Nuclear Waste: Department of Energy's Project to Clean Up Pit 9 at Idaho
Falls Is Experiencing Problems (Letter Report, 07/28/97,
GAO/RCED-97-180).

Pursuant to a congressional request, GAO reviewed the: (1) Department of
Energy's (DOE) basis for selecting a fixed-price contracting approach
and a subcontract for the Pit 9 project at Idaho National Engineering
Laboratory; (2) basis for awarding the subcontract to Lockheed Martin
Advanced Environmental Systems; and (3) current status of the project
and the potential for cost overruns.

GAO noted that: (1) DOE chose a fixed price approach for the project
because Department officials believed a fixed price would help limit the
project's total cost and provide an incentive for contractors to use
efficient practices in carrying out the cleanup by shifting the risk of
nonperformance to the contractors; (2) DOE officials believed they had a
better chance of achieving these goals with a fixed-price approach than
with a cost-reimbursement approach, even though uncertainties existed
about the actual wastes in the pit; (3) DOE also directed its management
and operating (M&O) contractor at the Idaho falls site to conduct the
procurement process for the selection of a subcontractor and to oversee
the project; (4) the M&O contractor awarded the subcontract to Lockheed
Martin Advanced Environmental Systems on the basis of several key
factors, including the adequacy of its technical proposal, its apparent
technical and managerial expertise, its successful completion of the
test phase, the price, about $200 million, and a guarantee of
performance under which the company would return all payments received
if its treatment system failed to work properly; (5) estimated
completion of the project is at least 26 months behind the original
subcontract schedule; (6) the waste retrieval and processing facilities
are not ready, and no retrieval or treatment of wastes has begun; (7)
instead, DOE has been assessed $940,000 in fines by its regulators, the
state of Idaho and the Environmental Protection Agency, for failure to
meet deadlines for submitting acceptable design documents; (8) Lockheed
Martin Advanced Environmental Systems estimates that its costs have
already exceeded the subcontract produce and has requested $257 million
for its work through June 30, 1997, as well as a new cost-based
subcontract to reimburse the company for all future costs; (9)
discussions are continuing, and the outcome of the disagreement is
uncertain; (10) meanwhile, because of these contract difficulties and
the related legal implications, the M&O contractor has hired outside
legal counsel for the Pit 9 project and, under the terms of the M&O
contract, DOE is responsible for paying those legal fees; (11) whatever
the outcome, the Pit 9 project, as originally conceived, is clearly a
failure; (12) it simply cannot be completed in the time frame or within
the price agreed to by the subcontractor; and (13) this has important
future implications because DOE's planned investment in privatization
cleanup projects is growing, the Department included over $1 billion in
its fiscal year 1998 budget request for 11 such projects.

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

 REPORTNUM:  RCED-97-180
     TITLE:  Nuclear Waste: Department of Energy's Project to Clean Up 
             Pit 9 at Idaho Falls Is Experiencing Problems
      DATE:  07/28/97
   SUBJECT:  Privatization
             Hazardous substances
             Environmental monitoring
             Nuclear waste disposal
             Radioactive wastes
             Fixed price contracts
             Cost overruns
             Subcontracts
             Technical proposal evaluation
             Contractor performance
IDENTIFIER:  DOE Environmental Management Program
             DOE Idaho Pit 9 Remediation Demonstration Project
             DOD Environmental Restoration Program
             Idaho Falls (ID)
             
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Cover
================================================================ COVER


Report to the Committee on Commerce, House of Representatives

July 1997

NUCLEAR WASTE - DEPARTMENT OF
ENERGY'S PROJECT TO CLEAN UP PIT 9
AT IDAHO FALLS IS EXPERIENCING
PROBLEMS

GAO/RCED-97-180

DOE's Pit 9 Cleanup

(141033)


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

  DOE - Department of Energy
  EPA - Environmental Protection Agency
  FAR - Federal Acquisition Regulation
  M&O - Management and Operating
  RFP - request for proposal
  LMAES - Lockheed Martin Advanced Environmental Systems
  LESAT - Lockheed Environmental Systems and Technologies

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


B-277164

July 28, 1997

The Honorable Tom Bliley
Chairman
The Honorable John Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

Cleaning up facilities that over the past 50 years have produced the
nation's supply of nuclear materials for weapons is an enormous and
complex challenge facing the federal government.  In fiscal year
1997, the Department of Energy's (DOE) Environmental Management
program is expected to spend about $5.6 billion to clean up
radioactive and hazardous wastes.  This effort is being performed
primarily under cost-reimbursement contracts by contractors that
manage and operate (M&O contractors) many of DOE's facilities.  DOE,
however, has found that using the M&O approach is expensive and slow. 
To reduce cleanup costs and spur greater progress, DOE is pursuing a
new contracting strategy, which it calls "privatization." This
approach relies on the use of a competitively awarded fixed-price
performance contract, through which DOE purchases waste cleanup
services from a private contractor.  While we have been supportive of
DOE's efforts to reform its contracting practices, we have also been
concerned that the Department effectively manage this transition. 

One of DOE's first privatization projects intended to clean up
radioactive wastes is the Pit 9 project at the Idaho National
Engineering and Environmental Laboratory.  In your letter of January
31, 1997, you expressed concerns about the status of the Pit 9
project and the potential for cost overruns.  As agreed with your
offices, we focused our review on (1) DOE's basis for selecting a
fixed-price contracting approach and a subcontract for the project,
(2) the basis for awarding the subcontract to Lockheed Martin
Advanced Environmental Systems, and (3) the current status of the
project. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOE chose a fixed-price approach for the project because Department
officials believed a fixed price would help limit the project's total
cost and provide an incentive for contractors to use efficient
practices in carrying out the cleanup by shifting the risk of
nonperformance to the contractors.  DOE officials believed they had a
better chance of achieving these goals with a fixed-price approach
than with a cost-reimbursement approach, even though uncertainties
existed about the actual wastes in the pit.  DOE also directed its
M&O contractor at the Idaho Falls site to conduct the procurement
process for the selection of a subcontractor and to oversee the
project. 

The M&O contractor awarded the subcontract to Lockheed Martin
Advanced Environmental Systems on the basis of several key factors,
including the adequacy of its technical proposal, its apparent
technical and managerial expertise, its successful completion of the
test phase, the price--about $200 million, and a guarantee of
performance under which the company would return all payments
received if its treatment system failed to work properly.  Because of
reservations about the maturity of the technologies, the M&O
contractor expanded the test phase of the procurement from a review
of references and results of prior work to include pilot scale
testing of key aspects of the proposed systems. 

Estimated completion of the project is at least 26 months behind the
original subcontract schedule.  The waste retrieval and processing
facilities are not ready, and no retrieval or treatment of wastes has
begun.  Instead, DOE has been assessed $940,000 in fines by its
regulators--the state of Idaho and the Environmental Protection
Agency--for failure to meet deadlines for submitting acceptable
design documents.  Lockheed Martin Advanced Environmental Systems
estimates that its costs have already exceeded the subcontract price
and has requested $257 million for its work through June 30, 1997, as
well as a new cost-based subcontract to reimburse the company for all
future costs.  These changes, if implemented, would bring the total
subcontract price for the Pit 9 cleanup to well over twice its
original $200 million value.  The company's basis for requesting more
money is its view that problems with the project are largely
attributable to DOE and its M&O contractor for improper
administration of the subcontract, excessive interference, and
substantially changing the estimate of types and amounts of materials
contained in Pit 9.  DOE officials said that it may be several months
before they have an official position on the company's claims, but
DOE and the M&O contractor disagree with the assessment of what
caused the problems and instead point mainly to the subcontractor's
insufficient application of technical and management skills on the
project. 

Discussions are continuing, and the outcome of the disagreement is
uncertain.  Meanwhile, because of these contract difficulties and the
related legal implications, the M&O contractor has hired outside
legal counsel for the Pit 9 project and, under the terms of the M&O
contract, DOE is responsible for paying those legal fees.  Whatever
the outcome, the Pit 9 project, as originally conceived, is clearly a
failure.  It simply cannot be completed in the time frame or within
the price agreed to by the subcontractor.  This has important future
implications because DOE's planned investment in privatization
cleanup projects is growing--the Department included over $1 billion
in its fiscal year 1998 budget request for 11 such projects. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Pit 9 is an inactive waste disposal pit, slightly larger than 1 acre
in surface area.  From November 1967 through June 1969, various
wastes ranging from contaminated rags to storage drums with hazardous
chemicals and plutonium-contaminated sludge were dumped into the pit
and covered with a layer of soil.  DOE estimated that the pit
contains about 250,000 cubic feet of transuranic and hazardous
wastes\1 and contaminated soil needing treatment.  Because the wastes
and soil are radioactive, retrieving and treating them involves
special handling so that workers are not exposed to contamination and
radioactive materials are not released to the environment. 

Starting in 1991, DOE and its regulators--the Environmental
Protection Agency (EPA) and the state of Idaho--began exploring ways
to remediate Pit 9.  They hoped that in doing so, they would also
obtain information that would help in cleaning up other locations at
the Idaho Falls site.  DOE and its regulators agreed to clean up Pit
9 as an interim action under Superfund\2 by retrieving soil and
wastes from the pit, separating those materials that could be
returned to the pit without treatment, treating the remaining soil
and wastes to achieve at least a 90-percent reduction in volume, and
packaging the remaining concentrated materials for on-site storage
until final disposal. 

Pit 9 is one of the first of several privatization projects at DOE
sites.  DOE's Office of Environmental Management, which is
responsible for cleanup efforts, intends privatization projects to
involve fixed-price, competitively awarded contracts.  A private
contractor would finance, design, build, own and operate any required
waste cleanup facilities, and DOE would pay the contractor only for a
successful cleanup.  Under a fixed-price contract, the contractor is
paid a specified amount that is not subject to adjustment on the
basis of the contractor's actual costs.  However, under certain
conditions, the contractor can request an adjustment to the contract
price for work that is done outside of the scope of the original
contract.  Such an adjustment is subject to review and approval by
DOE and would result in a contract modification if approved. 

This fixed-price approach is in contrast to the Department's past
practices, under which DOE used a cost-reimbursement contract, told
the M&O contractor how to perform waste-related cleanup activities,
and paid the M&O contractor regardless of what was accomplished. 
Cost-reimbursement contracts provide for payment of all costs
incurred by the contractor to the extent that these costs are
allowable under the specific contract provisions--reimbursable costs
can include such things as labor, materials, overhead, subcontract
costs, and legal fees.  Cost-reimbursement contracts establish an
estimate of total costs for the purpose of obtaining and obligating
the funds. 


--------------------
\1 Transuranic wastes, man-made radioactive elements produced from
uranium during a nuclear reactor's operations, emit alpha particles. 
Alpha-emitters are dangerous because of concerns about inhaling them. 
Hazardous wastes are wastes regulated by the Environmental Protection
Agency and authorized states under the Resource Conservation and
Recovery Act of 1976.  Hazardous wastes at Pit 9 include carbon
tetrachloride and mercury. 

\2 The Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA)--commonly referred to as
Superfund--allows an interim action, which is not necessarily a final
cleanup action.  The regulators agreed to address the Pit 9 cleanup
as an interim action to expedite the overall cleanup effort at the
Idaho Falls site and to reduce the risks associated with the
contamination at the pit. 


   DOE PREFERRED A FIXED-PRICE
   SUBCONTRACT
------------------------------------------------------------ Letter :3

DOE chose a fixed-price approach for the Pit 9 project because
Department officials believed a fixed price would help limit the
project's total cost and provide an incentive for contractors to use
efficient practices in carrying out the cleanup by shifting the risk
of nonperformance to the contractors.  During the early stages of the
procurement process, concerns arose about the appropriateness of a
fixed-price approach and the risks involved, such as the uncertainty
about the contents of the pit.  Nevertheless, senior DOE officials
decided that this approach was warranted, given the high costs and
the inefficient performance the Department had experienced with
cost-reimbursement contracts, private industry's expressed interest
in performing the cleanup using a fixed-price arrangement, and the
potential benefits of the approach.  DOE directed its M&O contractor
to conduct the procurement and selection process and to oversee the
subcontractor selected because the Department believed that the M&O
contractor had the necessary expertise and that a subcontract would
allow greater application of the private sector's best practices. 


      DOE CHOSE A FIXED-PRICE
      APPROACH TO LIMIT COSTS AND
      SHIFT PERFORMANCE RISK TO
      THE SUBCONTRACTOR
---------------------------------------------------------- Letter :3.1

DOE was looking for a new approach for the Pit 9 project--one that
would reduce the overall cost, shift the risk of nonperformance to
the private sector, and thus provide an incentive for contractors to
use efficient practices in carrying out the cleanup.  To accomplish
these objectives, DOE decided upon a fixed-price approach to the
cleanup.  Under this approach, DOE planned to pay only for actual
remediation of the Pit 9 wastes--at a fixed price intended to cover
all applicable costs associated with the project (e.g., those for
equipment, mobilization, processing, etc.). 

The fixed-price approach was selected despite some indications that
it was not well suited for an application such as Pit 9.  Limited
guidance exists on selecting a contract type; however, the Federal
Acquisition Regulation (FAR) suggests that a firm fixed-price
contract, which best utilizes the basic profit motive of the private
sector, should be used when the risk involved is minimal or can be
predicted with an acceptable degree of certainty.  Given that there
was little certainty about the contents of the pit, this guidance
seems to suggest that a fixed-price contract may not have been the
best approach.  In addition, questions that later arose during the
procurement process regarding whether the proposed technologies were
sufficiently developed added to the risk and uncertainty of the
project.\3 On the other hand, the FAR also suggests that a
firm-fixed-price contract may be suitable where performance
uncertainties can be identified, reasonable estimates of their cost
impact can be made, and the contractor is willing to accept a firm
fixed price representing assumption of the risks involved. 

Questions about whether a fixed-price approach was appropriate for
the Pit 9 cleanup surfaced during the early stages of the procurement
process.  For example, some DOE officials at the site had expressed
concerns about using a fixed-price approach given the uncertainties
associated with the contents of the pit.  In addition, responses to
the draft request for proposal (RFP) included concerns from
interested firms that a fixed-price approach would have to reflect
large contingencies and could therefore result in higher bids from
the competitors.  In addition, these responses stated that a
fixed-price subcontract could generate claims for additional
reimbursement if work outside the scope of the contract occurred. 

Even with these concerns, DOE decided to use a fixed-price approach. 
According to DOE officials at the Idaho Falls site, they realized
that a fixed-price approach to this cleanup entailed some risks due
to the uncertainties of the pit's contents.  However, DOE also
believed there was much to be gained, including information on how to
effectively clean up other DOE disposal sites, if this new approach
were successful.  In addition, DOE had come under criticism from
private industry for continuing to fund what was perceived as
research and development efforts of its M&O contractors without any
actual cleanup.  According to senior DOE officials, private industry
was confident that it had the technology to clean up the wastes and
preferred a fixed-price arrangement.  Therefore, senior DOE officials
at Idaho Falls and headquarters decided that the potential benefits
associated with fixed-price contracting outweighed the possible
risks. 

As we noted in our recent report on DOE's estimates of potential
savings from privatizing cleanup projects, DOE's use of fixed-price
contracts has not always been an effective method to minimize cost
growth on projects.\4 For example, a 1993 study of DOE's
Environmental Restoration projects found that, for a representative
sample of projects, cost growth on projects with fixed-price
contracts was almost 75 percent, more than double that of projects
with cost-reimbursement contracts.  This cost growth occurred
primarily because projects were poorly defined, leading to contract
change orders after the contracts were signed.\5 A 1996 update to the
study showed that cost overruns ranged from about 30 to 50 percent
but did not distinguish between projects with fixed-price and
cost-reimbursement contracts.\6


--------------------
\3 A study released after the subcontract was finalized, A Systematic
Look at TWRS Privatization, Pacific Northwest National Laboratory
(Jan.  1995), reported that privatization--which includes using a
firm-fixed-price contract--works best when the technology is mature
and the work is well defined. 

\4 See Nuclear Waste:  DOE's Estimates of Potential Savings From
Privatizing Cleanup Projects (GAO/RCED-97-49R, Jan.  31, 1997). 

\5 The Department of Energy, Office of Environmental Restoration &
Waste Management, Project Performance Study, Independent Project
Analysis, Inc.  (Reston, Va., Nov.  30, 1993).  Because the study
included both completed and ongoing projects, some of the costs were
estimated. 

\6 The Department of Energy, Office of Environmental Restoration &
Waste Management, Project Performance Study Update, Independent
Project Analysis, Inc.  (Reston, Va., Apr.  1996). 


      DOE DECIDED TO MANAGE USING
      A SUBCONTRACT
---------------------------------------------------------- Letter :3.2

In conjunction with its decision to use a fixed-price approach to the
Pit 9 cleanup, DOE also decided to have its M&O contractor--EG&G
Idaho, Inc.\7 (EG&G)--conduct the procurement process, select the
subcontractor, and oversee the subcontractor's efforts at Pit 9. 
According to DOE officials, there were several reasons for choosing a
subcontract for this effort: 

  -- DOE believed that EG&G already had the necessary expertise to
     evaluate the technical proposals submitted by interested firms
     and to oversee the cleanup, whereas DOE did not have the
     expertise in-house and would have had to acquire it. 

  -- DOE considered the Pit 9 project to be within EG&G's area of
     responsibility and wanted EG&G to oversee the cleanup. 

  -- DOE believed the project could be executed more efficiently as a
     subcontract through EG&G because using the M&O's procurement and
     contracting standards would simplify and streamline the
     procurement process and make it easier to implement private
     sector best practices. 

On the basis of these reasons, DOE authorized EG&G to initiate the
procurement process for the Pit 9 cleanup and to select a
subcontractor to remediate the wastes on a fixed-price basis.  The
cleanup was to be conducted in three phases:  (1) proof of process,
which would include a technical review of the results of prior
projects to verify that the proposed retrieval and processing systems
were effective (phase I); (2) limited production test, which would
operate the completed system on small quantities of actual waste from
Pit 9 to determine if it worked as designed (phase II); and (3) full
scale operations to remediate the contents of the pit (phase III). 


--------------------
\7 When the procurement process began, the M&O contractor at Idaho
Falls was EG&G-Idaho, Inc.  The M&O contract came up for renewal in
1994, Lockheed won the competitive bidding for the M&O contract, and
Lockheed Idaho Technologies Company (LITCO) became the new M&O
contractor in October of 1994.  Lockheed later merged with Martin
Marietta, and LITCO became LMITCO (Lockheed Martin Idaho Technologies
Company). 


   SUBCONTRACTOR SELECTED ON THE
   BASIS OF PROPOSAL, EXPERIENCE,
   PRICE, AND PERFORMANCE
   GUARANTEE
------------------------------------------------------------ Letter :4

Lockheed Martin Advanced Environmental Systems (LMAES) was selected
for the subcontract on the basis of its technical proposal, cleanup
experience, successful completion of the test phase, proposed price,
and willingness to provide a corporate guarantee of performance if
the system did not work as envisioned.  However, much of LMAES' prior
experience had been on smaller and simpler cleanup efforts, and its
proposed system had never been tested in a full-scale operation. 
Despite technical concerns raised during the review of the proposals
and the proof-of-process test phase, EG&G determined that the
corporate guarantee included in the subcontract would protect the
government's interests if the treatment process failed. 


      PROCUREMENT PROCESS USED
      PHASED APPROACH
---------------------------------------------------------- Letter :4.1

EG&G began the procurement process in 1991, using a phased approach,
under which interested firms would submit their technical proposals
first, and price would be negotiated later with the successful firm. 
EG&G's first step was to put a notice in the Commerce Business Daily,
which described the requirements for the Pit 9 comprehensive
demonstration and the relevant experience needed.  According to the
Pit 9 mission statement, the objective of the project was to
excavate, characterize, treat as necessary, and dispose of all wastes
from the pit at minimum cost to DOE.  Fifty private sector firms
expressed interest in the project by responding to the notice.  After
this initial show of interest, EG&G issued a draft RFP to qualified
firms, held a preproposal conference with interested firms to discuss
the project in more detail and answer questions, conducted a tour of
the site to provide additional information, and subsequently revised
the draft RFP to incorporate comments from the potential competitors. 

The final RFP was issued in November 1991 to 18 prospective
competitors who still expressed interest after the preproposal
conference and site tour.  This RFP contained the technical
requirements for the Pit 9 comprehensive demonstration and provided
the proposed plan for cleaning up the area, as agreed to by DOE and
its regulators.  In response to the RFP, EG&G received proposals from
three competitors--a team led by Lockheed\8 and two other teams, one
led by Rust Federal Services (formerly Waste Management Environmental
Services) and the other by Nuclear Radiation Technologies
Corporation. 


--------------------
\8 The Lockheed team was led by Lockheed-AWC.  This entity later
became known as Lockheed Environmental Systems and Technologies
(LESAT) and finally, with the Lockheed/Martin Marietta merger, as
LMAES. 


      SOURCE EVALUATION BOARD USED
      TO EVALUATE PROPOSALS
---------------------------------------------------------- Letter :4.2

EG&G used a Source Evaluation Board (Board)--consisting of eight EG&G
employees with technical and administrative expertise--to review and
evaluate the three proposals.  The Board used a combination of
mandatory requirements and technical criteria to evaluate the
proposals.  The mandatory requirements were these:  (1) Offerors must
provide demonstrated evidence that they are qualified by experience
to treat materials contaminated with the radioactive elements
plutonium and americium; (2) offerors must possess or have access to
approved analytical laboratory facilities capable of analyzing
radioactive, hazardous, and mixed wastes; and (3) offerors must have
an established environmental, safety, and health program. 

The Board determined that all three competitors met these mandatory
requirements.  For example, regarding the mandatory requirement for
demonstrated evidence of experience, the Lockheed team was deemed
qualified on the basis of its cleanup experience with
plutonium-contaminated soil on the Johnston Atoll.  Although members
of the Board checked with some of the references given and found that
projects were completed on time and within budgets, none of the
experience cited by the Lockheed team matched the size and complexity
of the Pit 9 cleanup effort.  According to a member of the Board,
they evaluated the Lockheed team more on the parent corporation's
overall reputation and resources. 

In addition to the mandatory requirements, the Board used three
technical criteria to evaluate the proposals:  (1) the technical
feasibility of the approach, including the best combination of
technologies to achieve remediation; (2) offerors' demonstrated
experience and qualifications, including the expertise of key
personnel; and (3) offerors' demonstrated ability to perform
full-scale operations within an agreed-upon schedule and budget.  On
the basis of its application of the technical criteria, the Board
determined that the teams led by Lockheed and Rust were essentially
equivalent in their overall scores.  The third team was dropped from
consideration after receiving lower scores on the technical criteria. 


      PROOF-OF-PROCESS PHASE
      EXPANDED
---------------------------------------------------------- Letter :4.3

Although the Lockheed and Rust teams were deemed to be essentially
equivalent, the Board had significant reservations about whether the
proposed technologies were sufficiently developed.  According to DOE
officials, the private sector--including representatives from the two
competing teams--had been telling DOE and EG&G that proven
"off-the-shelf" technology was capable of remediating the wastes in
the pit.  However, the Board believed that while the components of
the proposed systems may have been tested individually, they had
never been combined into a total system to treat radiologically
contaminated materials.  The Board reported that none of the proposed
technologies or processes fully complied with the intent of the RFP
selection criteria, but the Board believed that technology existed in
the commercial sector, which, "with additional development,
adaptation, schedule and resource considerations provided," could
successfully remediate Pit 9 to the desired objectives. 

Although the Board had reservations, it also believed that the
remaining two technical proposals reflected the best available
processes at the time.  To mitigate concerns about the proposed
technologies, the Board recommended that, in going forward with the
procurement, the proof-of-process phase be expanded from a review of
references and results of prior work to include pilot scale testing
of critical aspects of both treatment systems. 

Both Lockheed and Rust were awarded 1-year fixed-price subcontracts
for $8 million each to conduct the proof-of-process testing, with
payment to be made upon successful completion.  The specific tests to
be included were proposed by the competing teams, with concurrence
from EG&G.  Because the proposed treatment systems were different and
the Board's concerns about the technology differed for each team, the
tests conducted in the proof-of-process phase were also different for
each team and did not include a comprehensive test of the entire
process.  For example, the tests for the Lockheed team included key
aspects of such components as the chemical leach system and the
plasma melter, both key pieces of its proposed process.  The
proof-of-process phase concluded in December 1993, with both teams
passing their designated tests and receiving payment under their
subcontracts. 

Prior to the conclusion of the proof-of-process phase, EG&G sent a
request for pricing proposal to both teams.  Although DOE's original
intent had been to make no payments until actual remediation began,
the request for pricing proposal provided for some payments for
design milestones and construction progress to keep the overall
subcontract price lower by offsetting the cost of financing to the
subcontractor.  Because of this change in payment strategy, the
request for pricing proposal also required a corporate guarantee of
performance to protect the government's interests.  Under this
corporate guarantee, if the subcontractor's proposed system did not
pass the limited production test at the completion of construction
and installation, the subcontractor would be required to return all
payments made to date.  When the Rust team declined to provide the
corporate guarantee, EG&G deemed Rust to be nonresponsive to the
request for pricing proposal and disqualified it from further
consideration. 


      PRICE NEGOTIATIONS FOCUSED
      ON REDUCING SUBCONTRACT
      PRICE
---------------------------------------------------------- Letter :4.4

The Lockheed team submitted a best and final offer of $206 million
for the subcontract and included the corporate guarantee.  However,
because of overall budget constraints, the maximum that DOE was
willing to allocate to the Pit 9 project was $180 million. 
Therefore, the final negotiations for the subcontract focused on ways
to bring Lockheed's best and final offer down to DOE's funding level. 

In August 1994, DOE assumed responsibility for the subcontract
negotiations with LMAES because the Lockheed Corporation had won the
competitively bid M&O contract for the Idaho Falls site, to be
effective in October, and concerns were raised about a potential
conflict of interest between the two Lockheed companies.  To bring
the subcontract price down to the $180 million level, DOE officials
made two changes. 

  -- First, more of the construction costs were incorporated into
     progress payments to offset the subcontractor's cost of
     financing, which reduced the subcontractor's $206 million offer
     by $6 million to $200 million and shifted some of the costs of
     financing the project to the government. 

  -- Second, a provision was added to the subcontract for possible
     follow-on work.  This provision allowed the subcontractor to
     allocate $21 million in equipment to future work rather than the
     Pit 9 subcontract, further reducing the price to $179 million. 
     However, if the subcontractor is not allowed to proceed with the
     future work, the subcontractor would receive a $21 million
     deferred payment for the equipment.\9

The subcontract for the Pit 9 cleanup was signed in October 1994 and
included both design milestone and construction progress payments,
unit price payments for remediation of the contents of the pit, and
lump sum payments for decontamination and decommissioning and
profits.  (For additional information on the types and amounts of
payments made, see app.  I.) To address the potential conflict of
interest associated with one Lockheed company overseeing a
subcontract with another Lockheed company, the Lockheed M&O
contractor prepared an organizational conflict-of-interest mitigation
plan, which was reviewed and approved by DOE.  This resulted in the
sequestration of the M&O contractor's Pit 9 contract administration
and oversight group from the rest of the organization and the
establishment of a program oversight board to monitor the dealings
between the M&O contractor and the subcontractor. 


--------------------
\9 Because the $21 million payment will be made whether or not the
subcontractor processes the additional waste through its treatment
facility, we refer to the Pit 9 subcontract price as $200 million in
this report--the $179 million stated subcontract price plus the $21
million deferred payment. 


   SUBCONTRACTOR WANTS TO
   RENEGOTIATE CONTRACT BECAUSE OF
   SCHEDULE AND COST DIFFICULTIES
------------------------------------------------------------ Letter :5

After nearly 3 years of work on the subcontract, LMAES estimates that
the project is substantially behind the original subcontract schedule
and that its costs already exceed the total subcontract price of $200
million.  Yet the waste retrieval and processing facilities are not
ready, and no wastes have been retrieved or processed.  LMAES claims
DOE, through its M&O contractor, interfered in the performance of the
subcontract and made substantial changes to the estimates of the
materials in the pit.  As a result, LMAES contends that its corporate
guarantee of performance is no longer applicable to the project. 
LMAES requested a total of $257 million for costs through June 1997
and wants any future work on the project to be done under a
cost-reimbursement subcontract.  DOE and the M&O contractor are
studying LMAES' request but believe LMAES is responsible for many of
the current problems because it assigned personnel with inadequate
technical and managerial skills to the project.  DOE, its M&O
contractor, and LMAES are involved in discussions on how to move the
project forward.  Meanwhile, LMAES has substantially slowed its work
on the project to limit its costs and said that it will not resume
normal construction activities unless the subcontract is
satisfactorily renegotiated. 


      PROJECT IS BEHIND SCHEDULE
      AND OVER SUBCONTRACT PRICE
---------------------------------------------------------- Letter :5.1

On March 28, 1997, LMAES notified the M&O contractor that although
initial plans called for having facilities operational in time to
start a limited production test in August 1996, such testing cannot
begin until March 1998.  Likewise, LMAES estimated that it would not
be able to complete the project until April 2001, a delay of 26
months, compared with the subcontract's deadline of February 1999. 
By that date, LMAES was to have retrieved and processed all wastes
from the pit, returned untreated soil to the pit, decontaminated and
decommissioned the retrieval and treatment facilities, and removed
its retrieval facility from the site. 

Even though building construction is not complete and no wastes have
been processed, LMAES reports that its costs have already exceeded
the $200 million subcontract price.  On the basis of its reported
actual costs of $197.2 million through December 1996, LMAES estimated
its total reimbursable costs to be $257.4 million by June 30,
1997.\10 For any work conducted after April 1, 1997, LMAES asked to
convert the existing subcontract to a cost-reimbursement basis. 
These changes, if implemented, would bring the total subcontract
price to well over twice its original $200 million value.  At DOE's
request, the Defense Contract Audit Agency is auditing LMAES' cost
records. 

The current situation is in sharp contrast to the information DOE
submitted in its fiscal year 1997 budget request.  At that time, DOE
reported that the Pit 9 effort was a highly successful project with
savings estimated at $134 million compared to what it would have cost
under a cost-reimbursement project managed by the M&O contractor.  In
our previously cited January 1997 report on DOE's privatization
savings estimates, we reported that this cost savings estimate was at
best premature because the project was still under construction and
had experienced technical and other problems.\11

In addition to possible increases in the subcontract price, DOE has
incurred or will incur other costs related to Pit 9.  For example,
DOE has paid $23.1 million for phase I testing and preliminary design
activities, $12.9 million for project oversight by the M&O
contractor, and about $3 million for DOE oversight costs.  DOE was
also assessed $940,000 in fines by its regulators--the state of Idaho
and EPA--for failure to meet enforceable deadlines for submitting
acceptable design documents for the project, as specified in the
Federal Facility Agreement and Consent Order for the Idaho Falls
site.  DOE will pay the fines and is studying its options for
recovering the cost from either the M&O contractor or LMAES.  Under
the Agreement to Resolve Disputes signed with DOE's regulators in
March 1997, the next enforceable deadline is September 30,
1997--failure to meet this deadline could result in additional fines. 
In addition, because of the contract difficulties with LMAES and the
related legal implications, the M&O contractor has hired outside
legal counsel for the Pit 9 project, and, under the terms of the M&O
contract, DOE is responsible for paying those legal fees.\12


--------------------
\10 LMAES asked for $158.1 million in payments in addition to the
$52.9 million already received through March 1997.  LMAES expected an
additional $46.4 million to be recovered through future milestone
payments or some other method. 

\11 Nuclear Waste:  DOE's Estimates of Potential Savings From
Privatizing Cleanup Projects. 

\12 We have previously reported on DOE's efforts to control the legal
expenses its M&O contractors incur in defending themselves against
class action lawsuits.  See Managing DOE:  The Department's Efforts
to Control Litigation Costs (GAO/T-RCED-96-170, May 14, 1996);
Managing DOE:  The Department of Energy Is Making Efforts to Control
Litigation Costs (GAO/RCED-95-36, Nov.  22, 1994); and Managing DOE: 
Tighter Controls Needed Over the Department of Energy's Outside
Litigation Costs (GAO/T-RCED-94-264, July 13, 1994). 


      SUBCONTRACTOR FAULTS DOE FOR
      SCHEDULE AND COST PROBLEMS
---------------------------------------------------------- Letter :5.2

LMAES blames DOE and its M&O contractor for a large portion of the
schedule and cost problems.  The company stated its case in its
Request for Equitable Adjustment\13 to the M&O contractor and DOE. 
In summary, this document focuses on three main factors that LMAES
says were under DOE's control and led to the schedule and cost
problems:  (1) improper administration of the fixed-price
subcontract; (2) too much interference with a fast-track approach
that was necessary to meet subcontract deadlines; and (3) changing
estimates of Pit 9's contents.  LMAES argues that these factors,
particularly DOE's involvement in design activities and changing pit
inventories, have materially changed the Pit 9 project from what the
subcontract originally required.  Therefore, LMAES believes that its
corporate guarantee of performance is no longer applicable to the
project. 


--------------------
\13 This document contains LMAES' rationale for claiming that the
government caused the project to be behind schedule and over budget. 
The process of requesting an equitable adjustment is provided for in
the "changes" clause of the subcontract.  The changes clause is a
standard clause in government contracts and subcontracts that
authorizes the contracting officer to make changes within the general
scope of the contract and, where warranted, make equitable
adjustments in the contract price, delivery schedule, or both. 


         SUBCONTRACT
         ADMINISTRATION
-------------------------------------------------------- Letter :5.2.1

LMAES says that it undertook the project with the expectation that it
would have comparatively more freedom on the privatized fixed-price
Pit 9 project than on a project procured under a cost-reimbursement
approach, while accepting more risk if it failed.  The company
assumed there would be minimal government oversight and
administration of the subcontractor's effort because of DOE's
representation in subcontract specifications that the Pit 9 project
was an "integrated 'turnkey' pilot" effort, with the "subcontractor
assuming maximum responsibility, authority, and liability." LMAES
said that as a result, it expected to be able to follow a
results-oriented approach in which it could use best commercial
practices in exercising its own judgment as to how the task should be
done. 

In contrast to what it expected, LMAES says that DOE and its M&O
contractor actually administered the subcontract using substantial
and intrusive oversight that was inconsistent with DOE's
privatization concept.  Under the privatization agreement for the Pit
9 project, LMAES was to construct, own, and operate the facilities
and accept the financial risk by providing a guarantee that payment
for its services would depend on successfully remediating the wastes. 
However, LMAES officials believe that DOE administered the project as
if DOE itself were incurring the risks.  As evidence, they cite the
fact that between January 1995 and July 1996, DOE and its M&O
contractor made more than 7,000 detailed review comments on the
firm's designs for the project and expected LMAES to take them into
account while completing the design.  These comments ranged from ones
on significant safety issues such as whether a criticality alarm
system was required, to other less significant questions, such as
whether workers would be allowed in a personnel transfer trailer
during movement of the trailer. 

According to LMAES, the amount of oversight was a problem because the
number of review comments slowed its efforts and left the company
unable to exercise the degree of flexibility it expected when it
negotiated the subcontract.  For example, employees had to spend time
responding to DOE's and the M&O contractor's comments rather than
anticipating and working on the next steps needed to respond to the
subcontract schedule.  In having to respond to this degree of
oversight, LMAES said that it was performing unanticipated work, well
beyond the subcontract's scope, in order to keep the project moving
forward. 


         FAST-TRACK SCHEDULE
-------------------------------------------------------- Letter :5.2.2

DOE's approach also limited the company's ability to respond to the
extraordinary pressures of a fast-track project, according to LMAES
officials.  Design/build, fast-track, phased construction is a
process whereby design and construction work are performed
simultaneously.  Design and construction stages are broken into
several discrete packages and completed in phases.  As soon as the
design is completed for part of the project, construction work on
that portion of the project begins.  For example, LMAES began
construction of the treatment building before the design for the
chemical treatment system was finalized.  LMAES, DOE, and the other
parties to the effort agreed on this approach in order to comply with
the construction schedule specified in the December 6, 1993, request
for price proposal for phases II and III of the project, which
included a required January 1, 1995, date to "start staging and
installation." The request for price proposal also specified that the
subcontract to remediate Pit 9 would be awarded on June 1, 1994.  The
subcontract was not effective until August 1994,\14 and LMAES claims
the delay jeopardized achieving the mandatory January 1, 1995, date
for the start of construction. 

LMAES says that a fast-track approach required that the subcontractor
be allowed a great deal of discretion in determining the manner,
means, and methods of meeting the project's requirements within the
agreed-upon price and schedule.  The company believes, however, that
DOE's oversight and involvement were so excessive as to remove all
discretion for reducing the time required for the project's
completion.  For example, it contends that about one-quarter of the
2,500 safety-related review comments were inappropriate for a
fast-track project because they were based solely on omissions or
discrepancies that existed because design of the facilities was
progressing on a parallel track with construction. 

LMAES also says that DOE did not provide all necessary information in
a timely manner.  The agreement between LMAES and DOE called for the
Department to provide any review comments on LMAES' plans and designs
within 30 days.  LMAES analyzed DOE's review response times and found
that the average was about 53 days.  LMAES officials said that the
delays in receiving comments were another factor in the company's
inability to keep the project moving as scheduled. 


--------------------
\14 Although the subcontract was not approved until October 1994,
LMAES was given an interim letter subcontract effective in August
1994 so work could begin. 


         CONTENTS OF THE PIT
-------------------------------------------------------- Letter :5.2.3

Since 1994, when the subcontract was signed, DOE and the M&O
contractor have refined the information they had concerning the
possible contents of Pit 9.  That information was also provided to
LMAES.  While DOE and the M&O contractor said that the information
did not represent a modified inventory for the pit, LMAES claims that
the changes in estimated quantities and types of materials were so
extensive as to materially affect the treatment system's design. 

DOE has limited information as to the actual contents of the pit
because, at the time the wastes were placed in the pit, DOE did not
intend to later retrieve them.  Therefore, few records were kept, and
DOE has no precise knowledge of what quantities and types of
materials are in the pit.  However, in 1991, the M&O contractor
initially estimated the types and quantities of radioactive and other
materials in the pit, on the basis of the available shipping records,
process knowledge, written correspondence, and other information from
DOE. 

Beginning in 1993, the M&O contractor initiated an effort to develop
information for its baseline risk assessment for all of the disposal
pits and trenches at the Idaho Falls site's subsurface disposal area,
including Pit 9.  Individual disposal pits were not inventoried, but
rather the overall inventory for the area was apportioned to the pits
and trenches on the basis of the shipping records, the dates the pits
were open, etc.  The estimates for the contents of Pit 9 were refined
several times, and LMAES cites multiple instances in which the
subsequent revisions created the potential for substantial changes in
the proposed approach to remediating the wastes.  For example: 

  -- In February 1995, DOE and its M&O contractor notified LMAES of
     updated information indicating that considerably more salts,
     organics, and radioactive activation and fission products\15
     were present than initially believed.  These additional
     materials, LMAES said, would slow the speed at which materials
     could be processed through the plasma melter.  Since the melter
     was a key feature of the treatment process, anything that
     affected the melter was of significance.  In addition, the
     updated estimates of radioactive materials increased the
     potential for workers' exposure to radiation. 

  -- In February 1996, DOE and its M&O contractor provided LMAES with
     additional information that indicated significantly higher
     potential radioactivity in the form of cobalt\60 and cesium\137
     , both of which emit radiation in the form of gamma rays.\16
     LMAES says that its original designs for processing of the Pit 9
     wastes did not contemplate such high levels of gamma-emitters,
     indicating a need for additional personnel shielding in the
     treatment building. 


--------------------
\15 Activation products are metals that have been exposed to nuclear
reactions, e.g., cobalt\60 , while fission products are the result of
nuclear fission reactions, e.g., cesium\137 . 

\16 Gamma rays are the most penetrating of the three forms of
radioactivity and require the most shielding to protect personnel
from exposure. 


      DOE ATTRIBUTES MOST PROBLEMS
      TO SUBCONTRACTOR'S
      PERFORMANCE
---------------------------------------------------------- Letter :5.3

DOE and its M&O contractor are studying LMAES' claims and are
involved in discussions on how to move the project forward.  In the
interim, the M&O contractor has notified LMAES that both the M&O
contractor and DOE see no justification for converting the
subcontract to a cost-reimbursement basis; instead, they expect LMAES
to continue performing the subcontract as awarded.  DOE officials
said it may be several months before they have an official position
on LMAES' other financial claims.  However, DOE and the M&O
contractor disagree with LMAES' interpretation of why the cleanup is
behind schedule and its costs are above the subcontract price.  DOE
and the M&O contractor acknowledge that their oversight of the
project has been more extensive than they had expected but contend
that the degree of involvement was necessary because of LMAES'
inadequate approach to safety.  DOE and the M&O contractor attribute
the delays and cost overruns primarily to the insufficient technical
and managerial skills the company initially placed on the project. 


         SUBCONTRACT
         ADMINISTRATION AND
         FAST-TRACK SCHEDULE
-------------------------------------------------------- Letter :5.3.1

DOE and its M&O contractor contend that their oversight of the
project has been related to their responsibilities for ensuring
adequate consideration of environmental safety and health.  Although
a fixed-price approach shifts the risk of nonperformance to the
subcontractor, DOE still retains some of the risks.  For example, the
subcontract indemnifies LMAES in the case of a catastrophic nuclear
accident, and therefore that risk is not shifted from DOE to the
subcontractor.  However, DOE, its M&O contractor, and its regulators
noted that initially LMAES personnel seemed particularly limited in
their knowledge about necessary regulatory requirements, including
those dealing with nuclear materials, and, as a result, submitted
inadequate designs.  Therefore, DOE and the M&O contractor said they
had to provide much more oversight, including more design review
comments, than they expected for a fixed-price subcontract. 

As an example of why their extensive involvement was needed, DOE and
its M&O contractor cited their visit to the test site for the
project's chemical treatment system.  When DOE and M&O contractor
officials examined the assembled system, they noted what appeared to
be many safety-related problems.  In effect, DOE and the M&O
contractor said, LMAES had assembled a standard piping system without
consideration of the nuclear environment at Pit 9.  The piping was
subject to many leaks at the joints and was so complex that the area
would have been a safety hazard and prohibitive to decontaminate if
leaks occurred.  More significantly, the system as designed was
potentially susceptible to "criticality"--that is, to the potential
that radioactive materials could be brought together in sufficient
concentrations to sustain a nuclear chain reaction.  In addition, the
system lacked an adequate mechanism for tracking the radioactive
materials that were moving through the chemical treatment process. 

DOE and M&O contractor officials acknowledged that the combination of
design problems and the many review comments made it more difficult
for LMAES to accomplish a fast-track schedule.  The officials
believe, however, that the extent of the problems they were observing
required them to raise questions for LMAES to consider as project
development continued.  DOE officials stated that part of the reason
for the large number of review comments was that LMAES tended to
ignore some comments the first time.  As an example, EPA pointed out
in its February 1996 design review comments that having an adequate
capacity for the ventilation system was important to ensure safe
operations.  EPA stated it had raised this concern previously but
LMAES had not responded to it.  In addition, DOE officials do not
agree with LMAES' analysis of the timeliness of review comments and
state that such comments were generally submitted on time.  The M&O
contractor also disagreed with LMAES' analysis and pointed out that
LMAES' submittals were often incomplete and the review period should
not have started until a complete document was received. 


         CONTENTS OF THE PIT
-------------------------------------------------------- Letter :5.3.2

DOE and its M&O contractor also disagree with LMAES' contentions
regarding the significance of the updated information about the pit's
contents that they shared with LMAES.  They noted that the updated
information was not a formal revision to the contractual estimate of
the contents, and therefore the subcontractor had the discretion
whether to use it.  DOE and its M&O contractor further noted that
LMAES' subcontract proposal stated that all technologies used in its
proposed approach were proven in current industrial-scale
applications and that the treatment scheme was "very robust, in that
any chemical, radiological, or physical characteristic of waste in
Pit 9 can successfully be processed." LMAES pointed out that its
treatment scheme ensured that the Pit 9 process could successfully
handle other buried or stored transuranic and transuranic mixed
wastes as well as low-level mixed wastes and hazardous wastes in the
DOE complex.  In addition, DOE and M&O contractor officials noted
that the subcontract included a clause allowing for future
adjustments if differing site conditions are encountered--for
example, if the pit's actual contents differ from the estimates when
excavation occurs. 


         INSUFFICIENT TECHNICAL
         AND MANAGERIAL SKILLS
-------------------------------------------------------- Letter :5.3.3

DOE and M&O contractor officials said they believed LMAES' parent
corporation would use its vast worldwide resources to provide the
necessary expertise to accomplish the work.  However, the officials
contend this did not happen, at least in the early phases of the
work.  For example, the officials point out that Lockheed reported in
a 1995 peer review of LMAES' Pit 9 activities that there was a lack
of adequate personnel with experience with nuclear materials to
successfully execute the design review function, provide
environmental safety and health oversight during construction, and
administer the environmental safety and health functions during
operations.  Similar findings were noted in an assessment DOE
performed at the same time. 

Another problem contributing to the lack of progress on the
subcontract, according to DOE and M&O contractor officials, was the
high number of times the LMAES project staff has changed--as of May
1997, there had been four project managers.  LMAES acknowledges the
turnover, but maintains that the administrative approach used by DOE
and the M&O contractor materially increased the complexity of the
requirements associated with the project, necessitating the
assignment of managers with more experience to get the job done.  For
example, LMAES officials said the current program manager is one of
the most respected within Lockheed Martin, LMAES' parent company. 
DOE officials said that with these frequent changes in leadership,
some important actions were left unaddressed for a considerable
length of time.  For example, it was not until February 1997, after
the current manager was appointed, that LMAES developed a complete
system requirements document, which compiles the system performance
and design requirements of the subcontract into one place so that
managers can more clearly identify what the processes should be
designed to do. 

DOE has also faulted the M&O contractor for its performance in
overseeing the Pit 9 project, which has affected the overall award
fee received under its performance based contract.\17 Since October
1994, DOE has been critical of the M&O contractor's performance on
Pit 9.  For example, in rating the M&O contractor's overall
performance for the period ending March 30, 1996, DOE identified Pit
9 as the primary reason for the M&O contractor's declining
performance in managing the Environmental Restoration program at the
site.  DOE attributed the M&O's declining performance on Pit 9 to a
continued lack of management control systems, an apparent lack of
accountability in ensuring the timely submittal of two key documents
to regulators, and weak project management planning and
prioritization of issues.  However, DOE also gave the M&O contractor
credit for aggressively trying to keep activities on schedule and
resolve design-related issues at the earliest opportunity.  We could
not determine the impact of the M&O contractor's performance at Pit 9
on the amount of its overall award fee.  However, since 1994, DOE has
considered the M&O's overall performance under the contract to be
"good," with performance evaluation scores in the 86 to 90 percent
range and performance award fees totaling $33.3 million for the
2-year period. 


--------------------
\17 Under DOE's contract with the M&O contractor, a portion of the
payments to the contractor is based on how effectively it performs
the work.  DOE assesses that performance on a semiannual basis and
allocates award fees from a pool of funds. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

It remains to be seen whether DOE and its M&O contractor will be able
to hold Lockheed Martin Advanced Environmental Systems accountable
for the extra costs for the Pit 9 project, negotiate changes and pay
substantially more to complete the project, or attempt to recover the
government's investments to date.  Whatever the outcome, the Pit 9
project, as originally conceived, is clearly a failure.  It simply
cannot be completed in the time frame or within the price the
subcontractor agreed to.  This has important future implications
because DOE's planned investment in privatization cleanup projects is
growing--the Department included over $1 billion in its fiscal year
1998 budget request for 11 such projects.  In light of this growing
emphasis on privatization, the outcome of the Pit 9 subcontract
negotiations may provide some insight into DOE's overall ability to
achieve privatization goals, including lowering project costs and
shifting the risk of nonperformance from the Department to the
contractors. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided DOE, the M&O contractor, and LMAES with a draft of this
report for their review and comment.  DOE disagreed with our
conclusion that the project, as originally conceived, was a failure
and also expressed concern about the tone of the report.  The M&O
contractor also disagreed with our conclusion but said the report
presented a reasonably accurate portrayal of circumstances and events
pertaining to the Pit 9 project.  LMAES, as well as DOE and the M&O
contractor, also provided comments on technical aspects of the draft,
which we have incorporated where appropriate (see app.  II for DOE's
comments, app.  III for comments from the M&O contractor, and app. 
IV for LMAES' comments). 

DOE and the M&O contractor disagreed with our conclusion that the
project, as originally conceived, is a failure.  DOE noted that
although the original project schedule cannot be achieved, it is
premature to conclude that the government's costs on the project will
increase.  The M&O contractor identified lessons learned, such as the
need for a more careful analysis of what the subcontractor claims it
can accomplish, that it said kept the project from being a failure. 
We continue to believe, however, that it is clear that the project
has failed to achieve its schedule and cost targets.  Specifically,
(1) the project is more than 2 years behind schedule, costs greatly
exceed the subcontract price, and LMAES has said it will not resume
normal construction activities unless the subcontract is
satisfactorily renegotiated; (2) DOE has already incurred fines and
penalties; and (3) DOE is responsible for the M&O contractor's legal
fees in connection with the project.  As a result, it is impossible
for the project to be completed in the time frame or within the price
LMAES agreed to.  In addition, we do not agree that lessons learned
mitigate the fact that the Pit 9 project has failed to achieve its
schedule and cost targets. 

DOE also said the tone of our report, especially concerning the
inventory of the pit and LMAES' opinions about the project, unfairly
represented DOE's knowledge about the contents of the pit while
giving too much credit to LMAES' views of why the project is
experiencing problems.  In our view, the report is fair and balanced
on these issues.  Regarding the pit inventory, our report says that
DOE is not certain of the pit contents, in part because DOE has poor
records of the materials shipped there.  The various estimates of pit
contents demonstrate that DOE is uncertain of the actual inventory. 
Concerning the causes of problems on the project, we summarize and
attribute the viewpoints of DOE, the M&O contractor, and LMAES in a
similar way, and we have not taken a position on the merits of any of
the arguments. 

LMAES said we should have emphasized problems with proof-of-process
testing (phase I) to reflect its view that the testing was deficient
because it did not demonstrate the subcontractor's ability to perform
within a schedule or budget.  We believe that the testing phase was
intended to provide some increased assurance to DOE and the M&O
contractor that the proposed technologies would work in the Pit 9
environment, and that realistically it could not be expected to
ensure the subcontractor's performance within a schedule or budget. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To determine DOE's basis for selecting a fixed-price subcontracting
approach, we reviewed the Federal Acquisition Regulation for
available guidance and the procurement plan developed by the M&O
contractor at the Idaho Falls site.  We also reviewed DOE's Private
Sector Working Group Privatization Resource Document and other
documentation provided by DOE.  In addition, we interviewed the DOE
Contracting Officer, Pit 9 Project Manager, and Assistant Site
Manager at the Idaho Falls site.  We also interviewed DOE's
Environmental Management Director of Northwest Area Programs. 

To determine the basis for awarding the subcontract to LMAES, we
reviewed the RFP, LMAES' response, and the reports of the Source
Evaluation Board.  We also reviewed the Proof of Process Test
Comprehensive Evaluation Report and the contract files that detailed
the selection and evaluation process.  We also interviewed a member
of the Source Evaluation Board and the M&O contracting officer. 

To determine the current status of the Pit 9 project, we toured the
Pit 9 project site and interviewed project management personnel from
LMAES, the M&O contractor, and DOE.  We reviewed the Request for
Equitable Adjustment and supporting documentation submitted by LMAES. 
In addition, we reviewed correspondence between the M&O contractor
and LMAES and other documentation relating to the inventories of the
pit and review of design activities.  We also interviewed officials
with the Environmental Protection Agency-Region 10 and the Idaho
Department of Health and Welfare-Division of Environmental Quality
that are responsible for oversight of the cleanup activities at Pit
9.  In addition, we reviewed the Pit 9 Record of Decision; Federal
Facility Agreement and Consent Order; and Agreement to Resolve
Disputes, which assessed the fines against DOE. 

We have not attempted to compare the validity of the charges and
countercharges about causes of the problems at Pit 9 because of the
ongoing negotiations between the parties and the legal process in
place to resolve any disagreements. 

Our review was performed from March through July 1997 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Secretary of Energy.  We
will also make copies available to others on request. 

Please call me at (202) 512-3841 if you or your staff have any
further questions.  Major contributors to this report were William R. 
Swick, Robert M.  Antonio, Carole J.  Blackwell, Doreen S.  Feldman,
Susan W.  Irwin, Stan G.  Stenersen, and Charles A.  Sylvis. 

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


TYPES OF SUBCONTRACT PAYMENTS AND
AMOUNTS PAID AS OF MAY 31, 1997
=========================================================== Appendix I

                                                     Payments as of 5/
Type of payment                 Subcontract amount               31/97
------------------------------  ------------------  ------------------
Milestone payments
Final design                           $43,311,064         $26,151,914
Safety Analysis Report                   2,817,370                   0
Operational Readiness Review             8,239,237                   0
Total milestone payments                54,367,671
Progress payments                       34,787,746          28,234,251
 (construction of equipment &
 facilities)
Unit price payments
Analysis/handling of                   4,845,000 0

Remediation of the first                34,131,000                   0
 100,000 cubic feet of waste

Remediation of an additional            22,233,000                   0
 150,000 cubic feet of waste

Standby costs                              785,520                   0
Lump-sum payment                         4,203,664                   0
 (decontamination &
 decommissioning)
Profit
Limited production test                 13,373,313                   0
Remediation                              9,208,500                   0
Decontamination &                          672,586                   0
 decommissioning
Total                                 $178,608,000         $54,386,165
Contract modification #12 for            2,135,000
 water/power
Revised subcontract price             $180,743,000
----------------------------------------------------------------------
Source:  Lockheed Martin Idaho Technologies Company. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
ENERGY
=========================================================== Appendix I



(See figure in printed edition.)




(See figure in printed edition.)Appendix III
COMMENTS FROM LOCKHEED MARTIN
IDAHO TECHNOLOGIES COMPANY
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)




(See figure in printed edition.)Appendix IV
COMMENTS FROM LOCKHEED MARTIN
ADVANCED ENVIRONMENTAL SYSTEMS
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)


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