also jeopardizes DOD's ability to accurately estimate the cost and
    schedule to complete the CWDF program. Until the costs have been
    negotiated for building the remainder of Building 101, it is unclear
    whether the CWDF at Shchuch'ye will be completed on time and within
    budget. DTRA officials explained that if the costs for this effort exceed
    the original estimate, they will have to cover the shortfall using
    management reserve funds. Using management reserve funds for construction
    leaves less contingency funding available to complete and test the
    Shchuch'ye facility.

    Until December 2004, DTRA was using EVM data from a simplified Parsons EVM
    process. In September 2004, DTRA directed Parsons to implement a complete
    EVM system that was capable of being validated by DCMA. Although Parsons'
    EVM validation was originally scheduled for March 2005, Parsons was unable
    to meet this deadline and requested a series of extensions. In September
    2005, DCMA officials visited the Shchuch'ye site for a program assistance
    visit and then returned in mid-November 2005 to conduct the formal
    validation review, 8 months later than planned.

    DOD requires all EVM systems to go through a compliance audit or
    "validation" conducted by DCMA, with assistance from DCAA. The evaluation
    team looks for proof that the system meets the 32 criteria1 for a good EVM
    system, as well as 2 to 3 months of reliable EVM data. While the DCMA
    official who led the validation team saw much improvement in Parsons' EVM
    system from September to November 2005, he stipulated that an EVM
    compliance audit only tests whether the contractor has a good, capable EVM
    system and knows how to use it. A compliance audit does not identify
    whether the system is used properly, the data are reliable, or the
    products of the system are read and acted upon by management. The DCMA
    official stated that continual surveillance of Parsons' EVM system would
    be necessary to ensure these actions were occurring. According to the
    official, DCMA does not expect to perform surveillance for the Shchuch'ye
    project.

    1

    The American National Standards Institute/Electronic Industries Alliance
    guidance identifies 32 criteria that reliable EVM systems should meet. The
    criteria are organized into five categories: organization, planning and
    budgeting; accounting; analysis; and revisions and data maintenance.

    Page 33 GAO-06-692 CTR Assistance to Shchuch'ye Appendix II: Lack of
    Reliable EVM Data Limits DOD's Ability to Estimate Schedule and Cost for
    Constructing the CWDF

    DCAA also participated in Parsons' EVM validation and produced a
    corrective action report stating that its EVM accounting process was
    inadequate. Specifically, Parsons did not provide adequate documentation
    that direct costs of almost $300,000 were based on accurate and reliable
    accounting data. The source of the accounting data used by Parsons may be
    unreliable, causing actual costs for September 2005 to be significantly
    understated. For September 2005, Parsons subtracted almost $1 million
    without providing sufficient data that the adjustment was reasonable and
    allowable. A DCAA official stated that these findings are the result of
    Parsons' reliance on an outdated accounting system that has difficulty
    capturing actual costs for the Shchuch'ye project into a proper cost
    ledger. The official noted that the software Parsons uses to query the
    accounting system and pull data into the EVM reports also caused errors.
    DCAA was also concerned with Parsons' ability to apply effective EVM data
    quality control. According to DCAA officials, Parsons' management should
    have discovered such accounting errors before the EVM report was released
    to DOD. DCAA therefore questioned whether Parsons can generate correct
    accounting data and recommended that Parsons update its accounting system.

    Appendix III: Comments from the Department of Defense

    Appendix III: Comments from the Department of Defense

    Appendix III: Comments from the Department of Defense

    Appendix IV: GAO Contact and Staff Acknowledgments

    Joseph Christoff (202) 512-8979 or christoffj@gao.gov

      GAO Contact

    In addition to the individual named above, Muriel Forster (Assistant

    Director), Jerome Brown, Lynn Cothern, Jennifer Echard, David Hancock,
    Beth Hoffman Leon, and Karen Richey contributed to this report. Joanna
    Chan, Martin DeAlteriis, Mark Dowling, Jennifer Mills, and Jena Sinkfield
    also provided assistance.

    (320363)

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