Department of Energy: Lessons Learned Incorporated Into Performance-Based
Incentive Contracts (Letter Report, 07/29/98, GAO/RCED-98-223).

Pursuant to a congressional request, GAO reviewed the performance-based
incentives at the Department of Energy's (DOE) Hanford, Idaho Falls,
Rocky Flats, and Savannah River sites to determine: (1) the extent to
which DOE has incorporated lessons learned in developing its fiscal year
(FY) 1998 performance-based incentives; (2) whether these incentives
incorporate the baseline measures in DOE's 10-year plan for
environmental cleanup, and how fees are allocated to the incentives; and
(3) how DOE evaluates completed incentive measures and determines their
effectiveness.

GAO noted that: (1) during the past year, DOE has taken steps to correct
the problems identified in the Office of the Inspector General reports
and its own assessment of performance-based incentives; (2) these steps
have included issuing guidance, conducting training, and incorporating
lessons learned into the FY 1998 incentives; (3) however, DOE believes
that FY 1998 represents a transitional period to better
performance-based incentives because it plans to continue to make
improvements to the incentives; (4) for FY 1998, at three of the four
sites GAO visited, DOE's performance-based incentives incorporated the
baseline measures in the Department's 10-year plan for environmental
cleanup and were generally linked to both DOE's strategic plan and the
site-specific plans; (5) the fourth site, Idaho Falls, has not yet
developed performance incentives in environmental management, but its
goals and objectives do incorporate the 10-year plan's baseline
measures; (6) furthermore, each of the four sites generally allocates
fees to individual performance incentives in proportion to their
relative importance and on the basis of the site's missions and
objectives; (7) DOE evaluates completed actions that were tied to
performance-based incentives through reviews by its technical,
financial, and contracting personnel to determine whether the contractor
satisfied the criteria and earned the amount of fee to be paid; (8)
overall, DOE maintains that performance-based incentives have been
effective in achieving desired end results; (9) however, it is not clear
whether the successes reported in the departmentwide assessment have
been due to the performance-based incentives or to the accompanying
increased emphasis on program management; and (10) furthermore, it is
too soon to assess the effectiveness of the FY 1998 incentives because
the evaluation of these incentives will not be complete until the end of
the fiscal year.

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

 REPORTNUM:  RCED-98-223
     TITLE:  Department of Energy: Lessons Learned Incorporated Into 
             Performance-Based Incentive Contracts
      DATE:  07/29/98
   SUBJECT:  Strategic planning
             Contractor performance
             Program evaluation
             Contractor payments
IDENTIFIER:  DOE Environmental Management Program
             Savannah River (SC)
             Hanford (WA)
             Idaho Falls (ID)
             Rocky Flats (CO)
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


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


Report to the Chairman, Committee on Commerce, House of
Representatives

July 1998

DEPARTMENT OF ENERGY - LESSONS
LEARNED INCORPORATED INTO
PERFORMANCE-BASED INCENTIVE
CONTRACTS

GAO/RCED-98-223

Performance-Based Contracts

(141130)


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

  DOE - Department of Energy
  OIG - Office of Inspector General

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


B-280251

July 29, 1998

The Honorable Thomas J.  Bliley, Jr.
Chairman, Committee on Commerce
House of Representatives

Dear Mr.  Chairman: 

As part of its initiative to reform its management of its contract
operations, in 1994 the Department of Energy (DOE) began using
performance-based incentives in contracts for the management and
operation of its facilities.  These incentives are intended to better
link contractors' fees to the satisfactory accomplishment of specific
tasks.  However, DOE's Office of Inspector General (OIG) has
identified problems with the Department's implementation of
performance-based contracting at several facilities.  In addition,
DOE's October 1997 departmentwide assessment of performance-based
incentives in contracting identified other problems and recommended
specific corrective actions.  The assessment also cited examples of
successful results from the use of performance-based incentives. 

You requested that we review performance-based incentives at DOE's
Hanford, Idaho Falls, Rocky Flats, and Savannah River sites to
determine (1) the extent to which DOE has incorporated lessons
learned in developing its fiscal year 1998 performance-based
incentives; (2) whether these incentives incorporate the baseline
measures in DOE's 10-year plan for environmental cleanup, and how
fees are allocated to the incentives; and (3) how DOE evaluates
completed incentive measures and determines their effectiveness. 


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

During the past year, DOE has taken steps to correct the problems
identified in the OIG reports and its own assessment of
performance-based incentives.  These steps have included issuing
guidance, conducting training, and incorporating lessons learned into
the fiscal year 1998 incentives.  However, DOE believes that fiscal
year 1998 represents a transitional period to better
performance-based incentives because it plans to continue to make
improvements to the incentives. 

For fiscal year 1998, at three of the four sites we visited, DOE's
performance-based incentives incorporated the baseline measures in
the Department's 10-year plan for environmental cleanup and were
generally linked to both DOE's strategic plan and the site-specific
plans.  The fourth site, Idaho Falls, has not yet developed
performance incentives in environmental management, but its goals and
objectives do incorporate the 10-year plan's baseline measures. 
Furthermore, each of the four sites generally allocates fees to
individual performance incentives in proportion to their relative
importance and on the basis of the site's missions and objectives. 

DOE evaluates completed actions that were tied to performance-based
incentives through reviews by its technical, financial, and
contracting personnel to determine whether the contractor satisfied
the criteria and earned the amount of fee to be paid.  Overall, DOE
maintains that performance-based incentives have been effective in
achieving desired end results.  However, it is not clear whether the
successes reported in the departmentwide assessment have been due to
the performance-based incentives or to the accompanying increased
emphasis on program management.  Furthermore, it is too soon to
assess the effectiveness of the fiscal year 1998 incentives because
the evaluation of these incentives will not be complete until the end
of the fiscal year. 


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

To carry out its missions, DOE relies on contractors for the
management and operation of its facilities.  These efforts are
normally carried out using cost-reimbursement contracts, which
provide for the payment of all costs incurred by the contractor to
the extent that these costs are allowable under the specific contract
provisions.  In addition, DOE's regulations provide for a fee, or
profit, on these contracts.  The amount of fee available to the
contractor is based on the contract amount and the type of work to be
performed and may be allocated among base, award, and/or incentive
fees.  (App.  I provides information on the allocation of fees and
total contract amounts for the four sites included in our review.)

DOE began using performance-based incentives in fiscal year 1994 in
response to one of the recommendations in its February 1994 report on
contract reform.\1 In order to implement this recommendation quickly,
DOE directed the sites to develop performance-based incentives before
it developed key policies and procedures.  By fiscal year 1996, most
sites had incorporated these incentives into their contracts. 
However, it was not until May 1997 that DOE provided revised draft
guidelines for performance-based incentives. 

A key to implementing performance-based contracting is having a clear
picture of what needs to be accomplished.  DOE has laid out its
program goals in several documents.  DOE defined its mission and
program goals and the Department's plans for achieving those goals in
its first strategic plan, issued in 1994; and, in September 1997, in
response to the Government Performance and Results Act of 1993, DOE
issued a revised strategic plan.  DOE's Environmental Management
Program also began developing its own strategic plan, entitled
Accelerating Cleanup:  Paths to Closure (formerly called the 10-year
plan), by incorporating each site's projections for the scope, cost,
and schedule of cleanup. 

During 1997 and 1998, the OIG reported on problems with the
performance-based incentives for fiscal years 1995 and 1996 at four
sites, including Hanford, Rocky Flats, and Savannah River.\2 For
example, the OIG reported in March 1997, that at Hanford some
performance-based incentive fees were paid for work that had been
completed before the incentives had been agreed upon and that in one
instance safety was compromised by the contractor in order to earn a
fee.  In addition, DOE reported during 1997 on its assessment of the
implementation of performance-based incentives.\3 While this report
identified benefits from using performance-based incentive contracts,
it also raised a number of concerns.  For example, the report
indicated that formal guidance for developing and administering
performance-based incentives was limited and did not establish
criteria for measuring performance or allocating fees to incentives. 


--------------------
\1 Making Contracting Work Better and Cost Less:  Report of the
Contract Reform Team (DOE/S-0107, Feb.  1994). 

\2 Inspection of the Performance Based Incentive Program at the
Richland Operations Office (DOE/IG-0401, Mar.  10, 1997); Audit of
the Contractor Incentive Programs at the Rocky Flats Environmental
Technology Site (DOE/IG-0411, Aug.  13, 1997); and Inspection of the
Fiscal Year 1996 Performance Based Incentive Program at the Savannah
River Operations Office (DOE-INS-O-98-03, May 1998). 

\3 Assessment of the Use of Performance-Based Incentives in
Performance-Based Management and Management and Integration Contracts
(Oct.  1997). 


   DOE HAS TAKEN CORRECTIVE ACTION
   BY INCORPORATING LESSONS
   LEARNED
------------------------------------------------------------ Letter :3

Recent changes to DOE's performance-based contracting have generally
incorporated the lessons learned from the OIG's reviews and the
Department's own assessments of performance-based incentives.  DOE
has issued departmentwide guidance, developed performance-based
incentive training, and shared information through workshops and
reports on lessons learned.  In addition, DOE's field offices have
formalized procedures for the development and administration of
incentives and used those procedures, as well as experiences from
prior years, to develop the fiscal year 1998 incentives.  Although
these are steps in the right direction, DOE acknowledges that it
still has room for improvement. 


      DOE HAS INCORPORATED LESSONS
      LEARNED INTO FISCAL YEAR
      1998 INCENTIVES
---------------------------------------------------------- Letter :3.1

In developing its fiscal year 1998 incentives, DOE incorporated the
lessons learned from the OIG's reviews, its own assessment, and prior
years' experiences with performance-based incentives.  These lessons
included developing fewer and more specific performance-based
incentives that were results-oriented, defining key terms in the
performance criteria, and ensuring that all key personnel participate
in the development of the incentives. 

DOE's October 1997 report assessing its implementation of its
performance-based incentives noted that using too many incentives
made it difficult to focus the contractors' efforts on key results
and created an administrative burden.  In response, DOE reduced the
overall number of incentives in fiscal year 1998; three of the four
sites we visited had fewer incentives.  The largest reduction was at
Hanford, which went from over 200 incentives in fiscal year 1997 to
about 100 for fiscal year 1998.  Savannah River and Rocky Flats also
reduced the number of incentives in an effort to focus on a few
critical measures.  The number of incentives for the management and
operating contract at the Idaho Falls site has remained at 11 since
fiscal year 1995. 

Furthermore, the incentives that are in place are more
results-oriented and better define key terms.  For example, at
Savannah River, one of the fiscal year 1996 incentives was to
"optimize the production" of canisters containing immobilized
high-level waste by offering an incentive for each filled canister,
starting with the fifty-sixth canister, but the incentive did not
include criteria for what constituted an acceptably filled canister
or specify the desired number of canisters to be filled.  In
contrast, the fiscal year 1998 incentive not only requires that at
least 150 canisters be filled with processed waste and defines the
criteria for an acceptably filled canister (with a minimum level of
96 inches) but also includes a provision to reduce the overall fee
available to the contractor if the contractor fills fewer than 100
canisters. 

Finally, the incentives that are included have been agreed to by key
DOE personnel.  This is in contrast to how incentives were developed
by DOE when it first introduced them.  At that time, the incentives
were generally developed by DOE's technical personnel working with
their contractor counterparts.  According to DOE's assessment of
these earlier efforts, the resulting incentives were narrowly focused
and did not necessarily contribute to achieving DOE's goals for the
site.  To address this concern, the four sites we visited used an
interdisciplinary team of technical, financial, and contracting
personnel to develop their fiscal year 1998 incentives.  So that
these proposed incentives would be considered in the context of each
site's activities, they were reviewed and approved by DOE's senior
management at the sites.  Furthermore, any proposed changes to
individual incentives must go through a formal review process and be
approved by senior management at the sites. 


      DOE HAS TAKEN CORRECTIVE
      ACTION TO IMPROVE THE
      PERFORMANCE-BASED INCENTIVE
      PROCESS
---------------------------------------------------------- Letter :3.2

DOE's October 1997 assessment of its performance-based incentives
also noted that the guidance on the development and administration of
these incentives was limited and generally did not address such
issues as establishing baselines and allocating fee amounts to
specific incentives.  In response, DOE has taken steps to strengthen
departmentwide guidance and training for the development and
administration of these incentives.  In addition, the four sites we
visited have issued site-specific guidance concerning the
development, administration, and evaluation of performance-based
incentives. 

Although one of DOE's program areas--Environmental Management--issued
draft guidelines on performance-based incentives in May 1997,
departmentwide guidance was not issued until December 1997.  The
December 1997 guidance stressed the importance of results-oriented
performance expectations that can be measured by objective criteria. 
It also recommended that each field office institute a structured
process to develop performance-based incentives and to identify ways
to ensure the adequate monitoring and verification of a contractor's
performance in light of these incentives.  Furthermore, DOE created
an interdisciplinary training course that provides an overview on
developing performance-based incentives and presented the training to
headquarters and field office personnel.  In addition, DOE plans, by
the end of 1998, to develop a more detailed course on writing
individual performance-based incentives. 

DOE has held two workshops for field office personnel to share their
experiences with performance-based incentives and to identify both
efforts that have worked well and areas for further improvement.  In
March 1998, DOE issued a lessons learned document for
performance-based incentives to better disseminate this information,
and it plans to continue this practice semiannually. 

In addition to the corrective action taken by DOE headquarters, the
four sites we visited have formalized their procedures for developing
and administering performance-based incentives and have improved the
quality of the supporting documentation.  For example, the Hanford
directive issued in September 1997 requires that each incentive,
among other things, defines quantifiable performance criteria in
terms of cost, schedule, and technical baselines.  At Rocky Flats,
supporting documentation for each individual performance measure for
fiscal year 1998 has a justification and development record that
explains the rationale for selecting the activity for an incentive
and for assigning the specific amount of fee. 


      DOE ACKNOWLEDGES THAT
      FURTHER IMPROVEMENTS ARE
      NEEDED
---------------------------------------------------------- Letter :3.3

Although DOE has taken corrective action and incorporated lessons
learned in the fiscal year 1998 incentives, DOE's Deputy Assistant
Secretary for Procurement and Assistance Management acknowledges that
there is room for further improvements in both the process for
developing the incentives and in the individual incentives
themselves.  As we discussed in April 1998,\4 one of these areas is
the timeliness of the performance-based incentives.  For fiscal year
1998, the performance incentives at some of the sites were not
approved until several months after the fiscal year had begun.  DOE's
fiscal year 1999 goal is to have the incentives approved and in place
by the beginning of the fiscal year. 


--------------------
\4 Results Act:  DOE Can Improve Linkages Among Plans and Between
Resources and Performance (GAO/RCED-98-94, Apr.  14, 1998). 


   DOE'S FISCAL YEAR 1998
   INCENTIVES AND ASSOCIATED FEES
   ARE GENERALLY LINKED TO SITE
   OBJECTIVES
------------------------------------------------------------ Letter :4

For fiscal year 1998, the linkage between DOE's strategic plan and
the performance-based incentives has improved over that of prior
years at the sites we visited.  Furthermore, all four sites allocated
fees to individual performance incentives on the basis of their
relative importance and their contribution towards the site's mission
and objectives. 


      FISCAL YEAR 1998 INCENTIVES
      REFLECT LINKAGE TO DOE'S
      OBJECTIVES
---------------------------------------------------------- Letter :4.1

For fiscal year 1998, the linkage among DOE's strategic plan,
site-specific long-term and annual work plans, and performance-based
incentives has improved over that of prior years.  This linkage is
important to ensure that incentives contribute towards achieving the
goals and objectives of each site.  However, as we reported in April
1998, this linkage has not always existed at DOE's sites.  At three
of the four sites we visited, DOE's performance incentives
incorporated the baseline measures in DOE's 10-year plans for
environmental cleanup.  The fourth site has not yet developed any
incentives in environmental management because it is still validating
the baseline information. 

For fiscal year 1998, DOE has focused on improving the linkage of its
performance-based incentives with the Department's goals.  For
example, Hanford developed its integrated performance measurement
system to ensure that linkage exists between an individual
performance incentive and DOE's strategic plan.  At Hanford, one of
the fiscal year 1998 incentives is for the task of deactivating the
waste handling facility; this incentive supports the accomplishment
of DOE's strategic goal to reduce operating costs by completing the
deactivation of surplus nuclear facilities. 

The Idaho Falls site has yet to develop any performance incentives
for environmental management and therefore its performance incentives
do not incorporate the 10-year plan's measures for cleanup.  However,
Idaho Falls has a process to link its annual work plans to the
10-year plan and DOE's strategic plan, and the goals and objectives
of the site do incorporate the performance measures from the 10-year
plan for environmental cleanup.  According to officials at the site,
as soon as they have validated the baseline information for the
environmental management program, they will develop performance-based
incentives for that area.  Although there are currently no incentives
for this area, which represents 60 percent of the funding at the
site, the plan for evaluating the contractor's performance includes
specific objective criteria to determine award fees. 


      ALLOCATION OF FEES FOR
      FISCAL YEAR 1998 GENERALLY
      BASED ON RELATIVE IMPORTANCE
      OF ACTIVITIES
---------------------------------------------------------- Letter :4.2

Prior to fiscal year 1998, DOE did not assign fee amounts to
individual performance-based incentives on the basis of their
relative contribution to a site's overall goals and mission. 
Instead, fees were generally allocated to incentives on the basis of
the funding levels for the projects.  However, for fiscal year 1998,
DOE emphasized allocating fee amounts to incentives on the basis of
such criteria as the relative importance of the activity to
accomplishing the site's goals and missions. 

Our review of the fiscal year 1998 incentives showed improvement in
this area.  For example, for the project to clean up spent nuclear
fuel at Hanford, for fiscal year 1997, all of the fee amounts
assigned to individual incentives were the same, or 1 percent of the
total fee pool.  However, for fiscal year 1998, the fee amounts
assigned to incentives ranged from 0.25 percent to 6 percent, with
the 6 percent assigned to the incentive for actually removing the
spent nuclear fuel and lesser percentages to such steps as completing
the "sludge pretreatment process selection."

While DOE allocates fee amounts to individual performance incentives
to focus the contractor's efforts on a few critical measures, not all
of the total available fee is allocated to incentives.  A portion of
the total fee is used to ensure that the contractor does not neglect
the overall operation of the site while focusing on a few critical
measures to earn incentive fees.  In addition, the contracts for the
operation of the sites include a conditional fee payment clause that
requires the contractor to meet environmental, safety, and health
standards in order to earn any incentive fee.  Furthermore, the
individual performance-based incentives for fiscal year 1998 at the
four sites include a requirement that the work must be completed
within specified cost and schedule variances in order to earn the
incentive fee for the activity. 

For fiscal year 1998, several sites have also initiated new fee
provisions to enhance contractors' performance.  One of these
initiatives, at Hanford, Rocky Flats, and Savannah River,
incorporated provisions in the fiscal year 1998 incentives to reduce
the overall fee if specific performance measures are not
accomplished.  For example, at the Hanford Site, under these
provisions, if an activity is not successfully completed in a timely
manner, the contractor will not only earn little or no fee for that
activity, but the total fee available to the contractor may be
reduced.  Another initiative, at Rocky Flats, involves the use of
"gateway" provisions that require the contractor to complete the
prior year's work for a specific incentive before earning any fee for
the current year's efforts.  For example, if the contractor was to
remove 100 barrels of waste in fiscal year 1997 and completed only
50, the remaining 50 barrels would have to be removed in fiscal year
1998 before the contractor would be eligible to earn any fee for the
1998 work.  In addition, Rocky Flats, Savannah River, and Hanford
have begun using "stretch" provisions, under which the contractor can
earn more fee if it is able to accomplish additional work with the
same level of funding during the year. 


   THE EFFECT OF INCENTIVES ON
   CONTRACTORS' PERFORMANCE IS NOT
   CLEAR
------------------------------------------------------------ Letter :5

In October 1997, DOE reported that the use of performance-based
incentives "has served the Department well in focusing contractor
work efforts on results." DOE stated that the application of
performance-based incentive contracting had a positive impact on
DOE's ability to meet its mission needs and cited several specific
examples of successful results.  However, DOE and contractor
officials stated that these successes may be due to the Department's
increased emphasis on program management rather than the result of
performance-based incentives.  In addition, DOE's Deputy Assistant
Secretary for Procurement and Assistance Management stated that the
most positive impact of the performance-based incentives is the need
they create for DOE to focus on results and define the tasks it wants
to accomplish. 

DOE has taken corrective action and incorporated lessons learned in
its fiscal year 1998 performance incentives.  However, until all
these incentives are evaluated at the end of the fiscal year, the
impact of these changes is unknown.  To determine if a task has been
completed successfully, a DOE interdisciplinary team evaluates the
individual performance incentive to learn whether the contractor met
the criteria specified in the incentive and whether the work was done
within acceptable cost variances. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We sent a draft of this report to the Department of Energy for its
review and comment.  The Department's only comment related to our
presentation of the fees included in appendix I.  According to the
Department, the fees available to and earned by its major
subcontractors at the Rocky Flats Site are negotiated separately from
the prime contractor and therefore should not be included in the
table.  We included these fees because at the Hanford and Savannah
River sites, the fees shown included the amounts available to the
prime contractor, who shares the fees earned with the major
subcontractors.  Because the total contract amount for the Rocky
Flats Site includes the amounts paid to the major subcontractors, we
believe that it does not make any difference in the presentation of
the information to show that the fees are separately negotiated. 
Therefore, for consistency of presentation, we have retained these
fees in our table. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To determine the extent to which DOE has incorporated lessons learned
in developing the fiscal year 1998 performance-based incentives, we
interviewed DOE's Deputy Assistant Secretary for Procurement and
Assistance Management and officials from planning and procurement
organizations at DOE's Hanford, Idaho Falls, Rocky Flats, and
Savannah River sites.  We also reviewed the procedures and other
documentation provided by these officials.  We also reviewed OIG
reports on the performance-based incentives at the Hanford, Rocky
Flats, and Savannah River sites and DOE's assessments of contract
reform and performance-based incentives.  To determine whether the
proposed corrective actions had been implemented, we reviewed the
fiscal year 1998 incentives developed at the four sites and compared
them with prior years' incentives. 

To determine whether the incentives incorporate DOE's baseline
measures in its 10-year plan for environmental cleanup and how fees
are allocated to the incentives, we interviewed DOE's planning and
procurement personnel at the four sites.  We also reviewed DOE's
September 1997 strategic plan, the site strategic and management
plans, including the plans known as Accelerating Cleanup:  Paths to
Closure plans (formerly called the 10-year plans) at the four sites. 
We reviewed documentation provided by DOE to demonstrate the linkage
among these various levels of planning documents.  To determine how
fees are allocated among incentives, we interviewed DOE personnel,
reviewed procedures, and reviewed the individual performance
incentives and supporting documentation. 

To determine how DOE evaluates completed incentive measures and
determines their effectiveness, we interviewed DOE personnel at the
four sites, reviewed procedures and other documentation provided by
them, and reviewed supporting documentation for completed incentive
measures.  In addition, we interviewed DOE's Deputy Assistant
Secretary for Procurement and Assistance Management. 

We performed our review from November 1997 through July 1998 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 7 days after the date of this letter.  At that time, we will
send copies to the Secretary of Energy.  We will also make copies
available to others on request. 

Please call me at (202) 512-7106 if you or your staff have any
further questions.  Major contributors to this report were Jeffrey E. 
Heil, Carole J.  Blackwell, and Charles A.  Sylvis. 

Sincerely yours,

Susan D.  Kladiva
Associate Director, Energy, Resources,
 and Science Issues


ALLOCATION OF FEES
=========================================================== Appendix I

The Department of Energy calculates the total available fee for each
contract on the basis of the total contract amount and the type of
work to be performed.  This total available fee is then allocated to
a base fee amount, if any, and a performance fee amount.  The base
fee represents a portion of the contractor's profit and is paid
regardless of the contractor's performance level.  The remaining fee
is earned on the basis of the contractor's performance and may be
divided into two parts:  the award fee, which covers overall site
operations, and the incentive fee, which covers specific activities. 
Table I.1 shows how these fees were allocated and earned for the four
sites; amounts may not be comparable because of the scope of work and
contractual arrangements at each site.  The performance for fiscal
year 1998 has yet to be evaluated, so earned amounts are unknown. 



                                         Table 1
                         
                          Allocation and Payment of Fees at Four
                               Sites, Fiscal Years 1996-98

                                  (Dollars in millions)

                             Award            Incentiv
                               fee     Award     e fee  Incentiv     Total         Total
Site/fiscal               availabl       fee  availabl     e fee       fee      contract
year            Base fee         e    earned         e    earned    earned        amount
--------------  --------  --------  --------  --------  --------  --------  ------------
Hanford
----------------------------------------------------------------------------------------
1996               $ 8.0      $5.1      $2.6     $25.5     $19.4     $30.0      $1,166.5
1997                  \a        \a        \a      54.0      29.9      29.9       1,047.8
1998                  \a        \a        \a      50.0                             968.0

Idaho Falls
----------------------------------------------------------------------------------------
1996                  \a      35.7      18.4      12.5      10.3      28.7         675.5
1997                  \a      31.7      14.5      11.9       5.5      20.0         594.7
1998                  \a      30.2                11.1                             570.6

Rocky Flats
----------------------------------------------------------------------------------------
1996                 8.5        \a        \a      39.2      28.6      37.1         529.6
1997                 7.8        \a        \a      53.5      43.0      50.8         521.8
1998                 3.6        \a       \\a      68.3                             609.2

Savannah River
----------------------------------------------------------------------------------------
1996                  \a      27.5      20.4      31.7      20.0      40.4       1,491.6
1997                  \a      26.7      24.3      34.8      27.3      51.6       1,289.0
1998                  \a      42.7                18.8                           1,261.6
----------------------------------------------------------------------------------------
\a These fees were not part of this site's contracts. 

Source:  GAO's analysis of DOE's data. 


*** End of document. ***