Department of Energy: Improving Management of Major System Acquisitions
(Testimony, 03/06/97, GAO/T-RCED-97-92).

GAO discussed the Department of Energy's (DOE) performance in completing
its largest and most significant projects, referred to as major system
acquisitions, focusing on: (1) the key factors that hinder the timely,
cost-effective completion of the acquisitions; and (2) what is being
done to improve DOE's performance.

GAO noted that: (1) from 1980 through 1996, DOE conducted 80 projects
that it designated as major system acquisitions; (2) 31 of those
projects were terminated prior to completion, after expenditures of over
$10 billion; (3) only 15 of the projects were completed, and most of
them were finished behind schedule and with cost overruns; (4) further,
3 of the 15 projects have not yet been used for their intended purpose;
(5) the remaining 34 projects are ongoing, many with substantial cost
increases and schedule slippage; (6) GAO believes there are four key
factors underlying the cost overruns, schedule slippage, and
terminations of DOE's most critical projects: (a) unclear or changing
missions; (b) the incremental funding of projects; (c) a flawed system
of incentives both for DOE's employees and contractors; and (d) a lack
of sufficient DOE personnel with the appropriate skills to effectively
oversee contractors' operations; (7) on the positive side, DOE is
implementing several initiatives that could help improve its overall
management as well as the management of individual major system
acquisitions; and (8) GAO believes that the implementation of these
initiatives offers DOE an excellent opportunity to address the key
factors.

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

 REPORTNUM:  T-RCED-97-92
     TITLE:  Department of Energy: Improving Management of Major System 
             Acquisitions
      DATE:  03/06/97
   SUBJECT:  Energy research
             Federal procurement
             Cost control
             Cost overruns
             Agency missions
             Research program management
             Employee incentives
             Contract monitoring
             GOCO

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


Before the Subcommittee on Energy and Environment, Committee on
Science, House of Representatives

For Release
on Delivery
Expected at
10:00 a.m.  EST
Thursday
March 6, 1997

DEPARTMENT OF ENERGY - IMPROVING
MANAGEMENT OF MAJOR SYSTEM
ACQUISITIONS

Statement by Victor S.  Rezendes,
Director, Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-92

GAO/RCED-97-92T


(141035)


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

  GAO -
  DOE -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We appreciate the opportunity to discuss the Department of Energy's
(DOE) performance in completing its largest and most significant
projects, which are referred to as major system acquisitions.  As you
know, DOE considers these projects critical to fulfilling its
mission.  The projects are also extremely costly and can be
politically sensitive.  Our testimony today will summarize our
November 1996 report on DOE's management of its major system
acquisitions.\1

Specifically, we will address (1) DOE's performance in completing its
major system acquisitions; (2) the key factors that hinder the
timely, cost-effective completion of the acquisitions; and (3) what
is being done to improve DOE's performance. 

In summary, from 1980 through 1996, DOE conducted 80 projects that it
designated as major system acquisitions.  Thirty-one of the projects
were terminated prior to completion, after expenditures of over $10
billion.  Only 15 of the projects were completed, and most of them
were finished behind schedule and with cost overruns.\2 Further, 3 of
the 15 projects have not yet been used for their intended purpose. 
The remaining 34 projects are ongoing, many with substantial cost
increases and "schedule slippage."

We believe there are four key factors underlying the cost overruns,
schedule slippage, and terminations of DOE's most critical projects. 
These are unclear or changing missions; the incremental funding of
projects; a flawed system of incentives both for DOE's employees and
contractors; and a lack of sufficient DOE personnel with the
appropriate skills to effectively oversee contractors' operations. 
On the positive side, DOE is implementing several initiatives that
could help improve the Department's overall management as well as the
management of individual major system acquisitions.  We believe that
their implementation offers DOE an excellent opportunity to address
the key factors. 

Before we discuss these problems in greater detail, we will briefly
describe DOE's varied responsibilities and federal guidance on the
management of major system acquisitions. 


--------------------
\1 Department of Energy:  Opportunity to Improve Management of Major
System Acquisitions (GAO/RCED-97-17, Nov.  26, 1996). 

\2 Cost overruns are increases in a project's original cost
estimates. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

Over the years, DOE has conducted technically complex activities at
government-owned, contractor-operated facilities across the country. 
These activities have included developing and producing nuclear
weapons; operating nuclear reactors, uranium enrichment plants, and
plutonium production plants; performing research and development on
both the military and civilian uses of nuclear energy; promoting and
funding nuclear and other sciences; fostering energy conservation and
efficiency; managing federal petroleum reserves; and, more recently,
cleaning up environmental contamination resulting from its past
operations.  These activities have involved large-scale,
first-of-a-kind projects requiring substantial construction and other
expenses. 

Office of Management and Budget Circular A-109, dated April 5, 1976,
defined projects that are critical to fulfilling an agency's mission,
entail the allocation of relatively large amounts of resources, and
warrant special management attention as major system acquisitions. 
The circular requires that these systems receive top-level management
review and an integrated approach to budgeting, contracting, and
managing.  In accordance with the circular, DOE designated many
projects as major system acquisitions because of their high estimated
costs (ranging from about $100 million to many billions of dollars)
and their perceived importance to fulfilling DOE's missions.  From
1980 through 1996, DOE designated 80 projects as major system
acquisitions. 


   DOE'S PERFORMANCE ON MAJOR
   SYSTEM ACQUISITIONS
---------------------------------------------------------- Chapter 0:2

As stated earlier, 31 of the 80 major system acquisitions that DOE
conducted were terminated prior to completion, after expenditures of
over $10 billion.  The projects were canceled for a number of
reasons.  In some cases, changing circumstances and/or world events
simply caught up with the projects, and they were no longer needed. 
For example, because of the reduced demand for uranium enrichment
services to fuel commercial nuclear power plants, DOE canceled the
Gas Centrifuge Enrichment Plant after spending $2.8 billion.  Other
projects were canceled because of changes in the administration's
policy.  For example, DOE canceled five coal demonstration plants, on
which it had spent $459 million, because the administration at that
time did not believe that DOE should be funding demonstration
projects.  Because of anticipated reductions in nuclear weapons, DOE
canceled a new tritium production reactor, after expenditures of $1.2
billion. 

In other cases, however, management problems and/or ineffective
oversight by DOE led to large cost overruns and schedule slippage. 
Eventually, these problems led the Congress to terminate the
projects.  For example, we reported to the Congress that DOE's
original cost estimate of $5.9 billion for the Superconducting Super
Collider (a project intended to conduct high-energy physics
experiments) had grown to $8.3 billion; yet we identified additional
known cost increases showing that the total cost would exceed $11
billion.\3

The Congress cut off funding for the project after a total
expenditure of over $2 billion. 

Of the 15 projects completed, many incurred cost overruns and
schedule slippage.  Further, three have not yet been used for their
intended purpose.  For example, the Fuels and Materials Examination
Facility at DOE's Hanford Plant was intended to fabricate and examine
a full range of breeder reactor fuels.  However, the facility has
never been operated for its intended purpose because DOE's breeder
reactor program was terminated in the early 1980s when the Congress
cut off funding.  The facility is now being used for storage and
office space.  DOE spent $234 million on this project. 

As of June 1996, at least half of the 34 ongoing projects were
experiencing cost overruns and/or schedule slippage.\4 For example,
the estimated total cost for the Weldon Spring Remedial Action
Project grew from about $350 million to over $850 million and the
project is more than 5 years behind schedule.  The Yucca Mountain
Site Characterization Project's estimated cost has increased by more
than $1 billion and the project is more than 10 years behind
schedule. 


--------------------
\3 Federal Research:  Super Collider--National Security Benefits,
Similar Projects, and Cost (GAO/RCED-93-158, May 14, 1993). 

\4 Complete original cost estimates and current cost estimates were
available for 22 of the 34 ongoing projects.  Of the 22 projects, 17
were experiencing cost overruns, and 16 were experiencing schedule
slippage. 


   FACTORS AFFECTING DOE'S MAJOR
   SYSTEM ACQUISITIONS
---------------------------------------------------------- Chapter 0:3

We believe the high rate of cost overruns, schedule slippage, and
terminations on DOE's major system acquisitions can be traced to four
key factors: 

  -- The constantly changing missions for DOE that often make it
     difficult to maintain departmental and congressional support for
     these long-term, high-cost projects. 

  -- The funding of projects incrementally, from year to year rather
     than up front, which subjects the projects to potential delays
     or terminations in funding each year. 

  -- A flawed system of incentives that does not always reward
     individuals and organizations for doing "the right thing" and
     has often rewarded contractors despite poor performance. 

  -- The difficulty in hiring, training, and retaining enough people
     with the requisite skills to provide effective oversight and/or
     management of contractors' operations. 

DOE's missions have continued to evolve to the point where today's
DOE bears little resemblance to the Department created in 1977.  DOE
is no longer focused primarily on developing alternative sources of
energy, producing nuclear weapons, or modernizing the nuclear weapons
complex.  Today, DOE's focus has turned to maintaining the nation's
scientific and technological leadership, cleaning up the
environmental contamination resulting from the past 50 years of
operating the nuclear weapons complex, and providing stewardship for
the nation's nuclear weapons stockpile.  Such changing missions,
coupled with the fact that these projects take years to complete and
often cost billions of dollars, make it very difficult for DOE to
maintain the congressional and stakeholder support needed to complete
these projects. 

To carry out its mission, DOE has historically received incremental
funding for its projects.  One problem with incremental funding is
that the budget authority for the total cost of the project is not
provided when the project is approved.  Furthermore, for many
projects, particularly in their first years of development and
construction, the funding received is considerably below the amount
requested.  This causes project schedules to slip and costs to rise. 
For example, certain contractor expenses and administrative costs
(e.g., costs for heat, lights, water, security, etc.) will accrue
regardless of whether any progress is being made on the project.  As
a result, projects that received only partial funding usually end up
costing more than originally estimated and years behind schedule. 

Inappropriate incentives have also contributed to late and costly
projects.  Past Secretaries of Energy have commented on the need to
change the incentives in DOE to focus less on production-oriented
quotas and more on other important issues, such as environmental
health and safety and efficient management.  Some DOE managers view
themselves as advocates for their projects, which provides an
incentive for them not to surface potential problems that could
cancel their projects.  For example, participants in the
Superconducting Super Collider were focused on continuing the project
in order to maintain U.S.  preeminence in high-energy physics despite
repeated reports of chronic management problems and enormous cost
overruns. 

Most DOE contracts have incentives--such as bonuses or penalties--to
prompt satisfactory contractor performance.  However, we have found
that in some instances, DOE contracting officers did not use the
penalty clauses and gave contractors substantial bonuses despite
subpar performance.  For example, during fiscal years 1986 through
1988, many safety and health deficiencies at DOE's Rocky Flats Plant
in Colorado were repeatedly raised by DOE safety staff.  These
included problems in the plant's radiological protection program and
a lack of commitment by the plant's management to improve overall
safety and health conditions.  Despite this poor performance, the
contractor received over $26 million in bonuses during this period. 
The plant was eventually shut down for safety problems, among other
things. 

The last factor is DOE's lack of technical expertise to oversee the
design, construction, and operation of its major system acquisitions. 
This problem has been chronicled since DOE's early years.  A 1981 DOE
task force and a 1987 report by the National Research Council both
noted DOE's lack of technical capabilities and expertise.  A March
1996 report by the Defense Nuclear Facilities Safety Board echoed
those same concerns.  Throughout a series of management reviews of
DOE that we began in 1991, many DOE managers told us that the lack of
skilled staff in program, project, and contracting oversight
positions is one of the most fundamental problems in the Department. 


   EFFORTS TO RESOLVE ACQUISITION
   PROBLEMS
---------------------------------------------------------- Chapter 0:4

There are no quick, easy solutions to DOE's problems in keeping its
major system acquisitions on schedule and within budget.  However,
several governmentwide initiatives could help.  Recent changes to
federal procurement laws, including the Federal Acquisition
Streamlining Act of 1994 and the Clinger-Cohen Act of 1996 (formerly
called the Federal Acquisition Reform Act of 1996) provide an impetus
for agencies to, among other things, improve the technical
capabilities and performance of their acquisition management staffs. 
This could help resolve a long-standing problem at DOE.  In addition,
as of July 1996, the Office of Management and Budget has required all
federal agencies to request full funding for fixed assets (including
major system acquisitions).  If a project or separable segment\5 of a
project is approved, the agency will receive budget authority for the
full amount of the project's or segment's estimated cost and will not
have to return to the Congress for additional budget authority each
year. 

The full-funding provision could have a significant impact on DOE's
management of its major system acquisitions.  The Department and
other stakeholders, such as the Congress, need to reach a consensus
on which of DOE's major system acquisitions are most
mission-critical.  Then, by knowing that the funding will be
available when needed, DOE and its contractors should be better able
to stay within cost estimates and keep the projects on schedule.  DOE
has begun to implement the full-funding concept in its fiscal year
1998 budget. 

Furthermore, in 1994, DOE began implementing management initiatives
in the areas of contract reform, strategic systems and life-cycle
asset management, strategic planning, information resources
management planning, and financial planning.  Some of these
initiatives, such as contract reform, could improve many aspects of
DOE's contracting by stimulating more competition and better control
over the contractors.  This could lead to cost savings and quality
improvements. 


--------------------
\5 The guidance from the Office of Management and Budget allows for
the full funding of economically or programmatically separable
segments of projects. 


   OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

We believe that these initiatives have the potential to help improve
DOE's management of its major system acquisitions, but DOE may need
help in addressing some of the key factors.  For example, this is an
ideal time to reevaluate DOE's missions; however, DOE cannot do this
alone because the Congress plays a key role in setting the
Department's priorities.  Nevertheless, we believe that DOE's
management initiatives offer an opportunity for DOE to begin
addressing some of the factors affecting the management of its major
system acquisitions. 


-------------------------------------------------------- Chapter 0:5.1

Thank you, Mr.  Chairman and Members of the Subcommittee.  That
concludes our testimony.  We would be happy to respond to any
questions you may have. 


*** End of document. ***