National Laboratories: DOE Needs to Assess the Impact of Using
Performance-Based Contracts (Letter Report, 05/07/1999, GAO/RCED-99-141).
The Department of Energy (DOE) contracts with private companies and
educational institutions to run 18 of its 22 laboratories. These are
cost reimbursement contracts under which DOE pays all of its
contractors' allowable costs. In 1994, DOE switched to performance-based
contracts as part of its contract reform program. This report provides
information on the status of performance-based contracting in DOE's
national laboratory contracts and efforts to determine the impact of
performance-based contracting. GAO found that DOE's use of
performance-based contracting for its laboratories is in a state of
transition. GAO found a wide variance in the number of performance
measures and the types of fees negotiated. Also, the contractors
reported that the main benefits from performance-based contracting were
that it has helped DOE clarify what it expects from the contractors and
that it has improved communication.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-141
TITLE: National Laboratories: DOE Needs to Assess the Impact of
Using Performance-Based Contracts
DATE: 05/07/1999
SUBJECT: Contract performance
Contract terms
Laboratories
Management and operating contracts
Cost control
Performance measures
Fixed price contracts
Fixed price incentive contracts
Contractor payments
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United States General Accounting Office GAO Report
to the Committee on Science, House of Representatives May 1999
NATIONAL LABORATORIES DOE Needs to Assess the Impact of Using
Performance-Based Contracts GAO/RCED-99-141 GAO
United States General Accounting Office Washington, D.C. 20548
Resources, Community, and Economic Development Division B-282356
May 7, 1999 The Honorable F. James Sensenbrenner, Jr. Chairman The
Honorable George E. Brown, Jr. Ranking Minority Member Committee
on Science House of Representatives The Department of Energy (DOE)
contracts with private companies and educational institutions to
manage and operate 18 of its 22 laboratories. These are cost
reimbursement contracts under which DOE pays all of its
contractors' allowable costs. DOE can also provide a fee, or
profit, to a contractor for managing a laboratory. Responding to
criticism that its historical contracting practices were costly
and inefficient, DOE switched to performance-based contracts in
1994 as part of its contract reform program. Use of these
contracts allows DOE to structure each contract to provide a clear
statement of what needs to be accomplished-rather than providing
broad statements of work-and to rely on performance measures to
evaluate a contractor's progress toward meeting its objectives. An
important feature of performance-based contracting is providing
incentives, including fees, to the contractor's achievement of
objectives as a means of encouraging superior performance and
lowering costs. Concerned about the progress made to implement
performance-based contracting at the national laboratories, you
asked us to * assess the status of performance-based contracting
in DOE's national laboratory contracts, and * identify efforts
being made to determine the impact of performance-based
contracting. Results in Brief DOE's use of performance-based
contracting for its laboratories is in a state of transition.
While all laboratory contracts we examined had some performance-
based features, we found wide variance in the number of
performance measures and the types of fees negotiated. About half
of the 18 laboratory contracts have performance fees to encourage
superior performance-a major goal of performance-based
contracting. Most of the remaining laboratory contracts are still
based on DOE's traditional fixed-fee arrangement in which the fees
are paid regardless of performance. Page 1
GAO/RCED-99-141 Performance-Based Contracting B-282356 DOE has not
evaluated the impact of performance-based contracting on its
laboratory contractors and, as a result, does not know if this new
form of contracting is achieving the intended results of improved
performance and lower costs. Specifically, DOE has not determined
whether giving higher fees to encourage superior performance by
its laboratory contractors is advantageous to the government,
although we recommended in 1994 that DOE develop criteria for
measuring the costs and benefits to the government of using higher
fees.1 Fees for the laboratories totaled over $100 million for
fiscal year 1998. While the contractors were unable to cite
measurable benefits achieved by switching to performance-based
contracting, they support its goals. The main benefits from
performance-based contracting cited by laboratory contractors was
that it has helped DOE clarify what it expects from the
contractors and that it has improved communication. Background
DOE manages the largest laboratory system of its kind in the
world. Since the early days of the World War II Manhattan Project,
DOE's laboratories have played a major role in maintaining U.S.
leadership in research and development. DOE is responsible for
ensuring that the laboratory system-with 22 laboratories in 14
states, a combined budget of over $10 billion a year, and a staff
of about 60,000-is managed in an effective, efficient, and
economical manner. DOE contracts with educational institutions and
private sector organizations for the management and operation of
18 of its laboratories. (App. I lists DOE's national
laboratories.) The remaining four laboratories are staffed by
federal employees. DOE pays its laboratory contractors all
allowable costs. DOE can also pay contractors a separate fee, or
profit, as compensation for operating the laboratories. Fees are
based on the contract value and the technical complexity of the
work to be performed at a laboratory, but also on the degree of
financial liability or risk that a contractor is willing to
assume. Under performance-based contracting principles, fees can
include both a fixed amount and an amount that is linked to
achieving performance objectives. One of DOE's major goals in
performance-based contracting is to develop performance objectives
for each contractor that are specific, results-oriented,
measurable, and reflect the most critical activities. 1Energy
Management: Modest Reforms Made in University of California
Contracts, but Fees Are Substantially Higher (GAO/RCED-94-202,
Aug. 25, 1994). Page 2
GAO/RCED-99-141 Performance-Based Contracting B-282356
Performance-Based DOE's implementation of
performance-based contracting for its Contracting at the
laboratories is in a state of transition. While most of its
laboratory contracts contain some performance-based features, the
contracts National Laboratories negotiated by DOE vary
from contract to contract. For example, DOE is Is an Evolving
Process incorporating performance-based features in all of its
laboratory contracts, although measures vary substantially in
number, ranging from a low of 7 in one laboratory contract to
about 250 in another. Also, DOE has negotiated performance fees in
only 9 of its 18 laboratory contracts because the remaining
laboratories are still operating under DOE's traditional approach
in which fees are not linked to performance. We found that similar
laboratories managed by similar contractors have different
contracts. The wide diversity of contract features reflects DOE's
philosophy of relying on DOE field units to tailor contracts to
local conditions and contractors' preferences. Developing the
Right Since introducing performance-based contracting
in 1994, DOE and its Performance Measures Is a laboratory
contractors have struggled to find the right mix of measures
Challenge that accurately and reliably
capture the contractors' performance. According to DOE field
staff, in the early years of contract reform, DOE encouraged its
field units to construct as many measures as they could, but
provided limited guidance on how to accomplish this task. As a
result, early attempts led to large numbers of performance
measures. A large number of measures diminishes the importance of
any single measure, whereas a small number results in measures
that are too broad to be meaningful. For example, a DOE field
official told us, "The original guidance from DOE Headquarters was
to [develop performance measures] as much as possible.
Unfortunately, there was inadequate guidance on how to do this. .
. . The number of performance measures . . . is too large.
However, if we fail to cover an activity [with a measure] the
contractor may not give the attention needed to the activity." DOE
and its laboratories are still attempting to develop the right
number of measures. For example, we found that the number of
performance measures in the laboratory contracts we examined
ranged from a low of 7 measures at the Ames Laboratory in Iowa to
about 250 at the Idaho National Engineering and Environmental
Laboratory in Idaho. DOE and its contractors are also working to
develop measures that reliably address the most important
activities of the laboratories. According to a Page 3
GAO/RCED-99-141 Performance-Based Contracting B-282356 field
official, DOE's early attempts at developing performance measures
resulted in contractors focusing only on those activities that
were tied to performance fees, while neglecting other important
activities. Another DOE site official stated, "[P]erformance-based
contracting tends to focus too much on the monetary reward . . .
and less on an analysis of performance. The incentive at the labs
should be [for] good science, not more dollars." Developing the
right number and type of performance measures is an evolving
process between DOE and its contractors. Most DOE and contractor
representatives told us that they are making progress in finding
measures that accurately and reliably reflect performance,
particularly in management and operations activities. Measuring a
contractor's performance in science and technology is more
difficult. Science and technology measures are broader in scope
and typically rely on peer reviews and a contractor's self-
assessment for evaluating performance. Types of Fees Paid to
Although performance fees are a major feature of performance-based
Contractors Vary Widely contracting, only 9 of the Department's
18 laboratory contracts have them. Nine of the remaining
laboratory contracts operate under DOE's traditional fixed-fee
arrangement, and one laboratory contract has no fee. Fixed fees
are earned regardless of performance and were commonly used before
DOE adopted performance-based contracting as its normal business
practice. Appendixes I and II summarize laboratory fee
arrangements and illustrate the wide variety of fee arrangements
in use. In commenting on a draft of this report, DOE said that by
the end of calendar year 1999, the majority of laboratory
contracts that provide fees will have performance-based fee
structures. Performance fees were introduced as a way of
encouraging superior performance and can include an incentive and
an award fee. An incentive fee is usually applied to activities
for which progress can be accurately measured, for example,
cleaning up 40 barrels of toxic waste within a prescribed period
of time. An award fee is usually applied to tasks that are harder
to measure and require a more subjective judgment of performance,
for example, assessing a contractor's attention to community
relations. Performance fees represent the amount of a contractor's
total fee placed "at risk" since the fee that could be earned is
determined by how well the contractor performs. Page 4
GAO/RCED-99-141 Performance-Based Contracting B-282356 As the
following examples show, some laboratory contracts include both
types of performance fees, while others rely solely on an
incentive fee or an award fee. Still others have neither and use
only fixed fees. * At the Sandia National Laboratories in New
Mexico and the Oak Ridge National Laboratory in Tennessee, DOE
negotiated fixed-fee contracts. Both of these laboratories are
operated by subsidiaries of the Lockheed Martin Corporation-a for-
profit company. DOE officials told us they were confident that
incentive fees were not needed for these laboratories because the
existing Lockheed Martin contractors' performance is superior and
introducing incentive fees might distract the contractors from
performing all essential work. * At the Idaho National Engineering
and Environmental Laboratory in Idaho, operated by Lockheed Martin
Idaho Technologies Company, DOE uses a combination of fixed,
incentive, and award fees. DOE officials told us that incentive
fees were used because of the many different tasks that could be
identified and measured, but that award fees were also needed to
assess activities that required more subjective judgments. * At
the Stanford Linear Accelerator Center in California, operated by
Stanford University, DOE negotiated a no-fee contract, the only
such arrangement in the laboratory system. According to DOE, the
laboratory contractor does not want a fee for operating this
laboratory because a fee would not motivate performance and may be
a detriment to the conduct of outstanding science, which is the
primary mission of this laboratory. * The Lawrence Berkeley
National Laboratory and Lawrence Livermore National Laboratory in
California and the Los Alamos National Laboratory in New Mexico
are operated by the University of California. The contracts
contain a fixed fee and an incentive fee for meeting expectations,
plus another amount for exceeding expectations. A senior DOE
official acknowledged the variability in laboratory contracts but
said that imposing uniform practices throughout the laboratory
system would not necessarily improve the overall performance and
accountability of the contractors. According to DOE and laboratory
officials, there are several reasons for the variability in the
contracts. First, the laboratories engage in different activities
with different levels of technical complexities. Second, some
contractors are willing to assume greater financial risk or
liability and thus expect a higher or different fee arrangement.
Finally, DOE field officials who negotiate the contracts employ
features that they believe are best suited for their particular
circumstances. However, we found that similar laboratories
operated by similar contractors have different fee arrangements.
For example, both the Page 5
GAO/RCED-99-141 Performance-Based Contracting B-282356 Lawrence
Berkeley and Argonne national laboratories have similar research
missions and are both managed by university contractors. However,
Lawrence Berkeley's contractor, the University of California,
works under a fixed-fee plus performance fee arrangement, while
Argonne's contractor, the University of Chicago, works under a
performance fee arrangement only. We also found substantial
variations in contracting philosophy among DOE field officials.
DOE relies on field units to negotiate its contracts, including
whether to use performance-based fees, and how performance
objectives and measures will be accomplished. Some of these
officials told us that performance fees are important motivators,
while others said performance fees can distract the contractor
from other important work. In commenting on a draft of this
report, DOE provided us with additional reasons for the
variability in contracts, including the timing of when contractors
first converted to performance-based contracting, the nature of
the proposals received in competitive awards, and the negotiated
terms in contract extensions. In addition, DOE cited other
motivations for laboratory contractors, such as their reputations
in the scientific community and contract extensions. The Impact of
DOE's guidance states that the purpose of performance-based
contracting is Performance-Based to obtain better performance
or lower costs or both. DOE has not analyzed the impact of
performance-based contracting on its laboratory Contracting
Remains contractors. As a result, it has not determined whether
performance-based Unknown contracting is achieving
the intended objectives of reducing costs and improving
performance. DOE officials told us that the amounts of fees paid
to laboratory contractors have generally increased with the
implementation of performance-based contracting but that it is
difficult to determine the return on this investment since
contractors are also assuming more risk or liability for costs
previously paid by DOE. Increased liabilities include costs due to
a failure to exercise prudent business judgment on the part of the
contractor's managerial personnel. DOE has not analyzed the
relative costs and benefits to the government of using higher fees
in performance-based contracts. We previously recommended that DOE
ensure that the fees paid to contractors for incurring increased
financial risks are cost-effective by developing criteria for
measuring the costs and benefits to the government Page 6
GAO/RCED-99-141 Performance-Based Contracting B-282356 of this
approach.2 DOE officials told us that while they have not
conducted a comprehensive cost-benefit analysis of fees, they try
to negotiate fees that make sense for individual contracts, taking
into account the financial risks and incentives needed to motivate
performance. Without such an overall analysis, however, it is
difficult to determine the value to the government of the over
$100 million spent on contractor fees for fiscal year 1998.
Although DOE has not assessed the impact of performance-based
contracting, limited reviews have found both progress and
problems, as these examples show: * Since 1997, DOE's Office of
Inspector General has issued three reports on problems the
Department had in implementing performance-based incentives at
three facilities (one of which was a laboratory).3 Problems
reported by the Inspector General included contracts with poorly
developed performance measures and fees that were paid to
contractors before agreement was reached on the performance
incentives. * In 1997, DOE's Office of Procurement issued a report
on the use of performance-based incentives. The report noted that
the use of incentives has been effective in directing contractors'
attention to performance outcomes and has improved communications
concerning performance expectations. The report also noted that
DOE field units are improving the quality of their contracts.
However, the report pointed out that implementation was sometimes
inconsistent and that performance objectives sometimes were overly
focused on process milestones rather than on outcomes. DOE's
laboratories were not the focus of this review, however.4 * Our
July 1998 report on DOE's performance-based incentive contracts
noted that the Department had taken steps to correct many of the
problems cited in the Inspector General's reports, including
issuing guidance, conducting training, and incorporating lessons
learned into fiscal year 1998 contract incentives.5 We noted that
although DOE 2GAO/RCED-94-202, Aug. 25, 1994. 3Inspection 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 Report: The
Fiscal Year 1996 Performance Based Incentive Program at the
Savannah River Operations Office (DOE-INS-O-98-03, May 1998).
4Contract Reform Self Assessment Report, Office of Contract Reform
and Privatization, DOE (Sept. 1997). 5Department of Energy:
Lessons Learned Incorporated Into Performance-Based Incentive
Contracts (GAO/RCED-98-223, July 15, 1998). Page 7
GAO/RCED-99-141 Performance-Based Contracting B-282356 maintained
that its performance-based incentives have been effective in
achieving the desired end results, it had not been clear whether
these successes were due to performance-based incentives or to an
increased emphasis on program management. None of these
assessments focused exclusively on laboratory contracts. In our
discussions, DOE field staff generally credited performance-based
contracting with improving their ability to set expectations for
the Department's laboratories, and several laboratory contractors
concurred that this was a benefit. In addition, both DOE and
laboratory officials cited improved communication as a benefit of
performance-based contracting. Laboratory contractors also
credited DOE for focusing its oversight on evaluating results and
away from dwelling on strict compliance with DOE's rules and
regulations. In addition, contractors told us they have increased
productivity and lowered costs, especially for the support and
overhead functions. However, most of these officials also said
that these advances were more the result of other initiatives,
such as internal streamlining actions, than of performance-based
contracting. Conclusions DOE and its laboratory contractors
told us that they are committed to making performance-based
contracting work effectively and that the contracts are including
more specific and reliable performance measures. However, since
DOE has not evaluated the impact of performance-based contracting
on its laboratories-owing in part to the wide variance in fee
arrangements-there is limited evidence on how performance fees
ensure a high level of performance by contractors at lower cost.
As a result, DOE cannot show how the higher fees it is paying to
contractors under performance-based contracting are of value to
the government and to the taxpayers. We previously recommended
that the Secretary of Energy ensure that the fees paid to
contractors for incurring increased financial risk are cost-
effective by developing criteria for measuring the costs and
benefits to the government of this approach. DOE did not implement
our recommendation and has no plans to measure the overall costs
and benefits of performance-based contracting for its
laboratories. DOE officials maintain that performance-based
contracting is working, but this is based on anecdotal evidence.
Moreover, the fees DOE negotiates are based on its best judgment
of what is needed to motivate contractors and to compensate them
for increased risk, but DOE's evidence is based primarily on non-
laboratory contractors, and DOE has not quantified the Page 8
GAO/RCED-99-141 Performance-Based Contracting B-282356 value of
the increased risk assumed by contractors under performance-based
conditions. Recommendation Because DOE does not know whether
performance-based contracting is improving performance at lower
cost at its national laboratories and because our previous
recommendation to develop criteria for measuring the costs and
benefits of paying fees to contractors for incurring increased
financial risk was not implemented, we recommend that the
Secretary of Energy evaluate the costs and benefits from using
performance-based contracting at the national laboratories. While
we recognize that each laboratory contract is individually
negotiated, DOE should nevertheless ensure that the fees it
provides to motivate contractors and to compensate them for
increased financial risk is based on an analysis of costs and
benefits. The need for this type of evaluation is consistent with
the principles of the Government Performance and Results Act of
1993 that require agencies to measure outcomes against their
goals.6 Agency Comments We provided a draft of this report to
DOE for review and comment. DOE disagreed with our conclusion on
the need for determining the costs and benefits of the fees it has
negotiated with its laboratory contractors. DOE noted that its
performance-based contracting experience is in transition but that
its evaluations show that performance-based contracting is
working. We acknowledge in our report that DOE's evaluations of
performance-based contracting show promise, but we also point out
that these evaluations did not focus on the laboratories'
experiences with performance-based contracting. Because of this
limitation and because of the higher fees being negotiated with
the laboratories, we continue to believe it is desirable for DOE
to determine if its performance-based contracting is improving
performance at lower cost. DOE also commented that the variability
we found in performance-based laboratory contracts reflects many
different factors, including differences in the scope of work, the
type of contractor, and the experiences the laboratories have with
performance-based contracting features. Our report described the
reasons for the variability in laboratory contracts, and we have
included the additional reasons provided in DOE's comments. We
also agree that DOE's use of performance-based contracting is
evolving and that the variability we found in laboratory contracts
(principally in 6The Results Act applies to agencies as defined in
5 U.S.C. 306(f), which generally covers executive departments,
government corporations, and independent establishments. Page 9
GAO/RCED-99-141 Performance-Based Contracting B-282356 performance
measures and fee arrangements) is in part due to an ongoing
learning process associated with the transition to performance-
based contracting. DOE also raised a number of issues regarding
the use of fees in its laboratory contracts and strongly defended
its use of performance fees. We agree with many of DOE's
observations on the use of performance fees, and we are not
suggesting that DOE should abandon its performance-based approach
or that it should eliminate performance-based fees in its
laboratory contracts. It is also not our intent to show that
performance-based contracting should be abandoned if its impacts
on the laboratories cannot be measured. We do believe, however,
that effective implementation of performance-based contracting
provisions is dependent on the ability to support the fee amounts
paid through a cost and benefit analysis. DOE also provided a
number of clarifications that we have incorporated in our report
as appropriate. Appendix III includes the full text of DOE's
comments and our response. Our review was performed from September
1998 through April 1999 in accordance with generally accepted
government auditing standards. See appendix IV for a description
of our scope and methodology. As arranged with your offices,
unless you publicly announce its contents earlier, we plan no
further distribution of this report until 30 days after the date
of this letter. At that time, we will send copies to Bill
Richardson, Secretary of Energy, and Jacob J. Lew, Director,
Office of Management and Budget. We will make copies available to
others on request. If you or your staff have any questions about
this report, please call me at (202) 512-3841. Major contributors
to this report were Gary R. Boss and Tom Kingham. Susan D. Kladiva
Associate Director, Energy, Resources, and Science Issues Page 10
GAO/RCED-99-141 Performance-Based Contracting Page 11
GAO/RCED-99-141 Performance-Based Contracting Contents Letter
1 Appendix I
14 Contract Amount and Fees Earned by DOE's Laboratory Contractors
in Fiscal Year 1998 Appendix II
16 Status of DOE Laboratory Contracts as of March 30, 1999
Appendix III
18 Comments From the Department of Energy Appendix IV
29 Scope and Methodology Abbreviations DOE Department of
Energy GAO General Accounting Office R&D
research and development Page 12
GAO/RCED-99-141 Performance-Based Contracting Page 13
GAO/RCED-99-141 Performance-Based Contracting Appendix I Contract
Amount and Fees Earned by DOE's Laboratory Contractors in Fiscal
Year 1998 Contract amount Laboratory/contractor
(millions)a Fixed or base feeb Performance feec
Total fee earned Argonne National Laboratory/University of Chicago
$466.9 $3,425,000
$3,425,000 Brookhaven National Laboratory/Brookhaven Science
Associates 385.9
3,574,000 3,574,000 Idaho
National Engineering and Environmental Laboratory/Lockheed Martin
Idaho Technologies Company 578.7
9,848,000 9,848,000 Lawrence Berkeley National
Laboratory/University of California 320.0
420,000 1,063,780 1,483,780 Lawrence
Livermore National Laboratory/University of California
1,100.0 1,680,000 4,482,000
6,162,000 Los Alamos National Laboratory/University of California
1,345.0 2,100,000 5,550,000
7,650,000 Oak Ridge National Laboratory/Lockheed Martin Energy
Research 475.6
7,220,000 7,220,000 Pacific
Northwest Laboratory/Battelle Memorial Institute
461.0 5,600,000
5,600,000 Sandia National Laboratories/Sandia Corp. (Lockheed
Martin) 1,397.6
14,347,000 14,347,000 Ames
Laboratory/Iowa State University 25.4
TBDd TBDd Fermi National Accelerator
Laboratory/University Research Associates, Inc.
279.6 2,750,000
2,750,000 National Renewable Energy Laboratory/Midwest Research
Institute 199.4 3,522,500
3,522,500 7,045,000 Princeton Plasma Physics
Laboratory/Princeton University 59.4
10,000 10,000 Stanford
Linear Accelerator Center/Stanford University
187.0 Thomas Jefferson National Accelerator Facility/Southeastern
University Research Associates, Inc.
70.2 1,874,633
1,874,633e Bettis Atomic Power Laboratory/Bechtel Group
305.1 8,686,000
8,686,000 Knolls Atomic Power Laboratory/KAPL, Inc. (Lockheed
Martin) 265.0
7,300,000 7,300,000 Savannah
River Technology Centerf/Westinghouse Savannah River Co.
1,248.0 51,570,100
51,570,100 (Table notes on next page) Page 14
GAO/RCED-99-141 Performance-Based Contracting Appendix I Contract
Amount and Fees Earned by DOE's Laboratory Contractors in Fiscal
Year 1998 aContract amounts for fiscal year 1998 include some
estimates. bA base fee, used in a performance fee contract, is the
part of the fee not at risk and is similar to a fixed fee. cA
performance fee can be either an award fee or an incentive fee or
a combination. dThe fee is to be determined after DOE reviews of
the contractor's self-assessment and after the issuance of final
DOE reports. eThe fee is considered a management allowance, which
is similar to a fixed fee. fThe contract and fee amounts shown are
for the entire Savannah River Site, including the Savannah River
Technology Center. Source: GAO based on data from DOE's
headquarters and operations offices. Page 15
GAO/RCED-99-141 Performance-Based Contracting Appendix II Status
of DOE Laboratory Contracts as of March 30, 1999
Laboratory/contractor Type
and status of contract Argonne National Laboratory/University of
Chicago Incentive-fee contract. DOE plans to extend
this contract 5 years, but is renegotiating to make it consistent
with the federal acquisition regulations format and to incorporate
all contract reform features, including performance-based
provisions. Brookhaven National Laboratory/Brookhaven Science
Fixed-fee contract. The new contract was signed in January 1998
with a Associates
fixed fee through September 1998. DOE is still negotiating the
contract for fiscal year 1999. DOE plans to negotiate a
performance fee. Idaho National Engineering and Environmental
Incentive-fee contract. DOE plans to recompete this contract in
fiscal Laboratory/Lockheed Martin Idaho Technologies Company
year 1999. The current contractor, Lockheed Martin, announced it
will not bid. Lawrence Berkeley National Laboratory/University of
Incentive-fee contract. The amount of the annual available fee
remains California
the same for each year of the 5-year contract. Lawrence Livermore
National Laboratory/University of Incentive-fee contract.
The amount of the annual available fee remains California
the same for each year of the 5-year contract. Los Alamos National
Laboratory/University of California Incentive-fee contract.
The amount of the annual available fee remains the same for each
year of the 5-year contract. Oak Ridge National
Laboratory/Lockheed Martin Energy Fixed-fee contract. DOE
is recompeting this contract. DOE plans to Research
convert this contract to a performance fee. Lockheed-Martin
announced that it will not bid as a prime contractor on the new
contract. The other two contracts for this site-for environmental
cleanup and production-are performance-fee Pacific Northwest
Laboratory/Battelle Memorial Institute Incentive-fee contract.
DOE converted this contract from a fixed-fee to an incentive-fee
type and made available $7.1 million in potential fees geared to
incentives in four areas-science and technology excellence,
operational excellence, leadership and management, and community
relations. Sandia National Laboratories/Sandia Corp. (Lockheed
Martin) Fixed-fee contract. The contract that expired in September
1998 was renegotiated and extended noncompetitively for 5 years.
The new contract remains a fixed-fee arrangement but now includes
performance objectives, measures, and criteria. DOE decided that
the contractor's superior performance could be sustained with a
fixed fee. Ames Laboratory/Iowa State University
Incentive-fee contract. DOE is renegotiating this contract and
plans to extend noncompetitively for 5 years. DOE plans to make
the contract consistent with the federal acquisition regulations
format and to incorporate all contract reform conditions,
including performance-based provisions. Fermi National Accelerator
Laboratory/University Research Fixed-fee contract. DOE has not
announced whether it will recompete or Associates, Inc.
extend this contract. DOE rates the contractor's performance as
outstanding. National Renewable Energy/Midwest Research Institute
Award-fee contract. DOE recompeted this contract in 1998. The new
contract was effective on Oct. 1, 1998, and is fixed fee until
March 1999, at which time DOE intends to includes an award fee for
the remainder of the contract period. Princeton Plasma Physics
Laboratory/Princeton University Fixed-fee contract. The
contractor did not want any fee, but DOE negotiated a small fee of
$10,000. (continued) Page 16
GAO/RCED-99-141 Performance-Based Contracting Appendix II Status
of DOE Laboratory Contracts as of March 30, 1999
Laboratory/contractor
Type and status of contract Stanford Linear Accelerator
Center/Stanford University No-fee contract. The contract
term ended on March 31, 1998, and was extended noncompetitively on
a month-by-month basis during negotiations to incorporate
performance-based incentives. The contract was then extended
noncompetitively for 5 years in January 1999. The contract
includes performance measures and expectations, but no fee. Thomas
Jefferson National Accelerator Facility/Southeastern No fee
contract (with management allowance). The contract is currently
University Research Associates, Inc
being renegotiated so that it can be extended noncompetitively for
5 years. DOE plans the new contract to be a fixed-fee arrangement.
Objectives of the negotiations are to structure the contract to be
consistent with the federal acquisition regulations format and to
incorporate all contract reform conditions, including performance-
based features. Bettis Atomic Power Laboratory/Bechtel Group
Fixed-fee contract. The contract was recompeted in 1998. The new
contractor was selected (the Bechtel Group) but the incumbent
contractor, Westinghouse Electric Corporation, protested the
award. The existing contract extended non-competitively pending
the result of a bid protest to GAO. The bid protest was denied by
GAO. The new contract with Bechtel was effective February 1, 1999.
Knolls Atomic Power Laboratory/KAPL, Inc. (Lockheed
Fixed-fee contract. Martin) Savannah River Technology
Center/Westinghouse Savannah Incentive-fee contract. River Co.
Source: GAO based on data from DOE's operations offices. Page 17
GAO/RCED-99-141 Performance-Based Contracting Appendix III
Comments From the Department of Energy Note: GAO comments
supplementing those in the report text appear at the end of this
appendix. Page 18 GAO/RCED-99-141 Performance-Based
Contracting Appendix III Comments From the Department of Energy
See comment 1. See comment 2. See comment 1. Now on p. 1. See
comment 1. See comment 3. See comment 4. Page 19
GAO/RCED-99-141 Performance-Based Contracting Appendix III
Comments From the Department of Energy See comment 5. See comment
6. Now on p. 6. See comment 7. Page 20
GAO/RCED-99-141 Performance-Based Contracting Appendix III
Comments From the Department of Energy See comment 8. Page 21
GAO/RCED-99-141 Performance-Based Contracting Appendix III
Comments From the Department of Energy See comment 9. Page 22
GAO/RCED-99-141 Performance-Based Contracting Appendix III
Comments From the Department of Energy Now on p. 4. See comment
10. Now on p. 4. See comment 11. Now on pp. 5 and 6. See comment
12. Page 23 GAO/RCED-99-141
Performance-Based Contracting Appendix III Comments From the
Department of Energy Now on p. 6. See comment 13. Now on p. 8. See
comment 14. Page 24 GAO/RCED-99-141
Performance-Based Contracting Appendix III Comments From the
Department of Energy See comment 1. Page 25
GAO/RCED-99-141 Performance-Based Contracting Appendix III
Comments From the Department of Energy GAO Comments The
following are GAO's comments on the Department of Energy's letter
dated April 22, 1999. 1. We have made changes to the report as
appropriate in response to DOE's comments. 2. Our wording is drawn
from DOE's guidance on performance-based contracting, and we have
made changes to our report to reflect DOE's comments. DOE
recommends that its laboratory contracts contain performance-based
features, which include clear expectations described in terms of
results, not how the work is to be accomplished. 3. As we stated
in our report, DOE's evaluations did not focus on the laboratory
contractors, nor did these evaluations focus on the costs and
benefits of performance-based contracting features, including the
impact of fees. 4. We recognize that one of the purposes of
providing fees is to reflect the financial risk associated with
work performance, and we make this point in our report. Our 1994
recommendation questioned the cost-benefit of the increased fees,
regardless of whether they were related to performance or
financial risk. We continue to believe that our recommendation is
relevant because DOE has not evaluated the cost and benefit of the
fees it is providing to laboratory contractors. 5. We believe our
wording adequately reflects the conditions discussed. Information
on the laboratory fees and total contract costs is presented in
appendix I. 6. We have made changes to the report as appropriate
in response to DOE's comments on contract type. We stated in our
report that DOE's performance-based contracting is in a state of
transition. We also stated that there are wide variations in
performance measures and fee arrangements negotiated by DOE and
its laboratory contractors. This material is presented as facts
describing the conditions that presently exist. Our report also
describes the reasons for the variability in laboratory contracts
and includes most of the reasons given in DOE's comments. We have
made changes in the report to reflect these additional reasons for
the variability in DOE's laboratory contracts. 7. Our statement
that contract differences are the product of DOE's relying on its
field units to tailor contracts to local conditions is based on
Page 26 GAO/RCED-99-141 Performance-
Based Contracting Appendix III Comments From the Department of
Energy interviews with numerous DOE field officials. This
statement is not an implied criticism of how DOE negotiates
contracts. Also, we disagree with DOE's characterization that
contractors' preferences are "generally irrelevant" when
accounting for the variations that exist among laboratory
contractors. As DOE noted, contractors' preferences are reflected
in the negotiation process. In our discussions with DOE field
officials responsible for negotiating contracts, laboratory
contractors' preferences on fees were cited as a critical factor
in determining fee structures. 8. Our report recognizes that
developing the optimum number of performance measures is a
challenge, as reflected in the wide range of performance measures
in use even among similar laboratories. We are not suggesting that
any two contractors should have the same measures or the same
number of measures. Our point is that DOE continues to struggle
with finding the right number of measures. To further illustrate,
the University of California's fiscal year 1998 contracts for its
two weapons laboratories-Lawrence Livermore and Los Alamos-contain
83 and 120 performance measures, respectively, even though these
laboratories are very similar in budget and scope. They are,
however, managed by different DOE field units. 9. Our purpose in
including comments we received from DOE field units is to
illustrate the wide differences in philosophy about the use of
fees to motivate laboratory contractors. Several DOE field staff,
as well as contractors, told us that they strongly believe that
providing fees does not motivate contractors, including both for-
profit and not-for-profit contractors. Moreover, our statement
that performance-based contracting has tended to focus in some
instances on monetary rewards at the expense of good science was a
frequent comment from both DOE field officials and laboratory
contractors. Thus, it is very important to identify the need for
monetary incentives where they are appropriate. Other motivations
that DOE cited for laboratory contractors, such as their
reputations in the scientific community and desire for contract
extensions, were added to our report. These differences in
philosophy account for some of the variation in contracts. 10. Our
report reflects information provided directly from DOE field
staff, who we were advised by DOE headquarters were the proper
source for this information. The data in DOE's comments are
reflected in the appendixes to our report. We have also revised
our report to show that there are now 18 laboratory contractors,
reflecting a recent change in how DOE defines its laboratories.
Page 27 GAO/RCED-99-141 Performance-
Based Contracting Appendix III Comments From the Department of
Energy 11. DOE field officials told us that performance fees are
used to encourage superior performance. Asserting that fees are
used to link performance to financial reward is self-evident in
this context. 12. We agree with DOE that no single approach in
contracting has proven to be optimum, and we reflected this view
in our report. Regarding the wide variability in fee arrangements,
we stated that there was very little consistency among the
contracts of similar laboratory contractors conducting similar
work. We also stated that local conditions influence the
variability in laboratory contracts. 13. Our wording was taken
from DOE's guidance on performance-based contracting. As we state
in our report, prior assessments of performance-based contracting
have not focused on laboratory contractors. We also stated in our
report that DOE believes that the results from its assessments of
performance-based contracting have been positive. We believe it is
a logical and desirable step for DOE to determine whether
performance-based contracting is improving performance at lower
cost in its national laboratories. Also, we are not suggesting
that DOE should abandon its performance-based approach or that it
should eliminate performance-based fees in its laboratory
contracts. It is also not our intent to show that performance-
based contracting should be abandoned if its impacts on the
laboratories cannot be measured. We believe that effective
implementation of performance-based contracting provisions is
dependent on the ability to support the fee amounts paid through a
cost and benefit analysis. While it may appear intuitively obvious
that defining performance expectations and measuring results are
effective management tools, it is not intuitively obvious that the
government is receiving a reasonable return on its investments in
fee amounts for laboratory contractors. Likewise, while DOE
commented that increases in fees reflect, in part, the increased
financial risks being borne by contractors, no cost-benefit
analysis quantifying this increased financial risk has been
completed; thus it is not possible to determine if the proper
level of fee is appropriate for the risk assumed. 14. We recognize
that laboratory contractor fees are relatively small percentages
of the total contract amounts. However, these percentages, which
translated into $100 million in fees for fiscal year 1998, must be
considered in light of the fact that DOE's laboratories are
government owned and that a laboratory contractor's financial risk
is limited. Page 28 GAO/RCED-99-141
Performance-Based Contracting Appendix IV Scope and Methodology To
obtain information on the national laboratories' contracts, we
interviewed officials from the following laboratories: Sandia
National Laboratories and Los Alamos National Laboratory in New
Mexico; Lawrence Berkeley National Laboratory, Lawrence Livermore
National Laboratory, and the Stanford Linear Accelerator in
California; the National Renewable Energy Laboratory in Colorado;
the Idaho National Engineering and Environmental Laboratory in
Idaho; the Oak Ridge National Laboratory in Tennessee; and the
Argonne National Laboratory in Illinois. We also spoke with
laboratory officials in other locations to obtain cost and status
information. We asked officials at these laboratories to comment
on the impact of performance-based contracting on their
operations. We also interviewed Department of Energy (DOE)
officials responsible for overseeing these laboratories. These
officials were from DOE's operations offices in Albuquerque, New
Mexico; Oakland, California; Oak Ridge, Tennessee; and Chicago,
Illinois. We also interviewed DOE area and site office staff
located at each of the operations offices we visited. To obtain a
broader perspective, we interviewed DOE headquarters officials
responsible for developing contracting policy. We conducted our
review from September 1998 through April 1999 in accordance with
generally accepted government auditing standards. (141265)
Page 29 GAO/RCED-99-141 Performance-
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