Energy Management: Inadequate DOE Monitoring of Contractors' Acquisitions
From Affiliates (Chapter Report, 02/11/94, GAO/RCED-94-83).

The Energy Department's (DOE) monitoring of its main contractors at the
Savannah River Site in South Carolina--Westinghouse and Bechtel--do not
ensure that DOE pays fair and reasonable prices for acquisitions of
goods and services from the contractors' subsidiaries. GAO's review of
Westinghouse and Bechtel acquisitions uncovered inadequate cost controls
and performance problems, unallowable and questionable costs, and
inappropriate contract approvals and contract payments. Poor
Westinghouse management and limited DOE internal controls were
contributing factors. DOE has not complied with its own regulations
requiring competition for acquisitions from affiliates. Furthermore,
Westinghouse and Bechtel have been able to acquire items from its
subsidiaries without the same level of scrutiny that DOE would apply if
the purchases were made from nonaffiliated third parties. Various DOE
studies point out that problems with acquisitions from affiliates exist
elsewhere in the agency. GAO summarized this report in testimony before
Congress; see: Energy Management: Inadequate DOE Monitoring of
Contractors' Acquisitions From Affiliates, by Victor S. Rezendes,
Director of Energy and Science Issues, before the Senate Committee on
Governmental Affairs. GAO/T-RCED-94-128, Mar. 17, 1994 (10 pages).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-94-83
     TITLE:  Energy Management: Inadequate DOE Monitoring of 
             Contractors' Acquisitions From Affiliates
      DATE:  02/11/94
   SUBJECT:  Subcontracts
             Prime contractors
             Nuclear facilities
             Questionable payments
             Irregular procurement practices
             Contract monitoring
             Conflict of interest
             GOCO
             Unfair competition

             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Governmental Affairs, U.S. 
Senate

February 1994

ENERGY MANAGEMENT - INADEQUATE DOE
MONITORING OF CONTRACTORS'
ACQUISITIONS FROM AFFILIATES

GAO/RCED-94-83

Contractors' Acquisitions From Affiliates


Abbreviations
=============================================================== ABBREV

  BSRI - Bechtel Savannah River, Inc. 
  DEAR - Department of Energy Acquisition Regulation
  DOE - Department of Energy
  GAO - General Accounting Office
  M&O - management and operating
  SRS - Savannah River Site
  WSRC - Westinghouse Savannah River Company

Letter
=============================================================== LETTER


B-255787

February 11, 1994

The Honorable John Glenn
Chairman, Committee on
 Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

As you requested, this report presents the results of our work
examining the Department of Energy's (DOE) requirements for
management and operating contractors' acquisitions from affiliated
entities--that is, any divisions, subsidiaries or affiliates of the
contractors or their parent companies.  We are recommending that the
Secretary of Energy (1) provide for increased monitoring of the
contractors' acquisitions from affiliated entities and (2) require
that affiliate acquisitions comply with the DOE Acquisition
Regulation requirement regarding competition and subject such
acquisitions to the same standards that apply to transactions with
nonaffiliated third parties.  We make other recommendations dealing
with internal controls and specific acquisitions. 

As arranged with you office, unless you publicly announce its
contents earlier, we will make no further distribution of this report
until 30 days after the date of this letter.  At that time, we will
send copies to the Secretary of Energy and the Director, Office of
Management and Budget.  We will also make copies available to others
on request. 

This work was performed under the direction of Victor S.  Rezendes,
Director, Energy and Science Issues, who can be reached on (202)
512-3841, if you or your staff have any questions.  Other major
contributors to this report are listed in appendix II. 

Sincerely yours,

Keith O.  Fultz
Assistant Comptroller General


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Department of Energy's (DOE) management and operating (M&O)
contractors are spending millions of dollars acquiring supplies and
services from affiliated entities--that is, any divisions or
subsidiaries of the contractors or their parent companies.  Because
of concerns that M&O contractors and their affiliates may be
obtaining an unfair competitive advantage and that the government may
be paying more than is reasonable or necessary, the Chairman, Senate
Committee on Governmental Affairs, requested that GAO review a large
M&O contractor's acquisitions from affiliates to determine whether
(1) DOE is effectively monitoring the contractor's compliance with
procurement requirements and (2) DOE's requirements for acquisitions
from affiliated entities are adequate to protect the government's
interests.  As agreed with the Chairman's office, GAO's review
focused on the acquisitions of the Westinghouse Savannah River
Company (Westinghouse), DOE's principal M&O contractor at the
Savannah River Site in South Carolina. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

In general, the DOE Acquisition Regulation permits an M&O contractor
to make acquisitions from affiliates as long as certain requirements
are met--for example, that the award is made in accordance with
DOE-approved policies and procedures designed to permit effective
competition.  DOE's contract with Westinghouse allows for the
noncompetitive acquisition of necessary or desirable support from
Westinghouse's affiliates. 

During fiscal years 1990, 1991, and 1992, Westinghouse's acquisitions
totaled over $5 billion.  This amount included nearly $100 million in
acquisitions from Westinghouse's affiliates and the affiliates of a
subcontractor, Bechtel Savannah River, Inc.  (Bechtel).  DOE
considers Westinghouse and Bechtel a single entity for contracting
purposes because Bechtel constitutes an integral part of
Westinghouse's responsibility for the design, construction,
management, operations, and maintenance of the Savannah River Site. 
Bechtel's contract also allows that company to noncompetitively
obtain necessary or desirable support from affiliates. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

DOE's monitoring of Westinghouse's and Bechtel's acquisitions from
affiliates is inadequate to ensure that DOE pays fair and reasonable
prices for such acquisitions.  GAO's analysis of 60 selected
Westinghouse and Bechtel acquisitions, totaling about $48 million
from the sample's overall universe of about $100 million, identified
various problems, such as inadequate cost controls and performance
problems, unallowable and other questionable costs, and inappropriate
contract approvals and contract payments.  Factors contributing to
these problems included weaknesses in Westinghouse's management
systems and DOE's limited internal controls. 

The manner in which DOE, at Savannah River, has chosen to implement
its regulations on acquisitions from affiliates fails to adequately
ensure that the government's interests are protected.  DOE has not
required that acquisitions from affiliates comply with the DOE
Acquisition Regulation stating that competition must be obtained. 
Furthermore, Westinghouse and Bechtel have been able to obtain
support and services from affiliates without undergoing the same
level of scrutiny by DOE that would apply if the purchases were made
from nonaffiliated third parties. 

Various DOE studies show that problems with acquisitions from
affiliates exist elsewhere in DOE.  In fact, DOE headquarters
officials emphasized to GAO in December 1993 that DOE, through
reviews over the last 18 months, has recognized the need to ensure
that adequate procedures are developed for determining whether
acquisitions from affiliates are in the best interests of the
government.  These officials also agreed, however, that the
information presented in GAO's report demonstrates that acquisitions
from affiliates need increased attention. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      DOE'S MONITORING ACTIVITIES
      ARE INADEQUATE
-------------------------------------------------------- Chapter 0:4.1

DOE's monitoring of Westinghouse's and Bechtel's acquisitions from
affiliates has been inadequate.  GAO found examples showing that some
acquisitions were not in the best interests of the government.  For
instance, a Westinghouse affiliate's employees continued to work on a
cost-plus-fixed-fee subcontract after it expired, which resulted in
an unauthorized cost overrun of $1.3 million.  Without obtaining
DOE's approval, Westinghouse transferred the cost overrun to another
subcontract with the same affiliate that had sufficient funds
obligated to cover the overrun.  In another instance, a 1992
Westinghouse internal review reported that adequate control
procedures and management oversight had not been established to
properly plan for, procure, monitor, and pay for Bechtel's
acquisitions from its parent corporation.  Other Westinghouse reviews
of the Bechtel parent corporation's invoices showed substantial
amounts of improper costs.  For example, one review identified
$291,592 in unallowable costs, $51,900 in charges from prior years
that may have already been paid, and about $500,000 in charges that,
according to the review, were prohibited by the Bechtel contract. 
For another affiliate's acquisition, DOE did not know that about
$80,000 of the approved amount had already been billed and paid under
extensions of a separate affiliate acquisition that had not been
approved by either Westinghouse or DOE. 

A number of factors have contributed to the monitoring problems
facing DOE.  They include weaknesses in Westinghouse's management
systems and limitations in DOE's internal controls.  For example,
Westinghouse's system for monitoring procurement awards does not
provide some data needed for DOE's oversight, such as a list of
procurements that require DOE's review and approval.  In addition,
DOE does not have internal controls to verify that Westinghouse
submits acquisitions from affiliates for approval, as required. 
Instead, DOE relies on Westinghouse to comply with the requirement. 
As a result, in fiscal year 1992 DOE did not review and give the
required approval for 26 of Westinghouse's acquisitions from
affiliates, costing $514,240. 

GAO found that many of these same problem areas were highlighted in
DOE's April 1993 review of Westinghouse's and Bechtel's transactions
with affiliates.  In addition, on the basis of other DOE studies, the
procurement problems GAO identified involving affiliates at Savannah
River are not unique.  For example, a fiscal year 1992 DOE review of
Kaiser Engineers Hanford Company concluded that the company relies on
affiliates to perform work without making them aware of applicable
contract terms and conditions, allows the affiliates to set prices
and rates without obtaining documentation to support their
reasonableness, and does not review invoices for unallowable costs
before making payment. 


      DOE'S IMPLEMENTATION OF
      REGULATIONS WEAKENS
      OVERSIGHT
-------------------------------------------------------- Chapter 0:4.2

The DOE Acquisition Regulation allows M&O contractors to make
noncompetitive acquisitions from their affiliates in limited
circumstances.  Competition must be obtained, except for purchases of
technical services from affiliates that have special expertise that
is documented.  Under DOE's contract with Westinghouse and
Westinghouse's contract with Bechtel, each contractor may obtain
services for "necessary or desirable support" from affiliates.  DOE
officials at Savannah River have interpreted this provision as
allowing contractors to obtain noncompetitively a broad range of
services, such as training and legislative monitoring, without having
to document that the affiliate has special expertise.  This
interpretation, which has effectively eliminated the DOE Acquisition
Regulation's requirements for acquisitions from affiliates at
Savannah River, seems contrary to the regulation's stated purpose of
strictly controlling such acquisitions. 

Westinghouse and Bechtel have also been able to obtain support from
affiliates without the same level of DOE documentation that would
apply if the purchases were made from nonaffiliated third parties. 
These transactions have not been subject to the same DOE
requirements, such as organizational conflict-of-interest disclosure
statements and detailed cost estimates, that generally apply to
purchases from third parties.  When it lacks this kind of
information, DOE is relying on both contractors to determine that
their acquisitions from affiliates are in the best interests of the
government.  As illustrated by the problems GAO identified, this has
not always been the case. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

To ensure that acquisitions made from affiliated entities of
Westinghouse and Bechtel at Savannah River are in the best interests
of the federal government, GAO recommends that the Secretary of
Energy (1) provide for increased monitoring of the contractors'
acquisitions from affiliated entities and (2) require that such
acquisitions comply with the DOE Acquisition Regulation stating that
competition must be obtained and subject such acquisitions to the
same standards that apply to transactions with nonaffiliated third
parties.  GAO makes other recommendations in chapter 2 dealing with
internal controls and specific acquisitions. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO discussed the facts of this report with DOE officials at both
Savannah River and DOE headquarters, including the Chief of the M&O
Contractor Oversight Branch and the Director of the Office of
Contractor Management and Administration, respectively.  These
officials generally agreed with the facts presented and suggested
changes for clarification and updated information, including some
corrective actions that were taken, which GAO incorporated where
appropriate.  In addition, the DOE headquarters officials stressed
the extent of DOE's reviews over the last 18 months that examined
contractors' acquisitions from affiliates.  As requested, GAO did not
obtain written agency comments on a draft of this report. 


INTRODUCTION
============================================================ Chapter 1


   BACKGROUND
---------------------------------------------------------- Chapter 1:1

The Department of Energy's (DOE) Savannah River Site (SRS) is a
government-owned, contractor-operated nuclear weapons production
facility in South Carolina.  It is a large site--about 300 square
miles--that has produced nuclear weapons materials since the
mid-1950s.  Three management and operating (M&O) contractors--the
Westinghouse Savannah River Company (WSRC), Wackenhut Services, Inc.,
and the University of Georgia--are responsible for the site's
production-related activities, physical security, and nonproduction
environmental activities, respectively.  Their acquisitions of
supplies and services with appropriated funds for the use of the
federal government totaled about $5.4 billion during fiscal years
1990, 1991, and 1992.  Wackenhut Services' and the University of
Georgia's acquisitions comprised less than $20 million of the total. 

M&O contractors are allowed under certain conditions to acquire
support and services from affiliated entities (any divisions,
subsidiaries, or affiliates of the contractors or their parent
companies).  For example, nearly a combined $100 million in support
and services was acquired from affiliated entities of WSRC and
affiliated entities of Bechtel Savannah River, Inc.  (BSRI). 
Although BSRI is a subcontractor of WSRC, both agreed that DOE
considers them as a single entity for contracting purposes because
BSRI constitutes an integral part of WSRC's responsibility for the
design, construction, management, operations, and maintenance of SRS. 
Most of the acquisitions from WSRC's and BSRI's affiliates were
noncompetitive cost-plus-fixed-fee subcontracts and intercompany
transfers.\1

DOE follows specific regulations in administering M&O contracts. 
These regulations are referred to as the Federal Acquisition
Regulation and the DOE Acquisition Regulation (DEAR).  The DEAR
provides requirements for DOE's oversight of M&O contractors'
acquisitions from affiliates. 

The Federal Acquisition Regulation and the DEAR permit WSRC to make
acquisitions by contract with appropriated funds for the use of the
federal government from affiliates through purchase or lease.  In
general, DOE's regulations permit an M&O contractor to purchase from
an affiliate as long as (1) the M&O contractor's purchasing function
is independent of the proposed contractor-affiliated source, (2) the
same terms and conditions would apply if the purchase were from a
third party, (3) the award is made in accordance with DOE-approved
policies and procedures designed to permit effective competition, and
(4) the award is legally enforceable.  When technical services are
purchased from an affiliate that has special expertise, and that
expertise is documented, the DEAR does not require competition. 
These regulations are made specifically applicable to WSRC by
provisions in its contract with DOE. 

Additionally, DOE incorporated a nonstandard contract clause--a
clause in the contract that allows DOE to deviate from the standards
contained in the DOE regulations--in WSRC's contract.  This clause is
interpreted as allowing WSRC to noncompetitively obtain necessary or
desirable support at cost from affiliates through intercompany
transfers.  Like WSRC's contract, BSRI's contract contains a
nonstandard clause, which is interpreted as allowing it to
noncompetitively obtain necessary or desirable support at cost from
affiliates through intercompany transfers.  Under the DEAR, DOE can
authorize the use of nonstandard contract clauses. 

Subcontracts are awarded and administered through purchasing systems
established by individual M&O contractors and approved by DOE.  DOE
oversees subcontracts awarded by its M&O contractors, primarily
through reviews of contractors' purchasing systems.  DOE field
offices generally review these systems once every 3 years.  On the
basis of the review results, the field offices generally approve
contractors' purchasing systems, with recommendations to correct
identified problems, and set specified dollar thresholds above which
contractors must obtain DOE's approval of subcontracts in advance. 
For example, in fiscal year 1992 about 30 percent of the purchasing
systems that were reviewed were approved, and in fiscal year 1993
about 81 percent of the purchasing systems that were reviewed
received conditional approval.\2 In the years between these reviews,
DOE field offices are to provide oversight--termed
"surveillance"--that includes monitoring contractors' responses to
review recommendations, approving changes in the contractors'
purchasing systems, and reviewing subcontracts in excess of the
established dollar thresholds. 

As required by 42 U.S.C.  section 5918(a), DOE has established
policies and procedures for identifying and avoiding or mitigating
organizational conflicts-of-interests before contracts and
subcontracts are awarded.  DOE's regulations define "conflict of
interest" as a situation in which a potential contractor has
interests that (1) may diminish the potential contractor's capacity
to give impartial, technically sound, objective assistance and advice
or (2) may result in the contractor's having an unfair competitive
advantage over others competing for the contract.  DOE's regulations
emphasize that certain procurement categories are particularly
susceptible to conflicts of interest.  These categories include
contracts for evaluation services, technical consulting, management
support, and professional services.  DOE requires that subcontractors
at all tiers,\3 before they are awarded a contract, submit either (1)
a certification that they know of no relevant information bearing on
possible conflicts of interest or (2) information disclosing relevant
possible conflicts.  A DOE official must review this information to
determine whether a possible conflict of interest exists and, if so,
decide on the proper course of action.  Possible actions include
disqualifying the offeror from award or avoiding such conflicts by
the inclusion of appropriate conditions in the resulting contract. 


--------------------
\1 "Intercompany transfer," a term used by SRS' procurement
officials, is synonymous with the term "interorganizational
transfer," which is defined by DOE headquarters as the complete
agreement between the procuring contractor and an interorganizational
entity--an affiliate, subsidiary, or division of the procuring
contractor--for producing the item or providing the work effort. 

\2 Conditional system approvals are for 6 months and allow one
6-month conditional extension. 

\3 The term "tiers" refers to the fact that work under a subcontract
may be subcontracted out and that the subcontracted work may be
further subcontracted out, and so on. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:2

Concerned that M&O contractors and their affiliates may be obtaining
an unfair competitive advantage under sole-source contract awards and
that the government may be paying more than is reasonable or
necessary, the Chairman, Senate Committee on Governmental Affairs,
requested that we review a large M&O contractor's acquisitions from
affiliates.  In response to this request and subsequent discussions
with the Chairman's office, we specifically examined whether (1) DOE
is effectively monitoring M&O contractors' compliance with
procurement requirements and (2) DOE's requirements, including
nonstandard contract terms, for M&O contractors' acquisitions from
affiliated entities, are adequate to protect the government's
interests.  We also agreed with the Chairman's office that our review
would focus on the acquisitions of WSRC, DOE's principal M&O
contractor at SRS. 

We conducted this review between July 1992 and December 1993, in
accordance with generally accepted government auditing standards.  To
develop the information on the M&O contractor's acquisitions from
affiliates, we performed the following: 

  Reviewed the M&O contractor's acquisitions at SRS. 

  Reviewed DOE's controls, monitoring, and reports on related-parties
     transactions.\4

  Analyzed previously identified monitoring deficiencies and
     procurement problems for needed improvements in regulations,
     monitoring requirements, and contract clauses. 

  Examined efforts by the M&O contractor and DOE to increase
     competitive procurements. 

  Reviewed reports issued by various DOE field offices that examined
     M&O contractors' acquisitions from affiliates, including
     coordinating and discussing our review with officials of DOE's
     Financial Management Review and Evaluation Division at SRS,
     since this division was concurrently performing a review of
     WSRC's related-parties transactions as part of its oversight of
     WSRC's financial management activities. 

  Interviewed DOE, WSRC, BSRI, and Office of Inspector General
     officials at SRS and financial management officials at DOE
     headquarters.  We also interviewed Westinghouse's Director of
     Government Business Development in Washington, D.C., and
     reviewed the files that the Director maintained in connection
     with one of the WSRC acquisitions we selected for review. 

In carrying out our work, we judgmentally selected for review a
sample of 60 acquisitions made by either WSRC or BSRI that had a
total dollar value of about $48 million.  Because our sample was
judgmental, the results cannot be generalized.  We selected the
sample from listings of acquisitions and modifications that DOE
reviewed after October 1, 1989, until September 30, 1992, as well as
principally from listings of acquisitions made by WSRC and BSRI from
October 1, 1989, through September 30, 1992.  There were a few
instances where our sample universe included acquisitions from fiscal
year 1989.  The universe from which we selected our sample consisted
of 311 WSRC acquisitions totaling about $58 million and 430 BSRI
acquisitions totaling about $42 million.  We used our sample to test
DOE's compliance with monitoring and oversight requirements and to
identify any effects resulting from monitoring deficiencies and
procurement problems.  The sample included all major types of
acquisitions, including noncompetitive intercompany transfers and
cost-plus-fixed-fee subcontracts, as shown in table 1.1. 



                          Table 1.1
           
           Type, Number, and Cost of WSRC and BSRI
                Acquisitions That GAO Selected

                                   Number of
Type of acquisition             acquisitions      Total cost
----------------------------  --------------  ==============
WSRC's noncompetitive                     26     $11,272,563
 intercompany transfers
WSRC's noncompetitive cost-                9      22,260,875
 plus-fixed-fee subcontracts
WSRC's noncompetitive                      4       1,845,299
 memorandum purchase orders
WSRC's competitive                         7       1,617,581
 subcontracts
WSRC's sole-source                         6       3,270,655
 subcontracts
BSRI's noncompetitive                      8       8,102,054
 intercompany transfers
============================================================
Total                                     60     $48,369,027
------------------------------------------------------------
Except for some data available in Washington, D.C., we did not verify
invoices from WSRC's and BSRI's parent corporations (Westinghouse
Electric Corporation in Pittsburgh, Pennsylvania, and Bechtel
National, Inc., in San Francisco, California, respectively).  We also
relied on information in WSRC audits that identified significant
problems with support for the invoices from affiliated entities. 
Additionally, our review of M&O contractors at other sites was
limited to DOE reports we obtained on related-party transactions. 


--------------------
\4 DOE defines related-party transactions as transactions between a
contractor and its parent; a contractor and other subsidiaries of a
common parent; a contractor and trust for the benefit of employees,
such as pension and profit-sharing trusts that are managed by or
under the trusteeship of the contractor's management; a contractor
and its principal owners, management, or members of their immediate
families; and affiliates. 


DOE'S MONITORING OF WSRC'S AND
BSRI'S ACQUISITIONS FROM
AFFILIATES IS INADEQUATE
============================================================ Chapter 2

DOE's monitoring of WSRC's and BSRI's acquisitions from affiliates
has been inadequate.  Our analysis of 60 selected WSRC and BSRI
acquisitions totaling about $48 million identified various problems
showing that some acquisitions were not in the best interests of the
government.  For example, DOE had not approved the transfer of a cost
overrun from one affiliate subcontract to another subcontract,
affiliates were charging thousands of dollars in unallowable costs,
and DOE was unaware of costs being incurred under acquisitions not
approved by DOE or WSRC.  As a result, DOE does not know whether it
paid fair and reasonable prices for some acquisitions from WSRC's and
BSRI's affiliates.  Weaknesses in WSRC's management systems and DOE's
limited internal controls were factors contributing to these
problems. 

Other factors have adversely affected DOE's ability to adequately
protect the government's interests when obtaining goods and services
from affiliates.  The manner in which DOE has chosen to implement its
regulations on acquisitions from affiliates at Savannah River is one
such factor.  In this instance, DOE has not required such
acquisitions to comply with the DEAR requirement regarding
competition.  Furthermore, WSRC and BSRI have been able to obtain
support from affiliates without the same level of DOE scrutiny that
would apply if the purchases were made from third parties. 


   DOE'S MONITORING EFFORTS AT SRS
   ARE LAX, AND PROBLEMS WITH
   AFFILIATES EXIST ELSEWHERE IN
   DOE
---------------------------------------------------------- Chapter 2:1

Not only has DOE's monitoring of WSRC's and BSRI's acquisitions from
affiliates been lax, problems with such acquisitions exist elsewhere
in DOE.  On the basis of our analysis of selected acquisitions, we
found various problems involving millions of dollars in acquisitions. 
For example, DOE'S monitoring did not minimize cost, ensure receipt
of acceptable goods or services, or maximize competition.  Factors
contributing to these problems include weaknesses in WSRC's
management systems and limitations in DOE's internal controls.  In
addition to our identification of monitoring problems at SRS, various
DOE studies show that affiliate acquisition problems exist elsewhere
in DOE.  Moreover, DOE headquarters officials emphasized to us in
December 1993 that DOE, through reviews over the last 18 months, has
recognized the need to ensure that adequate procedures are developed
for determining whether acquisitions from affiliates are in the best
interests of the government.  These officials also agreed, however,
that our work shows that acquisitions from affiliates need increased
attention. 


      NUMEROUS DOE MONITORING
      DEFICIENCIES AND PROCUREMENT
      PROBLEMS EXIST AT SRS
-------------------------------------------------------- Chapter 2:1.1

By using our judgmental sample of WSRC's and BSRI's acquisitions from
affiliates, we identified a number of DOE monitoring deficiencies as
well as several procurement problems.  These deficiencies and
problems illustrate the consequences of DOE's inadequate monitoring. 
To simplify our discussion, we have categorized these deficiencies
and problems into the following three categories: 

  inadequate cost controls and performance problems,

  unallowable and other questionable costs, and

  inappropriate contract approval and contract payments. 

In the remainder of this section, we discuss several examples to
highlight the major problem areas we found and to illustrate the
consequences of inadequate monitoring.  (App.  I includes a detailed
discussion of each example plus some others to provide further
information on the types of problems we uncovered and the complex
issues involved.)


         INADEQUATE COST CONTROLS
         AND PERFORMANCE PROBLEMS
------------------------------------------------------ Chapter 2:1.1.1

This example involves two WSRC noncompetitive, cost-plus-fixed-fee
subcontracts that totaled about $12.1 million when awarded for
reactor restart support from the Westinghouse Nuclear Services
Division.  WSRC's contract files showed that employees continued to
work on one of the cost-plus-fixed-fee subcontracts after it expired,
which resulted in an unauthorized cost overrun of $1.3 million. 
Without obtaining DOE's required approval, WSRC transferred the cost
overrun to another Westinghouse Nuclear Services Division
cost-plus-fixed-fee subcontract that had sufficient funds obligated
to cover the cost overrun.  Furthermore, according to the contract
files, it appears that some of the same people worked under both
contracts, although there is no clear record of how this was handled
in accounting for the costs charged to both contracts. 

Another example involves a cost-plus-fixed-fee subcontract for
support to WSRC from Westinghouse Environmental and Geotechnical
Services.  According to the Subcontract Technical Representative's
subcontract closeout report, WSRC terminated the subcontract due to
continual problems with insufficient cost control (inadequate cost
and invoice supporting documentation) and cost overruns by
Westinghouse Environmental and Geotechnical Services.  Although
insufficient cost control and overruns were given as the reason for
terminating the subcontract, the subcontract experienced continual
performance problems and performance of work after the contracted
period of performance.  For example, performance problems included
products that were late, did not meet contractual requirements, and
were of poor quality.  Also, Westinghouse Environmental and
Geotechnical Services' lack of oversight contributed to a serious
power accident which occurred while it supervised one of two drilling
subcontractors during soil investigations at SRS' K-reactor.  Twice
in a matter of hours, the subcontractors drilled into buried power
cables.  Westinghouse Environmental and Geotechnical Services
supervised the first subcontractor that drilled into a cable.  If the
Westinghouse supervisor had ensured that all drilling was stopped
after the subcontractor under his supervision hit the first cable,
costs may have been substantially reduced--the estimated cost to
repair that cable was $29,000.  Although the cost to repair both
cables was originally estimated at $210,000, that cost subsequently
increased, according to a DOE reactor official at SRS, to about
$815,000 because WSRC did not prevent moisture intrusion, which
caused more damage. 

A third example involves 100 canisters manufactured by a WSRC
affiliate to hold vitrified high-level radioactive waste.  WSRC
managed the procurement, including inspecting the canisters received
at SRS, and Bechtel National participated in developing
specifications for the canisters and performed the inspections at the
affiliate's plant.  In August 1988, just before the transition of the
M&O contract from the former M&O contractor to WSRC, the former
contractor made a split award to a Westinghouse Electric Corporation
affiliate and a non-Westinghouse Electric Corporation affiliate to
manufacture 100 canisters each for SRS' Defense Waste Processing
Facility.  During the transition period, deficiencies were identified
in specifications for the canisters developed by the former M&O
contractor that necessitated the revision of the specifications.  The
revision, made by Bechtel National, Inc., in December 1988,
contributed to the scrapping of 23 manufactured canisters, plus the
materials for manufacturing the remaining canisters, and increased
the cost of the two contracts from $1,661,018 to $2,288,140.  The
Westinghouse Electric Corporation's affiliate delivered its 100
canisters by the end of 1990, and the other contractor delivered 10,
but none of the 110 canisters was acceptable.  WSRC subsequently
released Bechtel National from the effort to resolve the canister
problems and terminated the nonaffiliated contractor's contract due
to changing requirements.  WSRC plans to use all of the canisters,
except one damaged by a fall from a truck, for testing; however, some
of the testing includes a radioactive substance, and none of the
canisters has been approved for tests involving radioactive
substances.  WSRC paid its affiliate $1,276,708--the full contract
amount plus a fee, and WSRC paid the nonaffiliated contractor
$565,765 for terminating the contract after receiving the first 10
canisters. 


         UNALLOWABLE AND OTHER
         QUESTIONABLE COSTS
------------------------------------------------------ Chapter 2:1.1.2

This example involves WSRC's and DOE's monitoring of several of
BSRI's noncompetitive intercompany transfers.  Before fiscal year
1992, BSRI acquired about $35 million in services directly from its
parent company, Bechtel National, Inc., without purchase orders and
did not document that the services were received or that they were
acceptable.  A WSRC internal review in 1992 reported that adequate
control procedures and management oversight had not been established
to properly plan for, procure, monitor, and pay for BSRI's
acquisitions from Bechtel National. 

A subsequent review by WSRC's Subcontract Accounting Branch of
selected fiscal year 1992 Bechtel National invoices totaling
$3,469,000 identified $291,592 in unallowable costs, $51,900 in
charges from prior years that may have already been paid, and about
$500,000 in charges for subcontracting and consulting services that
were prohibited by the BSRI contract.  Additionally, WSRC's
Subcontract Accounting Branch withheld payment on a $67,024 cost
overrun and questioned $945,930 of charges in excess of the amounts
authorized for reactor restart geotechnical services.  Furthermore,
our limited review of selected intercompany transfers included one
transfer that had subcontracting costs of about $426,000 that WSRC
viewed as being prohibited by the BSRI contract. 

As a result of the problems with BSRI's intercompany transfers, WSRC
and DOE have initiated various corrective actions.  (These are
discussed in greater detail in app.  I.) For example, in August 1993
DOE established that all of BSRI's intercompany transfers, regardless
of dollar value, are to be submitted to DOE at SRS for approval. 


         INAPPROPRIATE CONTRACT
         APPROVAL AND CONTRACT
         PAYMENTS
------------------------------------------------------ Chapter 2:1.1.3

This example involves two of WSRC's intercompany transfers--the first
for $336,000 and a second follow-on intercompany transfer for
$625,000--to carry out legislative monitoring and liaison activities
at DOE headquarters over a period of several years.  On the basis of
our review of WSRC's and DOE's records and discussions with various
officials, we found the following: 

  Extensions of the first intercompany transfer, which overlapped the
     second intercompany transfer for 17 months, were authorized by
     the Westinghouse Electric Corporation and were not approved by
     either WSRC or DOE. 

  DOE's and WSRC's procurement officials did not have knowledge of
     payments made under the overlapping extensions approved by
     Westinghouse Electric Corporation and charged to the WSRC
     contract. 

  WSRC did not have detailed cost estimates to support the $625,000
     requested for the second intercompany transfer; yet DOE
     retroactively approved it, on a conditional basis, in August
     1992 back to February 1990, without obtaining information on the
     costs incurred before August 1992.  DOE did not know that only
     about $104,000 had been incurred as of August 1992, or that
     about $80,000 of this amount had been billed and paid under the
     overlapping extensions of the first intercompany transfer that
     had not been approved by DOE or WSRC. 

As a result of the various problems we identified in this example,
WSRC and DOE have initiated a number of corrective actions.  (These
are discussed in greater detail in app.I.)


      SEVERAL FACTORS CONTRIBUTED
      TO MONITORING PROBLEMS
-------------------------------------------------------- Chapter 2:1.2

A number of factors have contributed to the monitoring deficiencies
and procurement problems facing DOE at SRS.  They include weaknesses
in WSRC's management systems and internal reviews and limitations in
DOE's internal controls.  In addition, some DOE officials at SRS view
staffing constraints as limiting monitoring efforts. 


         WSRC'S MANAGEMENT SYSTEMS
         AND INTERNAL REVIEWS
------------------------------------------------------ Chapter 2:1.2.1

We noted several problem areas related to WSRC's management systems
and internal reviews.  For example, WSRC's system for monitoring
procurements does not provide some data needed by DOE, such as a list
of procurements, broken out by dollar threshold, that required DOE's
review and approval.  Also, some data within the WSRC procurement
system are missing or inaccurate.  According to DOE, improvements to
the procurement data base are being made, but the system may have to
be replaced. 

WSRC also has not implemented systems for monitoring contracts under
its subcontractor technical representative program or its finance
office's audits of invoices for improper payments.  For example, the
technical representative program was implemented in 1991 to provide
for adequate administration, technical follow-up, and financial
control of subcontracts.  As of June 1993, 744 program
representatives were monitoring 1,793 subcontracts.  However, WSRC
does not generate a program monitoring report that provides such data
as administrative difficulties due to heavy workloads; contract
weaknesses; contractors' responsiveness to the program
representatives' requests; or problems with costs, schedules, and
performance.  WSRC's March 1993 internal review of the program
indicated a high level of deficiencies in program compliance that, in
part, was attributed to a significant lack of management overview and
involvement as well as to deficient organizational controls.  The
review concluded that the program's objectives were not being
adequately achieved and that adequate levels of management knowledge
of and support for the program did not exist. 

Also, some of WSRC's internal reviews may not receive timely
attention from either WSRC or DOE.  For example, WSRC's February 1992
review of two affiliates' contracts for services performed by the
same expert reported the following about the two contracts: 

  Although both had almost identical scopes of work, one was
     fee-bearing while the other was non-fee-bearing. 

  The periods of performance overlapped for 11 months. 

  Both had broad scopes of work, vague deliverables, and no
     milestones. 

  The subcontractors' time and performance had not been adequately
     monitored. 

At the time we received the report in November 1992, WSRC had not
received an adequate response to the report from WSRC's Procurement
Department or provided a copy of the report to DOE, even though it
had been issued in February 1992.  On July 30, 1993, a WSRC official
provided us with a summary of WSRC's conclusions subsequent to
reviewing responses to the February 1992 report.  One major
conclusion was that more specific scopes of work were provided in
response to the report as well as a list of the deliverables for each
contract. 


         DOE'S INTERNAL CONTROLS
------------------------------------------------------ Chapter 2:1.2.2

In addition to problems associated with WSRC's management systems and
internal reviews, DOE has not implemented other needed internal
controls to ensure that M&O contractors identify acquisitions from
their affiliates and submit them to DOE for approval.  For example,
DOE does not verify that WSRC submits such acquisitions for approval,
as required.  Instead, DOE relies on WSRC to comply with the
requirement.  As a result, in fiscal year 1992 DOE did not review 26
of WSRC's acquisitions from affiliates that required DOE approval;
these acquisitions cost $514,240. 

Moreover, DOE does not require the identification of all acquisitions
from affiliates.  WSRC identifies acquisitions from only those
affiliates in its first tier of subcontractors.  WSRC does not
monitor its second or lower-tier acquisitions, and DOE does not
require its M&O contractors to monitor those lower-tier acquisitions
to identify acquisitions from affiliates. 

Lower-tier acquisitions not monitored total millions of dollars.  For
example, we reviewed WSRC's small business subcontracting plans and
reports of subcontracted amounts for 15 subcontracts awarded to large
businesses in fiscal year 1992.  The 15 subcontracts totaled
$47,532,250; of that amount, $3,666,978 was reportedly subcontracted
to large businesses and $1,197,744 to small businesses.  WSRC did not
identify who received the subcontracts.  Also, additional lower-tier
acquisitions awarded under the 15 monitored subcontracts, as well as
those under the other subcontracts awarded by WSRC, are not
identified or tabulated.  As a result, neither the volume of
lower-tier acquisitions nor of lower-tier acquisitions from
affiliates, if any, is known.  According to DOE's contracting
officials at SRS, no such information is required, and they did not
believe a requirement was needed because they said about 80 percent
of WSRC's acquisitions are competitive. 


         DOE'S STAFFING ISSUES
------------------------------------------------------ Chapter 2:1.2.3

According to some DOE officials at SRS, staffing constraints have
also limited DOE's monitoring of M&O contractors' acquisitions from
affiliates.  DOE adjusted dollar thresholds to reduce the number of
acquisitions requiring DOE's review and approval so that the staff
could perform surveillance reviews.  The number of procurement
actions reviewed at SRS decreased from 396 in 1991 to 267 in 1992. 
Furthermore, DOE completed only one of the nine surveillance reviews
scheduled for 1992.  In addition, in February 1993 DOE at SRS
reported that (1) 27 of 33 recommendations contained in a June 1992
DOE headquarters-conducted review of program management assistance
had not been closed out because of staffing constraints and (2) the
remaining recommendations would be prioritized to focus limited
resources on the most important issues.  Similarly, as of June 1993
DOE still had not closed out 20 of the 30 recommendations made in its
April 1991 review of WSRC's procurement system. 

DOE's Contracting Division at SRS includes an M&O Contractor
Oversight Branch that is responsible for overseeing the three M&O
contractors at SRS.  At the end of June 1993, this branch was staffed
with a branch chief, three contract specialists, a procurement
specialist, and a secretarial co-op.  According to the Branch Chief,
oversight of the M&O contractors has been essentially limited to
review and approval of acquisitions exceeding dollar thresholds
requiring DOE approval. 

DOE's Director of Contractor Management and Administration informed
us in December 1993 that in his view the staffing issue at SRS
stemmed more from the staff's not having the needed level of
expertise than from insufficient staffing. 


      RECENT DOE EVALUATION FOUND
      SIMILAR AFFILIATE PROBLEMS
      AT SRS
-------------------------------------------------------- Chapter 2:1.3

In April 1993, DOE's Financial Management Review and Evaluation
Division at SRS issued the results of its first review of WSRC's and
BSRI's related-party transactions.  This review highlighted many of
the same problems we found.  For example, according to the report,
(1) WSRC did not obtain DOE's approval for all changes in the
statement of work for contracts and orders placed with the
Westinghouse Electric Corporation and its affiliates, (2) DOE's
procedures for review and approval of WSRC's procurement actions with
Westinghouse Electric Corporation required strengthening, and (3)
noncompetitive intercompany transfers with Bechtel National,
Inc.--the parent company of BSRI--were not submitted to DOE for
approval. 

Although several recommendations were made to correct the problems
identified, DOE did not ensure timely implementation of the
recommendations.  Actions on the recommendations have not been
tracked, and no plans exist for following up on the recommendations
until the next regularly scheduled related-party transaction review,
which is currently planned for August 1994. 


      PROBLEMS WITH ACQUISITIONS
      FROM AFFILIATES EXIST AT
      OTHER DOE LOCATIONS
-------------------------------------------------------- Chapter 2:1.4

On the basis of DOE reports prepared on other DOE field locations,
the problems with acquisitions from affiliates that we identified at
SRS do not appear to be unique.  For example, during a December 1993
meeting at DOE headquarters, DOE officials, including the Director of
the Office of Contractor Management and Administration, were not
surprised by the intercompany transfer problems we found at SRS. 
These officials stated that DOE, through its reviews of contractors'
purchasing systems over the last 18 months, has recognized the need
to ensure that adequate procedures are developed for determining
whether awards to interorganizational entities are in the best
interests of the government; that effective cost analyses, technical
evaluations, and negotiations are conducted and documented; and that
payment procedures are structured to ensure that interorganizational
entities do not receive unreasonable interim payments.  To illustrate
the types of problems DOE has found during its reviews, these
officials provided us with an excerpt from DOE's October 1993
Contractor Purchasing System Review and Contractor Personal Property
System Review Annual Observations Report and Statistical
Summary--October 1992-September 1993 that echoed many of the problems
we identified at SRS.  According to the report: 

  If contractor-controlled sources had the capabilities to perform
     the work, they were selected, without satisfying the requirement
     to maximize the government's best interests. 

  Requisitions for intercompany transfer authorizations generally
     contained broad scopes of work that did not permit analyses of
     the factors of quality, cost, and time. 

  Proposals provided no justification for the hours proposed and did
     not relate the proposed hours to the specifics of the scope of
     work. 

  Proposed costs were not effectively evaluated.  Technical
     evaluations of cost proposals took no exceptions to any of the
     proposed efforts. 

These officials also stated that the problems we identified at SRS
demonstrate that acquisitions from affiliates need increased
attention. 

In addition, DOE sites that issued related-party transaction reports
in fiscal year 1992 reported various problems, including questionable
support for invoices, lack of cost analyses to determine price
reasonableness, and inappropriate temporary duty travel assignments
and costs.  For example, the review of Raytheon Services Nevada found
that as of February 1992, 14 employees were on extended temporary
duty travel; 8 of them had been in this status at Yucca Mountain
since 1987 and 2 at Lawrence Livermore National Laboratory since
1988.  According to the report, these employees were inappropriately
receiving per diem at Yucca Mountain, even though they had in fact
relocated to Yucca Mountain.  Their actual status was evidenced by
such actions as purchasing homes and relocating their families. 

A separate review of the Pacific Northwest Laboratory identified
problems with the adequacy of documentation of expenses and support
for invoiced costs.  According to the report, few receipts or cost
break downs were available, and it was not possible to determine what
the laboratory "is being charged for, if the amounts being charged
are at the negotiated rates, if the charges include fee or other
unallowable costs, or if travel is within the Federal Travel
Regulation." A review of Kaiser Engineers Hanford Company concluded
that the company relies on affiliates to perform work without making
them aware of applicable contract terms and conditions, selects
affiliates without providing source justification, allows the
affiliates to set prices and rates without obtaining documentation to
support the reasonableness of those rates, and does not review
invoices for unallowable costs before making payment. 


   DOE'S IMPLEMENTATION OF
   REGULATIONS WEAKENS OVERSIGHT
   AT SRS
---------------------------------------------------------- Chapter 2:2

The manner in which DOE, at SRS, has chosen to implement its
regulations on acquisitions from affiliates has also adversely
affected DOE's ability to adequately ensure that the government's
interests are protected.  DOE has not required acquisitions from
affiliates to comply with the DEAR's requirement regarding
competition.  Furthermore, WSRC and BSRI have been able to obtain
support from affiliates without undergoing the same level of DOE
scrutiny that would apply if the purchase were made from a
nonaffiliated third party.  Even where DOE, at SRS, recognized that
its affiliate acquisition regulations were applicable, DOE did not
fully implement the requirements. 


      DOE'S INTERPRETATION OF
      REGULATIONS CAUSES
      DIFFICULTIES
-------------------------------------------------------- Chapter 2:2.1

The DEAR allows M&O contractors to make noncompetitive acquisitions
from their affiliates in limited circumstances.  Competition must be
obtained, except for the purchases of technical services from
affiliates that have special expertise and that expertise is
documented.  Under DOE's contract with WSRC and WSRC's contract with
BSRI, each contractor may obtain services for "necessary or desirable
support" from affiliates.  DOE officials at SRS have interpreted this
provision as allowing contractors to obtain noncompetitively a broad
range of services.  For example, services such as training and
legislative monitoring were obtained without documentation that the
affiliates had special expertise.  This interpretation, which has
effectively eliminated the DEAR's restrictions\1 on acquisitions from
affiliates at SRS, appears to be contrary to the regulation's stated
purpose of strictly controlling such acquisitions. 

In general, DOE's regulations permit an M&O contractor to purchase
from an affiliate so long as (1) the M&O contractor's purchasing
function is independent of the proposed contractor-affiliated source,
(2) the same terms and conditions would apply if the purchase were
from a third party, (3) the award is made in accordance with
DOE-approved policies and procedures designed to permit effective
competition, and (4) the award is legally enforceable.  In purchasing
technical services, when the affiliate has special expertise and that
expertise is documented, the DEAR does not require competition. 
These regulations are made specifically applicable to WSRC by
provisions in its contract with DOE. 

In promulgating its rules governing M&O contractors' activities, DOE
recognized the importance of purchases from affiliates.  However, the
June 27, 1988, preamble to DOE's final rulemaking on purchasing
regulations for M&O contractors also states that purchases from
affiliates must be controlled.  The preamble states that

     These types of purchases, because of the opportunity for
     favoritism, must be no less regulated than a normal competitive
     transaction.  In fact, we believe that such purchases must be
     more strictly regulated.\2

DOE's contract with WSRC and WSRC's contract with BSRI do not
distinguish between purchases from affiliates or intercompany
transfers.  The contracts state that WSRC and BSRI may obtain
necessary or desirable support from affiliates.  This language has
been interpreted by DOE officials at SRS to mean that intercompany
transfers need not be competitive, nor meet the same terms and
conditions that would apply if the same goods or services were
obtained from a third party.  According to these officials, transfers
at cost are not purchases and should be referred to as "intercompany
transfers," but these officials believed that the DEAR does not
clearly differentiate between those situations in which purchase
criteria do and do not apply for acquisitions at cost.  As a result,
these officials at SRS asked DOE headquarters for clarification of
the rules on noncompetitive acquisitions from affiliates.  These
officials added that DOE headquarters was considering clarifying
these points. 

During a December 1993 meeting with DOE headquarters officials,
including the Director of the Office of Contractor Management and
Administration, we were informed that DOE headquarters does not see
the same type of clarification problem expressed by the SRS
officials.  These DOE headquarters officials again cited DOE's
October 1993 Contractor Purchasing System Review and Contractor
Personal Property System Review Annual Observations Report and
Statistical Summary--October 1992-September 1993 as showing that
contractors should conduct make-or-buy decisions to ensure that both
interorganizational entities and potential vendors receive fair
treatment during such decisions and that the government's interests
are protected for both quality of product and reasonableness of
price.  Furthermore, purchasing activities should also have an
effective management system to ensure that intercompany transfers are
operating in a cost-effective manner and provide satisfactory
performance in accordance with the terms of the contract. 

The interpretation of existing regulations by DOE officials at SRS
effectively eliminates the DEAR's requirements for affiliate
purchases and seems contrary to the stated purpose of the regulation
to strictly control intercompany transfers.  As a result, WSRC and
BSRI have been able to obtain support from affiliates without the
same level of DOE documentation that would apply if the purchase were
made from a third party.  The noncompetitive transfers have covered a
wide range of services, such as training, public relations, legal
services, legislative monitoring, development and implementation of
systems, total quality management, flow analysis of a cafeteria, and
soil investigations.  Justifications for the noncompetitive
intercompany transfers included the following reasons:  (1) the use
of affiliates enhances efficiency and productivity; (2) the need to
work with proprietary information; and (3) the need to maintain
corporate consistency with or knowledge of affiliates' policies,
procedures, and practices.  Had these transfers been made pursuant to
the DEAR's provisions related to purchases, they would have been
subject to a greater level of DOE documentation, including
requirements for sole-source justifications as well as organizational
conflict-of-interest disclosure statements. 

To the extent that WSRC and BSRI use intercompany transfers to obtain
services and property that could have been procured competitively,
these transfers have all the appearance of sole-source procurements
without any of the usual procurement protections.  Indeed, a March
1993 WSRC internal audit report stated that WSRC's "interparty
transfers at cost" represented sole-source contracts. 


--------------------
\1 Nothing in these restrictions, however, precludes WSRC from
obtaining goods and/or services from affiliates on the basis of a
sole-source justification. 

\2 53 Fed.  Reg.  24, 224 at 24229-24230 (1988). 


      DOE APPLIES LESS SCRUTINY TO
      ACQUISITIONS FROM AFFILIATES
-------------------------------------------------------- Chapter 2:2.2

The nonstandard clause requires WSRC to submit to DOE for approval an
estimate of the kind and amount of affiliate support anticipated for
the coming fiscal year.  Similarly, BSRI submits such an estimate to
WSRC for approval.  DOE does not have to review and approve
intercompany transfers awarded for WSRC and BSRI support approved in
the annual estimates.  Except for the BSRI estimates before fiscal
year 1992, the estimates contained scope and justification statements
for anticipated support.  The BSRI estimates before fiscal year 1992
were only listings of anticipated support.  An example of support
listed in BSRI's fiscal year 1991 estimate was $8.26 million for
reactor restart and the startup of the Defense Waste Processing
Facility; there was no supporting documentation for either effort. 

DOE reviewed and approved WSRC's estimates in fiscal years 1990 and
1991, with some exceptions.  DOE did not approve WSRC's fiscal year
1992 and 1993 estimates, thereby requiring WSRC to submit each
intercompany transfer to DOE for review and approval.  However, DOE's
documentation requirements for intercompany transfers are less
stringent than for purchases.  For example, DOE does not require WSRC
to obtain organizational conflict-of-interest disclosure statements,
certified cost and pricing data,\3 detailed cost estimates, and
sole-source justifications for intercompany transfers.  Instead, DOE
is relying on WSRC and BSRI to make determinations that their
acquisitions from affiliates are in the best interests of the
government.  As illustrated by the problems described earlier in this
chapter, these acquisitions may not always be in the best interests
of the government. 

In addition, acquisitions from affiliated M&O contractors at other
DOE sites are made through memorandum purchase orders that authorize
transfers of funds between M&O contractors.  Like intercompany
transfers, the memorandum purchase orders are transfers at cost that
undergo less stringent review than purchases.  For example, WSRC
purchased the services of eight employees of the Westinghouse Hanford
Company--the M&O contractor for DOE's Hanford, Washington, site--for
1 year at a cost of $1.4 million.  WSRC's procurement file indicates
that using the memorandum purchase order allowed WSRC to exceed its
authorized staffing because its budget did not include the eight
positions for new hires. 

In December 1993, DOE's Director of the Office of Contractor
Management and Administration informed us that memorandum purchase
orders are nontraditional acquisitions that are not covered under
procurement regulations or visible at the Department level.  The
memorandum purchase orders are acquisitions between DOE's integrated
contractors\4 that are paid via financial transfers between the
integrated contractors.  The memorandum purchase orders were only
covered in DOE's accounting handbook.  As the result of a report by
DOE's Office of Inspector General in 1993, the Director stated that
DOE was proposing new initiatives in December 1993 to control and
limit such memorandum purchase orders.  For example, DOE is proposing
that before the execution of any memorandum purchase order, a senior
official at the procuring contractor will determine in writing
whether the proposed order is primarily for funding.  The written
determination must provide sufficient supporting rationale
documenting the basis for the determination and be signed by a senior
official at the procuring contractor.  The memorandum purchase orders
shall be determined to be funding transfers when the order entails
work which involves unique expertise or facilities that are not
available from private commercial sources. 


--------------------
\3 A 1992 legal opinion by Westinghouse Electric Corporation, based
on activities carried out by another Westinghouse M&O contractor,
states that certified cost and pricing data are not required because
these acquisitions are not negotiated subcontracts within the meaning
of the DEAR and the Federal Acquisition Regulation.  The opinion also
notes that under a long-standing practice between Westinghouse and
its government-owned, contractor-operated facilities, Westinghouse
has not been required to furnish cost and pricing data under such
circumstances.  A subsequent 1992 WSRC legal opinion concurred that
neither certified cost and pricing data nor organizational
conflict-of-interest representations and certification statements are
required. 

\4 Integrated contractors are those required by contract provisions
to maintain a separate set of accounts and records for recording and
reporting all business transactions under the contract, in accordance
with DOE's accounting practices and procedures, and whose books of
account are integrated with those of DOE through the use of
reciprocal accounts. 


      EXISTING REGULATIONS ARE
      LESS THAN FULLY IMPLEMENTED
-------------------------------------------------------- Chapter 2:2.3

DOE, at SRS, had not fully implemented some regulatory requirements
applicable to acquisitions from affiliates.  These requirements were
in two areas--organizational conflicts-of-interest and payment of
fees to an affiliate. 


         ORGANIZATIONAL
         CONFLICT-OF-INTEREST
         REQUIREMENTS
------------------------------------------------------ Chapter 2:2.3.1

DOE has been inconsistent in applying its organizational
conflict-of-interest requirements to determine whether a potential
contractor has interests that (1) may diminish the potential
contractor's capacity to give impartial, technically sound, objective
assistance and advice or (2) may result in the contractor's having an
unfair competitive advantage over others competing for the contract. 
DOE does not apply the requirements to WSRC's intercompany transfers,
but it does apply them to WSRC's subcontracting activities, including
subcontracts to affiliates.  DOE has not been performing the required
determinations and does not have statistics on the number of WSRC
subcontracts made in prior years that required such determinations. 
However, in December 1992 WSRC estimated that 850 of its open
purchase requisitions at that time could require organizational
conflict-of-interest determinations.  It also estimated that
performing the determinations could (1) add 1 week to 1 month to the
procurement cycle, (2) increase WSRC's processing cost by $595,000 to
$1,190,000, and (3) require WSRC to obtain the services of 9 to 18
additional people.  In August 1993, DOE directed WSRC to comply with
organizational conflict-of-interest requirements and submit all
subcontracts that require organizational conflict-of-interest
determinations to DOE. 

Although DOE is requiring performance of the organizational
conflict-of-interest determinations, it still has not issued formal
instructions for carrying out its order on conflict-of-interest
processing procedures.  The lack of instructions was a finding in
DOE's reviews of program management assistance, performed by DOE
headquarters in February 1990 and June 1992, that examined
conflict-of-interest determinations for DOE's prime contracts.  In
response to DOE's August 1993 request, WSRC submitted to DOE in late
1993 its revised procurement procedures for organizational
conflict-of-interest determinations.  As of December 30, 1993, DOE
was still in the process of reviewing WSRC's submission. 


         PAYMENT OF FEES TO AN
         AFFILIATE
------------------------------------------------------ Chapter 2:2.3.2

We identified an example that illustrates some of the difficulties
caused when DOE does not fully implement its regulations.  In this
case, DOE did not follow standard procedures leading to the payment
of $1.2 million in fees to WSRC's affiliates for noncompetitive
support.  Within WSRC's M&O contract, clause I.103--Reactor Restart
Program Support--was added specifically for the Westinghouse Electric
Corporation to provide support in restarting SRS' production reactors
after the Secretary of Energy informed Westinghouse that DOE expected
Westinghouse to bring its corporate resources to bear on the startup
of the reactors.  This contract clause established the ground rules
for acquiring the needed support.  Work performed under the clause
had to meet the following criteria:  (1) The nature or extent of the
services to be provided are beyond the capabilities of the WSRC staff
and (2) the services are in response to (i) a critical and urgent
need that precludes a competitive procurement or (ii) source
direction from the Contracting Officer.  Also, the clause provided
for the payment of a fee in addition to direct and indirect costs. 
It limited the fee to 75 percent of the fee objective established
pursuant to the DEAR's requirements.  Because the clause did not meet
the DEAR's requirements for the payment of fees, the DOE Procurement
Executive had to authorize a deviation from those requirements. 

According to DOE officials at SRS, the SRS office obtained informal
approval to deviate from the DEAR's requirements on the basis of a
handwritten note.  The note stated that the approach for the
modification had been discussed with DOE's Procurement Executive. 
The DEAR requires that the Procurement Executive authorize the
deviation by a written justification that clearly states the special
circumstances involved.  The note stated that the clause was
discussed and there was agreement with the approach.  It did not
state that the clause had been reviewed and approved nor provide any
information about the special circumstances involved.  DOE paid about
$1.2 million in fees to WSRC's affiliates for reactor restart
services required under this clause.  Given the nature of this
clause, we question the policy of permitting a deviation on the basis
of information contained in the handwritten note.  In December 1993,
the Director of DOE's Office of Contractor Management and
Administration informed us that deviations from the DEAR have to be
well documented.  He added that in his view the handling of this
deviation represented a rather unique situation that resulted from
the priority that the Secretary of Energy had placed on restarting
the SRS' reactors.  The clause for payment of fees is still in
effect, even though the need for reactor restart services is no
longer urgent because the reactors have been placed in cold standby. 
According to DOE officials, some of the procurements still have not
been closed out, and the fee clause may be deleted from WSRC's
contract when it is renewed in 1995. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:3

DOE needs better and more complete information on acquisitions from
affiliates at SRS in order to be in a position to effectively monitor
the proper use of such acquisitions.  In the past, DOE has placed too
much reliance on WSRC and BSRI to carry out these activities.  As a
result, DOE officials at SRS do not know the full extent of
acquisitions from affiliates being made and are not taking advantage
of any possible opportunities to maximize cost savings and
competition. 

The examples highlighted in this chapter demonstrate the types of
financial impact and other problems that can occur when DOE does not
exercise appropriate monitoring of acquisitions from affiliates. 
Many of the same problem areas were independently identified in April
1993 during DOE's first review of WSRC's and BSRI's related-party
transactions.  Furthermore, other DOE studies and reports have
demonstrated a heightened need for improved monitoring of
acquisitions from affiliates throughout DOE.  Without such
improvements, DOE will not know whether (1) any of the affiliates
obtained an unfair competitive advantage under the existing
contracting process and (2) fair and reasonable prices were paid for
acquisitions from affiliates.  In fact, in December 1993 DOE
headquarters officials emphasized to us that DOE has recognized the
need to ensure that adequate procedures are developed for determining
whether acquisitions from affiliates are in the best interests of the
government.  These officials also agreed, however, that the
information presented in our report demonstrates that acquisitions
from affiliates need increased attention. 

At SRS, DOE has not required acquisitions from affiliates to comply
with the DEAR's requirement that competition must be obtained, except
for purchases of technical services from affiliates that have special
expertise and that expertise is documented.  This practice appears to
be contrary to the existing DEAR requirement's stated purpose of
strictly controlling acquisitions from affiliates.  Furthermore, WSRC
and BSRI have been able to obtain support from affiliates without
undergoing the same level of DOE scrutiny that would apply if the
purchase were made from a nonaffiliated third party.  We believe that
these acquisitions, such as intercompany transfers, have all the
appearance of sole-source procurements and should be treated in the
same way as any other purchase.  Nothing in the contract precludes
DOE's ability to require that necessary and desirable transfers also
meet the DEAR's purchase requirements. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:4

To ensure that acquisitions made from affiliated entities of WSRC and
BSRI at SRS are in the best interests of the federal government, we
recommend that the Secretary of Energy (1) provide for increased
monitoring of the contractors' acquisitions from affiliated entities
and (2) except for the purchases of technical services where the
affiliate has special expertise and that expertise is documented,
require that affiliate acquisitions comply with the DEAR's
requirement that competition must be obtained and subject such
acquisitions to the same standards that apply to nonaffiliated
third-party transactions. 

We also recommend that the Secretary of Energy require the SRS
Manager to

  develop and implement, on the basis of data from reliable
     management information systems, internal controls that can
     enhance DOE's ability to use its limited resources to ensure
     that monitoring activities involving acquisitions from
     affiliates are effectively carried out and

  review the appropriateness of the charges that have been made
     and/or paid in the specific examples we highlighted in this
     report to ensure that the costs incurred have been and still are
     proper and, in any instances in which costs have been improperly
     charged and/or paid, obtain reimbursement from the appropriate
     parties. 


EXAMPLES OF PROBLEMS INVOLVING
ACQUISITIONS FROM AFFILIATES
=========================================================== Appendix I

On the basis of our review at the Savannah River Site (SRS), we
identified several problem areas involving a number of the affiliate
acquisitions made by Westinghouse Savannah River Company (WSRC) and
Bechtel Savannah River, Inc.  (BSRI).  To provide further information
on the types of problems we uncovered and the complex issues
involved, this appendix provides a detailed discussion of six
examples of WSRC's and BSRI's acquisitions from affiliates. 

Example A.  This example involves two WSRC noncompetitive
cost-plus-fixed-fee subcontracts that totaled about $12.1 million
when initially awarded for reactor restart support from the
Westinghouse Nuclear Services Division.  WSRC's contract files showed
that employees continued to work on one of the cost-plus-fixed-fee
subcontracts after it expired, resulting in an unauthorized cost
overrun of $1.3 million.  Without obtaining the required Department
of Energy (DOE) approval, WSRC transferred the cost overrun to
another Westinghouse Nuclear Services Division cost-plus-fixed-fee
subcontract that had sufficient funds obligated to cover the cost
overrun. 

Also, WSRC's documentation states that most of the work under these
contracts was performed during the hectic days of reactor restart,
when there was a lack of control over and documentation of
contracting activities.  Furthermore, according to the documentation,
it appears that some of the same people worked under both contracts,
although no clear record exists of how this was handled in accounting
for the costs charged to both contracts.  The documentation noted
that these control problems were common to other reactor restart
subcontracts.  Additionally, even though these acquisitions were made
under a nonstandard contract clause in WSRC's management and
operating (M&O) contract with DOE at SRS--a clause that was added to
the contract to permit payment of fees to affiliates for support in
restarting the reactors--most of the employees used under the
subcontracts were independent job shoppers rather than Westinghouse
employees.  An underlying reason for adding the clause to pay fees to
affiliates was to compensate the affiliates for personnel taken from
profit-making activities to support reactor restart efforts. 

Initial approval of one of the subcontracts for $2.5 million included
a plan for the Westinghouse Nuclear Services Division to subcontract
out about $1.7 million.  According to DOE officials, the
subcontracting was permissible because Westinghouse was better able
to obtain needed services.  Additionally, both noncompetitive
subcontracts ran for more than a year, were extended, and had cost
overruns.  One, which ran for about 3-1/4 years, increased from $9.8
million to $12.7 million and included a fee of $628,927.  The other
one ran for about 2-1/2 years and increased from $2.3 million to $4.6
million; it included the transferred $1.3 million cost overrun and a
fee of $158,821. 

The issue of the transfer of the unauthorized cost overrun of $1.3
million to another contract was reported in a DOE review dated April
7, 1993.  That review stated the issue had been discussed with
Contracts Division officials and that they were going to review the
appropriateness of the $1.3-million charge and the related contract
fees.  As of September 30, 1993, DOE contract officials at SRS had
not addressed the cost overrun and related fees with WSRC. 

Example B.  This example involves a cost-plus-fixed-fee subcontract
and five intercompany transfers for support to WSRC from Westinghouse
Environmental and Geotechnical Services.  The cost-plus-fixed-fee
subcontract, the first of the six acquisitions, began as a $100,000
letter contract in May 1987 and ran for about 4 years.  It was
definitized after its termination in June 1991 for $2,883,295.  The
subcontract was awarded by DuPont\1 to Soil and Material Engineers,
Inc., and converted to a WSRC cost-plus-fixed-fee subcontract for
reactor restart work after Westinghouse Electric Corporation
purchased Soil and Material Engineers, Inc., for its Westinghouse
Environmental and Geotechnical Services in 1989.  At that time of the
purchase, the subcontract was for $1.6 million.  The subcontract
subsequently increased to $2,883,295, including a fee of $208,000. 

According to the Subcontract Technical Representative's subcontract
closeout report, WSRC terminated the subcontract due to continual
problems with insufficient cost control (inadequate cost and invoice
supporting documentation) and cost overruns by Westinghouse
Environmental and Geotechnical Services.  Although insufficient cost
control and overruns were given as the reasons for terminating the
subcontract, the subcontract experienced continual performance
problems.  Also, work was continued after the contracted period of
performance.  For example, performance problems included products
that were late, did not meet contractual requirements, and were of
poor quality.  Also, Westinghouse Environmental and Geotechnical
Services' lack of oversight contributed to a serious power accident
that occurred while the affiliate supervised one of two drilling
subcontractors during soil investigations at SRS' K-reactor.  Twice
in a matter of hours, the subcontractors drilled into buried power
cables.  Westinghouse Environmental and Geotechnical Services
supervised the first subcontractor that drilled into a cable.  If the
Westinghouse supervisor had ensured that all drilling was stopped
after the subcontractor under his supervision hit the first cable,
the costs may have been substantially reduced--the estimated cost to
repair that cable was $29,000.  Although the cost to repair both
cables was originally estimated at $210,000, that cost subsequently
increased, according to a DOE reactor official at SRS, to about
$815,000 because WSRC did not prevent moisture intrusion which caused
more damage. 

As for the five intercompany transfers from Westinghouse
Environmental and Geotechnical Services, one was completed after the
contractual period of performance, two were terminated before all the
required tasks were completed due to performance and invoicing
problems, and two were terminated due to the sale of Westinghouse
Environmental and Geotechnical Services (the remaining work was
handled in-house). 

Example C.  This example involves 100 canisters manufactured by an
affiliate to hold vitrified high-level radioactive waste.  WSRC
managed the procurement, including inspecting the canisters received
at SRS, and Bechtel National participated in developing
specifications for the canisters and performed the inspections at the
affiliate's plant.  In August 1988, just before the transition of the
M&O contract from DuPont to WSRC, DuPont made a split award to a
Westinghouse Electric Corporation affiliate and a non-Westinghouse
Electric Corporation affiliate to manufacture 100 canisters each for
SRS' Defense Waste Processing Facility.  During the transition
period, deficiencies were identified in specifications for the
canisters developed by DuPont that necessitated revising the
specifications.  The revision, made by Bechtel National, Inc., in
December 1988, contributed to the scrapping of 23 manufactured
canisters, plus the materials for manufacturing the remaining
canisters, and increased the cost of the two contracts from
$1,661,018 to $2,288,140.  The Westinghouse Electric Corporation's
affiliate delivered its 100 canisters by the end of 1990, and the
other contractor delivered 10, but none of the 110 canisters was
acceptable.  WSRC subsequently released Bechtel National from the
effort to resolve the canister problems and terminated the
nonaffiliated contractor's contract due to changing requirements. 
WSRC plans to use all of the canisters, except one damaged by a fall
from a truck, for testing; however, some of the testing includes a
radioactive substance, and none of the canisters has been approved
for tests involving radioactive substances.  WSRC paid its affiliate
$1,276,708--the full contract amount plus a fee, and WSRC paid the
nonaffiliated contractor $565,765 for terminating the contract after
receiving the first 10 canisters. 

Additionally, the failure of the affiliate's 100 canisters to meet
specifications for holding high-level radioactive waste is due in
part to the lack of attention given to WSRC's October 1989
nonconformance report on the first 10 canisters manufactured to meet
the revised specifications.  After Bechtel National's satisfactory
inspection of the first 10 canisters manufactured by the WSRC
affiliate and their delivery to SRS, WSRC did not inform Bechtel
National that it had issued a nonconformance report on all 10
canisters.  Unaware of the nonconformance report, Bechtel National
directed the affiliate to proceed with the manufacture of the
remaining 90 canisters.  Bechtel National subsequently learned of the
report in 1991 after all the canisters were delivered to SRS.  WSRC
received the report in October 1989 but did not close it out until
October 1991. 

Example D.  This example involves WSRC's and DOE's monitoring of
several of BSRI's noncompetitive intercompany transfers.  Before
fiscal year 1992, BSRI acquired about $35 million in services
directly from Bechtel National, Inc., without purchase orders or
sole-source justifications showing that Bechtel National was the only
source that could provide the services.  Moreover, BSRI did not
document that the services were received or that they were
acceptable.  In 1992, a WSRC internal review reported that adequate
control procedures and management oversight had not been established
to properly plan for, procure, monitor, and pay for BSRI's
acquisitions from Bechtel National.  The WSRC General Counsel's
office had sole responsibility for authorizing, reviewing, and
approving payments for these acquisitions.  BSRI was processing
authorizations for Bechtel National's services through a contract
administration branch within the WSRC General Counsel's office on the
basis of signature approvals instead of through the WSRC Procurement
Department.  The review reported that there was an improper
separation of duties in acquiring Bechtel National's services and
approving payment of the invoices for those services.  The review
also reported adequate reviews of supporting invoice documentation
were not performed before or on an after-the-fact basis, and the
invoices were paid using a payment method for acquisitions without
purchase orders that did not involve the Procurement Department or
minimize the possibility of duplicate payments.  The review stated
that all Bechtel National invoices should utilize the traditional
purchase order-based disbursement approach to ensure that invoiced
costs are properly monitored and tracked.  Several examples
illustrate various problems involving BSRI's acquisitions. 

Reviews of cost invoices since fiscal year 1991 disclosed substantial
amounts of improper costs.  A review by WSRC's Subcontract Accounting
Branch of $3,469,000 invoiced by Bechtel National in fiscal year 1992
identified $291,592 in unallowable costs, $51,900 in charges from
prior years that may have already been paid, and about $500,000 in
charges for subcontracting and consulting services prohibited by the
BSRI contract.  Additionally, WSRC's Subcontract Accounting Branch
withheld payment on a $67,024 cost overrun and questioned $945,930 of
charges in excess of the amount authorized for K-reactor restart
geotechnical services.  The excess charges include about $375,000 of
the prohibited subcontract costs identified in the above review. 
However, as of September 30, 1993, WSRC had not made a decision on
whether to recover the questioned costs. 

Additionally, our limited review of selected BSRI intercompany
transfers found similar problems.  For example, subcontract costs in
the BSRI contract included $426,238 for an accounting firm's services
provided in fiscal year 1991.  Due to a hiring freeze, WSRC first
obtained consulting services from this firm through an engineering
work request issued by its design contractor at SRS.  The consulting
services, obtained to support the implementation of a consolidated
labor system, were provided through the contractor's engineering work
request from March 1990 to April 1991 at a cost of $1,083,007. 
Subsequently, after the design contractor's contract expired at the
end of March 1991, WSRC submitted a requisition to continue the
accounting firm's consulting services under a new subcontract. 
Later, WSRC dropped the subcontract because of the timing required
for executing it.  However, because of the need to maintain the
accounting firm's employees in an active role of analyzing, training,
and administering the new consolidated labor system, WSRC had BSRI
authorize Bechtel National to provide the accounting firm's services,
since Bechtel National already had an existing agreement with the
accounting firm.  Hourly rates of the assigned accounting firm's
staff were $243 ($1,944 per day) for one partner and one manager;
$168 ($1,344 per day) for five associates; and $68 for one associate. 
All of the staff, except the one with the $68 hourly rate, had
equivalent daily rates exceeding DOE's review threshold for WSRC
consultants.  According to a BSRI official, the hourly rate was $68
for one associate because the associate was (1) new and (2) lived in
the area, which further reduced expenses included in the hourly rate. 

In 1992, WSRC implemented procedures to improve control of BSRI's
intercompany transfers from Bechtel National.  However, problems with
controlling these transfers have continued, as evidenced by cost
growth and deviations from procurement policy and procedures.  The
cost growth is due to a number of factors, such as inadequate task
definitions and changes in requirements.  For example, BSRI acquired
design services for repairs to SRS' Par Pond dam from Bechtel
National in November 1992 at a cost of $157,072.  The cost
subsequently increased to $200,520 in February 1993 because Bechtel
National had (1) charged $74.50 per hour for technical services from
the very start instead of the $54 called for in the $157,072
contract, (2) increased the hourly rate for technical services to $85
per hour in early February 1993, and (3) received an increase of 136
hours in the number of hours of technical services.  The cost
increase was contained at $200,520 by reducing the number of Bechtel
National trips to SRS, transferring some of the remaining
nontechnical work back to BSRI, and reducing computer hours.  The
increase in the hourly cost of technical services was attributed to
the need to use more senior and experienced engineers. 

DOE had not reviewed and approved any of BSRI's intercompany
transfers as of September 30, 1993.  WSRC's procurement procedures
did not provide for DOE review before fiscal year 1993.  WSRC's
revision of its procurement procedures in April 1993 required that
DOE review BSRI's intercompany transfers exceeding $500,000.  WSRC
officials informed us that none of the subsequent intercompany
transfers had exceeded the $500,000 threshold as of June 1993.  In
the past, some intercompany transfers between BSRI and Bechtel
National that did not exceed $500,000 experienced cost growth well in
excess of the threshold.  For example, a $200,000 intercompany
transfer approved in August 1992 for geotechnical investigations at
SRS' new Replacement Tritium Facility had increased to about $800,000
in December 1992.  Furthermore, this intercompany transfer included
costs for subcontracting and consulting services.  The consultant's
daily rate of $1,080 also exceeded DOE's review threshold of $1,000
for WSRC consultants at that time.  Subsequently, in December 1992
WSRC disapproved the costs invoiced for consulting services, but it
did not address Bechtel National's invoiced subcontracting costs. 
Since then, WSRC has also disallowed some subcontracting costs
charged in 1993.  For example, $61,446 of $80,838 (about 76 percent)
that BSRI invoiced WSRC for labor relations and safety support was
disallowed because the cost was for subcontracting and consulting
services. 

As a result of increased scrutiny of BSRI's intercompany transfers,
WSRC has implemented new procedures to improve its control over them. 
This action resulted in WSRC's (1) not approving BSRI's fiscal year
1993 estimate of about $7.7 million in planned intercompany transfers
from Bechtel National and (2) providing only interim funding of
$678,577 for 16 selected Bechtel National intercompany transfers.  In
addition, in an August 18, 1993, letter to WSRC, DOE established that
all of BSRI's intercompany transfers, regardless of dollar value, are
to be submitted to DOE at SRS for approval. 

Example E.  This example involves two of WSRC's intercompany
transfers for legislative monitoring and DOE headquarters liaison
activities in Washington, D.C.  The two intercompany transfers, the
first for $336,000 and the second for $625,000, provided the services
of the Westinghouse Government Business Development Office on a
continuous basis from January 1989 through September 30, 1993.  The
first intercompany transfer for these services, issued under the
Westinghouse Electric Corporation's transition contract, ran from
January 1989 through June 30, 1991, although DOE had approved this
intercompany transfer only through December 31, 1989.  Westinghouse
Electric Corporation approved extensions of this intercompany
transfer through June 1991 without going through WSRC's and DOE's
approval processes.  Furthermore, Westinghouse Electric Corporation
approved the extensions of the first intercompany transfer at the
same time that DOE was reviewing and disapproving the second
intercompany transfer.  Unaware of the Westinghouse Electric
Corporation's extensions of the first intercompany transfer, WSRC's
Procurement Department submitted the second intercompany transfer to
DOE for approval in January 1990, and DOE disapproved it in October
1990 and again in September 1991.  DOE based its September 1991
disapproval on the contention that the services being requested
represented general and administrative costs that should not be
allowable under the M&O contract. 

In August 1992, DOE conditionally approved the second intercompany
transfer, not to exceed $625,000, for the period from February 1,
1990, through September 30, 1993, pending a function review by the
Defense Contract Management Command's Corporate Administrative
Contracting Officer for Westinghouse Electric Corporation in
Pittsburgh, Pennsylvania.  On September 29, 1993--more than 1 year
after the conditional approval was granted--DOE verbally requested
the review during a visit to SRS by the Defense Corporate Executive\2
for the Westinghouse Electric Corporation.  Also, in approving the
$625,000, DOE did not obtain a detailed cost estimate or actual costs
for the period February 1, 1990, through June 30, 1992--29 months of
retroactively approved services.  In its August 1992 approval letter,
DOE requested information on costs charged from February 1, 1990,
through June 30, 1992, and stipulated that a separate request for
reauthorization of costs would be required for fiscal year 1994.  As
of September 30, 1993, DOE had not received any information on prior
costs.  On the basis of our review of WSRC's payment records, costs
for the period from February 1990 through August 1992 totaled
$104,447.  Of this amount, about $80,000 had been billed and paid
under the overlapping extensions of the first intercompany transfer
that had not been approved by DOE or WSRC. 

As of September 30, 1993, WSRC's payment records showed that WSRC had
paid Westinghouse Government Business Development $182,745 ($150,611
paid from August 1989 to December 1991 under the first intercompany
transfer and $32,134 paid as of September 30, 1993, for services
provided under the intercompany transfer approved in 1992). 
Additionally, invoices totaling $11,514 for 1991 services and $39,158
for 1992 services submitted in January 1993 had not been paid as of
September 30, 1993, because of insufficient support.  According to
the Westinghouse Government Business Development Director, the
invoices for 1991 and 1992 were not submitted until 1993 because of
confusion caused by a reorganization of the office, which included
the individual who should have submitted the invoices. 

On the basis of our review of WSRC's and DOE's records and
discussions with various officials, we found the following: 

  Legislative monitoring services provided for WSRC by the Government
     Business Development Director in the Westinghouse Government
     Affairs Office are paid by WSRC's intercompany transfer. 
     According to the Westinghouse official within the Government
     Affairs Office providing the services, similar legislative
     monitoring services provided for other Westinghouse M&O
     contractors, such as for the Hanford and Idaho facilities, are
     paid from Westinghouse's corporate account, not from any
     government contract. 

  Extensions of the first intercompany transfer from January 1, 1990,
     through June 1991 were not approved by either WSRC or DOE.  The
     first intercompany transfer, dated February 13, 1989, was issued
     under the Westinghouse Electric Corporation's transition
     contract dated September 26, 1988, and completed April 13, 1989. 
     At the end of the transition contract, DOE approved an extension
     of the intercompany transfer through December 31, 1989. 
     Subsequently, in 1990 Westinghouse Electric Corporation approved
     two more extensions of the intercompany transfer under its
     expired transition contract that extended the intercompany
     transfer through June 1991.  WSRC and Westinghouse Electric
     Corporation personnel could not explain the approval of the
     extensions.  According to the WSRC Procurement Manager, the
     person approving the extensions was an employee in Westinghouse
     Electric Corporation's Pittsburgh Office who is no longer with
     Westinghouse. 

  DOE and WSRC procurement officials did not have knowledge of
     payments made under the extensions approved by Westinghouse
     Electric Corporation.  WSRC's Procurement Department did not
     assign the intercompany transfer a WSRC purchase order number
     when WSRC became the M&O contractor in April 1989, even though
     DOE had approved its extension through December 31, 1989.  Since
     WSRC's Finance Department could not make payments under the
     expired Westinghouse Electric Corporation transition contract,
     it used a payment method for invoices without a purchase order
     to make payments under the WSRC contract.  WSRC's Finance
     Department continued to use this payment method to pay the
     invoices received under the Westinghouse Electric Corporation
     extensions, including four invoices after the end of the
     extensions.  Copies of the invoices referencing the applicable
     extension went to WSRC's Administrative Services Manager, but
     not to WSRC's Procurement Department.  The WSRC Finance
     Department official responsible for approving the invoices said
     he knew the invoices were going to the WSRC Administrative
     Services Manager and continued to approve the invoices for
     payment, anticipating that the purchase order would be extended. 
     He stopped approving the invoices only when he stopped receiving
     them. 

  WSRC did not have detailed estimates to support funding requested
     for the second intercompany transfer.  Initially, in January
     1990 WSRC requested $1.2 million for the period from February 1,
     1990, through January 31, 1995.  Then, in March 1991 after DOE's
     disapproval of the initial request, WSRC requested $836,000 for
     the period from February 1, 1990, through January 31, 1995.  DOE
     subsequently approved the intercompany transfer for the period
     from February 1, 1990, through September 30, 1993, and
     proportionally reduced the $836,000 to $625,000 for the
     reduction in the requested and approved period.  WSRC's
     Administrative Services Manager said that he requested the
     amounts based on "covering something big if it happens instead
     of detailed estimates."

  WSRC paid invoices for office rent without obtaining documentation
     supporting the basis for the charges.  The files of
     Westinghouse's Government Business Development Director showed
     that the monthly office rent of $2,543 charged to WSRC in 1990
     and 1991 was not for the purpose of providing office space for
     personnel employed in Washington, D.C.  Rather, the payment was
     for space that could be used by WSRC visitors if they came to
     Washington, D.C.  The $2,543 included $1,258 for space rent and
     $1,285 for secretarial salary and benefits, office maintenance,
     office supplies, postage and mailing, furniture/fixtures, office
     rental equipment, and taxes.  According to Westinghouse's
     Government Business Development Director, no documentation was
     available on actual usage of the space. 

  Even after DOE conditionally approved the intercompany transfer,
     the Director's 1993 invoices included $3,613 for a legal opinion
     by a law firm in South Carolina on whether the legislative
     monitoring intercompany transfer may have constituted
     unallowable lobbying costs.  The opinion, dated March 5, 1993,
     stated that costs may be allowable contingent on a number of
     factors, including the satisfactory conduct of the pending
     function review required by DOE's August 24, 1992, letter of
     conditional approval.  According to Westinghouse's Government
     Business Development Director, his superior, who is a registered
     lobbyist, instructed him to have the law firm review the
     acquisition.  Neither DOE nor WSRC had requested the function
     review until September 29, 1993. 

  The intercompany transfers' scopes of work did not specify the
     number, length, or destinations of trips to be authorized
     annually to perform the services to be provided.  On the basis
     of the files we reviewed, Westinghouse's Government Business
     Development Director charged 12 trips to the intercompany
     transfers during a 4-year period, asserting that each trip was
     necessary for business purposes.  However, WSRC officials did
     not request all of the trips and did not authorize them.  In
     addition, the Director incorrectly charged per diem to the
     intercompany transfers by filing inaccurate travel vouchers. 
     When we brought the incorrect charges to his attention, he said
     he was not familiar with the Federal Travel Regulations
     governing per diem charges.  Furthermore, he said that on at
     least four separate occasions, he combined personal travel with
     business travel.  However, the vouchers the Director submitted
     to WSRC did not clearly indicate any separation between personal
     and business travel.  As a result of the problems we brought to
     his attention, he resubmitted invoices for his travel costs in
     calendar years 1992 and 1993.  However, WSRC was still
     questioning the resubmitted invoices as of September 30, 1993. 

  The intercompany transfers' scopes of work did not clearly state
     the services to be provided.  For example, WSRC's Administrative
     Services Manager said that the following types of support cited
     in the scope of work in the second intercompany transfer were
     not clearly stated:  (1) represent Savannah River top
     management, as appropriate, with DOE, the Office of Management
     and Budget, and the Congress on key program/project issues; (2)
     represent Savannah River program/project management, as
     appropriate, before Washington-based committees, groups, etc.;
     and (3) provide technical and business advice to Savannah River
     managers on program/project development and operational matters. 

Before 1993, actual services provided to WSRC could not be determined
from document files.  WSRC did not maintain a file on services
provided before March 1993, and the activity files of Westinghouse's
Government Business Development Director generally did not identify
the services that he provided to WSRC.  According to the WSRC's
Administrative Services Manager and Westinghouse's Government
Business Development Director, various services were provided to WSRC
on a continuous basis. 

  The intercompany transfers did not require any specific
     deliverables, but the Director started submitting reports to
     WSRC in 1993 under the second intercompany transfer.  At the
     time of our review, DOE had not reviewed any of the reports
     submitted to WSRC.  We obtained some examples of reports
     prepared under this intercompany transfer and sent to WSRC
     officials.  Several were "Washington Update" memorandums.  For
     instance, the May 18, 1993, memorandum briefly discussed the
     following six topics:  (1) the weapons cleanup issue in both
     houses; (2) the House Science, Space, and Technology Committee's
     hearing on DOE's reorganization bill; (3) the Senate Energy
     Committee's markup of fusion bill; (4) the Senate Energy
     Committee's markup of S.  473; (5) the Environmental Protection
     Agency's announcement of new hazardous waste reduction
     requirements; and (6) the identification of President Clinton's
     science team. 

As a result of various identified problems, WSRC has initiated a
number of actions.  For example, in a July 29, 1993, letter, WSRC
requested that the Director provide additional information on the
$3,150 invoiced for the South Carolina law firm's services.  In
addition, this letter requested not only that future invoices comply
with the Federal Travel Regulations, but that the following
information be submitted with each invoice: 

  Specific activity/function performed. 

  Date of activity/function performed. 

  WSRC's primary contact for each activity. 

  Details of fees (for example, hours and rates). 

  Copies of travel expense reports, purpose of trip, who authorized
     it, etc. 

In addition, due to the problems associated with the intercompany
transfer approved in August 1992, WSRC billed back to Westinghouse
Electric Corporation all $32,134 paid under the intercompany transfer
as of September 30, 1993.  Also, the WSRC Subcontract Technical
Representative assigned to this intercompany transfer has recommended
that $150,000 of the $625,000 obligated for this intercompany
transfer be retained as a contingency to cover any 1991 and 1992
costs and the remaining $475,000 be deobligated.  According to the
Subcontract Technical Representative, no discussions have been held
on billing back payments made under the first intercompany transfer,
but he concurred that a similar case might be made for billing back
some of those payments. 

WSRC has also taken actions to ensure better oversight through
reduced funding of the Westinghouse Government Business Development
Director's services.  WSRC submitted a third intercompany transfer to
DOE for approval with a 1-year period of performance from October 1,
1993, through September 30, 1994, in the amount of $53,611.  WSRC
limited funding of the intercompany transfer by basing it on a
cost-price analysis and giving it a Section B classification that
disallowed the payment of indirect costs, rather that the Section A
classification that had been given to the previous intercompany
transfer.  The Section A classification allows the payment of
indirect costs. 

Also, on September 30, 1993, DOE stipulated conditions that WSRC must
meet before DOE will approve the third intercompany transfer as
requested by WSRC.  DOE informed WSRC that it was limiting approval
to $4,500 for October 1993 and that further extension past October
was conditional on WSRC's providing a full accounting of
expenditures, specifics on deliverables, and controls in place to
ensure that only proper charges are paid.  In stipulating the
conditions, DOE stated that WSRC still had not provided the
accounting of expenditures requested in DOE's August 24, 1992, letter
approving the second intercompany transfer and that the General
Accounting Office had raised many questions, including questions
about deliverables and payments. 

Example F.  This example involves a WSRC intercompany transfer for
support from Westinghouse Electric Corporation's Environmental Health
and Safety Services Group.  Westinghouse established the
Environmental Health and Safety Services Group to provide services,
including legislative monitoring services, to its DOE contractors. 
The Environmental Health and Safety Services Group proportionately
allocates its budget between DOE contractors on the basis of their
contract amount.  For example, the Environmental Health and Safety
Services Group allocated its fiscal year 1991 budget of $903,891
between six DOE contractors; $159,000--20 percent--was allocated to
WSRC.  The Group spent $772,638, of which WSRC paid $146,890, or
about 19 percent of the total expenditures. 

The Environmental Health and Safety Services Group has continually
been nonresponsive to WSRC's requests for support for invoices and
other information.  For example, as late as March 1993 WSRC was still
meeting with the Group in an effort to reach an agreement on
providing support for invoices.  Earlier, when WSRC requested
certified cost and pricing data for an extension of the intercompany
transfer, the Group obtained a legal opinion that did not require its
compliance with the request, and it did not provide the data. 
Furthermore, the Group has not always provided details on its actual
services.  For about an 18-month period (from July 1989 to December
1990), the Group provided no reports to WSRC on its services.  Since
January 1991, the Group has provided the contractors with various
information, including a periodic consolidated report giving a
general overview of issues, along with general statements on visits,
meetings, and assistance applicable to each DOE site. 

Additionally, the intercompany transfer has been continually
extended, and the funds obligated for the intercompany transfer
substantially exceed actual costs.  This intercompany transfer, which
started in July 1989, has been extended to March 31, 1994, and
currently totals $941,852.  As of September 30, 1993, WSRC had paid
$477,264 for 47 months of services invoiced through May 1993, leaving
a total of $464,588 obligated for the remaining 11 months. 


--------------------
\1 E.I.  du Pont de Nemours (DuPont) managed and operated SRS for DOE
from the 1950s until April 1, 1989, when WSRC became the new SRS M&O
contractor. 

\2 In 1992, the Defense Logistics Agency implemented the Defense
Corporate Executive Program to provide a corporate-wide perspective
on all government work performed by designated corporations.  The
Corporate Administrative Contracting Officers' and Defense Corporate
Executives' functions and responsibilities were consolidated under
this program, and the assigned Administrative Contracting Officers
filled the new Defense Corporate Executives' positions. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   RESOURCES, COMMUNITY, AND
   ECONOMIC DEVELOPMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

Jim Wells, Associate Director


   ATLANTA REGIONAL OFFICE
-------------------------------------------------------- Appendix II:2

John P.  Hunt, Jr., Assistant Director
Wallace H.  Muse, Evaluator-in-Charge
Johnnie E.  Barnes, Site Senior
Stacey Harlow, Staff Evaluator


   OFFICE OF THE GENERAL COUNSEL
-------------------------------------------------------- Appendix II:3

Michael G.  Burros, Senior Attorney
