    Hanford Waste Treatment Plant: Department of Energy Needs to
    Strengthen Controls over Contractor Payments and Project Assets
    (20-JUL-07, GAO-07-888).

    In December 2000, the Department of Energy (DOE) awarded Bechtel
    National, Inc. (Bechtel) a contract to design and construct the
    Waste Treatment Plant (WTP), one of the largest nuclear waste
    cleanup projects in the nation. Originally expected to cost $4.3
    billion and be completed in 2011, DOE now estimates that WTP will
    cost over $12.2 billion and be completed in late 2019. Weaknesses
    in DOE's management and oversight of contractors led GAO to
    designate DOE contract management as a high-risk area since 1990.
    GAO was asked to determine whether (1) DOE's internal controls
    are designed to provide reasonable assurance against improper WTP
    payments and (2) DOE's controls reasonably ensure proper
    accountability for WTP assets. GAO reviewed fiscal year 2005 and
    2006 internal controls by analyzing data and documents,
    interviewing DOE and contractor staff, and physically observing
    property items.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-888
        ACCNO:   A73088
      TITLE:     Hanford Waste Treatment Plant: Department of Energy Needs
    to Strengthen Controls over Contractor Payments and Project
    Assets
         DATE:   07/20/2007
      SUBJECT:   Accountability
    	     Contract administration
    	     Contract costs
    	     Contract oversight
    	     Contractor payments
    	     Cost analysis
    	     Erroneous payments
    	     Federal property management
    	     Financial management
    	     Internal controls
    	     Nuclear waste disposal
    	     Nuclear waste management
    	     Program evaluation
    	     Program management
    	     Schedule slippages
    	     Cost estimates
    	     Cost growth
    	     Policies and procedures

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    GAO-07-888

         * [1]Results in Brief
         * [2]Background

              * [3]Contract Requirements
              * [4]Internal Control

         * [5]Inadequate DOE Controls Heightened Risk of Improper WTP Cont

              * [6]WTP Project Has Significant Inherent Risks
              * [7]DOE Performed Little or No Review of Contractor Invoices
              * [8]DOE Placed Undue Reliance on DCAA and Other Entities

         * [9]DOE's Oversight Controls for Project Assets Were Inadequate

              * [10]DOE Did Not Ensure the Contractor Maintained Adequate Accoun
              * [11]Contractor Did Not Have Adequate Controls for Maintaining Pr
              * [12]DOE and Bechtel Are Implementing Corrective Actions

         * [13]Conclusions
         * [14]Recommendations for Executive Action
         * [15]Agency Comments and Our Evaluation
         * [16]Appendix I: Scope and Methodology

              * [17]Data Reliability

                   * [18]Payment Controls
                   * [19]Property Controls

         * [20]Appendix II: Comments from the Department of Energy
         * [21]Appendix III: GAO Contact and Staff Acknowledgments

              * [22]GAO Contact
              * [23]Staff Acknowledgments

                   * [24]Order by Mail or Phone

    Report to the Subcommittee on Energy and Water Development, Committee on
    Appropriations, House of Representatives

    United States Government Accountability Office

    GAO

    July 2007

    HANFORD WASTE TREATMENT PLANT

    Department of Energy Needs to Strengthen Controls over Contractor Payments
    and Project Assets

    GAO-07-888

    Contents

    Letter 1

    Results in Brief 3
    Background 5
    Inadequate DOE Controls Heightened Risk of Improper WTP Contractor
    Payments 10
    DOE's Oversight Controls for Project Assets Were Inadequate 19
    Conclusions 29
    Recommendations for Executive Action 30
    Agency Comments and Our Evaluation 32
    Appendix I Scope and Methodology 36
    Appendix II Comments from the Department of Energy 41
    Appendix III GAO Contact and Staff Acknowledgments 43

    Table

    Table 1: Fiscal Years 2005 and 2006 WTP Expenses Billed by Bechtel to DOE
    11

    Figures

    Figure 1: Aerial View of Hanford Waste Treatment Plant under Construction
    6
    Figure 2: Sample Charges from Bechtel Invoice to DOE 14
    Figure 3: Example of Construction Equipment and Tools Being Used at WTP 23

    Abbreviations

    DCAA Defense Contract Audit Agency
    DCMA Defense Contract Management Agency
    DEAR Department of Energy Acquisition Regulation
    DOE Department of Energy
    FAR Federal Acquisition Regulation
    WTP Waste Treatment Plant

    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

    July 20, 2007

    The Honorable Peter J. Visclosky
    Chairman
    The Honorable David L. Hobson
    Ranking Member
    Subcommittee on Energy and Water Development
    Committee on Appropriations
    House of Representatives

    The Department of Energy (DOE) is currently constructing one of the
    largest and most complex nuclear waste cleanup projects in the nation--the
    Waste Treatment and Immobilization Plant (WTP) at the Hanford site in
    southeastern Washington state. DOE awarded Bechtel National, Inc.
    (Bechtel) an 11-year cost-plus-incentive-fee contract in December 2000 to
    design, construct, and commission this one-of-a-kind nuclear waste
    treatment complex.^1 Although DOE originally projected the plant would
    cost $4.3 billion and be completed in 2011, it now estimates that the
    project will cost over $12.2 billion and be completed in late 2019. Sound
    financial management of projects, particularly as large and complex as the
    WTP project, requires effective design of and compliance with internal
    controls. However, work we have done in the past has found that DOE's
    controls over these types of contracts are not always effective, largely
    because of DOE's inadequate management and oversight of contractors. As a
    result, since 1990 we have designated DOE contract management as a
    high-risk area.

    Given that over $3 billion has been spent on this project to date with
    billions more expected to be spent in the future, this report examines
    whether (1) DOE's internal controls are designed to provide reasonable
    assurance that improper payments to WTP contractors will not occur or will
    be detected in the normal course of business and (2) DOE's oversight
    controls reasonably ensure proper accountability for assets purchased with
    WTP project funds.

    ^1A cost-plus-incentive-fee contract is a cost-reimbursement contract that
    provides for payment of allowable incurred costs to the extent prescribed
    in the contract. It also provides for the contractor to earn a fee, or
    profit, based on the contractor's ability to meet established cost
    targets.

    To address these objectives, we considered the internal controls relevant
    to contractor costs and property (assets) that DOE had in place in fiscal
    years 2005 and 2006. We reviewed applicable DOE directives, policies, and
    procedures; WTP contract requirements; the Federal Acquisition Regulation
    (FAR); the Department of Energy Acquisition Regulation; and GAO's
    Standards for Internal Control in the Federal Government to gain an
    understanding of the applicable internal control requirements. We visited
    DOE's Office of River Protection, which has oversight responsibility for
    the WTP project, in Richland, Washington, and performed walk-throughs and
    observations of DOE's oversight processes, interviewed agency officials,
    and reviewed related supporting documentation and compared DOE's controls
    against applicable requirements. Because the Defense Contract Audit Agency
    (DCAA) and the Defense Contract Management Agency (DCMA) perform reviews
    and oversight of Bechtel, we met with DCAA and DCMA auditors and with the
    DCMA corporate administrative contracting officer and reviewed relevant
    audit reports they prepared to better understand their work related to
    Bechtel. We also met with contractor staff in Richland, reviewed data
    extracts from selected Bechtel financial and property systems, performed
    limited data mining^2 procedures where possible on the data extracts and
    reviewed supporting documentation, reviewed the contractor's and selected
    subcontractors' property management policies and procedures, and performed
    walk-throughs and observations of the contractor's property management
    processes. We also performed physical observations of selected property
    items at the WTP site and selected subcontractor sites in Richland and at
    Bechtel offices in San Francisco, California to test the existence,
    accuracy, and completeness of a nongeneralizable selection of property
    items recorded in the contractor's property system. From the procurement
    system, we selected a nongeneralizable selection of property purchases to
    observe and to test whether these purchases had been recorded in the
    property system. The results of our review of these nongeneralizable
    selections cannot be used to make inferences about the population. Our
    work was not designed to determine or to project the allowability of all
    contractor costs or the accountability of all property items. Our scope
    and methodology are discussed in greater detail in appendix I. We
    performed our work from June 2006 through May 2007 in accordance with
    generally accepted government auditing standards.

    ^2In this context, data mining refers to a search process applied to a
    data set to identify trends, relationships, and data associations that may
    indicate potential control weaknesses, noncompliance with requirements, or
    improper activities.

    Results in Brief

    DOE's internal controls over payments to the WTP contractor do not provide
    reasonable assurance against the risk of improper payments, particularly
    given the WTP project's substantial inherent risks. Several factors
    combine to pose an inherent risk to the government of improper payments on
    this project, including the size and complexity of this one-of-a-kind
    nuclear construction project, the multibillion-dollar cost and schedule
    overruns the project has already experienced, and the substantial volume
    of transactions Bechtel bills to DOE on each invoice. As such, the project
    warrants a commensurate level of internal controls and oversight to help
    ensure that goods and services billed by WTP contractors have been
    received and are proper. Despite these risks, in fiscal years 2005 and
    2006, DOE performed little or no review of the contractor's invoices or
    supporting documents for the $40 million to $60 million in charges that
    Bechtel billed to DOE each month. The need for close, ongoing review of
    invoiced transactions and support is particularly compelling given that
    the contractor's invoices provided little detail as to the items
    purchased, contrary to FAR and contract requirements. However, DOE
    officials chose instead to rely primarily on DCAA's review and approval of
    Bechtel's corporate-wide financial systems, which DOE officials believed
    allowed them to rely on the contractor's systems with little or no DOE
    oversight. In addition, DOE relied primarily on Bechtel to review and
    validate subcontractor charges without having a process in place to assess
    whether Bechtel was properly carrying out its subcontractor oversight
    responsibility. DOE's heavy reliance on others, with little oversight of
    its own, exposed the hundreds of millions of dollars it spent annually on
    the WTP project to an unnecessarily high risk of improper payments.

    DOE also did not adequately oversee the contractor to ensure proper
    accountability for assets purchased with WTP contract funds. Under the
    contract, the contractor is responsible and accountable for all such
    property in accordance with sound business practice and applicable
    sections of the FAR. However, under the FAR, DOE is responsible for
    reviewing the contractor's property program to ensure compliance with the
    property clauses of the contract. We found that DOE relied primarily on
    the contractor to manage property without adequate oversight of the
    contractor's property program. Our review of Bechtel's property management
    program disclosed numerous internal control weaknesses that hindered
    accountability and increased the vulnerability of government property to
    theft or loss. For example, we found that Bechtel relied primarily on one
    property staff person to record the assets into its government property
    system, perform annual physical inventories, and update the information in
    the government property system. We also found errors and inaccuracies in
    the government property system, such as items listed with incorrect
    property custodians or locations, and unrecorded property items, such as
    personal digital assistants. Bechtel also lacked adequate procedures for
    the physical inventory of construction materials and the custodial
    accountability of tools, contributing to inadequate accountability of
    government property. Bechtel did not follow up on off-site property items
    with expired property passes to ensure accountability for the items, and
    did not adequately oversee its subcontractors to help ensure that they
    appropriately managed and safeguarded WTP property that they possessed.
    Bechtel also did not timely prepare and submit reports of lost or damaged
    property, taking up to 2 years in some instances to report missing assets,
    such as computers, to DOE. While the instances of errors and missing
    assets we identified are not generalizable to the population, they help
    illustrate the effects of the control weaknesses. These internal control
    weaknesses over property coupled with the lack of DOE oversight created an
    environment in which government property could be lost or stolen without
    detection. During our review, both DOE and Bechtel hired new property
    managers who in turn have made a number of recent policy and procedural
    changes that, if properly implemented, should help improve internal
    controls and oversight of property. However, these actions by themselves
    will not address all the property vulnerabilities we found.

    We are making 11 recommendations to DOE that, if effectively implemented,
    should improve DOE's oversight of WTP expenditures and strengthen its
    accountability for WTP-acquired government property. These recommendations
    are aimed at (1) establishing effective invoice review and approval
    procedures based on the WTP contract's risks, (2) periodically assessing
    the WTP contractor's property management program, and (3) directing the
    WTP contractor to establish controls to improve accountability for
    government property.

    DOE commented on a draft of the report and stated it had assessed the risk
    of improper payments at contract inception, but agreed with the
    recommendation to perform an updated risk assessment to ensure adequate
    oversight and accountability for WTP expenditures. DOE did not
    specifically comment on the remaining recommendations. DOE stated that it
    believed the controls in place during the period of review, fiscal years
    2005 and 2006, met the requirements and intent of the applicable FAR, DOE,
    and contract requirements, and that its existing practices adequately
    prevent unallowable or improper costs. DOE stated it would engage with
    DCAA to prepare an updated assessment of the risks, revise the current
    policies and procedures related to contractor billings as necessary, and
    assess the adequacy of property management staff levels and capabilities
    to ensure that adequate coverage is provided for oversight of the WTP.

    We disagree with DOE's contention that the controls in place during the
    period of review met all FAR, DOE, and contract requirements, as noted by
    several examples in our report where DOE's and/or the contractor's
    controls did not meet these requirements. Further, as reflected in both
    the report title and objectives, the focus of our report was not limited
    to DOE's compliance with regulations, but more broadly on the adequacy of
    its internal controls over contractor payments and project assets. Thus,
    our report also discusses areas in which DOE had not developed the
    policies needed to effect adequate internal control, and we continue to
    believe that DOE cannot rely primarily on others to ensure the propriety
    of its WTP contract payments. DOE's written comments are provided in
    appendix II and our detailed response to these comments is provided in the
    Agency Comments and Our Evaluation section of this report.

    Background

    DOE's Hanford site in southeastern Washington State was established in
    1943 to produce nuclear materials for the nation's defense. Although DOE
    stopped producing nuclear material at Hanford in 1989, millions of gallons
    of high-level radioactive waste from production still remain in aging,
    underground waste tanks, most of which are beyond their design life and
    many of which have reportedly leaked waste into the soil. Since production
    ended, DOE has attempted and abandoned several different approaches to
    treat and dispose of Hanford's tank wastes. DOE's current approach, the
    WTP project, is intended to separate the waste into high-level and
    low-activity fractions, and immobilize all of the high-level fraction and
    about half of the low-activity fraction of Hanford's approximately 56
    million gallons of radioactive waste for permanent disposal.^3 To achieve
    this goal, DOE contracted with Bechtel in 2000 to construct a complex of 3
    waste processing facilities, an analytical laboratory, and over 20
    smaller, supporting facilities to treat and package the waste. The
    original contract was for $4.3 billion, with a completion date of 2011.
    However, since then numerous problems with the design and construction of
    the facilities have resulted in several cost and schedule overruns. DOE
    currently estimates that the WTP project will cost $12.2 billion, with a
    completion date of late 2019. (See fig. 1 for an aerial view of WTP as of
    March 2007.)

    ^3In an effort to accelerate cleanup, DOE has been developing a
    supplemental technology outside the scope of the WTP to treat the
    remaining half of the waste. See GAO, Nuclear Waste: DOE Should Reassess
    Whether the Bulk Vitrification Demonstration Project at Its Hanford Site
    Is Still Needed to Treat Radioactive Waste, [25]GAO-07-762 (Washington,
    D.C.: June 12, 2007).

    Figure 1: Aerial View of Hanford Waste Treatment Plant under Construction

    DOE relies almost entirely on contractors to carry out its production,
    research, and cleanup missions. DOE's history of inadequate management and
    oversight of contractors and of failure to hold its contractors
    accountable led us in 1990 to designate DOE's contract management,
    including both contract administration and project management, as a
    high-risk area vulnerable to fraud, waste, abuse, and mismanagement.
    Similarly, both DOE and DOE's Office of Inspector General have reported
    contract and project management as significant DOE management challenges
    since the 1990s. Over the years, we have also reported on project
    management weaknesses at WTP.^4 Because of both contractor and DOE
    management problems with the project, DOE directed Bechtel to slow down or
    stop construction activities on two of the major facilities--the
    pretreatment facility and the high-level waste facility. The construction
    slowdown caused Bechtel to lay off several hundred construction workers in
    2005, and caused Bechtel's total annual WTP expenditures to drop from $751
    million in fiscal year 2005 to $498 million in fiscal year 2006. However,
    Bechtel is preparing to restart construction on the two facilities and
    hire several hundred more workers in 2007 and 2008. While the majority of
    Bechtel's WTP employees are located at or near the WTP construction site
    in Richland, Washington, some are also located off-site, primarily at
    Bechtel corporate offices in California and Maryland. DOE officials stated
    that because of the difficulty of hiring engineers willing to relocate to
    Richland, Bechtel plans to hire many more off-site employees in the future
    and is in the process of establishing a satellite office in Oakland,
    California, and expanding a satellite office in Frederick, Maryland,
    exclusively for the WTP project.

    ^4See for example, GAO, Nuclear Waste: Absence of Key Management Reforms
    on Hanford's Cleanup Project Adds to Challenges of Achieving Cost and
    Schedule Goals, [26]GAO-04-611 (Washington, D.C.: June 9, 2004), and
    Hanford Waste Treatment Plant: Contractor and DOE Management Problems Have
    Led to Higher Costs, Construction Delays, and Safety Concerns,
    [27]GAO-06-602T (Washington, D.C.: Apr. 6, 2006).

    While our previous reports on WTP primarily discussed DOE's project
    management practices, this report addresses aspects of its contract
    administration practices. Contract administration involves those
    activities performed by government officials, such as the program office
    staff, contracting officer and representatives, property administrator,
    and financial staff, after a contract has been awarded to help ensure that
    the contractor complies with the terms of the contract and that the
    government gets what it paid for at an appropriate cost.^5 DOE and the
    contractor must also comply with applicable provisions of the FAR, which
    is the primary regulation that federal agencies must follow when acquiring
    supplies and services with appropriated funds. The Department of Energy
    Acquisition Regulation establishes uniform acquisition policies that
    implement and supplement the FAR and is applicable to DOE acquisitions.
    The contract also specifies the DOE orders and directives that are
    applicable to the project. These orders and directives may impose
    requirements on DOE, the contractor, or both.

    Contract Requirements

    Under the WTP contract, Bechtel must submit an invoice to DOE twice a
    month for reimbursement of all allowable costs incurred to complete the
    contract.^6 Excluding incentive fees, each semimonthly invoice averaged
    more than $30 million in costs during fiscal year 2005, and more than $20
    million during fiscal year 2006. DOE's WTP contracting officer was
    responsible for approving each invoice within a few days so that DOE could
    pay the contractor within 7 days of receiving the invoice as required
    under the contract.^7 However, if DOE discovers an overpayment or
    underpayment after approval, it can make a subsequent adjustment at any
    time prior to contract closeout.

    ^5DOE sometimes uses the terms contract administration and contract
    management interchangeably to refer to tasks associated with the
    administration of the contract.

    Under the terms of the contract, the FAR, and the cost accounting
    standards, reimbursable costs include supplies and services purchased
    directly for the contract, payments to subcontractors,^8 direct labor,
    direct travel, other direct costs, and properly allocable and allowable
    indirect costs.^9 The FAR and the cost accounting standards provide the
    cost principles and procedures for determining the allowability,
    allocability, and reasonableness of such costs.^10 Bechtel calculates the
    indirect costs in each invoice based on the various indirect cost billing
    rates that Bechtel and the government's corporate administrative
    contracting officer negotiate and agree to each year. Once agreed upon,
    the same set of rates applies to all of Bechtel's government contracts.
    The corporate administrative contracting officer assigned to oversee
    Bechtel is an official of DCMA, a component of the Department of Defense.
    DCAA and, to a lesser extent, DCMA, perform various reviews and audits of
    Bechtel's corporate-wide billing, purchasing, and accounting systems as
    well as various reviews of direct and indirect costs.^11

    6Contract clauses B.1 and G.4(b). FAR 31.201-2 specifies that to be
    allowable, costs must also be reasonable and allocable to the contract.

    ^7Contract clauses G.4(b) and I.68 incorporating FAR 52.232-25, Prompt
    Payment (June 1997).

    ^8"Subcontractor" means any supplier, distributor, vendor, or firm that
    furnishes supplies or services to or for a prime contractor or another
    subcontractor; see FAR 44.101.

    ^9Contract clause I.19B incorporating FAR 52.216-7, Allowable Cost and
    Payment (March 2000) and contract clause I.63 incorporating FAR 52.230-2,
    Cost Accounting Standards (April 1998). See also 48 CFR Part 9904, Cost
    Accounting Standards.

    ^10FAR 31.105(c), FAR 31.201-2, 48 CFR Part 9904.

    ^11Although DCAA performs the majority of Bechtel audits that apply to
    WTP, DCMA has primary responsibility under FAR 42.302(a)(50) for Bechtel's
    corporate-wide contractor purchasing system review described in FAR 44.3.
    See also FAR Part 30, Cost Accounting Standards Administration and FAR
    Part 42, Contract Administration and Audit Services.

    The WTP contract provides that title to property purchased by the
    contractor for which the contractor is reimbursed by the government passes
    to the government, and that the contractor is responsible and accountable
    for all such property. It further requires the contractor to establish and
    maintain a program for the use, maintenance, repair, protection, and
    preservation of government property in accordance with sound business
    practice and with FAR 45.5.^12 The FAR provides additional requirements
    for the contractor's property control program, such as requirements for
    the contractor to investigate and report to the DOE property administrator
    all cases of loss, damage, or destruction of government property and to
    require and ensure that subcontractors provided government property under
    the prime contract comply with the FAR requirements.^13 The FAR requires
    DOE to review and approve the contractor's property control system and to
    perform reviews to ensure compliance with the government property clauses
    of the contract.^14 In addition, DOE Order 580.1, Department of Energy
    Personal Property Management Program, sets forth the standards, practices,
    and performance expectations for the management of personal property owned
    by DOE, including requirements for DOE property administrators to develop
    and apply an oversight program, resolve property administration issues,
    and make recommendations concerning the acceptability of contractor
    personal property management systems.

    Internal Control

    Internal control is the first line of defense in safeguarding assets and
    preventing and detecting fraud and errors. Internal control is not one
    event or activity but a series of actions and activities that occur
    throughout an entity's operations on an ongoing basis. It comprises the
    plans, methods, and procedures used to effectively and efficiently meet
    missions, goals, and objectives. As required by 31 U.S.C. S 3512(c),(d),
    commonly referred to as the Federal Managers' Financial Integrity Act of
    1982, GAO issues standards for internal control in the federal
    government.^15 These standards provide the overall framework for
    establishing and maintaining internal control and for identifying and
    addressing major performance and management challenges and areas at
    greatest risk of fraud, waste, abuse, and mismanagement. The accompanying
    internal control standards tool provides additional guidance to assist
    agencies in maintaining or implementing effective internal control and in
    determining what, where, and how improvements can be implemented.^16 The
    standards include establishment of a positive control environment that
    provides discipline and structure as well as a climate that influences the
    quality of internal control. As we reported in our Executive Guide,
    Strategies to Manage Improper Payments: Learning from Public and Private
    Sector Organizations (improper payments guide), a lack of or breakdown in
    internal control may result in improper payments.^17 Improper payments are
    a widespread and significant problem in government and include inadvertent
    errors, such as duplicate payments and miscalculations; payments for
    unsupported or inadequately supported claims or invoices; payments for
    services not rendered; and payments resulting from outright fraud and
    abuse.

    ^12Contract clause I.88 incorporating FAR 52.245-5, Government Property
    (Cost-Reimbursement, Time-and-Material, or Labor-Hour Contracts) (January
    1986).

    ^13FAR 45.504(b) and 45.502(d).

    ^14FAR 45.104(a), (b).

    ^15GAO, Standards for Internal Control in the Federal Government,
    [28]GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

    Inadequate DOE Controls Heightened Risk of Improper WTP Contractor Payments

    DOE's controls over payments to contractors were not effectively designed
    to adequately reduce the risk of improper payments, particularly given the
    inherent financial risks of the WTP project. Specifically, several factors
    combine to pose a significant inherent risk of improper payments to the
    government on this project, including the size and complexity of the
    project, escalating cost and schedule estimates, and the significant
    volume of transactions Bechtel bills to DOE each invoice. However, despite
    these risks, DOE performed little or no review of the contractor's
    invoices in fiscal years 2005 and 2006 or of supporting documents for the
    almost $1.25 billion Bechtel billed to DOE on these invoices. Instead, DOE
    relied primarily on DCAA's review and approval of Bechtel's financial
    systems and on Bechtel's review and approval of subcontractor charges.
    DOE's heavy reliance on others, with little oversight of its own, exposed
    the hundreds of millions of dollars it spent annually on the project to an
    unnecessarily high risk of improper payments.

    ^16GAO, Internal Control Management and Evaluation Tool, [29]GAO-01-1008G
    (Washington, D.C.: August 2001).

    ^17GAO, Strategies to Manage Improper Payments: Learning From Public and
    Private Sector Organizations, [30]GAO-02-69G (Washington, D.C.: October
    2001). This guide resulted from GAO's study of a number of private and
    public sector organizations and the actions they took and considered
    effective in reducing improper payments.

    WTP Project Has Significant Inherent Risks

    The WTP is a long-term project that DOE currently estimates will cost over
    $12 billion and take almost 20 years to complete. The size and complexity
    of the project and the escalating cost and schedule estimates pose a
    significant inherent risk to the government of improper payments that
    warrants a commensurate level of internal controls and oversight to help
    mitigate such risk. Table 1 illustrates the major categories of
    expenditures billed by Bechtel and reimbursed by DOE for the project in
    fiscal years 2005 and 2006.

    Table 1: Fiscal Years 2005 and 2006 WTP Expenses Billed by Bechtel to DOE

    Dollars in millions
    WTP expenses                                               FY 2005 FY 2006
    Salaries and benefits                                       $293.2  $180.7
    Construction materials and supplies                          215.8   132.7
    Subcontracts and consultants                                 131.2    93.8
    Overhead and general and administrative costs                 56.0    53.1
    Incentive fees                                                20.7    14.5
    Relocation and temporary assignments                          12.2     3.9
    Real property rental and operating expenses                    7.3     7.4
    Automotive and construction equipment and operating            6.1     0.6
    expenses
    Office furniture, computers, and supplies                      2.5     3.8
    Other                                                          6.2     7.4
    Total expenses                                              $751.2  $497.8

    Source: GAO analysis of Bechtel billing system data.

    As discussed in GAO's improper payments guide, the risk of improper
    payments increases in programs with a significant volume of transactions
    or emphasis on expediting payments.^18 Bechtel bills DOE for thousands of
    transactions totaling tens of millions of dollars on every semimonthly
    invoice. In addition, the WTP contract specifies that DOE pay the
    contractor within 7 days of receipt of a proper invoice rather than the 30
    days normally allowed under the Prompt Payment Act before it becomes
    liable for a late payment interest penalty.^19 This large volume of
    transactions combined with the expedited payment terms increases the risk
    of improper payments.

    ^18 [31]GAO-02-69G .

    ^19Contract clauses G.4(b) and I.68 incorporating FAR 52.232-25, Prompt
    Payment (June 1997). See also 31 U.S.C. SS 3901-3907. Contract clause I.68
    also specifies the information that must be included in a proper invoice.

    In addition, as a cost-plus-incentive-fee contract, the WTP contract type
    has its own inherent risks. Specifically, cost-reimbursement contracts (1)
    place maximum risk with the government and minimum risk with the
    contractor and (2) provide the contractor with little financial incentive
    to control costs. In some cases, the government may incorporate incentives
    within the fee structure to encourage the contractor to control costs,
    which DOE did in Bechtel's contract by providing the potential for Bechtel
    to earn incentive fees based on the relationship of total allowable costs
    to certain cost targets.^20 In this case, however, the current contract
    incentives are no longer meaningful because the current cost and schedule
    goals are no longer achievable due to the cost overruns and schedule
    delays that have already occurred. The FAR specifies that a
    cost-reimbursement contract may be used only when appropriate government
    surveillance during contract performance will provide reasonable assurance
    that efficient methods and effective cost controls are used.^21 Further,
    GAO's Standards for Internal Control in the Federal Government states that
    internal control should provide for an assessment of the risks the agency
    faces from both external and internal sources. It also states that once
    risks have been identified, they should be analyzed for their possible
    effect, including estimating the risk's significance, assessing the
    likelihood of its occurrence, and deciding how to manage the risk and what
    actions should be taken. Despite these requirements, DOE did not perform
    or document any type of formal risk assessment as a basis for determining
    the level of surveillance and internal controls it would use to manage the
    substantial risks associated with this project. Consequently, the low
    level of contractor oversight carried out by DOE was not commensurate with
    the high level of risk, thereby increasing the vulnerability of the
    contract payments to waste, fraud, and abuse.

    DOE Performed Little or No Review of Contractor Invoices

    Despite the project's risks, in fiscal years 2005 and 2006 DOE performed
    little review of contractor invoices or supporting documents for the
    millions of dollars in charges that Bechtel billed to DOE twice a month.
    GAO's Standards for Internal Control in the Federal Government states that
    internal control activities--such as approvals, authorizations,
    verifications, reconciliations, and reviews--should help ensure that
    actions are taken to address risks. It further states that control
    activities are an integral part of an entity's planning, implementing,
    reviewing, and accountability for stewardship of government resources and
    achieving effective results.

    ^20Contract clause B.4. See also FAR 16.405-1 for a further description of
    cost-plus-incentive-fee contracts.

    ^21FAR 16.301-3(a)(2).

    In fiscal years 2005 and 2006, Bechtel invoiced DOE twice a month for WTP
    expenses, averaging $20 million to $30 million and thousands of
    transactions per invoice. According to DOE officials, because of the size
    and volume of transactions in each invoice, the contractor did not provide
    supporting documents for the individual charges with each invoice but
    instead agreed to make them available to DOE upon request. DOE officials
    stated that prior to fiscal year 2005, a DOE accountant would judgmentally
    select from each invoice a few of the individual charges listed and
    request the contractor to provide the supporting documents for them.
    However, after a reorganization in fiscal year 2005 placed the contracting
    officer and the accounting staff that performed the invoice reviews in
    separate branches, DOE discontinued the reviews and instead conducted only
    an annual review of a few dozen transactions selected from two or three
    invoices. The contracting officer who was responsible for approving the
    invoices for payment said that DOE reduced the frequency of its invoice
    reviews in fiscal years 2005 and 2006 based on the results of the prior
    reviews. Consequently, he stated that his review of the invoice was
    limited primarily to ensuring that the contractor used the correct
    overhead and indirect cost billing rates; did not make any large, obvious
    mistakes; and properly treated any specific, unusual transactions he was
    expecting based on the project's progress.

    However, we found the lack of detail on the invoices for direct costs
    other than labor hindered DOE's ability to identify potentially improper
    charges, obvious mistakes, or unusual transactions based on the invoice
    alone.^22 For example, a standard invoice review procedure would include
    looking for items with descriptions of potentially unallowable charges.
    However, this type of review was impossible to perform on WTP billings
    because neither the contractor's invoices nor the billing system that
    generated them provided adequate descriptions of the charges. The FAR and
    the WTP contract require a proper contractor's invoice to include the
    description, quantity, unit price, and extended price of supplies
    delivered or services performed.^23 However, the contractor's invoice does
    not provide, and DOE has not required, purchase descriptions. Instead,
    Bechtel's invoices list most transactions under broad cost categories such
    as "construction material & supplies" or "subcontracts, consultants, &
    outside services" with vendor or subcontractor names, dates, and amounts.
    Thus, the lack of transaction descriptions would make it difficult for the
    contracting officer to identify obvious mistakes or unusual transactions,
    as well as potentially improper charges. Fig. 2 illustrates the level of
    detail provided, taken from an actual page of an invoice billed to DOE.

    ^22Because more detailed information was available on labor costs, we were
    able to perform selected data queries on labor charges and did not
    identify any significant exceptions.

    Figure 2: Sample Charges from Bechtel Invoice to DOE

    Notes: N/C stands for natural classification, which the contractor uses to
    identify the type of expense. For example, N/C 310 stands for construction
    materials and supplies. The reference number is used by the contractor to
    locate the hard copy support in its files for the corresponding
    transaction.

    ^23Contract clause I.68 incorporating FAR 52.232-25, Prompt Payment (June
    1997).

    DOE's WTP project directors, who were responsible for overseeing the
    design and construction of designated WTP facilities and thus had more
    knowledge of daily work activities, received an abbreviated version of the
    invoice twice a month for review. However, we found that the abbreviated
    invoice provided only summary totals for labor, other direct costs, and
    indirect costs and did not provide even the limited transaction detail
    that was included in the full invoice. Thus, the project directors'
    reviews were limited primarily to assessing whether the total costs billed
    for their respective projects appeared reasonable given their projects'
    annual budgets and progress. Although these project directors had project
    knowledge, the lack of invoice detail prevented them from performing any
    meaningful review of specific costs. For example, one report the project
    directors received for project management purposes was a biweekly report
    showing the construction materials Bechtel used during that period.
    However, the abbreviated invoice did not show the type and amount of
    materials purchased or used, or even a summary total of construction
    materials billed. Thus, the information on the two documents could not be
    compared and neither could be meaningfully used to confirm or question
    individual costs being billed to DOE.

    According to DOE officials, there was no requirement specifying how
    frequently invoices should be reviewed or how such reviews should be
    performed. DOE had previously issued a local directive, dated September
    23, 2002, specific to the WTP project that provided DOE staff with
    instructions for reviewing Bechtel's semimonthly invoices.^24 However, DOE
    officials stated the directive is inactive because it supplemented the WTP
    contract management plan that was undergoing revision, even though the
    plan had not been updated since July 11, 2002. According to DOE's
    acquisition guide, voucher (invoice) processing and review is an important
    aspect of contract management, and thus the guide recommends that the
    contract management plan discuss the process for reviewing and approving
    invoices and discuss the roles and responsibilities of individuals who are
    directly involved in the process. The lack of a current contract
    management plan and corresponding requirements for invoice
    review--specifying an appropriate level, extent, and
    responsibilities--further impedes the effective administration of the WTP
    contract.

    ^24ORP M 131.7 R1, ORP Review of Bechtel National Inc. Semimonthly
    Invoices, September 23, 2002. This was a revision of a previous version
    issued November 15, 2001.

    DOE Placed Undue Reliance on DCAA and Other Entities

    The manager of the DOE staff that previously performed the invoice reviews
    stated that he did not believe that the FAR required DOE to review the
    invoiced charges because DCAA had already audited and considered Bechtel's
    accounting system to be adequate. Specifically, he stated that FAR
    32.503-4 allowed DOE to rely on the internal controls of Bechtel's
    accounting system because DCAA had certified Bechtel's system; thus the
    invoice reviews DOE performed in the past were beyond what the FAR
    required. However, FAR 32.500 explicitly states that that section of the
    FAR does not apply to payments under cost-reimbursement contracts and,
    therefore, FAR 32.503-4 does not apply to the WTP contract. Instead, the
    FAR recognizes that cost-reimbursement contracts carry a greater degree of
    risk to the government, and specifies that cost-reimbursement contracts
    should have appropriate government surveillance during performance to
    provide reasonable assurance that efficient methods and effective cost
    controls are used.

    GAO's Standards for Internal Control in the Federal Government states that
    internal control should be designed to ensure that ongoing monitoring
    occurs in the course of normal operations, is performed continually, and
    is ingrained in the agency's operations. While the standards acknowledge
    that separate evaluations can also be useful by focusing directly on the
    controls' effectiveness at a specific time, both ongoing monitoring
    activities and separate evaluations of the internal control system should
    be considered in assessing the continued effectiveness of internal
    control. Consequently, while external reviews such as DCAA's can
    supplement an overall system of internal control, they are not a
    substitute for them. Although DCAA conducts several types of audits of
    Bechtel, it generally conducts its reviews at the corporate-wide level and
    not at the level specific to a particular contract. Bechtel maintains one
    overall accounting system that includes various feeder and
    subsystems--such as the timekeeping and billing systems--for the entire
    corporation.^25 DCAA audits these systems on a cyclical basis, such that
    each system is reviewed only once every 3 to 4 years, and these systems
    audits are not intended to determine the allowability of specific costs.
    Although DCAA performs annual incurred cost audits that do examine the
    allowability of the contractor's direct and indirect costs, there is a
    significant time lag between when a calendar year closes and when the
    audit takes place. For example, as of the end of fiscal year 2006 the most
    recent audit DCAA completed of Bechtel's incurred costs covered calendar
    year 2003. This delay was caused in part by the typical 8 months that it
    may take for the contractor to submit its final indirect cost rate
    proposal for the year reviewed and in part by a backlog of incurred cost
    audits at DCAA.^26 In addition, DCAA's incurred cost audits of Bechtel
    express an opinion on the allowability of both direct and indirect costs
    for all of Bechtel's government contracts and subcontracts. Although the
    WTP project accounts for a substantial portion of Bechtel's total federal
    contract dollars, the 2003 incurred cost audit report listed over 50
    applicable Bechtel contracts.^27 Consequently, WTP was just one of many
    contracts included in the audit's scope of review.

    ^25While Bechtel's field locations use a variety of local accounting
    systems, the accounting information from the local systems is uploaded to
    the corporate system monthly.

    In addition, DOE relied primarily on Bechtel to review and validate
    subcontractor charges without having an adequate process in place to
    assess whether Bechtel was properly carrying out this responsibility.
    While we recognize that under the FAR the government does not have privity
    of contract, that is, a direct contracting relationship, with the prime
    contractor's subcontractors,^28 the government should have a process in
    place to ensure that the prime contractor is providing adequate oversight
    and effective cost control of its subcontractors' expenditures. This need
    is even more pronounced when both the prime contract and the subcontract
    are cost-reimbursable contracts. In fiscal years 2005 and 2006, Bechtel
    had over 150 subcontracts open, of which 7 were cost-reimbursable
    subcontracts with a total contract value of $495 million. DOE's internal
    controls for ensuring the propriety of subcontractor costs were limited
    primarily to including selected subcontractor purchases during its
    periodic reviews of Bechtel's invoices. However, as noted previously,
    during the period of our review DOE performed little review of the
    contractor's invoices. DOE officials stated they also rely on DCMA's
    contractor purchasing system review of Bechtel, which includes reviewing
    the contractor's controls for subcontracting. However, similar to the DCAA
    system reviews described above, DCMA's contractor purchasing system review
    of Bechtel is a corporate-wide review performed only about once every 3
    years, and the review is not intended to determine the allowability of
    specific costs. Because a substantial portion of Bechtel's WTP
    expenditures goes to subcontractors, for which DOE ultimately pays, DOE
    should have a process in place to provide reasonable assurance that it can
    rely upon Bechtel's controls to ensure subcontractors' expenditures are
    allowable and necessary.

    ^26Bechtel bills the government for indirect costs during a given year
    based on forward pricing rates that Bechtel calculates based upon its
    estimate of the costs it will incur. After the year is over, it prepares a
    final indirect cost rate proposal based on the actual costs incurred. DCAA
    staff stated they usually require the contractor to provide additional
    information or other changes to the final rate proposal before it is
    considered acceptable for audit, and this further adds to the delays. For
    example, for calendar year 2003 Bechtel submitted its original final rate
    proposal in August 2004, but did not submit its final revised proposal
    until January 2006.

    ^27According to DCAA, in calendar year 2003, the WTP contract accounted
    for about half of Bechtel's total federal contract dollars, excluding its
    management and operating contracts. WTP makes up a smaller portion in
    subsequent years, due largely to a significant increase in Bechtel's total
    federal contract dollars beginning in calendar year 2004.

    ^28FAR 42.505(b)(1).

    The use of cost-reimbursement contracts places special responsibilities on
    the contracting agency to monitor and control costs by using good contract
    management and administration practices, including proper internal
    controls. By not adequately monitoring charges, DOE may not be identifying
    errors or the weaknesses that allowed them to occur and thus is providing
    no deterrent to future errors or improprieties. Although DOE officials
    stated that they were comfortable with the current level of review because
    they had not found a significant number of errors in the past, as noted in
    the Strategies to Manage Improper Payments guide, most improper payments
    associated with federal programs go unidentified typically because of
    factors such as insufficient oversight or monitoring.

    DOE recently took some steps to begin strengthening its oversight of
    contractor payments. Based on weaknesses identified in its limited fiscal
    year 2006 annual review of transactions selected from two invoices, DOE
    began performing monthly invoice reviews in fiscal year 2007. While this
    is a step in the right direction, it is no substitute for a comprehensive
    approach that includes an appropriate assessment of risk that could then
    be used as a basis to design a system of internal control that would be
    effective in reducing the risk of improper payments. In addition, without
    sufficient detail in the invoices from which the transactions are
    selected, such reviews are minimally effective in identifying potential
    improper payments.

    DOE's Oversight Controls for Project Assets Were Inadequate

    DOE did not perform adequate oversight to reasonably ensure that Bechtel
    had established proper accountability for assets purchased with WTP
    project funds.^29 The FAR and the contract require the contractor to
    establish a property management program to safeguard and account for such
    assets.^30 The FAR also requires DOE to review the contractor's property
    program to ensure compliance with the property clauses of the contract.^31
    However, we found that DOE relied primarily on the contractor to manage
    WTP property without adequate oversight to help ensure that the contractor
    complied with these requirements. As a result, until recently DOE
    management was largely unaware of numerous internal control weaknesses in
    the contractor's property management system, which exposed WTP assets to
    loss or misuse. While new property managers for DOE and Bechtel have begun
    addressing the internal control weaknesses we identified, both DOE and the
    contractor will need continued vigilance in their oversight and management
    of WTP property to help ensure that it is adequately safeguarded and
    tracked.

    DOE Did Not Ensure the Contractor Maintained Adequate Accountability over
    Property

    DOE reimbursed Bechtel more than $100 million and $200 million in fiscal
    years 2006 and 2005, respectively, for property purchased for the direct
    construction of the WTP facilities or to support the construction
    activities. Such property varies by type and value and includes (1)
    construction materials, which may be consumed during construction and
    incorporated into an end product (e.g., cement and pipes); (2) plant
    equipment, which is personal property of a capital nature and used for
    administrative or general plant purposes (e.g., cranes and vehicles); (3)
    sensitive items, which are personal property susceptible to theft and
    misappropriation (e.g., computers and audiovisual equipment); and (4)
    tools, which include both inexpensive handheld tools as well as power
    tools costing thousands of dollars.

    Despite the hundreds of millions of dollars in WTP funds expended to
    acquire property over the years, DOE performed little oversight of
    Bechtel's property management program, relying primarily on the contractor
    to meet property requirements and self-report its compliance. Although the
    contractor was responsible for the day-to-day management of the property,
    the FAR required DOE to (1) review and approve the contractor's property
    management system and (2) ensure compliance with the government property
    clauses of the contract.^32 In addition, DOE's own policies required DOE
    to maintain records of approvals and reviews of contractors' property
    management systems.^33 Nonetheless, besides issuing a letter dated
    November 21, 2002, approving Bechtel's property control system, DOE did
    not document its review of the system and could not provide any supporting
    documentation demonstrating what it reviewed as the basis for approving
    the system. The DOE official responsible for the approval told us that he
    reviewed the contractor's policies and procedures and spot-checked
    implementation of procedures on site but did not formally document his
    assessment or corrective actions he required of the contractor.
    Consequently, there was no documentary evidence available from which we or
    DOE could evaluate the adequacy of the original assessment and any
    corrective actions.

    ^29We use the terms property and assets interchangeably throughout this
    section to refer to all WTP property items (excluding real property) for
    which the contractor is expected to maintain some level of accountability.

    ^30FAR 45.502(a),(b) and contract clause I.88 incorporating FAR 52.245-5,
    Government Property (Cost-Reimbursement, Time-and-Material, or Labor-Hour
    Contracts) (January 1986).

    ^31FAR 45.104.

    Moreover, DOE did not perform sufficient reviews after its 2002 approval
    of Bechtel's property management system to help ensure that Bechtel
    followed property procedures and complied with FAR and contract
    requirements. GAO's Standards for Internal Control in the Federal
    Government states that internal control should be designed to provide
    reasonable assurance regarding prevention of or prompt detection of
    unauthorized acquisition, use, or disposition of an agency's assets.
    However, the DOE official responsible for the oversight of WTP assets from
    May 2005 to May 2006 stated that he never went out to the WTP site to
    review procedures, observe property management operations, or conduct spot
    checks of property because he did not have the time to perform such
    reviews. While DOE received some reports from the contractor related to
    property--such as periodic reports of lost, damaged, or destroyed
    government property and Bechtel's annual performance measures report that
    included limited summary-level data, such as percentage of items located
    during physical inventories--it accepted these reports without performing
    on-site observations or reviewing any supporting documentation to validate
    the information. In addition, DOE relied solely on Bechtel to ensure that
    subcontractors maintained adequate accountability for government property
    they possessed without having a process in place to assess whether Bechtel
    was properly carrying out this responsibility.

    ^32FAR 45.104.

    ^33Department of Energy Acquisition Regulation 945.102-71.

    DOE officials acknowledged that DOE oversight of WTP property management
    has been inadequate and attributed this control weakness to a staffing
    shortage. According to DOE's personal property director at DOE
    headquarters and the WTP contracting officer, a dedicated DOE property
    administrator should have been assigned to the WTP project, but DOE had
    difficulty filling the position. As a result, DOE did not assign a
    property administrator dedicated to the WTP project until June 2006, over
    5 years after it awarded the contract. In the meantime, DOE assigned to
    the DOE Richland Office's property management officer the oversight
    responsibility for all government property at Hanford--including WTP
    property--held by DOE and several contractors. Although DOE's written
    responsibilities for such property officers identify them as the leader of
    an appraisal team responsible for ensuring that DOE contractors
    established and maintained effective property management programs, a
    former property officer stated that he was never assigned staff to assist
    him with his oversight responsibilities. The lack of dedicated DOE staff
    to oversee management of WTP property was further exacerbated by the high
    turnover rate of property officers assigned to Hanford. DOE officials
    stated that there have been four property officers at Hanford within the
    past 5- 1/2 years, and that they were assigned other collateral duties in
    addition to their property oversight responsibilities.

    Ongoing monitoring of the contractor's program to safeguard and account
    for WTP assets located both on- and off-site is critical for preventing
    and detecting the loss and misuse of such assets. Had DOE implemented
    effective oversight controls, it may have identified the numerous
    weaknesses in the contractor's property management program described below
    and could have directed the contractor to take corrective actions sooner.

    Contractor Did Not Have Adequate Controls for Maintaining Property
    Accountability

    We identified several weaknesses with Bechtel's property management
    program that increased the risk of theft, loss, or misuse of government
    assets. The WTP contract provides that title to property purchased by the
    contractor for which the contractor is reimbursed by the government passes
    to the government, and that the contractor is responsible and accountable
    for all such property in accordance with sound business practice and with
    applicable provisions of FAR 45.5.^34 As part of these responsibilities,
    the FAR requires the contractor to establish and maintain a program to
    control, protect, preserve, and maintain all government property.^35 As of
    September 30, 2006, Bechtel reported that it had about $65 million in its
    inventory of capital equipment and sensitive property and $16 million in
    its tools inventory related to the WTP project.^36 Bechtel had about $100
    million in its construction materials inventory as of May 2007.^37 (See
    fig. 3 for a sample of equipment and tools used at WTP.)

    ^34Contract clause I.88 incorporating FAR 52.245-5, Government Property
    (Cost-Reimbursement, Time-and-Materials, or Labor-Hour Contracts) (January
    1986).

    ^35FAR 45.502(a).

    ^36In fiscal years 2005 and 2006, Bechtel used multiple databases to track
    its property inventories. It used its government property system to track
    its inventory of plant equipment and tools valued at $5,000 or more
    (capital equipment) and sensitive items at various lower dollar
    thresholds. It used its Toolhound database to track its inventory of tools
    regardless of value; thus Bechtel tracked some items in Toolhound that it
    also tracked in its government property system. As of September 30, 2006,
    Bechtel's government property system had $6.5 million in tools recorded.
    It used the Bechtel procurement system to track its inventory of
    construction materials.

    ^37The construction materials amount is based on the most current
    available materials inventory report as of the date of our inquiry.

    Figure 3: Example of Construction Equipment and Tools Being Used at WTP

    Our review of Bechtel's property management program disclosed numerous
    internal control weaknesses that exposed government assets to an increased
    risk of theft, loss, or misuse and decreased the likelihood of detecting
    such incidents in a timely manner:

               o Inadequate segregation of duties. GAO's Standards for Internal
               Control in the Federal Government state that key duties and
               responsibilities should be divided among different people to
               reduce the risk of error or fraud. The FAR and Bechtel's own
               policies require that personnel who perform the physical inventory
               not be the same individuals who maintain the property records.^38
               However, during our review, one Bechtel employee was primarily
               responsible for reviewing the procurement system to identify
               accountable property purchased, bar coding property when received,
               entering new property items into Bechtel's government property
               system, performing annual physical inventories, and updating the
               government property system for the results of the inventory. In
               addition, no one reviewed the data she entered into the property
               system. Bechtel management attributed this control weakness to
               reduced staffing caused by the construction slowdown.

               o Inaccurate property system data. Bechtel used its government
               property system to track its inventory of capital equipment and
               sensitive items. Thus, Bechtel's property procedures required it
               to maintain the government property system in a manner sufficient
               to keep database records current and accurate. For example, the
               procedures state that property management staff are responsible
               for updating the property records with current locations and
               custodians. However, during our physical observations of selected
               property items, we identified items recorded in Bechtel's
               government property system with the wrong custodian or location
               and items recorded in the system that were actually missing. We
               also identified property that Bechtel had purchased and received
               but not recorded in the government property system, such as
               personal digital assistants, copiers, and computer equipment.
               Bechtel's property management staff explained that the failure to
               record the items was caused in part by property staff errors in
               determining whether to record certain items and to receiving
               staff's failure to promptly notify property staff of newly
               acquired property. Bechtel property staff recorded the assets in
               their property system after we brought them to their attention.

               o Inadequate inventory procedures. The FAR requires the contractor
               to conduct periodic physical inventories of all government
               property in its possession or control. It also requires the
               contractor, with the approval of the government property
               administrator, to establish the type, frequency, and procedures
               for such inventories.^39 However, we found that Bechtel's
               procedures did not specify the frequency or type of inventory
               required for construction materials, and DOE approved Bechtel's
               inventory procedures for materials without an established time
               frame. Consequently, Bechtel's property manager stated that while
               it had performed some spot inventories of selected materials at
               various times, Bechtel had not performed a complete inventory of
               materials in fiscal years 2005 or 2006 because of staffing
               shortages. Bechtel property management staff also stated that they
               inventory all assets recorded in Bechtel's government property
               system annually, yet we identified about 900 items recorded as of
               September 30, 2006, that the system showed had not been
               inventoried within the prior year.^40 Bechtel staff claimed that
               the information in the property system was wrong and that the
               items had been inventoried, but could not provide adequate
               documentation to support their claim. We selected 32 of these
               items for observation and could not locate 4 of them. Records in
               the government property system as of September 30, 2006, for these
               4 missing items--3 computers and 1 projector that are considered
               sensitive assets--showed that they had not been inventoried in
               over 2 years.

               o Inadequate policies and procedures for the accountability of
               tools. Bechtel acquires a large number of tools at substantial
               cost for the WTP construction project, billing the government $2.3
               million for tools in fiscal year 2005 alone. Tools are easily
               pilferable, and while many tools may be considered nominal in
               cost, some cost thousands of dollars and thus warrant commensurate
               controls to safeguard them effectively. However, we identified
               several weaknesses with Bechtel's management of tools. For
               example, because Bechtel lacked adequate inventory procedures for
               tools, workers could check out tools from the main tool crib
               indefinitely without the tools ever being inventoried to ensure
               that they still existed and were being utilized. Additionally,
               employee exit procedures were not consistently followed to ensure
               that terminated employees returned their tools before leaving. We
               selected for observation five tools that property records showed
               were assigned to former employees, and found that all five were
               missing. Furthermore, our review of the tools database and human
               resource records showed that some workers checked out tools the
               day before or the day of their termination dates. Bechtel also
               lacked adequate guidelines for the disposal of tools damaged
               through normal wear and tear. Specifically, until recently there
               was no requirement to obtain Bechtel or DOE property management
               approval to dispose of worn tools. As a result, warehouse staff
               independently designated over $90,000 of tools as "worn" and
               disposed of them without any management concurrence required.

               o Lack of compliance with property checkout procedures. Bechtel's
               property procedures required employees to obtain a property pass
               for items removed from project-controlled areas, and to renew the
               pass annually if the asset was still needed off-site by presenting
               the item to the property staff for inspection. We reviewed
               Bechtel's government property system and found that about 100 of
               the 300 items checked out--primarily computers--had expired
               property passes, some of which had expired as far back as March
               2005. We selected 10 assets with expired property passes to
               observe, and could only locate 9 of them. The missing item, whose
               property pass had expired in March 2006, was also one of the
               computers discussed previously that had not been recently
               inventoried. Bechtel property staff stated they query the
               government property system monthly to identify and alert
               custodians of property passes that are about to expire, but could
               not explain how they missed the expired passes we identified.

               o Lost, damaged, or destroyed property items not promptly
               reported. Although the FAR requires the contractor to investigate
               and report to DOE all cases of loss, damage, or destruction of
               government property, Bechtel did not always submit such reports to
               DOE timely.^41 For example, Bechtel did not report to DOE the loss
               of 3 laptop computers and 2 projectors until 2 years after it
               first identified them as missing. In April 2007, Bechtel reported
               to DOE another 15 computers, a printer, and a projector as
               missing. Bechtel's government property system indicated and
               Bechtel's property staff confirmed that Bechtel first identified
               at least 2 of these items as missing as far back as 2002. Part of
               the cause for these delays was that until August 2006 neither
               Bechtel nor DOE had policies requiring specific time frames for
               investigating and reporting such incidents. Bechtel officials
               acknowledged that they should have reported these missing assets
               more promptly but stated that the delays were caused by Bechtel
               staff not always promptly reporting lost or damaged government
               property to Bechtel property staff, and by property staff delaying
               submitting the reports in hopes that the missing assets would
               eventually be found. These delays in reporting missing assets,
               particularly computers that may contain sensitive or proprietary
               information, decreased the opportunity for DOE to require a timely
               and thorough investigation into the losses and to require Bechtel
               to promptly implement controls to help avert future losses of a
               similar nature.

               o Inadequate oversight of subcontractors with WTP assets. Bechtel
               works with numerous subcontractors that supply materials and
               services to help construct WTP facilities, some of which possess
               WTP property. The FAR requires the prime contractor to ensure that
               its subcontractors adequately care for and maintain government
               property and ensure that it is used only for authorized
               purposes.^42 This is particularly important since the
               subcontractors generally maintain the property records for
               government property they purchase and use, rather than Bechtel.
               Consequently, Bechtel's property procedures require its property
               manager to review and approve its subcontractors' government
               property programs. However, Bechtel did not adequately perform
               such reviews or follow up on subcontractors' property management
               issues. For example:

                            o Although Bechtel policy required it to audit its
                            subcontractors' government property programs, one
                            subcontractor refused to be audited by Bechtel
                            because the subcontractor claimed that it already had
                            a property program approved and audited by the
                            government. Even though that program had no relevance
                            to the WTP contract, Bechtel never audited the
                            subcontractor. In addition, this subcontractor
                            refused to provide Bechtel a copy of its property
                            policies and procedures, citing proprietary concerns.
                            Thus, Bechtel had no basis for and never assessed the
                            adequacy of this subcontractor's property management
                            program.

                            o The subcontractors' property management policies
                            were not always complete or consistent with Bechtel's
                            property policies. For example, one subcontractor's
                            policy lacked formal procedures for reporting lost,
                            damaged, or destroyed government property and thus
                            did not have any requirements for reporting such
                            items promptly. Another subcontractor's policy for
                            tracking sensitive items was inconsistent with
                            Bechtel's own policy. Specifically, the
                            subcontractor's dollar threshold for tracking
                            sensitive items, such as cameras and video equipment,
                            was higher than Bechtel's threshold. As a result, WTP
                            assets susceptible to theft and misuse were not being
                            consistently tracked in the property systems for
                            inventory control purposes.

                            o Bechtel did not timely follow up on subcontractor
                            property management issues it identified through its
                            audit and oversight to ensure that the subcontractors
                            properly implemented corrective actions. For example,
                            during an April 2005 subcontractor audit, Bechtel
                            identified several government assets that were not
                            marked with indication of government ownership as
                            required by the FAR.^43 In its audit report, Bechtel
                            indicated that it would perform a follow-up review
                            within 30 days to ensure that corrective actions were
                            implemented; however, it could not provide us any
                            documentation that such follow-up was performed.
                            During our visit to that subcontractor in February
                            2007, we saw several government assets that were not
                            marked as government property. During the same April
                            2005 audit, Bechtel discovered a missing computer and
                            instructed the subcontractor to submit a lost
                            property report, which the subcontractor submitted in
                            June 2005. Bechtel rejected the report and requested
                            a revision, but did not follow up with the
                            subcontractor to ensure that a revised report was
                            submitted. Consequently, Bechtel did not receive a
                            revised report until February 2007, which it
                            subsequently submitted to DOE.

    ^38FAR 45.508.

    ^39FAR 45.508.

    ^40Bechtel's written procedures require physical inventories of plant
    equipment every 3 years and of sensitive assets annually. However,
    property management staff stated that in practice, they inventory all
    items recorded in the government property system annually.

    ^41FAR 45.504(b).

    ^42FAR 45.510.

    DOE and Bechtel Are Implementing Corrective Actions

    DOE has recently taken steps to increase its oversight of Bechtel's WTP
    property management program. At the time we began our audit, DOE hired a
    property administrator responsible solely for overseeing the WTP property
    management program. This property administrator has taken on a more active
    oversight role through his procedural and compliance reviews. For example,
    since his arrival in mid-2006 he has issued specific requirements to the
    contractor for reporting lost, damaged, or destroyed property more timely;
    directed the contractor to perform a materials inventory at least
    annually; issued guidelines for performing inventories of tools checked
    out to workers; and performed several on-site inspections identifying
    instances of noncompliance and corrective actions for Bechtel to
    address.^44 In addition, he has directed the contractor to prepare and
    submit for his approval a detailed inventory plan for construction
    materials specifying the inventory type, frequency, and detailed
    procedures.

    ^43FAR 45.506.

    For its part, Bechtel has also initiated a number of corrective actions to
    improve its management of government property. Bechtel also hired a new
    property manager in mid-2006 who in turn hired several additional property
    staff to better address the segregation-of-duties issue and to help
    implement requirements. The new property manager has developed and issued
    new policies, such as a policy requiring Bechtel and DOE property
    management concurrence prior to disposing of worn tools. In addition, he
    implemented a new property database system and tasked his staff with
    correcting errors in the property system. He stated he also plans to
    review Bechtel's receiving process and tools accountability.

    Because the policy and procedural changes primarily occurred after our
    review period, we have not assessed the effectiveness of the changes. If
    implemented properly, these should help improve the contractor's
    management of government property and DOE's oversight of the contractor's
    program. However, additional issues remain which, if not addressed, will
    continue to expose government property to an increased risk of theft,
    loss, or misuse.

    Conclusions

    DOE's oversight of contractor billings and property management on the WTP
    project did not have the level of internal controls that would be expected
    of a project of this magnitude and complexity. DOE's lack of appropriate
    oversight controls for contractor invoices significantly increased its
    vulnerability to improper payments. Further, DOE did not establish basic
    oversight controls to reasonably ensure that Bechtel and its
    subcontractors appropriately tracked and safeguarded the millions of
    dollars in property and equipment purchased for the project. Given that
    DOE has estimated that it will likely spend at least another $9 billion on
    the WTP project over the next decade or more, it is critically important
    that it establish appropriate oversight and controls commensurate with the
    risks involved in this costly, complex project. This is particularly
    important in the near term as the project ramps back up and the contractor
    begins to hire hundreds of additional workers in Hanford and at off-site
    locations. The recent corrective actions taken to date, if effectively
    implemented, are positive first steps to improving DOE's oversight of
    contractor payments and property management. DOE management's commitment
    and continued attention to these areas will be essential to establishing a
    lasting and more effective administration of the WTP contract.

    ^44For example, DOE's property administrator issued a memo directing
    Bechtel to notify him by e-mail within 24 hours of the discovery of lost,
    damaged, or destroyed property. It also requires Bechtel to follow up such
    notification with a formal lost, damaged, or destroyed property report
    within 7 calendar days after the discovery of an incident related to
    sensitive property, 14 calendar days for property valued at $5,000 or
    greater, and 45 calendar days for all other property.

    Recommendations for Executive Action

    To improve DOE's oversight of and accountability for WTP expenditures, we
    recommend the following 11 actions. To improve DOE's review and approval
    process for contractor billings, we recommend that the Secretary of Energy
    direct the Assistant Secretary for Environmental Management or designee
    to:

               o Perform an assessment of the risks associated with WTP contract
               payments, including subcontractor payments, which should include
               comprehensively identifying the risks, performing a risk analysis
               of their possible effects, and identifying the actions--both
               preventive and detective--to be taken to mitigate those risks.

               o Based on the results of the risk assessment, establish
               appropriate policies and procedures for effective review and
               approval of the prime contractor's invoices. Such policies and
               procedures should specify the steps to be performed for review and
               approval, the individuals responsible for carrying out these
               steps, the level of invoice detail needed to perform an
               appropriate review, and the appropriate documentation to be
               maintained of that review process.

               o Establish a policy and procedures to periodically assess the
               prime contractor's oversight of subcontractor payments to
               determine if there are any deficiencies and corrective actions
               needed and assess whether the controls can be sufficiently relied
               on to ensure that subcontractor payments are allowable,
               reasonable, and in compliance with all FAR and contract
               requirements.

    To strengthen DOE's accountability for contractor-acquired government
    property, we recommend that the Secretary of Energy direct the Assistant
    Secretary for Environmental Management or designee to:

               o Follow DOE's existing requirements to periodically document and
               assess the contractor's property management program for compliance
               with the FAR and DOE policy.

               o Follow DOE's existing requirements to document the adequacy of
               corrective actions planned and implemented by the contractor to
               address weaknesses identified in DOE's assessments of the
               contractor's property management program.

               o Direct the contractor to implement control procedures to help
               ensure the timeliness and accuracy of information entered into the
               property systems.

               o Review the adequacy of Bechtel's proposed inventory plan for
               construction materials once submitted, and ensure that the
               approved plan is properly implemented.

               o Direct the contractor to establish appropriate controls to
               ensure that employee exit procedures requiring terminated
               employees to return tools before they leave are followed.

               o Direct the contractor to establish a formal policy and
               procedures for property staff to (1) periodically monitor the
               government property system for assets with property passes that
               are due to expire soon, (2) notify property custodians with such
               assets to renew their property passes or return the items if no
               longer needed, and (3) ensure that such assets are verified as
               required.

               o Direct the contractor to establish control procedures to help
               ensure that Bechtel staff and subcontractors report lost or
               damaged government assets to property management in a timely
               manner so that they can be forwarded to DOE within recently
               established time frames.

               o Establish procedures to periodically assess the prime
               contractor's oversight of its subcontractors in possession of
               government property to ensure that the prime contractor (1) audits
               applicable subcontractors' property management programs as
               required, (2) reviews applicable subcontractors' property
               management policies and procedures for completeness and
               consistency, and (3) follows up on and documents resolution of
               corrective actions in a timely manner.

    Agency Comments and Our Evaluation

    We provided a draft of this report to DOE for its review and comment. In
    its written comments, DOE stated it had assessed the risk of improper
    payments at contract inception, but agreed with the recommendation to
    perform an updated risk assessment to ensure adequate oversight and
    accountability for WTP expenditures. It did not specifically comment on
    the remaining recommendations. DOE stated in the letter that it would
    engage with DCAA to update the assessment of the risks, revise the current
    policies and procedures related to contractor billings as necessary, and
    assess the adequacy of property management staff levels and capabilities
    to ensure that adequate coverage is provided for oversight of the WTP.
    However, while not disputing the specific facts contained in the report,
    the letter states that DOE believes (1) the controls in place during the
    period of review, fiscal years 2005 and 2006, met the requirements and
    intent of the applicable federal acquisition regulation, DOE orders, and
    contract terms; (2) the combination of the contractor's billing systems,
    DCAA's ongoing audits, and the recurring DOE review of selected invoices
    adequately prevent unallowable or improper costs, and (3) the property
    management weaknesses and corrective actions reflected in our reported
    findings and recommendations were self-identified by DOE and the
    contractor. DOE also provided technical comments that we subsequently
    discussed with DOE officials and incorporated as appropriate.

    We disagree with DOE's contention that the controls in place during the
    period of review met the requirements and intent of the applicable FAR
    requirements, DOE orders, and WTP contract terms. For example, as noted in
    our report, the FAR and the WTP contract require that a proper
    contractor's invoice include the description, quantity, and unit price of
    supplies delivered or services performed, but Bechtel's invoice did not
    include such detail and DOE did not enforce the requirement. DOE's
    policies required it to maintain records of its reviews of contractors'
    property management systems, but DOE could not produce any documentation
    demonstrating what it reviewed as the basis for approving Bechtel's
    property management system. The FAR requires that personnel who perform
    the physical inventory not be the same individuals who maintain the
    property records, but at the time of our review one property staff member
    was performing both of these duties. These and other examples in our
    report illustrate that DOE's and the contractor's controls did not always
    meet FAR, DOE, or WTP contract requirements.

    Further, as reflected in both the report title and objectives, the focus
    of our report was not limited to DOE's compliance with regulations, but
    more broadly on the adequacy of its internal controls over contractor
    payments and project assets. The Standards for Internal Control in the
    Federal Government, with which DOE as a federal agency must comply, state
    that internal control is an integral part of managing an organization, and
    involves providing reasonable assurance that the agency not only complies
    with applicable laws and regulations, but also operates efficiently and
    effectively, including the use of the entity's resources. Internal control
    is to serve as the first line of defense in safeguarding assets and
    preventing and detecting errors and fraud. Internal control helps
    organizations achieve desired results through effective stewardship of
    public resources. Our report discusses several areas in which DOE had not
    developed the policies needed to effect adequate internal control. For
    example, there was no requirement specifying how frequently contractor
    invoices should be reviewed or how such reviews should be performed.
    Similarly, until August 2006 neither Bechtel nor DOE had policies
    requiring specific time frames for reporting lost, damaged, or destroyed
    property items. Thus, while taking 2 years to report such property to DOE
    may not have violated any specific FAR, DOE, or contract requirements up
    to that point, such practices did not constitute acceptable internal
    control.

    Regarding the contractor billing process, DOE stated that it assessed the
    risk of improper payments at contract inception and believes the
    combination of the contractor's billing systems (based upon DCAA's
    assurances), DCAA's ongoing audits, and the recurring DOE review of
    selected invoices adequately prevent unallowable or improper costs. We
    disagree. The WTP project has changed significantly since contract
    inception. Numerous DOE and contractor problems and project management
    weaknesses over the years have contributed to an almost threefold increase
    in the project's estimated cost and an almost twofold increase in the
    completion schedule since the contract began in December 2000. Thus, a
    risk assessment performed at contract inception does not reflect current
    conditions and risks and thus does not provide a proper foundation for
    designing an adequate system of internal control.

    Further, while we agree that a DCAA audit of contract costs can provide a
    detective control to help determine whether contractor costs were proper,
    reliance on an after-the-fact audit is not an acceptable replacement for
    the type of real-time monitoring and oversight of contractor
    costs--preventive controls--that we found to be deficient. Also, as noted
    in our report, while the FAR allows contracting agencies to rely on DCAA's
    certification of the contractor's accounting system for certain types of
    payments, the FAR explicitly excludes payments under cost-reimbursement
    contracts from this provision, recognizing that cost-reimbursement
    contracts carry a greater degree of risk to the government and therefore
    must have appropriate surveillance during performance to provide
    reasonable assurance that efficient methods and effective cost controls
    are used. It is important that DOE establish a control environment that
    includes specific control activities to prevent questionable or improper
    payments to begin with or that detects them soon after they occur so that
    they can be resolved in a timely manner. Primary reliance on an audit of
    contractor costs by DCAA 3 years after DOE reimbursed the contractor for
    such costs is not adequate given the magnitude of the contract.

    With regard to DOE's invoice reviews, we noted in our report that DOE
    began performing monthly invoice reviews in fiscal year 2007, which we
    believe is a step in the right direction. However, we continue to maintain
    that the effectiveness of such reviews is hindered by the lack of detail
    in the invoices from which the transactions are judgmentally selected.
    Given the many challenges and events that have occurred on this project
    since the contract began, a proper and current assessment of the risks
    that is then used as the foundation for designing an overall system of
    internal control is needed to effectively reduce the risk of improper
    payments. DOE has committed to updating its assessment of the risks and
    revising its policies and procedures as necessary, and we will continue to
    monitor its progress in addressing our recommendations in this area.

    With regard to the property management issues identified, we commend DOE
    and the contractor for taking a more aggressive approach in the last year
    toward improving the WTP property management program, which we recognized
    in our report. Throughout our fieldwork, we raised issues and concerns
    regarding property management weaknesses we observed, some of which we
    recognize were also being identified by DOE and the contractor concurrent
    with our review. For example, during our initial site visit in June 2006
    we obtained some of the contractor's reports of lost, damaged, and
    destroyed property and noted significant delays in Bechtel's reporting of
    these assets. During the same week, DOE issued a memo to the contractor
    questioning these delays, and subsequently issued a new policy in August
    2006 to improve the timeliness of such reporting. However, we disagree
    with DOE's contention that all of the weaknesses and corrective actions
    reflected in our findings and recommendations were self-identified by DOE
    and the contractor. Our audit work identified many internal control
    weaknesses that were not identified before we raised them or did not
    result in corrective action until after we brought them to DOE's or the
    contractor's attention during the course of our audit.

    For example, it was our data mining queries of the property databases that
    identified the assets checked out to employees with expired property
    passes, property items purchased and received that had not been recorded
    in the government property system, and tools that were still assigned in
    the property records to former employees. Our physical observations of
    selected property items identified items recorded in Bechtel's government
    property system with the wrong custodian or location and items recorded in
    the tools database that were missing. Our inquiries and walk-throughs of
    operations identified still other weaknesses. For example, after Bechtel
    told us on May 14, 2007, that a complete materials inventory had not been
    done for 2005 or 2006, DOE issued a memo to the contractor on May 17,
    2007, expressing disappointment in Bechtel's inability to provide us with
    materials inventory results, and directed the contractor to begin
    conducting annual materials inventories starting in 2007. We were
    encouraged by the fact that as we asked questions and raised concerns with
    both DOE and contractor staff throughout our audit, they typically took
    prompt action to address these issues. Continued focus on this area with
    prompt, corrective actions consistent with our recommendations will go a
    long way toward reducing the risk of theft, loss, or misuse of WTP assets.

    We are sending copies of this report to other interested congressional
    committees and to the Secretary of Energy. We will also make copies
    available to others upon request. In addition, this report will be
    available at no charge on the GAO Web site at [32]http://www.gao.gov .

    If you or your staff have any questions on this report, please contact me
    at (206) 287-4809 or by email at [33]calboml@gao.gov . Contact points for
    our Offices of Congressional Relations and Public Affairs may be found on
    the last page of this report. Key contributors to this report are listed
    in appendix III.

    Linda M. Calbom
    Director, Financial Management and Assurance

    Appendix I: Scope and Methodology

    For this review, we considered internal controls in place during fiscal
    years 2005 and 2006 at the Department of Energy (DOE) and at Bechtel
    National, Inc. (Bechtel) related to the Hanford Waste Treatment and
    Immobilization Plant (WTP) project. To perform our work, we reviewed the
    WTP contract; the Federal Acquisition Regulation (FAR); DOE's Acquisition
    Regulation (DEAR) and other DOE directives, policies, procedures; and
    GAO's Standards for Internal Control in the Federal Government to gain an
    understanding of the applicable requirements. We made site visits to
    Richland, Washington, to perform work at DOE's Office of River Protection,
    Bechtel's WTP project office, and the WTP work site. We also met with
    Defense Contract Audit Agency (DCAA) and Defense Contract Management
    Agency (DCMA) auditors and with the DCMA corporate administrative
    contracting officer and reviewed copies of relevant reports they had
    prepared based on their reviews of Bechtel to obtain an understanding of
    DCAA's and DCMA's reviews and oversight of Bechtel. We also coordinated
    with DOE Inspector General staff to determine whether they had performed
    audit work that may be relevant to our review, and met with Bechtel
    internal audit staff and obtained copies of their reports. Our work was
    not designed to determine or estimate the allowability of all contractor
    costs or the accountability of all property items.

    Data Reliability

    To assess the reliability of data we used for this report, we performed
    the following steps:

               o Because Bechtel maintains the billing system that generates the
               hard copy invoices it provides to DOE, we requested data extracts
               from its billing system representing charges that Bechtel billed
               to DOE in fiscal years 2005 through 2006. These extracts contained
               the amounts billed to DOE for labor and other direct costs.^1 To
               assess the reliability of the billing data extracts for purposes
               of our review, we (1) compared total WTP disbursements to Bechtel
               per DOE's accounting records to the total amount of invoices
               Bechtel billed to DOE for the period, (2) compared the invoiced
               total to Bechtel's schedule of amounts billed to DOE, (3) compared
               the amounts shown for labor and other direct costs on Bechtel's
               schedule to the billing data extracts we received for the period
               of review, and (4) reviewed other documents to verify the amount
               of adjustments and other items billed. We also performed
               electronic testing of selected data elements, reviewed existing
               information about the data and the system that produced them, and
               interviewed Bechtel officials knowledgeable about the system. We
               determined that the billing data extracts were sufficiently
               reliable for the purposes of this report.

               o Because the billing system did not contain detailed
               information--such as purchase descriptions--for other direct costs
               that would enable us to sufficiently perform data mining, we
               worked with Bechtel staff to identify an alternative system.
               Bechtel's procurement system was the primary system that contained
               detailed purchase descriptions;^2 however, it did not directly
               feed or otherwise interface with the billing system.^3 In
               addition, Bechtel officials stated that the procurement system was
               not designed with commensurate controls to be a source system. We
               worked with Bechtel staff to attempt to identify a potential
               work-around to link the billing system charges to the
               corresponding purchases in the procurement system using data from
               the accounts payable system; however, results of our electronic
               testing showed that the linkages between the data were not
               sufficiently reliable to perform data mining.

               o The billing data extracts contained detailed information on
               nonmanual labor costs, such as the amount of straight time and
               overtime paid per employee per pay period. However, because
               Bechtel pays its manual, or craft, labor costs directly to the
               unions in aggregate weekly totals, the billing data only reflect
               these aggregate payments. Thus, we requested a data extract of the
               craft labor payroll system. We assessed the reliability of the
               payroll data by comparing the payroll system totals to the related
               billing system totals for manual labor, reviewed existing
               information about the data and the system that produced them, and
               interviewed Bechtel officials knowledgeable about the data. We
               determined that the data were sufficiently reliable for the
               purposes of this report.

               o We assessed the reliability of extracts from Bechtel's human
               resource system for nonmanual labor by performing electronic
               testing of required data elements, reviewing existing information
               about the data and the systems that produced them, and
               interviewing Bechtel officials knowledgeable about the systems.^4
               We determined that the data were sufficiently reliable for the
               purposes of this report.

               o Based on our property walk-throughs, we determined that controls
               over property were weak and that the two property databases used
               to track these items were incomplete and thus unreliable.
               Therefore, we used the property system data to perform selected
               internal control tests to illustrate the effects of their weak
               property controls, as discussed further below.

    ^1Labor and other direct costs accounted for about 85 to 90 percent of the
    total amounts billed to DOE in fiscal years 2005 and 2006. The remaining
    amounts billed consisted primarily of indirect costs and contract fees.

    ^2Bechtel's purchase card system contains item descriptions for purchase
    card purchases; however, only 1 percent of other direct costs billed to
    DOE in fiscal years 2005 through 2006 came from that system.

    ^3Instead, Bechtel staff manually enter data from the hard copy vendor and
    subcontractor invoices into the accounts payable system, which in turn
    feeds into the billing system.

    Payment Controls

    To determine whether DOE's internal controls were adequately designed to
    prevent and detect improper payments, we used GAO's Standards for Internal
    Control in the Federal Government as a basis to assess the internal
    control structure--control environment, risk assessment procedures,
    control activities, information and communications, and monitoring efforts
    of DOE over contractor payments. Further, we reviewed the contract
    requirements, the FAR, the DEAR, and other relevant DOE policies,
    procedures, and guidance. We interviewed program oversight and financial
    management personnel regarding policies and procedures that were in place
    over contractor payments, performed walk-throughs of key processes, and
    reviewed supporting documentation to gain an understanding of DOE's
    controls over contractor payments. We interviewed Bechtel staff to gain an
    understanding of their billing process and controls. We performed data
    mining on billing system nonmanual labor data, manual labor payroll data
    extracts, and human resource data extracts to query for records with
    certain characteristics, such as payments made to employees after
    termination dates and employees with high numbers of hours paid during a
    pay period; followed up on query results with Bechtel staff; and obtained
    and reviewed supporting data to corroborate explanations.

    ^4Bechtel officials stated that because Bechtel hires craft employees
    through the labor unions, they are not considered permanent Bechtel
    employees, and thus Bechtel does not maintain records on these employees
    in its human resource database. Instead, it maintains limited human
    resource data on these employees in its payroll system.

    Property Controls

    To determine whether DOE's oversight controls reasonably ensured proper
    accountability over WTP property, we used our Standards for Internal
    Control in the Federal Government as a basis to assess the internal
    control structure--control environment, risk assessment procedures,
    control activities, information and communications, and monitoring efforts
    of DOE over contractor payments. Further, we reviewed the contract
    requirements, the FAR, the DEAR, and other relevant DOE policies,
    procedures, and guidance. We also reviewed contractor and selected
    subcontractor property management policies and procedures. We interviewed
    the DOE headquarters personal property management division director as
    well as former and current DOE officials responsible for the oversight of
    Bechtel's management of WTP property to understand the level and extent of
    DOE oversight controls over the contractor's property management system.
    Additionally, we interviewed Bechtel property management staff, requested
    and reviewed relevant documentation, and performed walk-throughs to gain
    an understanding of Bechtel's internal controls and procedures over
    property management. We also performed the following tests.

               o Data queries. We performed data mining queries on data extracts
               from Bechtel's government property system and its Toolhound system
               to identify records with certain characteristics, such as property
               not recently inventoried or items with expired property passes. We
               followed up on selected results with Bechtel property staff and
               reviewed related documentation. We also selected a
               nongeneralizable sample of items from our query results with
               different attributes to physically observe as described further
               below.

               o Physical observations. We selected assets using three different
               methods to perform physical observations. First, based on our
               query results, we selected a limited number of assets from
               Bechtel's government property system and Toolhound database to
               observe at the WTP project site, selected WTP subcontractors in
               Richland, and Bechtel offices in San Francisco in order to test
               for existence of the assets and accuracy of recording. Second, to
               test for completeness of Bechtel's and the subcontractors'
               government property systems, we selected a limited number of
               assets we observed at WTP and subcontractor sites and determined
               whether they had been properly tagged as government property and
               recorded in the respective property systems. Third, we selected a
               limited number of transactions from Bechtel's procurement,
               accounts payable, and purchase card databases that appeared to be
               potential property purchases; reviewed the supporting documents to
               determine whether they were in fact property purchases; traced the
               items to the government property system where possible to
               determine if they had been recorded; and physically observed some
               of the items. For all items observed, we reviewed supporting
               documentation, such as invoices, packing slips, and material
               receiving reports; verified the assets' serial numbers,
               custodians, locations, and other key identifying information; and
               compared this information to the applicable property systems.
               Because we only selected a limited number of transactions from
               each method in order to test for different attributes, the results
               of our review cannot be used to make inferences about the
               population.

               o Contractor compliance with reporting requirements. We reviewed
               reports on lost, damaged, and destroyed property that Bechtel
               provided to DOE to assess the timeliness of the reports. We also
               queried the property databases and reviewed subcontractor
               inventory records for items indicated as lost or missing, and
               compared them against copies of the lost property reports to
               determine whether Bechtel had reported them to DOE. We requested
               and reviewed copies of the contractor's audits and reviews of
               applicable subcontractors' property management programs.

    We provided DOE with a draft of this report for review and comment. DOE's
    Assistant Secretary for Environmental Management provided written
    comments, which are reprinted in appendix II. We also had subsequent oral
    discussions with DOE officials to clarify the written comments. We also
    provided key DCAA and DCMA officials with draft excerpts of the report
    relating to their respective agencies, and incorporated as appropriate
    oral and written comments we received from them. Our work was performed
    from June 2006 through May 2007 in accordance with generally accepted
    government auditing standards.

    Appendix II: Comments from the Department of Energy

    Appendix III: GAO Contact and Staff Acknowledgments

    GAO Contact

    Linda Calbom, (206) 287-4809 or [34]calboml@gao.gov

    Staff Acknowledgments

    In addition to the individual named above, Doreen Eng, Assistant Director;
    Jessica Gray; R. Ryan Guthrie; Mary Ann Hardy; Delores Lee; Jenny Li; and
    Ting-Ting Wu made significant contributions to this report. Others who
    made important contributions included Richard Cambosos; Tim DiNapoli; and
    Wil Holloway.

    (190149)

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    Highlights of [42]GAO-07-888 , a report to the Subcommittee on Energy and
    Water Development, Committee on Appropriations, House of Representatives

    July 2007

    HANFORD WASTE TREATMENT PLANT

    Department of Energy Needs to Strengthen Controls over Contractor Payments
    and Project Assets

    In December 2000, the Department of Energy (DOE) awarded Bechtel National,
    Inc. (Bechtel) a contract to design and construct the Waste Treatment
    Plant (WTP), one of the largest nuclear waste cleanup projects in the
    nation. Originally expected to cost $4.3 billion and be completed in 2011,
    DOE now estimates that WTP will cost over $12.2 billion and be completed
    in late 2019. Weaknesses in DOE's management and oversight of contractors
    led GAO to designate DOE contract management as a high-risk area since
    1990. GAO was asked to determine whether

    (1) DOE's internal controls are designed to provide reasonable assurance
    against improper WTP payments and (2) DOE's controls reasonably ensure
    proper accountability for WTP assets. GAO reviewed fiscal year 2005 and
    2006 internal controls by analyzing data and documents, interviewing DOE
    and contractor staff, and physically observing property items.

    [43]What GAO Recommends

    GAO makes 11 recommendations to DOE to (1) establish effective invoice
    review procedures based on the WTP contract's risks, (2) periodically
    assess the WTP contractor's property management program, and (3) direct
    the WTP contractor to establish controls to improve accountability for
    property. While DOE agreed with one recommendation, it also stated its
    controls were adequate. GAO disagrees.

    DOE's internal controls over payments to contractors on its WTP project
    did not provide reasonable assurance against the risk of improper
    contractor payments, particularly given the project's substantial inherent
    risks. Several factors combined to pose a risk of improper payments on
    this project, including the size and complexity of this one-of-a-kind
    nuclear construction project, escalating cost and schedule estimates, and
    the thousands of charges Bechtel billed to DOE on each invoice. Despite
    the risks, in fiscal years 2005 and 2006 DOE performed little or no review
    of contractor invoices or supporting documents for the $40 million to $60
    million in charges that Bechtel billed to DOE each month to help ensure
    the validity of these charges. Instead, DOE officials relied primarily on
    the Defense Contract Audit Agency's reviews of Bechtel's corporate-wide
    financial systems and on Bechtel's reviews of subcontractor charges for
    assurance that the charges were proper. DOE's heavy reliance on others,
    with little oversight of its own, exposed the hundreds of millions of
    dollars it spent annually on the project to an unnecessarily high risk of
    improper payments.

    DOE also did not adequately oversee the contractor to ensure
    accountability for assets purchased with WTP contract funds, relying
    primarily on the contractor to manage such government property without
    ensuring the adequacy of the contractor's controls. We found numerous
    internal control weaknesses with Bechtel's property management program,
    including poor segregation of duties, property system errors, and
    inadequate property procedures. For example, Bechtel did not timely
    prepare and submit required reports of lost or damaged property, taking up
    to 2 years in some instances to report missing assets, such as computers,
    to DOE. Bechtel also did not always review subcontractors' property
    management policies and procedures as required or follow up on
    subcontractor weaknesses it identified to help ensure that its
    subcontractors adequately managed and safeguarded WTP property in their
    possession. These property control weaknesses coupled with the lack of DOE
    oversight created an environment in which property could be lost or stolen
    without detection.

    Aerial View of the Hanford Waste Treatment Plant under Construction

    References

    Visible links
      25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-762
      26. http://www.gao.gov/cgi-bin/getrpt?GAO-04-611
      27. http://www.gao.gov/cgi-bin/getrpt?GAO-06-602T
      28. http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD-00-21.3.1
      29. http://www.gao.gov/cgi-bin/getrpt?GAO-01-1008G
      30. http://www.gao.gov/cgi-bin/getrpt?GAO-02-69G
      31. http://www.gao.gov/cgi-bin/getrpt?GAO-02-69G
      32. http://www.gao.gov/
      33. mailto:calboml@gao.gov
      34. mailto:calboml@gao.gov
      35. http://www.gao.gov/
      36. http://www.gao.gov/
      37. http://www.gao.gov/fraudnet/fraudnet.htm
      38. mailto:fraudnet@gao.gov
      39. mailto:JarmonG@gao.gov
      40. mailto:AndersonP1@gao.gov
      41. http://www.gao.gov/cgi-bin/getrpt?GAO-07-888
      42. http://www.gao.gov/cgi-bin/getrpt?GAO-07-888
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