Resources, Community, and Economic Development Division B-278476 November 24, I997 The Honorable Ron Wyden United States Senate Subject: Department of Energy: Subcontracting Practices Dear Senator Wyden: This report responds to several questions you had regarding subcontract oversight practices used by the Department of Energy (DOE). DOE accomplishes much of its work by contracting with private companies, _ and these companies in turn often subcontract many of the tasks to other companies. Your questions stem from a subcontract for cleaning up a radioactive waste dump called Pit 9 at DOE’s Idaho Falls site, which we previously reported was a failure.’ The project was behind schedule and over budget and could not be completed either within the established time frame or the original subcontract price. DOE and the contractors blamed each other for the problems. The uhimate cost to DOE for the project is still unclear because DOE and the contractors have not reached agreement on how to proceed witi the project. As a resuk of these problems, you raised concerns about DOE’s subcontract oversight practices in general, as well as how these practices were reflected in the Pit 9 project. The Pit 9 project involves two companies, or “corporate af%liates,” that are part of Lockheed Martin. One company, Lockheed Martin Idaho Technologies Company, has a direct (prime) contract with DOE to manage and operate the entire Idaho Falls site. The other company, Lockheed Martin Advanced Environmental ‘Nuclear Waste: Deuartment of Enere[v’s Proiect to Clean UD Pit 9 at Idaho Falls Is Exneriencing Problems (GAO/RCED-97-180, July 28, 1997); Nuclear Waste: Detxrrtment of Ener&s pit 9 Cleanup Proiect Is Exneriencing Problems (GAO/T-RCED-97-221, July 28, 1997). GAO/RCED9830R DOE’s Subcontracting Practices B-278476 - Systems, has a subcontract with Lockheed Martin Idaho Technologies Company to clean up the wastes in Pit 9. In its role as-management and operating contractor for the Idaho Falls site, Lockheed Martin Idaho Technologies Company is responsible for administering the subcontract with Lockheed MarUn Advanced Environmental Systems. As agreed with your office, this report discusses whether DOE has policies or contract requirements that (1) limit subcontracting between corporate affiliates or limit the amount a subcontractorcan charge for profit when it contracts with a corporate affiliate and (2) ensure that contractors and subcontractors make payments they owe to suppliers or other companies supporting their work. In summary, we found the following: In certain instances federal and DOE procurement regulations place limits on subcontracting between a DOE contractor and its corporate affiliates. The nature of DOE’s controls over these transactions between corporate affiliates depends on the type of contract that exists between DOE and the prime contractor. If DOE has a cost-reimbursement contract with the prime contractor under which the contractor generally is paid for aII costs incurred, the regulations generally (1) require that DOE have approval authority over transactions between corporate aftiliates and (2) prohibit amounts for profit that can be charged on such transactions if the contractor and subcontractor have the same corporate mation. However, if DOE has a fixed-price contract with the prime contractor under which the contractor is paid a fixed amount regardless of the contractor’s costs for doing the work, the regulations do not eaU for imposing such controls on subcontracts. Controls are not applied under tied-price contra<ts because, unlike under cost-reimbursement arrangements, the overah costs to the government are not affected. In the case of the Pit 9 project, even though the prime contract was a cost- reimbursement contract, DOE ahowed the subcontractor to include an amount for profit. DOE did so because at the time the Pit 9 subcontractor was initially selected, the management and operating contract for the Idaho Falls site was held by EG&G Idaho, a company that was not a corporate aBiliate of Lockheed Martin Advanced Environmental Systems. While DOE expects its contractors to conduct business in a responsible manner, it generally lacks the authority to require contractors or their subcontractors to make payments to suppliers or other companies supporting the work. An exception exists for certain federal construction 2 GAO/WED-98-30R DOE’s Subcontracting Practices B-278476 - project contracts, for which federal law requires, among other things, that the contractor post a payment bond to better ensure that suppliers receive payments owed to them. In the case of the Pit 9 project, DOE determined. that the project was not a federal construction project because a private company would own and operate the facilities. Therefore, DOE did not require a payment bond. A supplier subsequently complained about not being paid by Lockheed Martin Advanced Environmental Systems for proposed design work on an analytical laboratory. DOE examined the complaint, in keeping with its general practice of loo-g into ahegations that contiactors are not performing responsibly, and determined that the complaint was not valid because no contractual arrangement existed between the two companies. BACKGROUND Cleaning up facilities that over the past 50 years have produced the nation’s supply of nuclear materials for weapons is an enormous and complex task. This effort is being performed primarily by contractors that manage and operate many of DOE’s sites, generally under cost- reimbursement contracts. Under such a contracting arrangement, these “M&O contractors” are paid for all costs they incur to the extent that the costs are allowable under the contract. However, primarily in an attempt to reduce its cleanup costs, in certain instances DOE has used fixed-price contracts to purchase specific waste cleanup services. These tixed-price contracts are generally managed either by the M&O contractors or by DOE directly. The Pit 9 project at the Idaho Falls site is one of such contracts intended to clean up DOE’s radioactive wastes. Fit 9 is an inactive disposal site about 1 acre in size. In the 196Os,DOE used it to dispose of radiologically contaminated and hazardous wastes, most of which were packaged in barrels and boxes and covered with soil. The Pit 9 project is being implemented through a contract between Lockheed Martin Idaho Technologies Company, the M&O contractor, and Lockheed Martin Advanced Environmental Systems, a subcontractor. The Federal Acquisition Regulation (FAR) contains overall procurement and contracting requirements for federal executive agencies. DOE has also issued supplemental requirements in the Department of Energy Acquisition Regulation (DEAR). The DEAR includes detailed controls over M&O contractors and their subcontracting and procurement practices. DOE’s contracting officers are responsible for ensuring that M&O contractors conform to the relevant regulations. 3 GAOlRCED-9&30R DOE’s Subcontracting Practices B-278476 _ DOE’S CONTROLS OVER CONTRACTS WITH CORPORATE AFFILJATES VARY WITH THE TYPE OF CONTRACT ._ _ The type of contract between DOE and its prime contractor determines the extent of DOE’s controls over the contractor’s procurements, including transactions between corporate affiliates. Controls are stronger when the prime contract is a cost-reimbursement contract because under such a contract costs potentially can be added and passed through to the government. As a result, DOE looks more closely at the costs incurred and generally prohibits the addition of an amount for profit in a subcontract with a corporate affiliate. In the case of the Pit 9 subcontract, even though the M&O contract was a cost-reimbursement contract, DOE allowed the subcontract to include a profit because it determined that the initial selection of the subcontract firm was not a transaction between corporate af6liates. DOE Oversees Contracts Between Affiliates When the Prime Contract is a Cost-Reimbursement Contract When the prime contract between DOE and a company is on a cost- reimbursement basis, as is the case with most M&O contracts, DOE has detailed procedures to follow in overseeing the contractor’s procurements. Because M&O contractors usually obtain needed goods and services through subcontracung, DOE must ensure that the M&O’s procurement system meets the standards established by the DEAR. To do so, the DOE contracting officer (1) requires the M&O contractor to maintain written descriptions of its procurement system and submit those descriptions for review and approval, (2) ensures that periodic appraisals of the contractor’s procurement system are performed, and (3) sets threshold levels by types of transactions and reviews and approves individual purchasing actions that exceed those threshold levels. For example, at the Idaho FalIs site, the DOE contracting officer must review and approve the M&O contractor’s procurement of individual transactions for $2 million or more. These requirements do not preclude contractors from entering into subcontracts with affiliated companies. However, DOE monitors these transactions to ensure that the government is getting a good value. Regardless of whether the subcontract is cost-reimbursement or fixed- price, such subcontracted transactions generally require review and approval by the DOE contracting officer. In addition, the subcontract with the affiliate would generally not be ahowed to include an amount for 4 GAOLRCED-9%30R DOE’s Subcontracting Practices B-278476 profit unless a similar amount was subtracted from the M&O contractor’s profit (normally referred to as the “fee” for a cost-reimbursement contract). DOE Does Not Oversee Contracts Between Affiliates When the Prime Contract Is a Fixed-Price Contract When a prime contract is awarded on a tied-price basis, with the prime contractor being paid a specified amount that is not subject to adjustment on the basis of the contractor’s actual costs, DOE is generally unconcerned about subcontracts with affiliates. Since DOE would be paying a fixed price regardless of the costs the contractor incurred, subcontracting with a corporate mate would not adversely affect DOE’s overall costs. Therefore, the stronger controls DOE places on cost- reimbursement prime contracts are not needed under fixed-price prime contracts. Profit on Pit 9 Subcontract Was Allowed Because of Suecial Circumstances The M&O contractor at the Idaho Falls site-Lockheed Martin Idaho Technologies Company-has a cost-reimbursement prime contract with DOE. The Pit 9 subcontract is a fixed-price subcontract between Lockheed Martin Idaho Technologies Company and Lockheed Martin Advanced Environmental Systems, a subcontractor. Since the M&O contract is a cost-reimbursement prime contract, DOE would generally prohibit the subcontractor from including an amount for profit in the subcontract because it is between corporate affiliates. However, the Bit 9 subcontract was a special case in which DOE allowed a profit to be included. The exception for the Pit 9 subcontract occurred because when Lockheed Martin Advanced Environmental Systems was initially selected for the subcontract, no corporate affiliation existed between it and the initial M&O contractor. The procurement for the Pit 9 subcontract was conducted by the previous M&O contractor at the Idaho Falls site-EG&G Idaho. EG&G Idaho evaluated the proposals and selected the Lockheed Martin company to perform the Pit 9 subcontract. During this same period, DOE recompeted the M&O contract at the site. After Lockheed Martin Advanced Environmental Systems was selected for the Pit 9 project but before the final price was negotiated for the fixed-price subcontract, Lockheed Martin Idaho Technologies Company won the M&O 5 GAO/RCED-9%30R DOE’s Subcontracting Practices ,; .,... B-278476 - contract for the Idaho Falls site. This M&O contract was awarded on a cost-reimbursement basis. Because the contracting relationship for the Pit 9 project would now involve two affiliated companies, DOE decided to assume responsibility for the final Pit 9 subcontract negotiations. According to DOE officials, DOE also decided that because Lockheed Martin Advanced Environmental Systems had been selected by EG&G Idaho and not by Lockheed Martin Idaho Technologies Company, an amount for profit was allowable. DOE approved a profit as part of the subcontract price, without requiring the new M&O contractor to reduce its profit (called a “fee” for a cost-reimbursement contract) by an equivalent amount. If the subcontract had been ruled a transaction between corporate af%liates, the DEAR would have required a reduction in the M&O contractor’s payment to offset the profit going to the corporate affiliate. Although DOE allowed a profit to be included in the Pit 9 subcontract, it also took steps to further oversee the corporate relationship created in the middle of the subcontracting process. Although DOE conducted the price negotiations for the subcontract, the Lockheed Martin M&O contractor signed the subcontract with Lockheed Martin Advanced Environmental Systems and was responsible for administering the subcontract. DOE was concerned about the potential conflict of interest associated with one corporate affiliate overseeing a subcontract with another. To address this concern, DOE required the Lockheed Martin M&O contractor to prepare an organizational conflict of interest plan, which included the establishment of a program oversight board with members from DOE, Lockheed Martin Idaho Technologies Company, and an impartial third party to monitor the dealings between the two Lockheed Martin companies. DOE GENER&LLY CANNOT REQUIRE CONTRACTORS OR SUBCONTRACTORS TO PAY SUPPLIERS OR COMPANIES PROVIDING SERVICES DOE generally lacks the authority to ensure that suppliers or companies that do work for contractors or subcontractors receive payment for their services. An exception exists for federal construction projects, which include a requirement under the Miller Act (40 USC. 270a et seq.) that contractors provide the government with a payment bond to ensure that suppliers of labor and materials will receive payment for their efforts. For other than construction contracts, the Miller Act does not apply. However, DOE officials said that, as a general practice, they look into any 6 GAO/RCED-9%30R DOE’s Subcontracting Practices D-278476 - allegations that DOE’s contractors are not acting responsibly in carrying out work at DOE’s sites. _. The Miller Act requires that for federal construction contracts-contracts “for the construction, alteration, or repair of any public building or public work of the United States” exceeding $lOO,OOO-thecontractor must post a performance bond that protects the government in case the contractor fails to complete its contract and a separate payment bond that-protects suppliers of labor and materials against nonpayment by the contractor. Suppliers and subcontractors that do not receive payment from the contractor for their work or materials may file a claim against the payment bond to collect the amounts owed. While the Miller Act and implementing regulations require bonds for federal construction contracts, the FAR specifies that generally agencies shah not require either performance or payment bonds for other than construction contracts. DOE does not generally require payment bonds on other types of contracts; rather, it relies on its contractors to act responsibly and pay their suppliers. DOE also encourages its M&O contractors to establish an ombudsman or a similar program to handle the - questions or concerns of their subcontractors and suppliers. Nevertheless, DOE officials at the Idaho FaUs site and in headquarters stated that, even without direct authority, they look into complaints against DOE’s contractors and work informally to resolve problems. In the case of the Pit 9 project, DOE determined that the Miller Act did not apply and therefore a payment bond was not required. The project was structured so that Lockheed Martin Advanced Environmental Systems was to finance, design, build, own, and operate the Pit 9 facilities with DOE paying for the remediation of the Pit 9 wastes on a unit-price basis. According to DOE officials, DOE decided that the Miller Act did not apply because (1) DOE was purchasing the performance of a service rather than the construction of a facility, and (2) the completed facilities would be owned by the private contractor and would not be considered public buildings. During the Pit 9 project, one company complained that it had not been paid by Lockheed Martin Advanced Environmental Systems for proposed design work on an anaQtical laboratory. DOE reviewed the complaint to determine if it was legitimate. DOE concluded that the complaint was not legitimate because no subcontract existed between Lockheed Martin 7 GAOIRCED-9830R DOE’s Subcontracting Practices B-278476 . Advanced Environmental Systems and the company registering the complaint. _ AGENCY COMMENTS We provided a draft of our report to DOE for its review and comment. In its written comments (see enc. I), DOE said that, generally, the report was a balanced and accurate description of DOE’s oversight of subcontracts between corporate a.t%iJiates.However, DOE (1) disagreed that the Pit 9 subcontract was a transaction between corporate affiliates and (2) suggested that we provide more information on DOE’s regulatory framework for a%liate transactions. DOE said our report should state that the Pit 9 subcontract award was not a transaction between corporate affiliates. According to DOE’s Deputy Assistant Secretary for Procurement and Assistance Management, because EG&G Idaho selected Lockheed Martin Advanced Environmental Systems for the Pit 9 subcontract and because EG&G Idaho had no affiliate relationship with Lockheed Martin Advanced Environmental Systems, the subcontract award was not an affiliate transaction. While we agree that the initial selection of Lockheed Martin Advanced Environmental Systems as the Pit 9 subcontractor did not involve two affiliated companies, the resulting subcontract, which defined the subcontract’s requirements and price, was a subcontract between two corporate affiliates, now called Lockheed Martin Idaho Technologies Company and Lockheed Martin Advanced Environmental Systems. Therefore, in our view, the Pit 9 subcontract was a transaction between corporate affiliates. Regarding the discussion of DOE’s regulatory framework, DOE suggested that we include in our report a more detailed explanation of DOE’s regulatory controls over affiliate txutsactions by M&O contractors. We believe, however, that the report adequately explains these controls without being overly technical and thus we did not add more detail. DOE also suggested several clarifications, which we incorporated where appropriate. SCOPE AND METHODOLOGY We conducted our review at DOE headquarters, DOE’s Idaho Operations Office in Idaho Falls, and the offices of its M&O contractor and the 8 GAO/RCED-9%30R DOE’s Subcontracting Practices B-278476 - subcontractor for Pit 9. To respond to your questions, we reviewed the FAR, DEAR, and the Miller Act and other documentation. provided by DOE and the contractors, including the M&O contract and the Pit 9 subcontract at the Idaho Falls site. In addition, we interviewed contracting officials with DOE’s Idaho Operations Office, the M&O contractor, and the subcontractor. To obtain DOE’s overall view on these questions, we interviewed DOE’s Deputy Assistant Secretary for Procurement and Assistance Management and the Deputy Assistant General Counsel for Procurement. Our work was performed from September through October 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Energy. We will also make copies available to other interested parties upon request. Please call me at (202) 512-8021 if you or your staff have any questions. Major contributors to this report include William R. Swick, Carole J. Blackwell, Susan W. Irwin, Stanley G. Stenersen, and Charles A. Sylvis. Science Issues 9 GAOIRCED-9830R DOE’s Subcontracting Pradices ENCLOSURE I ENCLOSURE I Department of Energy Washington,DC 20585 November 19. 1997 Ms. Gary L. Jones Acting AssociateDirector Energy,Resources,and ScienceIssues U.S. GeneralAccountingOflice 441 GStreet.NW Washington.DC 20548 Dear Ms. Jones: We havereviewed your draft report entitled DOE’s Subcontractinypractices(GAO/RCED-98- 3OR Code I4 I 102)and. generally.we find the report to be a balancedand accuratedescriptionof subcontractingoversightby the Departmentwith respectto affiliate transactions.We would lie to offer the following paragraphsfor your considerationas a more completeand detailed explanationof the regulatoryframework which the Depanmentappliesto affiliate transactions. The FederalAcquisition Regulation(FAR), which is generallyapplicableto Federalexecutive agencies,dealswith the subjectof contractor afI’iliatetransactionsonly in the context of contractingagencyreview of contractor purchasingsystems The FAR directs agencies.in their review of a cost-reimbursementcontractor’spurchasingsystem.to give “specialattention”to, amongother things.the contractor’stransactionswith its affiliates. Although the FAR provideslittle guidanceon this matter. the Departmentof Energy Acquisition Regulation(DEAR), which containsrequirementsspecific to DOE contractors,provides considerablymore detailedguidanceand controls on affiliate transacrionsfor its managementand operating(M&O) contractors. DOE regulationsprovide for significantlimitations on how M&O contractorsmay purchasefrom affiliates. For example.the DEAR calls for the provision at cost by an affiliate where the affiliate receivesa non-competitiveaward for technicalservices consistingof a specialexpertiseof the affiliate In all other situationsinvolving the provisionsof suppliesor services.it requiresthat the transactionbe conductedin sucha manneras to ensurean arms-lengthrelationshipbetweenthe contractingparties It also requiresadvancenotification to the ContractingOfficer prior to making purchasesfrom contractor-affiliatedsourcesover a value establishedby the Headof the ContractingActivity There are even more restrictionsassociated with M&O subcontractswith affiliatesfor the performanceof core contract work itself. Such subcontractsrequire DOE authorizationand usuallyinvobtz an adjustmentof the contractor’sfee. DOE approvalnormally would require either that the affiliate perform suchwork without fee or profit, or that the M&O’s fee be adjusteddownward. 10 GAO/RCED-93-3OR DOE’s Snbcontracting Practices - . ENCLOSiJRE I ENCLOSURE I In additionto thesegeneralcomments,we respectfullyoffer the specificcommentson the attachmentfor your considerationfor purposesof ciarity. If you haveany additionalquestionsregardingthis matter,pleasecontactme at 202-586-8613. DeputyAssistantSecretaryfor Procurementand AssistanceManagement Attachment: Commentson Draft Report B-278476 11 GAO/RCED-983OR DOE’s Subcontracting Practices _ ENCLOSURE I ENCLOSURE I COMMENTS ONDRAFTRJZPORTB-278476 Now on p. 5. i. On page 7, we recommendchangingthe first four words in the fifth line of rhe first paragraphto read. ‘*. a fee or profit . .*’ratherthan .I. a fee for profit ” 7 A. On page 7, we recommendchangingthe last sentenceofthe first paragraphto read. Now on p. 5. “However. in the caseof the Pit 9 subcontract,the subcontractaward was not, in fact, an afiiiiate transaction.” 3. On page 7. we recommendreplacingthe first two sentencesof the secondparagraphwith the following three sentences: Now on p. 5. “When LockheedMartin AdvancedEnvironmentalSystemswas competitivelyselected for the subcontract,no corporate&liation existedbetweenit and the then M&O contractor. The competitiveprocurementfor the Pit 9 subcontractwas conductedby the previousM&O contractor at the Idaho Falls site-EG&G Idaho. EG&G Idaho had ‘, no affiliate relationshipwith LockheedMartin AdvancedEnvironmentalSystems.” Now on p. 6. 4. On page 7. we recommendchangingthe eighth and ninth sentences.beginningon the 14th line of the secondparagraph,to readas follows: “According to DOE officials, DOE alsodecidedthat becauseLockheedMartin AdvancedEnvironmentalSystemshadbeenselectedby EG&G Idaho and not by LockheedMartin Idaho TechnologiesCompany,a subcontractfee was permissible. DOE approveda fee as part of the subcontractprice, without requiring the new M&O contractor to reduceits fee by an equivalentamount.” Now on p. 6. On page 8. we recommendchangingthe terms +. fee for profit . .‘* on the secondand third tinesat the top ofthe page, to read,**. fee .” On page 8. we recommendrevisingthe last sentenceof the first full paragraph and adding a new last sentenceto the paragraphto read as foiiows: Now on p. 6. “To addressthis concern DOE requiredthe LockheedMartin M&O contractor to preparean organizationalconflict of interestplan. which includedthe establishmentof a program oversightboard with membersfrom DOE. LockheedMartin Idaho TechnologiesCompany.and an impartialthird party to monitor the dealingsbetweenthe two LockheedMartin companies.DOE reportsthat the organizationalconflict of interest plan has worked well, andthat the affiliate relationshiphas not affectedthe LockheedMartin M&O contractor in its aggressiveadministrationof the subcontract.” (141102) 12 GAO/RCED-98-30R DOE’sSubcontracting Practices Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and Master-Card credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 or visit: Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Department of Energy: Subcontracting Practices
Published by the Government Accountability Office on 1997-11-24.
Below is a raw (and likely hideous) rendition of the original report. (PDF)