Department of Energy: Contract Reform Is Progressing, but Full
Implementation Will Take Years (Chapter Report, 12/10/96,
GAO/RCED-97-18).

Pursuant to a congressional request, GAO reviewed certain aspects of the
Department of Energy's (DOE) contract reform initiative.

GAO found that: (1) DOE has completed action on 47 of the 48 contract
reform recommendations, but 9 of the completed actions did not meet the
requirements of the Contract Reform Team; (2) DOE also missed its
deadlines for completing the required new policies, guidance, and plans
that serve as the framework for contract reform by an average of 11
months; (3) the missed deadlines have added to the time needed to
implement contract reform; (4) while DOE has changed its policy and
adopted competitive contract awards as the new standard for management
and operating (M&O) contracts, in practice, DOE continues to make
noncompetitive awards for these contracts; (5) DOE's contracting offices
are including performance goals in their M&O contracts, but the contract
goals are not always clearly linked to those of the Department; (6)
DOE's contracting offices have moved quickly to implement another
important reform by using incentive contracts, but the negotiation of
these incentives did not always prove effective; and (7) since DOE is
authorized to use its own procurement regulation for M&O contracts, the
contracting officers have been left to use their own judgment and have
achieved different results with the use of these incentives.

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

 REPORTNUM:  RCED-97-18
     TITLE:  Department of Energy: Contract Reform Is Progressing, but 
             Full Implementation Will Take Years
      DATE:  12/10/96
   SUBJECT:  Federal property management
             Federal procurement policies
             Procurement regulation
             Work measurement standards
             Irregular procurement practices
             Contracting procedures
             Contract negotiations
             Contract administration
             Strategic planning
             Contractor performance
IDENTIFIER:  Manhattan Project
             DOE Tank Waste Remediation System Program
             DOE Procurement and Assistance Data System
             DOE Rocky Flats Operational Improvement Program
             DOE Strategic Plan
             Oak Ridge (TN)
             DOE Contract Reform Initiative
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Energy and Power, Committee
on Commerce, House of Representatives

December 1996

DEPARTMENT OF ENERGY - CONTRACT
REFORM IS PROGRESSING, BUT FULL
IMPLEMENTATION WILL TAKE YEARS

GAO/RCED-97-18

Contract Reform at DOE

(308685)


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

  CERCLA - Comprehensive Environmental Response, Compensation and
  Liability Act
  DOE - Department of Energy
  FAR - Federal Acquisition Regulation
  GAO - General Accounting Office
  GPRA - Government Performance and Results Act of 1993
  M&O - management and operating

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


B-274918

December 10, 1996

The Honorable Dan Schaefer
Chairman, Subcommittee on Energy and Power
Committee on Commerce
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we assess certain aspects
of the Department of Energy's contract reform initiative.  The report
describes the overall status of individual reform initiatives and
contains recommendations designed to better link the Department's
goals to contract goals and to improve the pricing of contracts and
the setting of incentives in management and operating contracts. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter.  At that time, we will
send copies to the Secretary of Energy; the Director, Office of
Management and Budget; the House Committee on Government Reform and
Oversight; the Senate Committee on Governmental Affairs; the House
and Senate Committees on Appropriations; and other interested
parties.  We will make copies available to others upon request. 

If you or your staff have any questions about this report, please
call me at (202) 512-3841.  Major contributors to this report are
listed in appendix III. 

Sincerely yours,

Victor S.  Rezendes
Director, Energy, Resources, and
 Science Issues


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


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

As the largest civilian contracting agency in the federal government,
the Department of Energy (DOE) obligated $17.5 billion, or about 91
percent of its fiscal year 1995 obligations to contracts.  For
several years, GAO has reported on weaknesses in DOE's contracting
practices.  In May 1993, the Secretary of Energy told the Congress
that DOE was not adequately in control of its contractors and, as a
result, was not "in a position to ensure effective and efficient
expenditures of taxpayer dollars .  .  .  ."\1

As a result, the Secretary initiated a complete review of DOE's
contracting practices.  This review, completed in February 1994 by
the Secretary's Contract Reform Team, resulted in recommendations to
make DOE's contracting work better and cost less. 

Concerned about the results of DOE's undertaking, the Chairman,
Subcommittee on Energy and Power, House Committee on Commerce
requested, in January 1996, that GAO review DOE's contract reform
efforts and focus on the key contracting areas of competition and
performance goals.  Specifically, GAO (1) determined the status of
the Contract Reform Team's recommendations; (2) evaluated the effect
of the initiatives on competition for management and operating
contracts, which are used to manage and operate DOE's facilities; (3)
evaluated DOE's initial efforts at inserting performance goals in its
management and operating contracts; and (4) evaluated DOE's early use
of incentive contracts to control the costs of its management and
operating contracts. 


--------------------
\1 Testimony before the House of Representatives, Committee on Energy
and Commerce, Subcommittee on Oversight and Investigations (May 26,
1993). 


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

DOE's contracting practices were framed during World War II and date
from that era.  Although this nation has changed considerably during
the decades since the War, DOE's contracting practices for its
management and operating contracts have remained much the same as
they were in the 1940s.  DOE's practices led to an undocumented
policy of blind faith in its contractors' performance, which is
called its "least interference" policy.  This policy, in many cases,
left DOE unaware of its contractors' activities.  Additionally, DOE
accepted and paid nearly every cost that these contractors incurred. 

DOE's contract reform has been an elusive and longstanding goal.  The
last two Secretaries of Energy have sought to correct the problems,
and the current Secretary initiated a new and extensive effort at
contract reform.  The current reform effort is based on a February
1994 report by DOE's Contract Reform Team.  In its report, the Reform
Team recommended actions to make DOE's contracting work better and
cost less.  Each of these actions required a specific end product to
be prepared and a deadline for the completion of each action.  In
response to the Reform Team's recommendations, DOE has written policy
and guidance to change its past practices and is in the process of
implementing the Contract Reform Team's recommendations. 


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

DOE has completed action on 47 of the 48 contract reform
recommendations, but 9 of the completed actions did not meet the
requirements of the Contract Reform Team.  DOE explained that while
actions may not have strictly adhered to the requirements of the
Reform Team, nevertheless, the actions achieved their intended goals. 
DOE also missed its deadlines for completing the required new
policies, guidance, and plans that serve as the framework for
contract reform by an average of 11 months.  The missed deadlines
have added to the time needed to implement contract reform. 

While DOE has changed its policy and adopted competitive contract
awards as the new standard for management and operating contracts, in
practice, DOE continues to make noncompetitive awards for these
contracts.  Of 24 decisions to award new management and operating
contracts between July 1994 and August 1996, DOE decided to
noncompetitively award 16 of them.  Furthermore, DOE decided not to
competitively award three major contracts before it negotiated the
terms of the contract renewal--a practice that is contrary to
contract reform.  Such actions can weaken DOE's position to negotiate
acceptable terms. 

DOE's contracting offices are including performance goals in their
management and operating contracts, but the contract goals are not
always clearly linked to those of the Department.  Although DOE
acknowledges that contract goals must be clearly linked to its
departmental goals, the connection between contract and departmental
goals is unclear.  In addition, some contract language allows
contractors to dispute the available amount and allocation of
incentives.  These situations impinge on DOE's authority to place
priorities on contract work, motivate contractors to perform the
work, and create the potential for compromising DOE's ability to
fulfill its missions. 

DOE's contracting offices have moved quickly to implement another
important reform by using incentive contracts, which can be used
effectively to control costs, but the negotiation of these incentives
did not always prove effective.  For cost incentives to work under
these contracts, the incentives must be based on good contract price
negotiations.  Although the governmentwide procurement regulation
identifies procedures to follow in negotiating contract prices and
incentives, DOE's procurement regulation for its management and
operating contracts does not.  Since DOE is authorized to use its own
procurement regulation for management and operating contracts, the
contracting offices have been left to use their own judgment and have
achieved different results with the use of these incentives. 


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


      DOE HAS MADE PROGRESS ON
      REFORMS, BUT THEIR
      IMPLEMENTATION IS IN ITS
      EARLY STAGES
-------------------------------------------------------- Chapter 0:4.1

DOE stated that it has completed action on 47 of its 48 contract
reform recommendations.  To its credit, DOE has developed a number of
new policies, guidance, and plans that form the framework of reform. 
Although DOE has made significant progress in developing this
framework, GAO found that nine actions did not fully respond to the
requirements of the Contract Reform Team.  For example, to operate
DOE's facilities in a more efficient and cost-effective manner, the
Reform Team recommended that DOE establish a preference for its
management and operating contractors to subcontract various
functions, such as laundry and cafeteria services, and provide
contractors with an incentive to encourage them to subcontract these
services.  However, DOE's proposed regulation, published in the
Federal Register in June 1996, did not include provisions for the
incentives that were recommended by the Reform Team.  DOE officials
who were responsible for completing the actions explained that
although DOE did not always meet the exact requirements of the
Contract Reform Team, the intent of the Reform Team was met. 

DOE missed the deadlines on 45 of the 47 completed actions by an
average of 11 months because, among other things, of the unexpectedly
lengthy internal coordination and review required.  Moreover, nearly
one-half of the reform actions were completed recently in fiscal year
1996.  This has added to the time required to fully and properly
implement contract reform, which is now in its early stages.  As
discussed below, GAO also has identified some early implementation
problems that need to be addressed and corrected for contract reform
to produce the results that are intended. 


      DOE CONTINUES TO RENEW MOST
      CONTRACTS WITHOUT
      COMPETITION
-------------------------------------------------------- Chapter 0:4.2

Despite changing its policy to adopt the Contract Reform Team's
recommendation to competitively award management and operating
contracts except in unusual circumstances, between July 1994 and
August 1996, DOE decided to award 16 of 24 management and operating
contracts noncompetitively.  The average age of these 16 contracts is
35 years.  Furthermore, in three recent decisions covering major
contracts, DOE did not negotiate the renewal terms of the contracts
before making its decision to extend the contract--contrary to
another Contract Reform Team recommendation.  Thus, DOE continues to
miss the infusion of the new offerors it had hoped for under
competition and continues to weaken its negotiating position on
noncompetitive contracts. 


      PROBLEMS EMERGE IN EARLY USE
      OF CONTRACT PERFORMANCE
      GOALS
-------------------------------------------------------- Chapter 0:4.3

The early implementation of a key contract reform--the placement of
performance goals in contracts--shows that contract goals are not
consistently linked to DOE's departmental goals.  While DOE was
working on contract reform, it also was developing its strategic
planning process.  DOE's strategic plan, developed in April 1994,
identifies DOE's departmental goals for its five business lines and
four key success factors.  DOE's business lines and key success
factors include areas such as national security and environment,
safety, and health.  Since most of DOE's missions are performed by
its management and operating contractors, DOE's contract reform and
strategic planning personnel acknowledged that contract goals must be
linked to the strategic plan goals.  However, in a review of several
contracts awarded after DOE's strategic plan was published, GAO had
significant difficulty linking contract goals to strategic goals. 
For example, one contract contained goals listed under seven
different categories.  However, the seven categories were not
comparable to the nine business lines or key success factors.  As a
result, GAO could not link the contract goals to the goals of DOE. 

In addition, some contract provisions provided that if disagreements
arose between the contractor and DOE in regard to incentives, the
contractor had the legal right to contest either DOE's decision on
the amount of the incentive fee available or the allocation of the
incentive fee to the specific contract goals.  By providing
contractors with the authority to question its decisions, these
contracts could hinder DOE's ability to determine the priority of its
work, motivate the contractors, and fulfill its mission requirements. 


      EARLY PROBLEMS ARE SURFACING
      WITH THE USE OF INCENTIVE
      CONTRACTS
-------------------------------------------------------- Chapter 0:4.4

Another key contract reform--the use of incentive contracts to
control costs--also has experienced some problems with its initial
implementation.  Two DOE contracting offices used incentive contracts
that are designed to provide incentives for the management of
contract costs.  Although these contracts can be effective tools to
control costs by transferring cost risk to the contractor, the
setting of incentives under these contracts must be based on a
contract target cost that is realistic.  If this is not done, the
contractor can earn additional profits without any real improvement
in performance. 

The governmentwide procurement regulation provides clear guidance for
assessing whether costs are realistic.  DOE's management and
operating contract regulation does not.  Since DOE is not required to
use the governmentwide procurement regulation to negotiate its
management and operating contracts, DOE's contracting offices have
been left to use their own judgment in setting the incentives and
negotiating target costs.  Under these conditions, two contracting
offices improvised and obtained different results.  Under one
contract, the contractor earned the incentive profit without any
improved performance.  Under the second contract, both the
contracting office and the contractor believe that the contractor's
performance was improved by the incentive. 


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

GAO makes several specific recommendations to the Secretary of Energy
directed at linking contract goals to departmental goals and
improving the pricing of contracts and the setting of incentives in
management and operating contracts. 


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

GAO transmitted a draft of this report to DOE for review and comment
and has incorporated changes as needed.  DOE's written comments and
GAO's response appear in appendix II.  Overall, DOE had two main
concerns.  First, DOE believes that the draft report did not fully
recognize DOE's efforts to improve contracting problems identified in
GAO's past reports nor its current accomplishments under contract
reform.  GAO agrees that DOE has taken steps to reform its
contracting problems.  DOE has (1) changed its policy and adopted
competitive awards as its new contracting standard, (2) included
performance goals in its contracts, and (3) moved quickly to
implement the use of incentive contracts to control costs.  However,
DOE's new contracts were not based on final policy, and they had been
in effect for only about 1 year.  Thus, it will take years to
determine the extent to which DOE has met its goal of making
contracting work better and cost less.  Second, DOE believes that
GAO's draft report did not adequately acknowledge the implementation
of its new competition policy.  Specifically, DOE was concerned that
GAO did not adequately recognize its culture change for increased
competition and disagreed with GAO's assessment over the contract
extension decision for three DOE laboratories.  DOE believes that the
Department's culture has changed from one in which extending
contracts was the normal practice to one in which competition is the
first consideration.  DOE also states that in all cases where
noncompetitive extensions have been sought, the Department subjected
each decision to a rigorous examination of the facts and
circumstances.  Finally, DOE states that rather than using the
existing contract as a basis for negotiation, the Department
developed administrative mechanisms to ensure that contract reform
terms and conditions were the bases for negotiation. 

GAO believes that it did adequately represent DOE's new reform that
requires contracts to be competitively awarded--except in unusual
circumstances.  Yet, regardless of this goal, two-thirds of DOE's
decisions were to noncompetitively extend management and operating
contracts.  Such a large proportion of noncompetitively extended
contracts suggests that DOE still has a long way to go before it
realizes the benefits of competitive contracting.  Although DOE
states that it is improving its existing contracts through
noncompetitive negotiations, it is doing just that--negotiating in a
noncompetitive environment.  This does not identify new contractors
as contract reform intended.  Only competition will do that. 

DOE states that extending the three laboratory contracts was
contingent on incorporating contract reform provisions and achieving
other negotiation objectives.  However, on the basis of DOE's past
performance, it will be difficult for DOE to implement such a policy
on these contracts.  The Secretary's decision to extend these
contracts stated that considering other contractors was unrealistic
and incompatible with program requirements.  Once DOE stated that
only one contractor could do this work, the Department weakened its
negotiating position.  While DOE is not legally bound to extend these
contracts, its actions to date give the appearance that the decision
to extend the contracts was made prior to the completion of
successful negotiations and is inconsistent with the intent of
contract reform. 

DOE generally agrees with GAO's recommendations that contract reform
goals be linked to agency goals and that policies be adopted to
improve incentive contract cost controls.  DOE also indicated that
these recommendations will be implemented. 


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

For about 50 years, the Department of Energy (DOE) and its
predecessors have used contracting policies that were developed
during the crisis of World War II.  Since that time, billions in
taxpayer dollars have been spent on contracts where competition was
the exception, almost any contractor's cost was reimbursed, and lax
oversight of contractors was the practice.  In 1990, DOE began taking
initial steps toward improving its contracting.  The current
Secretary of Energy, after acknowledging that DOE was not in control
of its contractors, is continuing to reform DOE's contracting. 


   DOE'S CONTRACTING PRACTICES ARE
   ROOTED IN WORLD WAR II
---------------------------------------------------------- Chapter 1:1

DOE is the largest civilian contracting agency in the federal
government.  In fiscal year 1995, DOE had contract obligations of
$17.5 billion, or about 91 percent of the Department's total fiscal
year 1995 obligations.  Its contracting practices are rooted in the
development of the atomic bomb under the Manhattan Project during
World War II.  This Project was a unique undertaking to produce
atomic capability under emergency conditions and under circumstances
of utmost urgency, extreme risk, and unprecedented security.  Special
contracting arrangements were developed by DOE's predecessor agencies
with participating industry and academic organizations, including the
government's agreement, with few exceptions, to fully reimburse all
of the contractors' costs and completely indemnify contractors
against any liability incurred from their involvement on the project. 

From these roots, DOE's contracting took two separate paths--(1) the
path for management and operating (M&O) contracts, the direct
descendants of the Manhattan Project, under which several current
contracts were originally awarded during World War II and (2) the
path for non-M&O contracts.  The M&O contracts, which accounted for
82 percent ($14.3 billion) of DOE's fiscal year 1995 contract
obligations, have been governed in key procurement areas by DOE's own
unique procurement regulations.  M&O contracts are for the operation,
maintenance, or support of government-owned research, development,
production, or testing facilities, both nuclear and nonnuclear.  The
non-M&O contracts, which account for the remaining 18 percent ($3.2
billion) are governed by the governmentwide Federal Acquisition
Regulation (FAR).\2 As a result of the two different paths, these
contracts have distinct differences.  For example, noncompetitive
procurement has been the normal practice for M&O contracts, while
competitive contracting has been the norm for non-M&O contracts. 


--------------------
\2 The contracting practices of federal executive agencies are
governed by the Federal Acquisition Regulations System, including the
(1) FAR, which is the governmentwide procurement regulation, and (2)
individual agency acquisition regulations that implement or
supplement the FAR for activities that are unique to the individual
agency.  DOE's unique agency regulation is called the Department of
Energy Acquisition Regulation. 


   GAO DESIGNATED DOE'S CONTRACT
   MANAGEMENT AS AN AREA OF HIGH
   RISK
---------------------------------------------------------- Chapter 1:2

In early 1990, we designated DOE's contract management as one of 16
high-risk areas in the federal government warranting close attention
over a period of several years.  We did so because we believed that
DOE was highly vulnerable to waste, fraud, abuse, and mismanagement
as a result of DOE's extensive reliance on contracting and its
history of inadequate oversight of contractors.  From this effort, we
have issued a series of reports and testimonies on DOE's contracting
practices that have contributed to Congress's deliberation on DOE's
budget and have provided an important impetus for DOE's efforts to
reform its M&O contracts.  (See the end of this report for a list of
related GAO products and testimonies.) DOE's contract reform
initiatives encompass a myriad of efforts.  This report focuses on
important changes being made in the areas of competition, performance
goals, and incentives but does not cover all aspects of DOE's
contract reform effort. 


   DOE HAS MADE EFFORTS TO REFORM
   M&O CONTRACTS
---------------------------------------------------------- Chapter 1:3

Reforming M&O contracts has been an elusive and longstanding DOE
goal.  For the fiscal 1989, 1990, and 1991 Federal Managers'
Financial Integrity Act reports, the Secretary of Energy identified
contract management as a material weakness and recommended actions to
correct some of the weaknesses.\3 In April 1992, we reported that the
Secretary's recognition of contract management weaknesses, commitment
to strengthening contract controls, and actions to address some
contracting weaknesses were important first steps for reform.\4
However, we concluded that the weaknesses would not be corrected in
the near future because the corrective actions would take several
years to implement. 

In May 1993, the Secretary of Energy told the Congress that DOE was
not in control of its M&O contractors and was not in a position to
ensure the effective and efficient expenditure of taxpayer dollars.\5
To find solutions to its contracting problems, the Secretary
announced the creation of a Contract Reform Team, chaired by the
Deputy Secretary of Energy, to do a "top-to-bottom" review of DOE's
contracting mechanisms and practices.  In February 1994, the Contract
Reform Team published its report, Making Contracting Work Better and
Cost Less.  In the report, the Reform Team focused its efforts on M&O
contracting and identified a number of problems that needed
correction, including the following: 

  -- Loose accountability for contractors' performance and few
     controls to ensure that funds are spent on the highest
     priorities. 

  -- Few controls over contractors' costs. 

  -- Fees that did not properly reflect the quality of the
     contractor's performance. 

  -- Insufficient fee incentives to encourage excellent performance. 

  -- The reimbursement of costs that the government should not
     reimburse. 

  -- Insufficient competition and a strong bias for existing
     contractors. 

  -- Insufficient financial accountability. 

To correct these problems, the Reform Team recommended 47 specific
actions to make DOE's contracting work better and cost less.  The
Secretary subsequently added another recommendation to the Reform
Team's list regarding diversity among participating contractors and
subcontractors.  These 48 recommendations included requirements to
develop items, such as policy, guidance, and plans to correct
identified problems.  The policy and guidance provide a framework for
reform, but their actual implementation will require a period of
years, as the current contracts are either competitively awarded or
renewed and the reform provisions incorporated into the contracts. 

Chief among the Contract Reform Team's goals, represented by several
recommendations, was a new contract form that the Reform Team
proposed--the Performance-Based Management Contract.  Key elements of
this contract included the following: 

  -- Clearly stated, results-oriented, performance goals and
     indicators of performance. 

  -- Incentives for contractors to meet and exceed the performance
     goals effectively and efficiently. 

  -- Criteria and incentives for contractors to seek opportunities to
     subcontract work that could be performed better by firms other
     than the M&O contractor. 

  -- Incentives for cost-saving. 

  -- Improved financial accountability. 


--------------------
\3 Weaknesses are material when the deficiency significantly impairs
the fulfillment of a mission or significantly weakens safeguards
against waste, loss, and the unauthorized use or misappropriation of
funds, property, or other assets, among other things. 

\4 Energy Management:  Vulnerability of DOE's Contracting to Waste,
Fraud, Abuse, and Mismanagement (GAO/RCED-92-101, Apr.  10, 1992). 

\5 DOE Contract Management Issues, statement by the Secretary of
Energy before the House of Representatives, Committee on Energy and
Commerce, Subcommittee on Oversight and Investigations (May 26,
1993). 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

Concerned about the results of DOE's undertaking, the Chairman,
Subcommittee on Energy and Power, House Committee on Commerce
requested, in January 1996, that we review DOE's contract reform
efforts and focus on the key contracting areas of competition and
performance goals.  Specifically, we (1) determined the status of the
Contract Reform Team's recommendations; (2) evaluated the effect of
the initiatives on competition for M&O contracts, which are used to
manage and operate DOE's facilities; (3) evaluated DOE's initial
efforts at inserting performance goals in its M&O contracts; and (4)
evaluated DOE's early use of incentive contracts to control the costs
of its M&O contracts. 

To determine the status of DOE's actions in response to the Contract
Reform Team's recommendation, we analyzed the Contract Reform Team's
report and identified the actions that the recommendations required. 
We then reviewed DOE's documentation supporting the actions to
determine if they met each requirement of the individual
recommendations.  To determine the timeliness of each action, we
compared the original and amended deadlines with the actual dates
that the actions were completed.  We discussed each action with the
staff of the Contract Reform Project Office and staff of the DOE
organizations that acted on the Reform Team's recommendations. 

To evaluate the effect of contract reform on competition for M&O
contracts, we reviewed the Contract Reform Team's report and
recommendations and reviewed DOE's interim and final policy for the
award of M&O contracts.  We identified each decision to award
contracts including those listed in the Secretary of Energy's July 5,
1994, decision memorandum to those decisions made by the end of
August 1996 and obtained information from DOE showing whether these
contracts had been competitively awarded previously.  We then
analyzed the information provided by DOE to determine if the new
decisions reflected an increase in competition from past
procurements.  Since DOE did not provide specific justification for
each of its noncompetitive decisions in the July 5, 1994, decision
memorandum, we could not evaluate whether these decisions were
appropriate. 

To evaluate DOE's use of performance goals for M&O contracts, we
reviewed the requirements of the Government Performance and Results
Act of 1993, DOE's strategic plan, and the Secretary's performance
agreements with the President for fiscal years 1995 and 1996. 
Additionally, we reviewed the performance goals and indicators
contained in the contracts for the Rocky Flats Environmental
Technology Site, the Nevada Operations Office's Support, the Argonne
National Laboratory, and the Thomas Jefferson National Accelerator
Facility (formerly called the Continuous Electron Beam Accelerator
Facility).  We compared the performance goals from these contracts
with the goals identified in DOE's strategic plan and annual
performance agreements.  We also discussed the goals and plans with
DOE's strategic planning staff, contract reform staff, and
contracting staff involved with the contracts we reviewed. 

To evaluate the use of cost incentives on incentive contracts, we
reviewed DOE's M&O procurement regulations and the FAR for the
negotiation of contract prices.  To evaluate two alternative ways in
which DOE applied cost incentives to its M&O contracts, we reviewed
the two contracts that used contract types that typically are used to
control costs.  These included contracts for the Oak Ridge facility
and the Waste Isolation Pilot Plant.  These two contracts used
incentive contracts that are typically used to provide a cost
incentive in their pricing arrangement.  We discussed the contracts
with DOE contracting staff involved in the setting of incentives for
these contracts and with cognizant contracting officials at DOE's
headquarters. 

We provided DOE with a draft of this report for its review and
comment.  The Department provided us with written comments on the
draft report, which are presented and evaluated in chapters 2 through
5 and are reprinted in appendix II. 

We performed our review from March 1996 through November 1996 in
accordance with generally accepted government auditing standards. 


DOE IS MAKING PROGRESS IN
DEVELOPING A FRAMEWORK FOR
CONTRACT REFORM
============================================================ Chapter 2

DOE is making headway in developing policies, procedures, and
guidelines in response to the Contract Reform Team's report. 
Together, these reform actions, among others, should serve as the
framework for contract reform.  At the end of August 1996, DOE
reported completing 47 of the 48 actions needed to respond to the
Reform Team's recommendations. 

Our analysis indicates, however, that DOE has not completed nine
actions in accordance with the Reform Team's recommendations. 
Moreover, DOE is well behind its original schedule for completing
reform actions, which will add to the time that is needed to fully
and properly implement contract reform for its contracts. 
Furthermore, DOE staff that developed reform actions have reported
potential problems with implementation.  In subsequent chapters in
this report, we identify examples of problems that DOE has
encountered as it begins to implement contract reform. 


   DOE SETS UP PROCESSES FOR
   DEVELOPING CONTRACT REFORM
   ACTIONS
---------------------------------------------------------- Chapter 2:1

As a result of its review of DOE's contracting practices, DOE's
Contract Reform Team made 47 recommendations in its February 1994
report to make DOE's contracting work better and cost less.  Shortly
after the Reform Team's report was published, the Secretary of Energy
added a 48th recommendation concerning diversity.  For the most part,
the Reform Team's recommendations dealt with the development of
policies, procedures, guidance, or plans involving such key
contracting issues as competitive procurement, performance goals, and
performance and cost-reduction incentives.  or each recommendation,
the Reform Team prescribed a specific reform action to be taken,
established a specific deadline for the action, and assigned a
specific DOE organization with the responsibility for developing the
reform action.  (See app.  I for a list of the specific reform
actions and their status.)

In March 1994, the Secretary established an executive committee to
oversee the implementation of contract reform, and in June 1994, the
committee established the Contract Reform Project Office within the
Office of the Deputy Secretary.  The purpose of the Project Office is
to provide DOE organizations having responsibility for completing
actions with guidance as well as to shepherd completed reform actions
through the approval process.  Among its other duties, the Project
Office ensures that (1) recommendations have been assigned to the
proper departmental organizations for action, (2) desired reform
goals have been clarified, and (3) systems have been established to
track reform efforts.  The Project Office considers a reform action
complete when the action has been officially approved by the
executive committee.\6


--------------------
\6 A proposed action may be approved for implementation directly by
the executive committee or after having received the proposed action,
the executive committee does not comment within 2 weeks. 


   DOE HAS ACTED ON 47
   RECOMMENDATIONS BUT SOME
   ACTIONS DID NOT COMPLY WITH
   CONTRACT REFORM TEAM'S
   REQUIREMENTS
---------------------------------------------------------- Chapter 2:2

DOE states that it has completed action on 47 recommendations. 
However, nine of DOE's actions were not performed in accordance with
the Reform Team's requirements.  DOE's Contract Reform Project Office
staff explained that all of their completed actions complied with the
intent of the Reform Team. 

We reviewed the documentation for each of DOE's completed actions
performed in response to the Reform Team's recommendations and found
that nine actions did not meet the specific requirements of the
Reform Team's recommendations.  For example, to operate DOE's
facilities in a more efficient and cost-effective manner, the Reform
Team recommended that DOE establish a preference for its M&O
contractors to subcontract various functions, such as laundry and
cafeteria services, unless the M&O contractor could perform these
functions at a lower cost.  The Reform Team further recommended that
contractors be provided with incentives to encourage the contractors
to subcontract these services.  However, DOE's proposed regulation,
published in the Federal Register in June 1996, did not include
provisions for the incentives that were recommended by the Reform
Team.  According to Project Office officials, the incentives were
unnecessary because the proposed regulation would require contractors
to subcontract for these services where appropriate.  However, the
Project Office officials stated that several DOE field offices are
currently providing their contractors with incentives to subcontract
these services. 

Furthermore, in an effort to implement performance-based contracting
methods for support service contracts, the Reform Team recommended
that DOE develop a plan for converting cost-reimbursement support
service contracts to performance-based contracts, when applicable. 
Although DOE provided illustrations of potential application of
performance-based methods to support services and identified specific
program and field offices that are now planning to convert some of
their support service requirements to performance-based support, DOE
did not develop an actual plan with targets and milestones for
converting these possible support services as required by the Reform
Team. 

Project Office officials and program office officials who were
assigned to develop actions in response to recommendations stated
that while actions may not have strictly adhered to the requirements
of the Reform Team's report, these actions, nevertheless, achieved
their intended goals.  For example, the Reform Team recommended that
DOE reduce its current audit backlog in order to improve the ability
of DOE managers to administer financial operations.  In doing so, the
Reform Team advised DOE to identify ways to provide the Defense
Contract Audit Agency with sufficient funding to permit additional
resources to be assigned to DOE's non-M&O contracts.  Before
providing the Defense Contract Audit Agency with funds, however, the
Reform Team recommended that the costs and benefits of obtaining such
additional resources as well as any plausible alternatives be
assessed.  In response, DOE provided the Defense Contract Audit
Agency with funding in fiscal year 1995 to reduce DOE's current audit
backlog with plans to continue funding until the current backlog is
eliminated.  However, DOE neither performed a cost-benefit analysis
nor suggested any viable alternatives as recommended in the contract
reform report. 


   COMPLETED REFORM ACTIONS ARE
   BEHIND SCHEDULE
---------------------------------------------------------- Chapter 2:3

Although DOE has made progress in its efforts to write new policy,
guidelines, and plans, it has substantially exceeded its deadlines
for 45 of 47 completed reform actions.  DOE exceeded its deadlines by
an average of 11 months, and 13 actions were from 18 months to 26
months late.\7 Moreover, many of the original deadlines had been
subsequently extended by the executive committee at the request of
cognizant departmental organizations.  However, even the extended
deadlines have been exceeded as well. 

According to Project Office officials, unanticipated circumstances
often caused delays in the processing of actions.  For example, some
of these delays were caused by the review process.  Moreover, Project
Office officials said that a considerable amount of time was consumed
in an attempt to achieve greater participation from departmental
organizations in reviewing and commenting on actions.  Delays were
also encountered in the assigning of actions to specific departmental
organizations.  For example, Project Office officials mentioned that
the Office of Procurement and Assistance Management opposed being
assigned responsibility for six action items because these actions
were inherently field related, which the officials believed, could
best be handled by the Office of the Associate Deputy Secretary for
Field Management.  Project Office officials further pointed out that
the reform actions were done by staff on a part-time basis because
the reform action work was in addition to their normal duties. 
Moreover, because many of the actions were new approaches that
crossed lines of responsibility, they often required considerable
internal coordination among the offices that shared such
responsibility.  According to the officials, other factors such as
newly established initiatives, downsizing, and retirements also
caused delays in completing actions. 


--------------------
\7 Average includes two reform actions that were on time. 


   TOO EARLY TO ASSESS EFFECT OF
   REFORM ACTIONS BUT
   IMPLEMENTATION MAY BE
   PROBLEMATIC
---------------------------------------------------------- Chapter 2:4

Although it is too soon to assess the overall effectiveness of the
reform actions on achieving DOE's contract reform goals, early
indications suggest that delays, limited available resources, and
overly broad guidance may inhibit implementation. 

The deadlines for the vast majority of the reform actions were
missed.  Of those reform actions that are now reported as complete,
many have been completed recently.  For example, 49 percent were
completed during fiscal year 1996.  Because of these delays in
setting the framework of contract reform, successful implementation
of the new policies will be pushed further into the future. 

Several task teams have expressed concerns about whether available
resources can adequately support the reform actions they developed. 
For example, the task team with responsibility for developing
specific performance goals and indicators for real and personal
property reported that numerous stakeholders expressed concerns that
implementation may be problematic "because of the lack of resources
and baselines to be measured against." We raised similar concerns in
a 1995 report on property management at DOE's Rocky Flats site.\8 In
the report, we concluded that without accurate data on property,
neither DOE nor its contractor can determine how much property is
present at the site and how much has been lost or stolen. 

Furthermore, the task team charged with developing generic and
specific performance goals and indicators for business management as
well as environment, safety, and health expressed similar concerns. 
The task team recommended that "prior to commencing implementation,
detailed planning, including an assessment of the impact on staffing
and infrastructure and the ability to adjust to such impact, must be
done." The team further reported that the performance goals and
indicators were developed "at a high level and may not directly apply
to an individual contract being incentivized."\9 The team finally
added that many of the examples contained in its report were based on
site-specific goals that would need to be replaced with goals that
are relevant to each contractor. 

Project Office officials reiterated that it may take years to
determine whether many of these actions will make DOE contracting
work better and cost less.  However, the Project Office expects to
issue its own report on the impact of the contract reform actions in
late 1996.  Project Office officials stated that they will not assess
each action individually but will assess the cumulative impact of the
actions on such things as competition, performance goals, and
incentives. 


--------------------
\8 Department of Energy:  Property Management Has Improved at DOE's
Rocky Flats Site (GAO/RCED-96-39, Dec.  28, 1995). 

\9 The word incentivized means being provided with an incentive. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:5

Although, DOE has made significant progress in setting a framework
for contract reform through the issuance of new policies, guidance,
and plans, the real test of contract reform will be in the
implementation of these reforms in contracts.  These changes will
take time to come to fruition because (1) it will take time for DOE's
existing contracts to be replaced by new ones incorporating reform
measures, (2) some reform actions are still works-in-progress and
will continue to evolve, and (3) DOE was late in completing almost
all of its reform actions. 

Because of the magnitude of DOE's reforms, some of which are directly
opposed to its previous contracting policy, we believe that
implementation problems are to be expected.  These problems must be
identified and corrected during implementation for contract reform to
succeed.  For this reason, we believe it is vital for the continued
monitoring of contract reform implementation by the Secretary of
Energy and other top DOE officials.  Since contract reform has been a
high priority of the Secretary, we are not making any recommendations
along this line.  While we recognize that having new policies in
place is an important step toward ensuring that reform occurs, the
actual implementation of contract reform and these policies should
not lose momentum nor priority. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:6

DOE believes that our draft report did not provide a comprehensive
overview of their reform efforts and failed to address the extent to
which contract reform has made contracting work better and cost less. 
We believe that DOE has taken some very important steps in reforming
its contracting problems.  DOE has (1) changed its policy and adopted
competitive awards as its new contracting standard, (2) included
performance goals in its contacts, and (3) moved quickly to implement
the use of incentive contracts to control costs.  In our opinion, the
broad strategy presented by DOE is inextricably linked with contract
reform and, more particularly, the 48 action items.  Furthermore, the
completion of the policies, procedures, and guidance developed under
the action items is the backbone of sustained contract reform. 
Therefore, the status of these action items provides a reasonable
assessment of DOE's progress and the framework for future assessments
as DOE's overall effort evolves. 

Furthermore, DOE's new contacts are not based on final policy, and
they had been in effect for only about 1 year.  Thus, it will take
years to determine the extent to which DOE has met its goal of making
contracting work better and cost less. 

DOE believes that our report does not address what the Department has
done to make each of the 48 action items a reality, and it attached
specific comments relating to these items.  Our detailed responses
addressing the specific items that DOE questioned is discussed in
appendix II. 


COMPETITION BECOMES THE RULE BUT
NOT THE PRACTICE
============================================================ Chapter 3

In response to one of the most significant recommendations of the
Contract Reform Team, DOE has changed its policy from one of making
noncompetitive M&O contract awards to one that adopts full and open
competition as the norm for M&O contract awards.  For various
reasons, however, the majority of M&O contracts continue to be
extended on a noncompetitive basis.  Of the 24 decisions made between
July 1994 and August 1996, DOE decided to extend 16 on a
noncompetitive basis while competitively awarding 8.\10 Furthermore,
for three University of California contracts, DOE made the decision
to extend the contracts prior to completing negotiations despite the
Contract Reform Team's recommendation to the contrary.  As a result,
DOE has placed itself in the same weak negotiating position that it
has maintained for years and that contract reform was designed to
prevent. 


--------------------
\10 According to DOE's Procurement and Assistance Data System, DOE
had 42 active M&O contracts as of July 1, 1996. 


   NEW DOE POLICY ON M&O CONTRACTS
   REFLECTS CONTRACT REFORM TEAM'S
   RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:1

The Contract Reform Team recommended, and DOE put in place, a policy
to overturn years of noncompetitive contracting with M&O contractors. 
Prior to contract reform, DOE's procurement regulation authorized
competition for M&O contracts when it appeared likely that the
government's position might be meaningfully improved in terms of cost
or performance unless it was determined that to change contractors
would be contrary to the best interests of the government.  As a
result of this policy and practice, the Contract Reform Team
concluded that noncompetitive contracting had become the norm in M&O
contracting. 

The Contract Reform Team was critical of this noncompetitive policy
stating that because, in part, of the close working relationships
with particular contractors, contracts were routinely extended every
5 years, thus resulting "in many contractors continuing to perform
for decades." The Reform Team further said that this practice created
a bias that favored the incumbent contractor and that a new policy
favoring competition would improve DOE's contracting by encouraging
new contractors to participate in M&O awards because they would
understand that DOE and the incumbent contractor would no longer have
perpetual relationships.  Finally, the Reform Team noted that DOE's
decisions to extend individual M&O contracts were made before
negotiations were held with the contractors.  As a result, DOE's
negotiating position with its contractors was weakened. 

DOE established an interim policy on September 28, 1994, that changed
its M&O contract award policy to one favoring full and open
competition.  As recommended by the Contract Reform Team, the policy
provided that competitively awarded M&O contracts would include a
basic contract term of 5 years or less and may include an option to
extend the term of the contract for 5 additional years or less and a
maximum term limit of 10 years.  As recommended, the policy also
provided for noncompetitive extensions of M&O contracts, in
exceptional circumstances, where competition was "incompatible with
the effective and efficient discharge of Departmental programs or is
otherwise incompatible with the paramount interest of the United
States." In these instances, the Secretary of Energy was to authorize
the use of noncompetitive procedures to extend an existing contract,
and the extension of the contract was to be conditioned upon the
successful negotiation of DOE's objectives. 

DOE's final policy, which became effective on August 23, 1996,
adopted a standard of full and open competition in the award of M&O
contracts, including performance-based management contracts.  The
policy further states that an M&O contract may be awarded or extended
without providing for full and open competition only when justified
under one of the exceptions provided under the Competition in
Contracting Act of 1984.  The seven exceptions provided by the act
include identified and specific circumstances such as where only one
source can perform the work or when an agency's need for an item is
of unusual and compelling urgency.\11

The policy states that noncompetitive extensions shall be considered
conditional upon the successful negotiation of the contract. 
Additionally, the Secretary must authorize all awards that do not use
full and open competition. 


--------------------
\11 The seven exceptions to full and open competition are listed at
FAR 6.302. 


   IN PRACTICE, NONCOMPETITIVE
   EXTENSIONS REMAIN THE NORM
---------------------------------------------------------- Chapter 3:2

From July 5, 1994 to August 31, 1996, DOE made 24 decisions to
competitively award or noncompetitively extend M&O contracts.  Of
these 24 decisions, 16 were to noncompetitively extend contracts and
8 were to competitively award contracts.\12 Additionally, decisions
were made on four other former M&O contracts that either brought them
to an end or converted them to cooperative agreements.\13

The 16 contracts that DOE noncompetitively extended or plans to
noncompetitively extend include 12 contracts that, according to DOE,
have never been competitively awarded.  The average age of these 16
contracts is about 35 years.  Table 3.1 lists contracts that DOE
either noncompetitively extended or plans to noncompetitively extend. 



                               Table 3.1
                
                List of M&O Contracts That Were Extended
                or to Be Extended as of August 31, 1996

                               Current
                              contract  Competitively   Current
Facility                          date  awarded in      contractor
--------------------------  ----------  --------------  --------------
Waste Isolation Pilot             1985  1978            Westinghouse
Plant                                                   Electric

West Valley Demonstration         1981  1981            West Valley
Project                                                 Nuclear
                                                        Services

Kansas City Plant                 1948  Never           Allied Signal
                                        competitively
                                        awarded

Argonne National                  1946  Never           University of
Laboratory                              competitively   Chicago
                                        awarded

Brookhaven National               1947  Never           Associated
Laboratory                              competitively   Universities
                                        awarded

Thomas Jefferson National         1984  1984            Southeastern
Accelerator Facility\a                                  University
                                                        Research
                                                        Associates

Ames Laboratory                   1943  Never           Iowa State
                                        competitively   University
                                        awarded

Stanford Linear                   1976  Never           Leland
Accelerator Center                      competitively   Stanford, Jr.
                                        awarded         University

Knolls Atomic Power               1946  Never           KAPL
Laboratory                              competitively
                                        awarded

Pacific Northwest National        1964  Never           Battelle
Laboratory                              competitively   Memorial
                                        awarded         Institute

Lawrence Livermore                1940  Never           University of
National Laboratory                     competitively   California
                                        awarded

Los Alamos National               1943  Never           University of
Laboratory                              competitively   California
                                        awarded

Lawrence Berkeley National        1947  Never           University of
Laboratory                              competitively   California
                                        awarded

Princeton Plasma Physics          1975  Never           Princeton
Laboratory                              competitively   University
                                        awarded

Fermi National Accelerator        1967  Never           Universities
Laboratory                              competitively   Research
                                        awarded         Association

Pantex Plant                      1991  1991            Mason &
                                                        Hangar-Silas
                                                        Mason
----------------------------------------------------------------------
\a Until 1996, this facility was known as the Continuous Electron
Beam Accelerator Facility. 

Source:  DOE's Contract Reform Project Office. 

The eight contracts that DOE has competitively awarded or is planning
to competitively award include four prior contracts that were
competitively awarded in the late 1980s, according to DOE.  These
include the contracts for the Savannah River, Hanford Reservation,
Hanford Environmental Health Center, and Mound facilities.  However,
the Oak Ridge contracts, which DOE plans to competitively award, will
replace contracts that were noncompetitively awarded.  On the other
hand, the new competitively awarded contracts for the Idaho, Nevada,
and Rocky Flats facilities each replaced several contracts that were
both competitively and noncompetitively awarded.  Table 3.2 presents
a list of the competitively awarded procurements or procurements that
are planned for competition. 



                               Table 3.2
                
                    List of M&O Contracts That Were
                  Competitively Awarded or Planned for
                   Competition, as of August 31, 1996

                                New
                                contract
Facility                        awarded   Current contractor
------------------------------  --------  ----------------------------
Idaho National Engineering      1994      Lockheed Idaho Technology
Laboratory and the Specific
Manufacturing Plant\a

Rocky Flats Environmental Test  1995      Kaiser Hill
Site

Nevada Operations Office        1995      Bechtel Nevada
Support

Savannah River Site             1996      Westinghouse Savannah River

Hanford                         1996      Fluor Daniel Hanford

Hanford Environmental Health    Not yet   Hanford Environmental Health
Center                          awarded   Foundation

Mound Facility                  Not yet   EG&G Mound Applied
                                awarded   Technologies

Oak Ridge Facility and          Not yet   Lockheed Martin Energy
Laboratory\b                    awarded   Systems
                                          Lockheed Martin Energy
                                          Research
----------------------------------------------------------------------
\a Two new Idaho contracts replaced and consolidated the work
regarding five individual M&O contracts that were competed at
different times in the past, and the new Nevada contract replaced
three previous contracts. 

\b This contract was noncompetitively extended in August 1995.  In
early 1996, DOE split the national laboratory work from the contract
and awarded a second contract noncompetitively to the incumbent
contractor.  DOE's current plans are to award three separate
contracts competitively in the future for the facility's defense
work, environmental restoration work, and national laboratory work. 

Source:  DOE's Contract Reform Project Office. 

In reaching its decisions on whether to competitively award or
noncompetitively extend a contract, DOE considered such things as

  -- the transition of its facilities to environmental restoration
     facilities;

  -- the long-standing relationships with its incumbent contractors
     at research and development laboratories and the need to make
     special arrangements with contractors on whose property the
     facilities were situated (some of DOE's laboratories are located
     on the campuses of universities); and

  -- the need to maintain core competencies in nuclear weapons
     design, production, and dismantlement during the transition to a
     post-Cold War society. 

We discussed the results for the 24 contract decisions with the
Deputy Assistant Secretary for Procurement and Assistance Management,
the Director of the Contract Reform Project Office, the Deputy
Associate Deputy Secretary for Field Management, and other DOE staff. 
They explained that the new noncompetitive contracts are really new
contracts that include new clauses and new requirements.  In
addition, they stated that there is increased competition for former
M&O work, which is being competitively awarded through DOE's
privatization efforts.  For example, at the Hanford facility, the
procurement for the Tank Waste Remediation System, which in the past
would have been done noncompetitively by the current M&O contractor,
is now being competitively awarded as a separate procurement. 
Finally, the procurements for sites that had a change in their
missions or were in transition from one mission to another were
competitively awarded and the contracts were noncompetitively
extended for those where there was a significant amount of continuity
with the contractor. 


--------------------
\12 On July 5, 1994, the Secretary signed the initial decision
memorandum for a number of DOE facility contracts.  Included in this
memorandum were competitive procurements for the Idaho National
Engineering Laboratory and the Rocky Flats Environmental Technology
Site which were in progress.  Also included in the memorandum were
the noncompetitive negotiation of the West Valley Demonstration
Project contract, which was in process, and the noncompetitive
negotiation for the Knolls Atomic Power Laboratory, which was
recently completed. 

\13 These include the decisions whereby the agreements for the
Savannah River Ecology Laboratory and the Inhalation Toxicology
Research Institute would be converted to cooperative agreements and
decisions whereby the agreements for the Laboratory of Radiological &
Environmental Health and the Energy Technology Engineering Center
would be discontinued. 


   DOE WEAKENED ITS BARGAINING
   POSITION BEFORE CONTRACT TERMS
   WERE NEGOTIATED
---------------------------------------------------------- Chapter 3:3

Although contrary to a recommendation by the Contract Reform Team,
DOE may have weakened its bargaining position with the University of
California when it conditionally decided to extend the contracts
prior to their negotiation. 

The Contract Reform Team recommended that the terms of contracts be
negotiated before making the decision to extend contracts, but a
recent decision for three University of California contracts, which
had fiscal year 1995 obligations of $2.3 billion, appears to
contradict this recommendation.  For example, in the Secretary of
Energy's May 14, 1996, "conditional extension decision" for the
management and operation of the Los Alamos National Laboratory and
the Lawrence Livermore National Laboratory, the Secretary summarized
the university's more than 50 years of work under the two existing
contracts and concluded that

     "Under these circumstances, it would be unrealistic to consider
     the introduction of an unknown and untested management team to
     these critical scientific and technical endeavors."

Likewise, in discussing the university's nearly 50 years' performance
on the existing contract for the Lawrence Berkeley National
Laboratory, where the laboratory's facilities are located on
university property, the Secretary concluded that

     "The loss of such resources by transferring to a different
     contractor is equally incompatible with our program
     requirements."

At the end of the decision, the Secretary explained that any award to
the University is contingent on improvements in the terms of the
current contracts. 

We discussed this decision with the Deputy Assistant Secretary for
Procurement and Assistance Management, the Director of the Contract
Reform Project Office, and the Deputy Associate Deputy Secretary for
Field Management and were told that regardless of the statements, DOE
has the resolve to competitively award these contracts if it does not
obtain the contract reforms that it is seeking from the university. 
Additionally, the officials explained that they were very careful in
the wording of the decision and that the comments about the
university only reflected its scientific capabilities and not its
business management, which must be improved. 


   DOE'S IMPLEMENTATION OF THE NEW
   COMPETITION POLICY COULD BE
   BENEFICIAL
---------------------------------------------------------- Chapter 3:4

DOE's new policy on competition became effective on August 23, 1996. 
As a result, the timing of our work did not give us the opportunity
to review DOE's justifications for noncompetitive procurement under
the new policy.  However, we note that the new policy adopts a
standard of full and open competition.  DOE's policy also adopts the
provision of the Competition in Contracting Act, as implemented by
the FAR, that provides specific exceptions to the act's requirements
for full and open competition.  Under these exceptions, DOE can
continue to justify its noncompetitive procurements and not fulfill
the intent of its own competition policy. 

The Competition in Contracting Act was enacted in 1984 to increase
the use of competitive procurement in the federal government. 
Although the act requires full and open competition, it provides
seven exceptions to full and open competition that can permit
noncompetitive procurement.  One exception that DOE could use to
justify noncompetitive procurements for many of its M&O contracts is
the exception that authorizes noncompetitive procurements to maintain
an essential engineering, research, or development capability to be
provided by a federally funded research and development center. 
Although this exception is available to DOE, in the past, DOE has
successfully awarded M&O contracts competitively to operate its
research centers at the Sandia National Laboratory and the Idaho
National Engineering Laboratory.  Additionally, within the last few
months, DOE has decided to competitively award the future contract
for the Oak Ridge National Laboratory--another research center.  We
believe that DOE should continue its efforts to competitively award
its research centers whenever feasible. 

In the event that DOE does need to use this exception to justify a
noncompetitive procurement, we believe that, whenever feasible, DOE
should use noncompetitive procedures only after segregating the
research work from other activities of its M&O contractors.  For
example, in 1995, we reported that about 50 percent of the funds
spent by M&O contractors in fiscal year 1994 under 19 contracts for
research centers was for research and development activities.\14 The
remaining funds were spent on such things as the environmental
restoration of facilities contaminated with hazardous and nuclear
waste.  Thus, about 50 percent of the M&O contractors' funds were not
directly associated with research activities.  DOE could maximize its
competitive awards by separating the nonresearch work from that of
the research center and competitively awarding the nonresearch work. 

We discussed the new competition policy and its potential use in
regard to the research centers with the Deputy Assistant Secretary
for Procurement and Assistance Management, the Director of the
Contract Reform Project Office, and the Deputy Associate Deputy
Secretary for Field Management.  They told us that DOE shares our
concern about the granting of exceptions from competition for all of
the work done at research facilities.  Furthermore, they told us that
DOE is also concerned with the number of its federally funded
research and development centers and is considering a reduction in
the number of research centers it now operates. 


--------------------
\14 Federal Research:  Information on Fees for Selected Federally
Funded Research and Development Centers (GAO/RCED-96-31FS, Dec.  8,
1995). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:5

Bringing competition into DOE's contracting could be the single most
significant aspect of the contract reform initiative.  However, DOE's
new policy is only as good as its implementation.  After nearly 2
years of experience under contract reform and after 24 decisions,
DOE's actions show that it has a long way to go before it realizes
the benefits of competition.  Although DOE officials told us that DOE
is improving its existing contracts through noncompetitive
negotiations, it is doing just that--negotiating in a noncompetitive
environment.  This does not identify new potential contractors as
contract reform intended.  Only competition will do that. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:6

DOE believes that our draft report did not adequately acknowledge the
impact of the Department's new competition policy.  Specifically, DOE
believes that real changes have occurred in its contract competition
culture and practices and that the proposed extension of the three
laboratory contracts conforms to its policy. 

First, DOE states that in all cases where noncompetitive extensions
have been sought, the Department subjected each decision to a
rigorous examination of the facts and circumstances.  Also, DOE
states that rather than using the existing contract as a basis for
negotiation, the Department developed administrative mechanisms to
ensure that contract reform terms and conditions were the basis for
negotiation.  While we agree that DOE has changed its competition
policy, the Department decided in two-thirds of its decisions to
noncompetitively extend M&O contracts.  Furthermore, the Contract
Reform Team's report concluded that contracts should be competitively
awarded except for unusual circumstances.  We believe that such a
large proportion of noncompetitively extended contracts suggests that
DOE still has a long way to go before realizing the benefits of
competitive contracting.  Although DOE believes that it is improving
its existing contracts by negotiating in a noncompetitive
environment, it is not obtaining the benefits of competition. 

Second, DOE states that extending the three laboratory contracts was
contingent on incorporating contract reform provisions and achieving
other negotiation objectives.  As noted in our draft report, the
Secretary's decision to extend these contracts stated that
considering other contractors was unrealistic and incompatible with
program requirements.  Once DOE stated that only one contractor could
do this work, DOE effectively weakened its negotiation position. 
Even though the Secretary also noted that any resulting contract was
contingent on the incorporation of reform measures, we believe that
DOE's actions to date, give the appearance that the decision to
extend these contracts was made prior to the completion of successful
negotiations and therefore is inconsistent with the intent of
contract reform. 


DOE'S CONTRACT REFORM AND
STRATEGIC PLANNING REVEAL
INCONSISTENCIES IN CONTRACT GOALS
============================================================ Chapter 4

One of the key elements of DOE's new Performance-Based Management
Contracts is their inclusion of clearly stated, results-oriented
performance goals and indicators to determine if the performance was
achieved.\15 However, as DOE seeks to implement its new contracting
approach together with its strategic planning initiative, contract
weaknesses are becoming apparent.  DOE's new contracts do not always
contain a clear linkage between the contract goals and those of the
Department.  In addition, some contract provisions allow contractors
to dispute either the total amount of the contract incentive or the
amount of the incentive provided for a specific goal.  Because DOE
relies heavily on its contractors to carry out its missions, it is
essential that the goals in DOE's contracts be aligned with DOE's
strategic goals.  Additionally, DOE's contracts should not harm the
Department's authority to allocate incentives to the performance of
contract goals.  DOE officials agree that their efforts to put
reforms and initiatives in place quickly resulted in inconsistencies. 
They see these early stages of implementing contract reform and
strategic planning as a learning process. 


--------------------
\15 We use the terms goal and indicators as identified in the
Government Performance and Results Act of 1993.  DOE's strategic
plan, performance agreements, and contracts included a variety of
terminology such as goals, indicators, criteria, measures,
commitment, strategies, and objectives. 


   DOE'S ONGOING CONTRACT REFORM
   AND STRATEGIC PLANNING ARE
   INTERCONNECTED
---------------------------------------------------------- Chapter 4:1

Two DOE initiatives--contract reform and strategic planning--are
closely aligned.  The conversion of M&O contracts into
Performance-Based Contracts is a major goal of the Contract Reform
Team's report and DOE has been converting its management and
operating contracts to Performance-Based Contracts.  The Reform Team
concluded that earlier M&O contracts included loose accountability
for performance with few quantitative controls to ensure that funds
were spent on the highest priorities.  While DOE was incorporating
performance goals in its new contracts, it also was working on its
strategic planning initiative.  During its strategic planning
efforts, DOE developed a strategic plan that includes performance
goals to be achieved and performance indicators to determine if the
goals were achieved.  Considering that DOE's M&O contractors were
provided with about 74 percent of DOE's total fiscal year 1995
obligations, it is clear that DOE cannot fulfill its strategic goals
without directing the work of its M&O contractors.  Therefore, DOE's
contract reform and strategic planning initiatives are closely
linked. 

In February 1995, DOE developed contract reform guidance for the use
of performance goals, indicators, and incentives in M&O contracts.\16

Among other things, the guidance stated that (1) a top-down approach
should be used to link DOE's strategic plan to subordinate strategic
plans and ultimately into specific goals and indicators in contracts
and (2) performance goals and indicators should be traceable to the
successive levels of strategic plans.  Additionally, the guidance
indicated that goals and indicators must be derived from the site
where the contract work is to be performed. 

Under the Government Performance and Results Act of 1993 (GPRA), most
federal agencies, including DOE, will be required to set strategic
goals, measure performance, and report on the degree to which their
goals are met.  Specifically, by September 30, 1997, they will be
required to prepare a strategic plan covering at least a 5-year
period that describes, among other things, (1) general goals and
objectives for the major functions and operations of the agency, (2)
how the agency intends to achieve these goals and objectives, and (3)
how the goals of the strategic plan are related to those to be used
in annual performance plans.  In later years, agencies will be
required to prepare annual performance plans with goals that are
related to those of the strategic plans and program evaluation
reports that show the success at accomplishing their goals.  Finally,
the GPRA identifies the drafting of strategic plans, annual
performance plans, and program performance reports as inherently
governmental functions that must be performed by federal employees. 

DOE is ahead of the deadlines imposed by GPRA's requirements and
published its first departmental strategic plan in April 1994.  The
plan identifies five programmatic business lines and four critical
success factors.\17 The plan includes performance goals and
indicators to determine if the goals for the business lines and
success factors have been achieved.  Additionally, the Secretary of
Energy developed performance agreements between herself and the
President for fiscal years 1995 and 1996.  DOE considers these
performance agreements to be similar to the annual performance plans
that will be required by GPRA in future years. 


--------------------
\16 Report on Contract Reform Actions 3, 4, 5, 6, 8, and 14
Performance Criteria, Measures and Incentives (Feb.  16, 1995). 

\17 DOE's April 1994 Strategic Plan listed industrial
competitiveness, energy resources, science and technology, national
security, and environmental quality as its business lines and
communication and trust; human resources; environment, safety, and
health; and management practices as its critical success factors. 


   CONTRACT GOALS ARE NOT ALWAYS
   CLEARLY LINKED TO STRATEGIC
   PLAN'S GOALS
---------------------------------------------------------- Chapter 4:2

Although DOE cannot fulfill its strategic goals without the work of
its M&O contractors, it is difficult to find a connection between
DOE's overall strategic plan goals, its performance agreement goals,
and its M&O contracts.  Without a clear connection, DOE is not
assured that its contractors are focused on the Department's
identified goals.  Additionally, it will be difficult for DOE to
quantify, in the performance reports required by GPRA, its success in
meeting goals. 

DOE's strategic plan and annual performance agreements identify its
five departmental lines of business and its four critical success
factors.\18 The performance goals and indicators are then listed
together with the lines of business and the success factors.  We
reviewed four contracts that were awarded after the development of
DOE's strategic plan in 1994 to determine if the contracts'
performance goals could be traced to the strategic plan's goals.  We
also compared contract goals with the performance agreement goals
using the fiscal year performance agreement that was in effect when
the contract was awarded. 

In some cases, a contract goal could be clearly linked to the
strategic plan goal.  For example, a goal of the departmental
strategic plan under the business line "science and technology" is to
"Provide new insights into the nature of matter and energy, address
challenging problems, and create a climate in which breakthroughs
occur." The contract for the Argonne National Laboratory under its
"science and technology" area included a corresponding contract goal
to "Provide new insights [into] the nature of matter and energy."
Although, through experience, DOE may find a need for more specific
goals in the individual contracts, such clear linkage to the
strategic plan's business lines and goals can help DOE's contract
efforts and contract results focus on the identified goals of the
Department. 

In other cases, contract goals were difficult to link to the
strategic plan or the current fiscal year's performance agreement. 
For example, the M&O contract that supports the Nevada Operations
Office included goals grouped under seven categories.  However, the
seven contract categories were not the same as the nine departmental
business lines and key success factors.  As a result, we could not
link the contract goals to those of the strategic plan.  A DOE Nevada
operations office official explained that specific goals were in the
contract even though the Nevada office's mission was uncertain. 
Additionally, the office noted a lack of direction from DOE
headquarters during the negotiation of performance goals for the
contract. 


--------------------
\18 The performance agreements for fiscal years 1995 and 1996 use the
goal "economic productivity" in place of the industrial
competitiveness goal which is identified in the strategic plan. 


   SOME CONTRACT PROVISIONS COULD
   AFFECT DOE'S AUTHORITY TO SET
   CONTRACT INCENTIVES
---------------------------------------------------------- Chapter 4:3

Some contract provisions give the contractors the right to legally
dispute DOE's determination of the total amount of contract
incentives available or the amount of incentives that can be applied
to specific contract goals.  Such provisions can compromise DOE's
ability to place priorities on its contract work because these
incentives are used to motivate contract performance. 

The setting of the goals by DOE is clearly important because DOE
needs to maintain its authority to direct the work.  However, the
setting of incentives is also important.  Incentives are used to
motivate contractors' efforts that might not otherwise be emphasized. 
Without the authority to identify the amount of incentives necessary
to motivate the contractor, DOE loses an important contracting tool
that helps it direct the contract work.  DOE's procurement regulation
for its award-fee contracts, a type of contract providing an
incentive for contractor performance, likewise emphasizes that the
government has the unilateral right to identify the criteria to
evaluate the contractor's performance and the percentage of award fee
to be allocated to the individual criterion. 

However, for the four new M&O contracts identified in table 4.1, we
found that the contract language in each contract was different for
determining how goals would be determined and how incentives would be
allocated to the goals.  For example, under the Rocky Flats contract,
the contractor can propose goals to add to the contract, but if there
is a disagreement between the contractor and DOE, the contractor may
legally dispute the amount of an incentive to be applied to a
goal.\19

On the other hand, the Hanford contract specifically states that the
final determination of goals and the distribution of incentives will
be made solely by DOE and the contractor cannot dispute DOE's
decision. 



                               Table 4.1
                
                     Key Contract Features for the
                 Development of Goals, Indicators, and
                               Incentives

Contract                        Key features
------------------------------  --------------------------------------
Rocky Flats Environmental       DOE and contractor may initiate
Technology Site Contract        negotiations to set goals and/or
                                incentives.

                                Contractor may propose projects,
                                tasks, or other goals that may qualify
                                for incentive fees.

                                Contractor may dispute DOE's
                                determination of the amount of
                                available incentive fee provided for
                                the goals.

Nevada Management and Support   Contractor proposes revisions to the
Contract                        goals and indicators.

                                Contractor meets with DOE and other
                                stakeholders to select recommended
                                high-priority incentive objectives.

                                Contractor develops incentive goals
                                that are specific to each incentive
                                objective with input from DOE and
                                other stakeholders.

                                Contracting officer reviews the plan
                                including goals and indicators as
                                necessary.

                                Contractor may dispute DOE's decision
                                on the amount of incentive fee
                                available including the performance-
                                based incentive fee components.

Idaho National Engineering      DOE and the contractor may propose
Laboratory Contract             specific projects, discrete tasks, and
                                associated incentives for the projects
                                and/or tasks.

                                Contractor is encouraged to propose
                                projects or tasks that it feels are
                                appropriate for incentive fees.

                                Contractor may not dispute an
                                incentive amount for any project and/
                                or task.

Hanford Management Contract     DOE develops performance goals with
                                the related fee distribution.

                                Contractor also prepares additional
                                performance goals to be negotiated
                                prior to placement in the contract.

                                Final determination of goals,
                                indicators, and incentives are made
                                solely by DOE.

                                Contractor may not dispute DOE's goals
                                and indicators.
----------------------------------------------------------------------
DOE's field offices gave us different reasons for using these
provisions.  For example,

  -- contracting staff at Rocky Flats and Nevada told us they
     included the provisions because they considered these provisions
     as typical standard provisions in DOE contracts;

  -- contracting staff at Idaho said they incorporated language
     prohibiting disputes on goal setting to protect the government's
     interests and to minimize disputes; and

  -- the chief counsel at DOE's Richland office, which manages the
     Hanford contract, stated that Richland incorporated language
     prohibiting disputes on goal setting and the amount of
     incentives applied to each goal because Richland considered the
     setting of goals and incentives to be basic to DOE's ability to
     direct the work of the contractor in fulfilling the government's
     requirements. 

Language permitting contractors to dispute how DOE will apply
incentives to goals can compromise DOE's ability to place priorities
on the work that it deems necessary at its facilities. 


--------------------
\19 Under the provisions of the contracts, the contractors may
contest (dispute) the decision of a contracting officer, which could
ultimately result in a legal decision against the government. 


   LEARNING PROCESS CITED AS CAUSE
   OF DOE'S WEAKNESSES
---------------------------------------------------------- Chapter 4:4

DOE personnel are in the early stages of implementing contract reform
and strategic planning and are still learning about the processes. 
Although DOE officials agree that the linkage should exist, they cite
their attempts to put things in place quickly as reasons for the
differences in actual practice.  With changes occurring
simultaneously and different offices initiating different actions,
inconsistencies are occurring in implementation. 

DOE's strategic planning staff and contract reform staff agreed with
us that there should be a clear linkage of departmental strategic
plan goals to those of the M&O contracts.  They explained that at
present, this clear linkage does not exist, in part, because of DOE's
changing mission and the learning process involved in these new
initiatives.  They also explained that DOE focused on moving forward
with changes and that at times, policy and guidance did not precede
the actual implementation of the contract reform and
strategic-planning implementation.  Because of the concurrent
development of guidance and its actual implementation, several
different strategies have been followed in DOE's contracts. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:5

A clear linkage of goals in M&O contracts, annual performance
agreements, and strategic plans is needed to manage DOE's complex and
varied missions.  Such linkage should help DOE in directing the
performance of its missions and reporting on its success in
accomplishing mission goals.  Additionally, contracts that contain
provisions that impinge on DOE's authority to set incentives have the
potential to detrimentally affect DOE's ability to perform its
missions. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 4:6

We recommend that the Secretary of Energy require that

  -- the goals written into the M&O contracts be clearly linked to
     DOE's strategic plan and annual performance goals and

  -- a mandatory standard contract clause be included in all M&O
     contracts that gives DOE the exclusive authority to set contract
     goals and incentives that support the strategic plans and
     missions of the Department. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:7

Although DOE generally agrees with our two recommendations, it was
concerned over two issue related to the linkage of contract
performance goals and departmental goals.  Specifically, DOE believes
that (1) our analysis did not consider subordinate goals, such as
program goals, that would better link departmental goals with
contract goals and (2) we should have taken a larger sample of
contracts in our analysis of performance goals. 

In analyzing DOE's goals, we considered the provisions of GPRA and
did not find the linkage between agency and contract goals.  We
reviewed DOE's strategic plan, annual performance agreements,
strategic plans for DOE's five business lines and key success
factors, and site- strategic plans.  We discussed our results with
staff of DOE's Office of Strategic Planning, Budget and Program
Evaluation and the Contract Reform Project Office and explained to
them that we could not track the goals from the Departmental
Strategic Plan, through the subordinate program plans, and into the
M&O contracts. 

In selecting the contracts for detailed review, we chose from 11
contracts that were awarded at the time of our selection.  From
these, we selected four because they had the most thorough provisions
for performance goals.  On the basis of this selection process, we
believe our detailed analysis was sufficient to suggest that as DOE
moves forward with contract reform and strategic planning, it needs
to ensure that contract goals are clearly identified with
departmental goals. 


M&O PROCUREMENT REGULATIONS DO NOT
PROVIDE GUIDANCE FOR INCENTIVE
CONTRACTS
============================================================ Chapter 5

Another key element of the Contract Reform Team's new
Performance-Based Management Contract is the inclusion of incentives
to control contract costs.  As DOE begins to use incentive contracts
to control costs, its M&O procurement regulations are not providing
the necessary direction for the placement of these incentives in
contracts by DOE's contracting officers.  For a cost incentive to be
effective, the contracting officer must establish a reasonable target
price to motivate the contractor to effectively manage costs. 
Although the FAR provides considerable direction on the pricing of
contracts, DOE's M&O regulations do not.  Since DOE's contracting
officers are not required to follow the FAR for pricing M&O
contracts, they are largely left on their own to determine how best
to accomplish this task.  Our analysis of two DOE contracts--where
one contracting officer used important aspects of the FAR
requirements and the other did not--show that when the FAR
requirements were used, DOE was able to affect the contractor's
performance. 


   EFFECTIVENESS OF COST
   INCENTIVES DEPENDS ON THE
   PRICING OF THE CONTRACT
---------------------------------------------------------- Chapter 5:1

Incentive contracts can be used to effectively reduce costs. 
However, to be effective, incentives need to be properly set within
the pricing structure of the contract.  Although the FAR provides
direction and procedures for the pricing of contracts, DOE's M&O
procurement regulation only provides guidance for the setting of
fees. 

Two basic incentive contracts used by government contracting officers
to control costs are the fixed-price-incentive and
cost-plus-incentive contracts.  Under each of these contracts, the
contracting officer's goal is to negotiate a target cost and a profit
or fee that motivates the contractor to effectively manage costs. 
The incentive should provide the contractor with an incentive to
reduce costs and a disincentive to overrun costs.  Typically,
incentives are expressed as a sharing ratio between the government
and the contractor.  For example, a sharing ratio of 50/50 indicates
that for each dollar of cost reduction below the target cost, the
government saves 50 cents and the contractor increases its profit by
50 cents, while for each dollar over the target cost, the
government's costs increase by 50 cents and the contractor's profit
or fee is reduced by 50 cents. 

These contracts provide the contractor with a clear understanding of
how its cost performance will affect its profits or fee and can be
effective tools to control costs.  However, in order for them to be
effective, the contracting officer needs to properly negotiate the
target cost of the contract. 


      THE FAR PROVIDES DIRECTIONS
      FOR NEGOTIATING CONTRACT
      PRICES
-------------------------------------------------------- Chapter 5:1.1

Under the FAR, a key responsibility of the government contracting
officer is to obtain supplies and services at fair and reasonable
prices.  In the negotiation of contract prices, the contracting
officer must determine a fair and reasonable price through an
analysis of proposed costs and/or prices.  This analysis may include
the review and evaluation of individual cost elements, such as
materials, labor, and subcontract prices that support the
contractor's overall proposed price.  For contracts expected to cost
$500,000 or more, the contractor may be required to submit cost or
pricing data that include all the facts that prudent buyers and
sellers would reasonably expect will affect price negotiations
significantly.  These data are then certified by the contractor as
being accurate, current, and complete as of the date of agreement on
the contract price or another date agreed to by the contracting
officer and the contractor. 

For a cost analysis, contracting officers generally are to request a
technical analysis of the contractor's proposed costs.  This
technical analysis is done by specialists who advise the contracting
officer on costs for such things as material and labor.  In addition,
the contracting officer may have the proposal reviewed by an auditor. 


      DOE'S M&O PROCUREMENT
      REGULATION LACKS GUIDANCE ON
      PRICE NEGOTIATIONS
-------------------------------------------------------- Chapter 5:1.2

DOE's M&O procurement regulations do not require contracting officers
to negotiate costs and prices, determine fair and reasonable prices,
obtain cost or pricing data, nor analyze proposed costs.  Instead,
contract costs are determined by the M&O contractors, who then submit
this information to DOE as the basis for the Department's annual
budget process.  This process reflects DOE's historical long-term
relationship with its M&O contractors and not the typical
arm's-length relationship between buyers and sellers. 

As part of the budget process, M&O contractors prepare their own
budget requests for the upcoming fiscal year in accordance with DOE's
policy.  The budget requests are reviewed by DOE personnel in
accordance with DOE's budget formulation process.  M&O contract
funding is then determined by the amount of funds appropriated by the
Congress and the amount of funds that DOE obligates to the M&O
contracts. 

DOE is including various different cost reduction and cost incentive
clauses in its contracts as a contract reform.  However, as discussed
in the two case studies below, DOE's process did not provide its
contracting officers with the needed direction to price their
incentive contracts. 


   CASE STUDIES SHOW THE EFFECT OF
   NO M&O GUIDANCE
---------------------------------------------------------- Chapter 5:2

As DOE begins to implement contract reform and adopt cost incentive
contracts the need for cost guidance becomes important.  Therefore we
reviewed DOE's two incentive contracts used under contract reform to
determine the possible impact of the absence of guidance for price
negotiations.  One of these contracts included both a
fixed-price-incentive provision and cost-plus-incentive provision and
the other contract included only a cost-plus-incentive provision. 
The experiences of DOE's contracting officers at the Oak Ridge
Facility and the Waste Isolation Pilot Plant, who used these
contracts, demonstrates how contracting officers developed cost
incentives in the absence of procedures. 


      OAK RIDGE FACILITY CONTRACT
-------------------------------------------------------- Chapter 5:2.1

The Oak Ridge Facility Contract involves work for DOE's national
security and the environmental management and uranium enrichment
facilities programs at Oak Ridge, Tennessee; Paducah, Kentucky; and
Piketon, Ohio.  The contract is structured as a cost-plus-award-fee
contract and it includes a base fee.  The award fee includes three
parts:  (1) performance fee, (2) cost reduction fee, and (3)
remaining award fee.  In addition, the contract established a
cost-plus-incentive-fee arrangement for performing work assigned for
specific task orders. 

We reviewed Oak Ridge's efforts at negotiating a
cost-plus-incentive-fee arrangement on one of the task orders that
included this incentive arrangement.  We selected the first task
order negotiated under the contract--for a demolition
project--because it had a large dollar value and the work performed
on the task order was nearing completion.  As of March 31, 1996, DOE
had issued 17 task orders estimated to cost $144 million under the
contract with a total available fee of $13 million for these task
orders. 

Table 5.1 shows the amounts negotiated between the contracting
officer and the M&O contractor for the one task order and the amount
that DOE expects the completed work will actually cost. 



                               Table 5.1
                
                 Negotiated and Expected Contract Cost
                for the Powerhouse Demolition Task Order

Negotiated and actual costs and fees           Cost-plus-incentive fee
----------------------------------------  ----------------------------
Negotiated costs and fees:
Target cost                                 $18,700,000 to $19,700,000
Target fee                                                     935,000
Incentive fee                                                  654,500
Negotiated cost and fee                     $20,289,500 to $21,289,500
Expected actual costs and fees:
Actual cost                                                $14,809,000
Expected target fee earned                                     935,000
Expected incentive fee earned                                  654,500
Expected total cost and fee                                $16,398,500
----------------------------------------------------------------------
Source:  GAO's analysis of DOE's contract data. 

On the surface, the task order pricing arrangement appears to have
been successful.  However, as explained below, the contractor
received the incentive because DOE accepted the contractor's
unsubstantiated target costs (which were significantly higher than
actual costs) as part of the contract. 

A major cost element of the task order was the M&O contractor's
proposed subcontract cost, which the contractor estimated at $10.9
million without obtaining actual bids from any subcontractors. 
Although DOE's contracting officer requested a technical analysis of
the estimated subcontract costs from an independent engineering firm,
the contracting officer did not require the contractor to support its
subcontract cost estimate with actual bids from prospective
subcontractors.  The engineering firm advised the contracting officer
that the subcontract should cost about $4.9 million.  However, the
contracting officer did not use the engineering firm's advice because
the project manager believed that the engineering firm's estimates
were too low.  The task order's target cost was then negotiated with
a final subcontract amount of $10 million. 

After the cost and fees were agreed to on the task order, the M&O
contractor obtained competitive bids for the subcontract work that
were much less than the negotiated amount.  According to the
contracting officer and the project manager, the winning bid was
about $3.5 million--or about $6.5 million below the task order cost
of $10 million.  Under the incentive agreement, the M&O contractor
will receive a target fee of $935,000 if the project cost comes
within the target range of $18.7 million to $19.7 million and could
earn an additional incentive fee of up to $654,500 for underrunning
the target cost to as low as $17 million.  Additionally, the
incentive fee was based on a sharing ratio in which the contractor
receives 40 percent of the cost underrun.  For example, if the target
cost was underrun by $1 million, the contractor would receive 40
percent of the underrun, or $400,000.  Since the total potential
incentive was limited to $654,500, the contractor is limited to that
amount even though its costs were expected to be much lower than the
$18.7 million to $19.7 million target.  On this task order, the M&O
contractor earned the entire incentive fee simply by obtaining
competitive subcontract bids and not through any effort associated
with the work. 

DOE's Oak Ridge officials acknowledged the problem that this
situation created and to counter it, adopted a "capping" policy on
fee amounts that could be paid to the M&O contractor for cost
reductions resulting from subcontract costs that are lower than the
negotiated cost.  The capping policy limits the fee amount that the
contractor can receive to a prenegotiated amount.  Although this
policy limits the incentive fee that the M&O contractor can earn by
shopping for bids after task order prices are negotiated, it is only
a partial solution.  We believe that additional guidance is needed. 


      WASTE ISOLATION PILOT PLANT
-------------------------------------------------------- Chapter 5:2.2

The Waste Isolation Pilot Plant contract is for a repository for the
disposal of transuranic wastes resulting from defense activities and
programs.  The contract is a multiple incentive contract including
both a fixed-price-incentive and a cost-plus-award fee that acts much
like a cost-plus-incentive to control contract costs.\20 In addition
to the cost incentives, this contract also included performance
incentives. 

In pricing the contract, the contracting officer started with the M&O
contractor's budget request for fiscal year 1995.  The budget request
had been reviewed and approved by DOE during the budget process.  In
addition, the contracting officer requested that DOE specialists
evaluate the budget amounts.  After the budget request was approved
by DOE, the M&O contractor identified two work items that could be
performed at less cost by a subcontractor.  These new amounts were
then negotiated into the contract and represented a decrease from the
amount that had been submitted in the budget request and earlier
approved by DOE.  Although not required by DOE's M&O procurement
regulations, the contracting officer obtained a certificate of
current cost or pricing data from the contractor in accordance with
the FAR because she did not believe that the DOE M&O procurement
regulations were adequate for contract pricing of incentive
contracts.  Table 5.2 shows the negotiated costs for the incentive
parts of the contract, the actual costs incurred, and the fees
earned. 



                               Table 5.2
                
                 Pricing and Actual Costs on Incentive
                  Parts of Waste Isolation Pilot Plant
                     Contract for Fiscal Year 1995

Negotiated and actual   Fixed-price-incentive
costs                   fee                     Cost-plus-award fee
----------------------  ----------------------  ----------------------
Negotiated costs:
----------------------------------------------------------------------
Target cost             $41,024,000             $28,569,000

Negotiated target       0                       1,277,000
profit or base fee

Negotiated performance  4,000,000               1,915,500
incentive or award fee

Cost incentives         40 percent of cost      40 percent of cost
                        underruns and 60        underruns limited to
                        percent of cost         the amount of unearned
                        overruns up to 110      award fee and 40
                        percent of the target   percent of overruns
                        and 100 percent         limited to the amount
                        thereafter              of the earned award
                                                fee

======================================================================
Negotiated costs,       $45,024,000             $31,751,500
fees, and profit


Actual costs:
----------------------------------------------------------------------
Costs                   $39,191,735             $21,478,432

Target profit or base   0                       1,277,000
fee earned

Performance incentives  4,000,000               620,622
or award fee earned

Cost reduction          732,906                 1,294,878
incentives earned

======================================================================
Costs, fees, and        $43,924,641             $24,670,932
profits earned
----------------------------------------------------------------------
Source:  GAO"s analysis of DOE"s contract data. 

The contracting officer believed that the cost incentive provision
served as the catalyst for the substantial cost reduction under the
cost-plus-award-fee part of the contract.  Although we did not
evaluate the incurred costs to determine the reasons for the
reduction in cost, both the contractor and the contracting officer
said that the contractor's efficiencies and improved performance
contributed to the reduction in the estimated cost of the work. 

For the fiscal year 1996 price negotiations, the contracting officer
went a step further toward the FAR requirements, again on her own
initiative, by (1) requesting that the contractor submit cost or
pricing data and (2) analyzing the contractor's documentation that
supported about 48 percent of the proposed costs for the contract. 


--------------------
\20 The cost-plus-award-fee part of the contract included incentives
and disincentives for cost control with a sharing formula for cost
underruns and overruns.  Although, DOE called this a
cost-plus-award-fee contract, because of the cost incentive features,
it effectively worked like a cost-plus-incentive-fee contract. 


   DOE ACKNOWLEDGES WEAKNESSES
   WITH ITS CONTRACT PRICING
   REGULATIONS
---------------------------------------------------------- Chapter 5:3

We discussed our findings regarding DOE's incentives under these two
contracts with the Deputy Assistant Secretary for Procurement and
Assistance Management, the Director of the Contract Reform Project
Office, and the Deputy Associate Deputy Secretary for Field
Management.  They acknowledged that DOE's regulations are inadequate
for the pricing of contracts and the use of incentives tied to the
contract pricing.  Specifically, they noted that the basic problem is
that DOE's M&O costs are budget based and not cost based.  They
explained that incentives should not be based on the budgeted amounts
but should be based on negotiated contract costs. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 5:4

Under contract reform, DOE planned to increase the use of incentive
contracts.  However, in the absence of M&O procurement regulations
governing the negotiation of contract prices, DOE's ability to
control costs under this type of contract is limited.  When the FAR
was used, DOE was able to reduce its contract costs. 


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

To continue DOE's reforms that are aimed at placing more cost risk on
its contractors through the use of cost incentives and in a further
effort to bring M&O contracting into the mainstream of federal
contracting, we recommend that the Secretary of Energy adopt federal
contract pricing policies such as those contained in the FAR. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 5:6

DOE agrees with our recommendation regarding the inclusion of cost
incentives based on those included in the FAR.  Furthermore, DOE has
a draft fee policy that contains a requirement that contracts (cost
plus incentive fee, fixed price incentive fee, and firm fixed price)
in the future will be developed pursuant to FAR Part 16.  However,
FAR Subpart 15.8 provides specific guidance on the analysis of prices
and costs and the documentation of price negotiations.  DOE's draft
policy should include provisions from this part of the FAR that are
appropriate for the pricing of M&O contracts. 

DOE also believes that our discussion of cost incentives is limited
by the number of contracts that we reviewed.  However, our primary
purpose was to determine the impact of the lack of DOE regulations on
how to set these incentives.  We looked at two contracts because one
case demonstrated the benefits of applying the FAR to this process
and the other case showed the impact of not having a regulation. 

In addition, DOE's comments questioned our reference to Oak Ridge's
capping policy on fee amounts.  DOE officials acknowledged problems
with cost incentives at Oak Ridge and adopted a capping policy to
limit the fees that could be earned and to provide a check on
potential errors in estimating unique projects.  Although this policy
may have some benefits, it does not fully resolve the identified
contract pricing problems. 


STATUS OF 48 CONTRACT REFORM
RECOMMENDATIONS
=========================================================== Appendix I

                                                Completion date
                                              -------------------
Recommendation                                                           Addressed report
number and action   End product                Deadline    Actual          requirements\a
------------------  ------------------------  ---------  --------  ----------------------
Selecting alternatives to traditional cost-reimbursement contracts
-----------------------------------------------------------------------------------------
1, 2, and 17.       Site-by-site assessment       3/31/    3/8/96                     Yes
 Review work         of work requirements          95\c
 requirements of     that identifies the
 current M&O         supplies or services
 contracts and       that may be obtained by
 identify discrete   other than a cost
 tasks that may be   reimbursement
 acquired through    contract.\b
 fixed-price
 contracts and       A plan for each site to
 subcontracts.       increase its use of
                     fixed-price contracts
                     and subcontracts for
                     tasks that can be
                     acquired on a fixed
                     price. The plan must
                     include a schedule and
                     the identification of
                     pilot sites and must
                     address workforce
                     displacements.\b

                     A plan to test the
                     effectiveness of using
                     fixed-price contracts
                     and subcontracts and
                     acquiring selected
                     goods and services on a
                     "least cost" basis.\b
3, 4, 5, 6, 8, and  Matrices of performance       9/30/   3/31/95                     Yes
 14.                 criteria and measures         94\c
 Develop             and incentives for both
 performance         for profit and
 criteria and        nonprofit entities, and
 measures and        an integrated plan to
 corresponding       implement these
 incentive           mechanisms in existing
 mechanisms for      M&O contracts and
 defense programs,   future Performance-
 environmental       Based-Management
 restoration and     contracts.\b
 waste management
 programs, applied
 technology
 programs,
 environmental
 safety and health
 requirements, and
 business
 management
 requirements.
7. Train DOE        Plan for training          6/1/94\c   4/25/96                     Yes
 program personnel   personnel in
 in performance-     performance-based
 based               contracting
 contracting.
9. Establish an     Establish revised fee         12/1/   6/24/96                      No
 appropriate         policy, identify pilot        94\c                   (fee policy not
 management fee      solicitation(s), and                                        revised)
 policy for          contract to validate.\b
 nonprofits.
10. Establish       Performance-based             1/31/   12/1/95                     Yes
 compensation        incentive compensation        95\c
 incentives for      policy for senior
 senior nonprofit    laboratory personnel.
 laboratory
 personnel.
11. Develop a DOE-  Policy guidelines and        9/1/94   2/22/95                     Yes
 wide incentive      implementation plan
 program for the     that include
 contractor cost-    identification of pilot
 reduction/cost-     contract(s).\b
 avoidance
 programs.
12. Use cost-       Policy that requires         9/1/94    11/22/                     Yes
 sharing             solicitation of cost-                     95
 arrangements in     sharing arrangements in
 performance-        the selection process
 based management    for new contractors;
 contracts.          identification of pilot
                     solicitation(s).\b
13. Use multiple-   Policy guidelines on the     9/1/94   5/27/95                      No
 fee arrangements    use of multiple-fee                             (multiple fee policy
 in performance-     arrangements.                                         guidelines not
 based management                                                              officially
 contracts.                                                                  established)

Making cost-effective "make-or-buy" decisions
-----------------------------------------------------------------------------------------
15. Obtain quality  Policy and program-           9/30/   1/27/95                     Yes
 performance at      specific criteria             94\c
 the least cost,     regarding DOE's "make
 consistent with     or buy" decisions;
 departmentally      identification of pilot
 approved program-   sites.\b
 specific factors.
16. Require         Contractual requirements     11/15/   6/24/96                      No
 management          and associated                94\c            (associated incentives
 contractors to      incentives for an                                    not in proposed
 prepare "make-      annual "make-or-buy"                                     rulemaking)
 or-buy" plans.      plan.


Increasing competition to improve performance
-----------------------------------------------------------------------------------------
18. Except in       DOE policy emphasizing       8/1/94   6/24/96                     Yes
 unusual             competition.
 circumstances,
 automatically
 award management
 contracts
 competitively
 after no more
 than one
 extension.
19. Negotiate the   Revised extend/              8/1/94   6/24/96                     Yes
 terms of the        competitive award
 extended contract   policy.
 before making the
 extend decision,
 and make the
 decision-making
 process open to
 public scrutiny.
20. Develop         Guidelines that will          9/30/   5/16/96                     Yes
 evaluation and      increase competition.         94\c
 selection
 criteria that
 increase
 competition.

Streamlining the procurement process
-----------------------------------------------------------------------------------------
21. Create a        Report and                 12/31/94    11/22/                     Yes
 Procurement         recommendations to                        95
 System              increase the speed,
 Improvement Task    quality, and
 Force to            competitiveness of
 streamline DOE's    DOE's procurements.
 procurement
 process.


Reducing the use of contracts for support services
-----------------------------------------------------------------------------------------
22. Identify DOE    Plan to reduce program       8/1/94   1/27/95                     Yes
 support services    costs and improve
 that can be cost-   program management by
 effectively         converting contractor
 performed by        positions to federal
 federal             positions over the next
 employees.          3 years.
23. Reduce support  Plans for reducing           8/1/94    6/1/95                     Yes
 service             support service
 contracting by at   contracting in fiscal
 least 10 percent    years 1995-97.
 in fiscal years
 1995-97.
24. Implement       Plan for conversion to        7/15/   1/27/95                      No
 performance-        performance-based             94\c              (conversion plan not
 based contracting   support service                                           completed)
 methods for         contracts.
 support service
 contracts.

Strengthening financial and accounting systems
-----------------------------------------------------------------------------------------
25. Improve DOE's   Develop plan for revised     12/31/      Open              Incomplete
 financial           financial information         94\c                  (action still in
 management          systems.\b                                           review process)
 information
 system.
26. Ensure that     Revised audit plans that   12/31/94   1/27/95                     Yes
 the Office of       reflect the new
 Inspector           priorities of the
 General's audit     Department.
 goals place high
 priority on
 reviews and
 evaluations of
 contractors'
 financial
 management
 systems.
27. Develop         Guidelines for              12/1/94   9/29/95                     Yes
 departmentwide      coordination of
 guidelines for      contractor oversight.
 coordination of
 contractor
 oversight
 programs.
28. Explore the     Report and                 12/31/94   12/1/95                      No
 use of              recommendations on                                  (report does not
 alternatives to     alternatives.                                  address specific goal
 the voucher                                                                   for action
 accounting for                                                          alternatives not
 net expenditures                                                               provided)
 accrued.
29. Evaluate        Report on evaluation and     2/1/95   1/27/95                      No
 increasing          recommendations for                                (alternatives not
 departmental        alternatives.                                              provided)
 capability for
 review and audit
 of contracts and
 contractors.
30. Provide the     Report on costs and         9/30/94   1/27/95                      No
 Defense Contract    benefits of obtaining                         (cost-benefit analysis
 Audit Agency with   additional resources                            not performed viable
 the funding         and recommendations on                              alternatives not
 needed to           alternatives.                                              provided)
 eliminate audit
 backlog.

31. Train DOE       Training program and        12/1/94   7/17/96                     Yes
 managers to use     implementation plan.
 integrated
 financial and
 managerial
 reporting systems
 effectively.

Improving the management of particular categories of costs and cost controls
-----------------------------------------------------------------------------------------
32. Initiate        Report on specific goals   5/1/95\c   12/1/95                      No
 departmentwide      and benchmarks and                                  (specific goals,
 benchmarking of     implementation plan.                                 benchmarks, and
 various indirect-                                                    implementation plan
 cost categories                                                           not completed)
 against the "best
 in class" of
 public and
 private
 businesses and
 initiate planning
 for specific
 goals for
 reducing indirect
 costs.
33. Establish       A matrix of generic and    8/1/94\c   2/22/95                     Yes
 effective           specific performance
 contract            criteria and measures.
 performance
 measures for real
 and personal
 property
 management and
 accountability.
34. Manage          System to track              7/1/95   7/17/96                     Yes
 contractors'        maintenance costs.
 maintenance costs
 more effectively.
35. Develop a       Policy for managing and      7/1/94   4/12/96                     Yes
 departmentwide      overseeing pension
 policy on pension   funds.
 fund management
 and oversight.
36. Develop         Policy for insurance        12/1/94   4/12/96                     Yes
 departmental        risk management.
 policy on claims
 adjustment and
 evaluation of
 contractor risk
 management.
37. Implement       Policy on use of           9/1/94\c   2/22/95                     Yes
 improved overtime   contractor overtime.
 policy.
38. Conduct two     Report on uncosted          11/1/94   1/27/95                     Yes
 reviews of          balances twice a year.
 uncosted balances
 each year.
39. Reexamine the   Report recommending         10/1/94   7/19/96                     Yes
 need for advanced   improvements and/or
 funding through     changes and
 special bank        alternatives.\b
 accounts.

Modifying and improving cost-reimbursement policies
-----------------------------------------------------------------------------------------
40. Revise the      Notice of proposed           9/1/94   6/24/96                     Yes
 Department of       rulemaking.
 Energy
 Acquisition
 Regulation
 provisions on
 fines and
 penalties, third-
 party
 liabilities, and
 related matters.
41. Apply           Notice of proposed           9/1/94   6/24/96                     Yes
 comparable          rulemaking.
 reimbursement
 rules to
 nonprofit
 contractors.
42. Develop         Guidelines on               1/31/95   1/27/95                     Yes
 guidance on         "reasonableness."
 determining the
 "reasonableness"
 of contractors'
 costs.
43. Develop and     Notice of proposed          12/1/94   6/24/96                     Yes
 implement a         rulemaking.
 contractor
 indemnification
 scheme for
 response action
 contractors
 consistent with
 the principles of
 section 119 of
 CERCLA.

Reducing cost of contractor litigation
-----------------------------------------------------------------------------------------
44. Issue uniform   Guidelines on procedures    3/31/94   1/27/95                     Yes
 guidance on the     for litigation
 review and          management.
 oversight of
 contractor
 litigation.
45. Institute       Identification of           3/31/94   1/27/95                     Yes
 training in         training programs and
 litigation          establishment of round
 management          table discussion format
 techniques.         for Chief Counsel
                     meetings.
46. Select one or   Report on pilot              7/1/94   1/27/95                     Yes
 two large pilot     projects, including
 cases for           recommendations for
 immediate           cost reductions.
 implementation of
 cost-reduction
 techniques.
47. Develop an      Option paper on               5/15/   6/24/96                     Yes
 explicit policy     allowability of defense       94\c
 concerning the      costs in
 allowability of     "whistleblower"
 defense costs in    cases.\b
 "whistleblower"
 cases.

Diversity
-----------------------------------------------------------------------------------------
48. Develop         Evaluation and selection   10/31/94   2/13/95                      No
 contract            strategies and criteria                        (training requirement
 evaluation and      with guidelines for                            and pilot application
 selection           their use; and                                        not completed)
 criteria and        identification of
 related             necessary training
 strategies that     requirements and pilot
 promote and         applications.
 facilitate
 economic
 diversity through
 the participation
 of small, small
 disadvantaged,
 and women-owned
 business
 participation in
 DOE contracts.
-----------------------------------------------------------------------------------------
Legend

CERCLA = Comprehensive Environmental Response, Compensation and
Liability Act

DOE = Department of Energy

M&O = management and operating

\a Making Contracting Work Better and Cost Less, Report of the
Contract Reform Team (DOE/S-0107, Feb.  1994). 

\b The original end product was modified by the Executive Committee. 

\c The original deadline was modified by the Executive Committee. 

Source:  DOE's Contract Reform Project Office and GAO Analysis. 




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COMMENTS FROM THE DEPARTMENT OF
ENERGY
=========================================================== Appendix I



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The following are GAO's comments on the Department of Energy's letter
dated November 12, 1996. 


   GAO'S COMMENTS
--------------------------------------------------------- Appendix I:1

Our comments on DOE's two main themes--that the draft report did not
(1) fully recognize DOE's efforts to improve contracting problems
identified in GAO's past reports nor DOE's current accomplishments
under contract reform and (2) adequately acknowledge the
implementation of its new competition policy--are summarized in the
executive summary.  In addition, applicable chapters contain
summarized comments.  In this appendix, we address each of the
comments made in DOE's letter and attachment. 

1.  DOE does not believe that the draft report placed the contract
reform initiative in its historical perspective.  Although we agree
that our prior reports had an important impact on DOE's overall
contracting initiatives, our focus was on evaluating the results of
the Contract Reform Team's effort.  Furthermore, we believe that DOE
is putting in place policies and practices to correct its historical
contracting deficiencies, including those identified in our reports
and testimonies.  However, we also believe that DOE's Contract Reform
Team's report is an important event dealing with contracting in DOE's
history.  While we acknowledge the evolutionary nature of DOE's
contract reform efforts, it will be some time before we can fully
assess whether DOE accomplished its goal of making contracting work
better and cost less. 

2.  DOE believes that our draft report did not provide a
comprehensive overview of its reform efforts, focuses on
administrative outputs, and fails to address the extent to which
contract reform has made contracting work better and cost less.  DOE
states that we only looked at 1 of the 11 elements of contract
reform--competition--in an in-depth way and that 7 of the elements
were not discussed at all.  Since the contract reform report's
issuance, DOE has taken its 48 action items and linked them under the
11 elements.  We addressed these elements as they related to the 48
specific action items. 

We also believe that DOE has taken some very important steps in
reforming its contracting problems.  DOE has (1) changed its policy
and adopted competitive awards as its new contracting standard, (2)
included performance goals in its contacts, and (3) moved quickly to
implement the use of incentive contracts to control costs.  However,
DOE's new contracts were not based on final policy and they had been
in effect for only about 1 year at the time of our analysis.  Thus,
it will take years to determine the extent to which DOE has met its
goal of making contracting work better and cost less.  DOE agrees
with GAO's recommendations and indicated that they were being
implemented. 

While we could have listed all of the efforts DOE has made, as
indicated in chapter 2, many of them are just beginning and are in
the form of new policies and procedures.  In addition, DOE
characterizes our discussion in chapter 2 as administrative outputs. 
However, we believe that our presentation addresses the requester's
need for information on the status of the reform efforts.  Because of
the delays experienced in completing many of the reforms, it is
premature to assess the extent to which they will make contracting
work better and cost less. 

3.  DOE also lists a series of its accomplishments over the past 3
years.  For example, DOE notes that by the end of 1996, 21 of its
management and operating (M&O) contracts will be performance based. 
As stated earlier, we also believe that these are important steps in
reforming DOE's contracting.  However, in the Summer of 1996, when we
reviewed these contracts, they were generally about 1 year old. 
Thus, these contracts were not in place long enough for us to assess
whether DOE's contracting works better and costs less. 

4.  DOE believes that we should have taken a larger sample of
contracts in our analysis of performance measures.  In selecting the
contracts for detailed review, we chose from 11 contracts that were
awarded at the time of our selection.  From these, we selected four
because they had the most thorough provisions for performance goals. 
On the basis of this selection process, we believe our detailed
analysis was sufficient to suggest that, as DOE moves forward with
contract reform and strategic planning, it needs to ensure that
contract goals are in line with departmental goals.  DOE also noted
that our report did not discuss its Hanford management contract,
which DOE believe is an important example of its efforts to link
programmatic and site-strategic goals to contract performance goals. 
We did not include this contract because it was not awarded until
August 6, 1996, too late to be included for detailed review. 

5.  DOE also believes that our discussion of cost incentives is
limited by the number of contracts that we reviewed.  However, our
primary purpose was to determine the impact of the lack of DOE
regulations on how to set these incentives.  We looked at two
contracts because one case demonstrated the benefits of applying the
Federal Acquisition Regulation (FAR) to this process and the other
case showed the impact of not having a regulation. 

6.  DOE is concerned that we did not provide examples of the actions
that it had completed.  As discussed in our conclusions to chapter 2,
DOE has made significant progress in setting a framework for contract
reform through the issuance of new policies, guidance, and plans. 
However, we did not provide specific examples of this progress, but
rather we focused on those actions that were not completed in
accordance with the requirements. 

7.  DOE believes that we do not have sufficient justification to
conclude in our report that "although it is too soon to assess the
overall effectiveness of the reform actions in achieving DOE's
contract reform goals, early indications suggest that delays, limited
available resources, and overly broad guidance may inhibit
implementation." Our conclusion is based on our review and generally
summarizes the sentiments of DOE staff who completed some of the
contract reform actions and staff within the Contract Reform Project
Office. 

DOE also notes that preliminary results of its own self-assessment
provide evidence that substantial implementation of contract reform
is occurring throughout DOE.  We do not question that contract reform
is occurring.  However, our analysis indicated that nearly half of
the contract reform actions were completed recently--within the past
fiscal year.  In our view, the true success of contract reform will
be realized by the consistent application of reform policies and
procedures in contracts, resulting in contracts that work better and
cost less. 

8.  DOE believes that we did not recognize that the Contract Reform
Team report and its 48 action items were just the beginning of a
process that is evolving and is much broader than the report's action
items.  DOE outlined efforts under its evolving strategy and believes
that we did not recognize the progress in implementing this strategy. 
As previously discussed (responses 1 and 2), we believe that DOE has
taken some very important steps in reforming its contracting
problems, and we recognize that its efforts are broader than the
Contract Reform Team report.  In our opinion, the broad strategy
presented by DOE is inextricably linked with contract reform and,
more particularly, the 48 action items.  Furthermore, the completion
of the policies, procedures, and guidance developed under the action
items is the backbone of sustained contract reform.  Therefore, the
status of these action items provides a reasonable assessment of
DOE's progress and the framework for future assessments as DOE's
overall effort evolves. 

9.  DOE believes that our draft report did not address what it has
done to make each of the 48 action items a reality, and it attached
detailed comments relating to these items.  As discussed earlier, we
believe that it will take years to fully assess whether DOE's actions
are effective in making contracting work better and cost less.  Our
detailed responses addressing the specific items DOE questioned in
its Attachment A starts at number 13 below. 

10.  DOE believes that our conclusions in chapter 3 reflect a
misunderstanding of the Contract Reform Team's report and that we do
not adequately acknowledge the impact of its new competition policy. 
Specifically, DOE believes that (1) the proposed extension of the
three laboratory contracts conforms to its new policy, (2) real
changes have occurred in its contract culture and practice, and (3)
we did not acknowledge that its competition policy was adopted in
1994. 

First, DOE states that extending the three laboratory contracts was
contingent on incorporating contract reform provisions and achieving
other negotiation objectives.  On the basis of DOE's decision and
past performance, it will be difficult for DOE to implement such a
policy on these contracts.  As noted in our draft report, the
Secretary's decision to extend these contracts stated that
considering other contractors was unrealistic and incompatible with
program requirements.  Once DOE stated that only one contractor could
do this work, it effectively weakened its negotiating position.  Even
though the Secretary also noted that any resulting contract was
conditional upon the incorporation of reform measures, it appears
that the decision to extend these contracts was made prior to the
completion of successful negotiations and is inconsistent with the
intent of contract reform. 

From a historical perspective, we note that DOE's earlier extension
of these contacts was also predicated upon incorporating reforms. 
Our work and that of DOE's Inspector General pointed out problems
preceding the award of the prior contracts, such as contract clauses
that weakened DOE's position.  However, the resulting contracts
perpetuated DOE's weak position. 

Second, DOE believes that the Department's culture has changed from
one in which extending contracts was the normal practice to a culture
in which competition is the first consideration.  While DOE believes
that a cultural change has occurred, two-thirds of its decisions were
to noncompetitively extend management and operating contracts. 
Furthermore, the Contract Reform Team report concluded that contracts
should be competitively awarded--except for unusual circumstances. 
We believe that such a large proportion of noncompetitively extended
contracts seems inconsistent with the Contract Reform Team's
criterion of "unusual" circumstances. 

In achieving greater competition in its contracting, DOE cites the
new contract for the Hanford Tank Waste Privatization effort.  (This
effort is different from the broader contract awarded on August 6,
1996, for the management of DOE's Hanford facility.) DOE expects this
approach to affect cost savings because competing contractors will
strive for the most cost-effective operation.  However, as we
reported in August 1996, because of the less-than- expected actual
competition on the effort and the large margin of error in the cost
estimates, the savings estimates must be viewed with caution.\21

Third, DOE believes that our draft report incorrectly stated that the
competition policy did not go into effect until August 1996.  DOE
believes that the policy was in effect 2 years earlier.  Our draft
report clearly explained that DOE issued an interim policy on
September 28, 1994, and that its current and final policy was
effective on August 23, 1996.  However, regardless of the date the
policy was put in place, as stated above, the policy had little
effect on competition.  DOE also believes that it did not have time
or resources to competitively award more contracts at the time it
issued the July 5, 1994, decision memorandum.  We believe that DOE
could have extended these contracts to allow for staggered completion
dates to provide for orderly competitions. 

11.  Although DOE generally agrees with our conclusion that contract
performance goals should be linked to departmental goals as discussed
in chapter 4, DOE was concerned that our analysis did not consider
subordinate goals, such as program goals, that would better link
departmental goals with contract goals.  However, we reviewed DOE's
strategic plan, annual performance agreements, strategic plans for
DOE's five business lines and key success factors, and site strategic
plans.  We discussed our results with staff of DOE's Office of
Strategic Planning, Budget and Program Evaluation and the Contract
Reform Project Office and explained to them that we could not track
the goals from the Departmental Strategic Plan, through the
subordinate program plans, and into the management and operating
contracts. 

Furthermore, DOE believes that our recommendation should be refined
to include program goals and site goals and should not just focus on
broad departmentwide goals.  As discussed in chapter 4, we believe
that these linkages are important and that our recommendation already
addresses this linkage. 

DOE agreed with our conclusion and recommendation to retain the
authority to establish contract goals and incentives. 

12.  DOE agrees with our recommendation in chapter 5 regarding the
inclusion of cost incentives based on those included in the FAR. 
Furthermore, DOE has a draft fee policy that contains a requirement
that certain contracts must be done pursuant to federal regulations. 
DOE states that it is going to use FAR part 16, which addresses the
contract types.  However, FAR part 15.8 provides specific guidance on
the analysis of prices and costs and the documentation of price
negotiations.  DOE's draft policy should include provisions from this
part of the FAR that are appropriate for the pricing of M&O
contracts. 

In addition, DOE's comments questioned our reference to Oak Ridge's
capping policy on fee amounts.  As discussed in chapter 5, DOE
officials acknowledged problems with cost incentives at Oak Ridge and
adopted a capping policy for fee amounts.  Although this policy
limits the incentive fee that the contractor can earn, it does not
fully resolve the identified contract pricing problems. 

13.  DOE disagrees with our finding that significant delays occurred
in the completion of many of its action items and provides a detailed
description of its approval process.  DOE also states that
implementation of the reforms began immediately, and it did not wait
for the action items to be finalized.  Rather than use the final
approval date to assess the completion of the action items, DOE
believes that it is more appropriate to assess completion on the
basis of the date an item was delivered to the Contract Reform
Project Office.  Finally, DOE does not believe that the delays in the
closure of action items pushed successful implementation of the
policies far into the future. 

DOE believes that submission of an action item to the Project Office
constitutes completion.  However, we believe that at this point, the
proposed action is only a draft that will undergo further review to
ensure conformance with departmental policy.  For example, action
item number 25 is reported by DOE as having been completed on June 1,
1995.  However, as of August 13, 1996, the action was still
undergoing comment resolution within the Department and was thus
subject to change.  Therefore, we could not assess the completion of
the action items until they were finalized by the Executive
Committee.  Finally, our subsequent analysis of the action items
using DOE's completion criteria still showed that nearly 70 percent
of them did not meet their respective deadlines.  While DOE's
approach of implementing the action items before they are finalized
gets reform efforts under way, it also raises some serious concerns. 
These items are being implemented without final approval and
concurrence by important offices within the Department.  For example,
they are being implemented before the Office of General Counsel gives
final legal approval.  At best, we believe they become test items and
may not accurately reflect new policies.  Therefore, the success of
DOE's new policies cannot be measured until they are implemented in
their final form.  In fact, this would include any changes that could
occur in the adoption of final regulations after undergoing public
comment.  Because approximately 49 percent of these actions were not
formally accepted by the Executive Committee until fiscal year 1996,
it is too soon to assess their success. 

Although we recognize DOE's zeal in implementing many reform actions
before they were formally approved, we nonetheless believe that
successful implementation will take some time.  We maintain that the
delays in developing final departmental policy will delay successful
implementation of the new policies. 

14.  DOE agrees that we correctly assessed the completeness of the
action item that required DOE to provide incentives for its
contractors to subcontract various routine functions.  However, DOE
believes that it should not be required to implement a recommendation
that does not result in sound business practices, as it believes in
this case.  We agree with DOE's assessment that a recommendation
should not be employed if it is deemed an unsound business strategy. 
However, we believe that this recommendation does represent sound
business strategy.  In fact, according to officials in the Contract
Reform Project Office, several DOE contracts contain incentives to
encourage the subcontracting of routine functions.  If DOE believes
that this is an unsound business practice, it should not be allowed
to occur.  Furthermore, such inconsistencies can occur in an
environment in which DOE allows the implementation of its action
items before the policies are finalized. 

15.  Again, DOE acknowledges that for another action item concerning
the implementation of performance-based contracting methods for
support service contracts, it did not develop an action plan with
targets and milestones.  Rather, DOE maintains that it reduced
support service contracting primarily by its Strategic Alignment
Initiative.  We agree and acknowledged this in our draft report under
the action item requiring a reduction of support service contracts by
10 percent in fiscal years 1995-97. 

16.  DOE believes that it has implemented the main thrust of the
action item to reduce its current audit backlog.  This action item
required a cost-benefit analysis for obtaining additional resources
and recommendations on alternative approaches.  DOE believes that it
had no other alternative and thus did not do a cost-benefit analysis
because of budgetary constraints.  We agree that DOE has implemented
the main thrust of this action item.  However, without studying
additional approaches, DOE's action may not be the most
cost-beneficial.  One option that DOE could have considered is the
FAR's quick closeout procedure that allows the contracting officer to
reach some agreements without a contract closeout audit. 

17.  DOE contends that our draft report inferred that the Office of
Procurement and Assistance Management was less than enthusiastic in
meeting the Secretary's goals of contract reform.  We disagree.  Our
reference to the Office of Procurement and Assistance Management was
to illuminate the difficulties encountered by DOE in effectuating
contract reform.  As stated in our draft report, that office opposed
being assigned responsibility for six action items because it
believed those actions were inherently field related and not due to a
lack of enthusiasm. 

18.  Again, DOE believes that we ignored the fact that the
implementation of contract reform started in 1994 and disagrees that
successful implementation of the new policies will be pushed into the
future.  As discussed elsewhere in these comments, we recognize the
efforts that DOE has made; but, nonetheless, we believe that
successful implementation will take some time. 

19.  DOE was unclear about our reference to the adequacy of resources
and lack of baselines to adequately support the reform actions.  This
concern was expressed by several of the task teams in their action
item reports.  Our intent was to show possible barriers to
implementing contract reform. 

20.  DOE is uncertain of the meaning of our reference to goals and
indicators being developed at a high level.  As noted above, our goal
was to reflect the task team's concern over possible difficulties in
implementing contract reform. 

21.  DOE asserts that the statement made by a Project Office
officials that "it may take years to determine whether many of these
actions will make DOE contracting work better and cost less" is taken
out of context by implying that nothing is happening.  To the
contrary, as discussed throughout our draft report, we indicated that
DOE is making progress in enacting contract reform.  We also noted
that it is too early to assess the effect of reform action items on
contracting goals because, among other things, it will take time for
existing contracts to be replaced by new ones that incorporate reform
measures. 


--------------------
\21 See Hanford Waste Privatization (GAO/RCED-96-213R, Aug.  2,
1996). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION

Jeffrey E.  Heil, Assistant Director
Robert M.  Antonio
Gene M.  Barnes
James S.  Crigler
John C.  Johnson
Casandra D.  Joseph
Robert E.  Sanchez

OFFICE OF THE GENERAL COUNSEL

Doreen S.  Feldman



RELATED GAO PRODUCTS
============================================================ Chapter 1

Managing DOE:  The Department's Efforts to Control Litigation Costs
(GAO/T-RCED-96-170, May 14, 1996). 

Federal Research:  Information on Fees for Selected Federally Funded
Research and Development Centers (GAO/RCED-96-31FS, Dec.  8, 1995). 

Nuclear Facility Cleanup:  Centralized Contracting of Laboratory
Analysis Would Produce Budgetary Savings (GAO/RCED-95-118, May 8,
1995). 

Managing DOE:  The Department of Energy Is Making Efforts to Control
Litigation Costs (GAO/RCED-95-36, Nov.  22, 1994). 

DOE Management:  Contract Provisions Do Not Protect DOE From
Unnecessary Pension Costs (GAO/RCED-94-201 Aug.  26, 1994). 

Energy Management:  Modest Reforms Made in University of California
Contracts, but Fees Are Substantially Higher (GAO/RCED-94-202, Aug. 
25, 1994). 

Managing DOE:  Tighter Controls Needed Over the Department of
Energy's Outside Litigation Costs (GAO/T-RCED-94-264, July 13, 1994). 

Department of Energy:  Challenges to Implementing Contract Reform
(GAO/RCED-94-150, Mar.  21, 1994). 

Energy Management:  DOE Can Improve Distribution of Dollars Awarded
Under SBA's 8(a) Program (GAO/RCED-94-28, Feb.  23, 1994). 

Energy Management:  Inadequate DOE Monitoring of Contractors'
Acquisitions From Affiliates (GAO/RCED-94-83, Feb.  11, 1994). 

Financial Management:  Energy's Material Financial Management
Weaknesses Require Corrective Action (GAO/AIMD-93-29, Sept.  30,
1993). 

Energy Management:  High Risk Area Requires Fundamental Change
(GAO/T-RCED-93-7, Feb.  17, 1993). 

Department of Energy Contract Management (GAO/HR-93-9, Dec.  1992). 

DOE Management:  Impediments to Environmental Restoration Management
Contracting (GAO/RCED-92-71, Apr.  20, 1992). 

Energy Management:  Vulnerability of DOE's Contracting to Waste,
Fraud, Abuse, and Mismanagement (GAO/RCED-92-244, Aug.  14, 1992). 

Energy Management:  Systematic Analysis of DOE's Uncosted Obligations
Is Needed (GAO/T-RCED-92-41, Mar.  24, 1992). 

Nuclear Health and Safety:  Increased Rating Results in Award Fee to
Rocky Flats Contractor (GAO/RCED-92-162, Mar.  24, 1992). 

Nuclear Waste:  Weak DOE Contract Management Invited TRUPACT-II
Setbacks (GAO/RCED-92-26, Jan.  14, 1992). 

Energy Management:  DOE Has an Opportunity to Improve Its University
of California Contracts (GAO/RCED-92-75, Dec.  26, 1991). 

Energy Management:  Tightening Fee Process and Contractor
Accountability Will Challenge DOE (GAO/RCED-92-9, Oct.  30, 1991). 

Energy Management:  Contract Audit Problems Create the Potential for
Fraud, Waste, and Abuse (GAO/RCED-92-41, Oct.  11, 1991). 

Energy Management:  DOE Actions to Improve Oversight of Contractors'
Subcontracting Practices (GAO/RCED-92-28, Oct.  7, 1991). 

DOE Management:  DOE Needs to Improve Oversight of Subcontracting
Practices of Management and Operating Contractors (GAO/T-RCED-91-79,
Aug.  1, 1991). 

DOE Management:  Management Problems at the Three DOE Laboratories
Operated by the University of California (GAO/T-RCED-91-86, July 31,
1991). 

DOE's Management and Oversight of the Nuclear Weapons Complex
(GAO/T-RCED-90-52, Mar.  22, 1990). 


*** End of document. ***