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

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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][email protected] . 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][email protected]

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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[41]www.gao.gov/cgi-bin/getrpt?GAO-07-888 .

To view the full product, including the scope
and methodology, click on the link above.

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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:[email protected]
  34. mailto:[email protected]
  35. http://www.gao.gov/
  36. http://www.gao.gov/
  37. http://www.gao.gov/fraudnet/fraudnet.htm
  38. mailto:[email protected]
  39. mailto:[email protected]
  40. mailto:[email protected]
  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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