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NNSA Should Establish Clear Costs and Benefits Reporting for M&O Contracts, GAO Says

Despite the implementation of various reform initiatives over the years, the National Nuclear Security Administration (NNSA) continues to struggle in its oversight of management and operating contracts (M&O), according to a recent Government Accountability Office (GAO) audit report.

NNSA, the agency within the Department of Energy (DOE) responsible for the management and security of the nation’s nuclear weapons programs, relies on contractors to carry out this mission, often through the use of M&O contracts.

Two of NNSA’s major production sites that contribute to the maintenance of nuclear weapons—the Y-12 National Security Complex (Y-12) in Tennessee and the Pantex Plant in Texas—were managed and operated under separate M&O contracts until January 2013 when NNSA awarded a single M&O contract for both sites.

The National Defense Authorization Act for Fiscal Year 2013 as amended for fiscal year 2014 requires NNSA to report to Congress on the costs and benefits of the contract competition no longerthan 30 days following the award of an M&O contract.

GAO determined that although NNSA intended to reduce costs and improve efficiency by consolidating the Y-12 and Pantex M&O contracts, NNSA’s report to Congress on the benefits and costs of the contract was incomplete. NNSA failed to adequately describe key analyses and assumptions for cost savings estimates or provide an estimate of competition costs, a description of analysis of disruptions or delays and a description of unquantified benefits.

“As a result, NNSA’s report does not clearly and completely convey to Congress the agency’s expectations for cost savings, benefits, and contract competition costs over the life of the contract, or the basis for its conclusions about disruptions or delays,” GAO reported.

For example, although federal cost accounting standards and the GAO Cost Estimating and Assessment Guide both call for agencies’ cost estimates to be complete, NNSA’s report appears to have excluded hundreds of millions of dollars of competition costs.

NNSA reported that the agency’s total estimated competition cost was $3.3 million. NNSA’s estimate excluded both indirect costs, such as the cost of general administrative expenses, and the direct costs of federal salaries for personnel involved in conducting the contract competition.

The estimate also failed to include any increased costs over the life of the contract, including the cost savings incentive fee included in the contract fee structure, estimated at $262 million, and over $20 million in costs incurred by the new contractor after the contract award for its work during the 4-month transition period.

“We recognize there is uncertainty associated with future costs and estimates, however, NNSA’s report does not describe these limitations to its estimate of competition costs or associated data and assumptions,” GAO said, but, “Without describing these assumptions and limitations, which created uncertainty regarding total competition costs, NNSA’s report does not clearly and completely convey to Congress the immediate or anticipated costs to the agency, or the factors that may affect these costs, of the contract competition.”

This isn’t the first time NNSA’s management of M&O contracts has come into question. GAO said since the 1980s, it and others have identified issues with DOE and NNSA’s oversight of M&O contracts. Over the years, DOE has implemented a number of various reforms, but problems remain.

In 2013, for example, GAO reported NNSA’s M&O contractors differed in how they classified and allocated indirect costs at NNSA laboratories, limiting the ability to compare program costs across the laboratories. With the billions of dollars spent each year by M&O contractors to manage and operate these laboratories, it is critical NNSA effectively assess cost data and meaningfully compare cost management performance across laboratories.

Moreover, in April 2014, GAO said the Congressional Advisory Panel on the Governance of the Nuclear Security Enterprise charged with examining the NNSA governance model, described the relationship NNSA and M&O contractors as “dysfunctional.”

Moving forward, GAO recommended NNSA enhance the clarity and completeness of its future reports. NNSA concurred with this recommendation.

“Going forward, since the NDAA for fiscal year 2013, as amended, requires NNSA to report to Congress about the associated benefits and costs each time it awards an M&O contract at one of its facilities, NNSA has the opportunity to improve the clarity and completeness of its future reports, so that the information provided is more useful for congressional decision making and oversight," GAO concluded.

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