Department of Energy: Improving Management of Major System Acquisitions

Published by the Government Accountability Office on 1997-03-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting Office

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

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

                   Improving Management of
                   Major System Acquisitions
                   Statement by Victor S. Rezendes,
                   Director, Energy, Resources, and Science Issues,
                   Resources, Community, and Economic
                   Development Division

             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’svaried responsibilities and federal guidance on the management of
             major system acquisitions.

             Over the years, DOE has conducted technically complex activities at
Background   government-owned, contractor-operated facilities across the country.

              Department of Energy: Opportunity to Improve Management of Major System Acquisitions
             (GAO/RCED-97-17, Nov. 26, 1996).
              Cost overruns are increases in a project’s original cost estimates.

             Page 1                                                                     GAO/T-RCED-97-92
                    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.

                    As stated earlier, 31 of the 80 major system acquisitions that DOE
DOE’s Performance   conducted were terminated prior to completion, after expenditures of over
on Major System     $10 billion. The projects were canceled for a number of reasons. In some
Acquisitions        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

                    Page 2                                                         GAO/T-RCED-97-92
                         $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

                         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.

                         We believe the high rate of cost overruns, schedule slippage, and
Factors Affecting        terminations on DOE’s major system acquisitions can be traced to four key
DOE’s Major System       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.

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

                         Page 3                                                                           GAO/T-RCED-97-92
•   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.

    Page 4                                                         GAO/T-RCED-97-92
                       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.

                       There are no quick, easy solutions to DOE’s problems in keeping its major
Efforts to Resolve     system acquisitions on schedule and within budget. However, several
Acquisition Problems   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 segment5 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 guidance from the Office of Management and Budget allows for the full funding of economically
                       or programmatically separable segments of projects.

                       Page 5                                                                        GAO/T-RCED-97-92
               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.

               We believe that these initiatives have the potential to help improve DOE’s
Observations   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.

               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.

(141035)       Page 6                                                     GAO/T-RCED-97-92
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