Energy Management: Modest Reforms Made in University of California
Contracts, but Fees Are Substantially Higher (Chapter Report, 08/25/94,
GAO/RCED-94-202).
The Energy Department (DOE) provides the University of California about
$2.5 billion a year for research and development at the Los Alamos,
Lawrence Livermore, and Lawrence Berkeley Laboratories. In the past,
these contracts contained many special, nonstandard clauses that reduced
or eliminated DOE's authority to direct the university's actions and
contributed to management problems that led to losses of millions of
dollars' worth of government property, excessive subcontracting costs,
and the loss of classified documents. In 1992, DOE and the University of
California negotiated new five-year contracts. This report discusses (1)
DOE's efforts to add standard clauses typical of DOE's other contracts
and eliminate requirements that weakened DOE's authority, (2) the
compensation that DOE negotiated for the current contracts, and (3)
proposed changes in contracting policy announced by DOE in February 1994
that may apply to these contracts with the University.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-94-202
TITLE: Energy Management: Modest Reforms Made in University of
California Contracts, but Fees Are Substantially
Higher
DATE: 08/25/94
SUBJECT: Laboratories
Contractor performance
Contract monitoring
Energy research
Contract costs
Federal property management
Contract specifications
Disputes clauses
Contractor payments
Accountability
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce, House of Representatives
August 1994
ENERGY MANAGEMENT - MODEST REFORMS
MADE IN UNIVERSITY OF CALIFORNIA
CONTRACTS, BUT FEES ARE
SUBSTANTIALLY HIGHER
GAO/RCED-94-202
Modest Reforms in University of California Contracts
Abbreviations
=============================================================== ABBREV
DEAR - DOE Acquisition Regulation
DOE - Department of Energy
FAR - Federal Acquisition Regulation
GAO - General Accounting Office
GSA - General Services Administration
M&O - management and operating
Letter
=============================================================== LETTER
B-246522
August 25, 1994
The Honorable John D. Dingell
Chairman, Subcommittee on Oversight
and Investigations
Committee on Energy and Commerce
House of Representatives
Dear Mr. Chairman:
As you requested, this report provides information on the 5-year
contracts that went into effect in 1992 between the Department of
Energy (DOE) and the University of California for the management and
operation of the Los Alamos National Laboratory, the Lawrence
Livermore National Laboratory, and the Lawrence Berkeley Laboratory.
The report contains recommendations designed to ensure that (1) DOE
has adequate controls over the University of California, including
the research projects the university sponsors at the laboratories,
and (2) DOE's proposed changes in contracting policy are
cost-effective and fair.
As arranged with your office, unless you publicly announce its
contents earlier, we will make no further distribution of this report
until 30 days after the date of this letter. At that time, we will
send copies to the Secretary of Energy; the Inspector General,
Department of Energy; the Director, Office of Management and Budget;
and other interested parties. We will also make copies available to
others on request.
This work was performed under the direction of Victor S. Rezendes,
Director, Energy and Science Issues, who can be reached on (202)
512-3841 if you or your staff have any questions. Major contributors
to this report are listed in appendix III.
Sincerely yours,
Keith O. Fultz
Assistant Comptroller General
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
The Department of Energy (DOE) contracts with the University of
California to provide about $2.5 billion a year for research and
development work at the Los Alamos National Laboratory, the Lawrence
Livermore National Laboratory, and the Lawrence Berkeley Laboratory.
In the past, these contracts contained many special, nonstandard
clauses that reduced or eliminated DOE's authority to direct the
university's actions and contributed to management problems that
resulted in losses of millions of dollars' worth of government
property, excessive subcontracting costs, and the loss of classified
documents. In 1992, DOE and the University of California negotiated
new 5-year contracts.
At the request of the Chairman, Subcommittee on Oversight and
Investigations, House Committee on Energy and Commerce, GAO examined
the terms of these contracts. This report addresses (1) DOE's
efforts to add standard clauses typical of DOE's other contracts and
eliminate requirements that weakened DOE's authority, (2) the
compensation that DOE negotiated for the current contracts, and (3)
proposed changes in contracting policy announced by DOE in February
1994 that may apply to these contracts with the university.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
To protect the government's interests, DOE's policy is to use the
standard clauses for federal contracts in the Federal Acquisition
Regulation and DOE's Acquisition Regulation. However, because the
University of California has viewed its role as a public service and
required terms that reflect mutual interest, the earlier contracts
omitted or modified a number of standard clauses. For example, those
contracts (1) narrowed the limited instances in which DOE could
require the university to incur a financial risk and (2) required DOE
and the university to mutually agree to any changes (known as
"mutuality requirements"). As a result, DOE could not require the
university to make policy or procedural changes in the laboratories'
operations, and identified management deficiencies were not corrected
for years. In 1991, GAO recommended changes to the contracts to
ensure, among other things, that clauses deviating from the standard
language provided DOE with authority at least equivalent to that in
the standard clauses.\1
--------------------
\1 Energy Management: DOE Has an Opportunity to Improve Its
University of California Contracts (GAO/RCED-92-75, Dec. 26, 1991).
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
For the current contracts, DOE negotiated standard clauses for some
business management practices--property management, procurement
systems, and internal audits--that improve DOE's authority and
clarify expectations for performance in these areas, potentially
resulting in better management of the laboratories. However, these
gains could be minimized by a special clause on dispute resolution
that continues the principle of mutual agreement. DOE agreed to
deviations from standard clauses in instances in which the university
expressed strong opposition and did not adopt GAO's recommendation
that deviations from standard clauses should provide DOE with
authority at least equivalent to that provided in DOE's standard
clauses. Some nonstandard clauses in the contracts offer DOE
significantly less authority than the standard clauses. For example,
the university has the right to direct its own research at the
laboratories without DOE's advance approval--a standard
requirement--potentially reducing the priority given to DOE's
projects. As a result of the nonstandard contract terms, the
University of California continues to be subject to fewer controls
than DOE's other nonprofit contractors.
In addition, the compensation provided to the university under the
contracts has more than doubled--from $13 million to about $30
million a year. In justifying the fee increase, DOE pointed to the
university's acceptance of additional financial risk. However, DOE
acknowledges that paying fees in exchange for increased risk has been
costly and has not improved the accountability of its for-profit
contractors. Without criteria for measuring the benefits of having
the university assume limited risks against the fees paid, DOE is
continuing an approach that has so far been costly and ineffective.
Proposed changes to its contracting policy that DOE announced in
February 1994 provide the Department with increased controls and
leverage in negotiating its contracts. However, DOE's proposed
policies include criteria that may be used to waive the policies in
some cases. Given the number of policy waivers DOE has granted to
the university in the past, it is uncertain whether the Department
will require the university to comply with the new policies,
including increasing the financial risks for the contractors or
opening the contracts to competition for the first time. If DOE were
to waive the competition requirements for the university--one of
DOE's largest contractors in terms of expenditures--the inconsistent
application of these requirements could reduce DOE's potential
negotiating gains.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
DOE ACHIEVED SOME
STANDARDIZATION, BUT NEW
NONSTANDARD CLAUSES WEAKEN
ITS AUTHORITY
-------------------------------------------------------- Chapter 0:4.1
DOE made some progress in negotiating standard terms in its contracts
with the university. The university has agreed to comply with
specific standards and criteria in important business management
areas such as property management, procurement, and accounting. The
university also accepted criteria for cost allowability more similar
to those that generally apply to DOE's other nonprofit contractors.
The new contracts permit either DOE or the university to propose
modifications to the contracts at any time, to be negotiated "in good
faith."
However, like the mutuality requirements in the previous contracts, a
new, nonstandard clause establishes a process for resolving disputes
that limits DOE's ability to unilaterally direct the university to
take actions. The new process, aimed at resolving the chronic
communications problems that arose in the past, calls for up to three
rounds of negotiations to resolve disputes, may be applied to any
issue that either DOE or the university wants to raise, and does not
specify time limits for the negotiations. This process has not yet
been invoked by either DOE or the university to resolve a dispute,
and it is too early to determine if it will work as planned. DOE
officials reported that the university has demonstrated a willingness
to resolve some disagreements to DOE's satisfaction without resorting
to the issues resolution process. However, GAO has concerns about
what may happen if the university and DOE cannot readily resolve a
dispute. Needed corrective actions could be delayed, as was the case
in the past, because the process does not include time limits or a
mechanism for DOE to terminate negotiations and invoke its authority
to resolve disputes under the standard disputes clause, which is also
included in the contracts.
DOE negotiated away other authority that some standard clauses would
have provided, thereby limiting its ability to ensure that adequate
policies, procedures, and controls are in place to protect the
government's interests. For example, one nonstandard clause may
enable the university to fund its own research projects at the
laboratories without obtaining DOE's approval. All other contractors
must get DOE's approval for such work to ensure, among other things,
that the Department's own work requirements are met. In another
clause, DOE agreed to limit its access to records of communications
between laboratory and university attorneys. As a result, management
problems or deficiencies could be concealed from DOE.
INCREASED FEES FOR THE
UNIVERSITY MAY NOT BE
COST-EFFECTIVE FOR DOE AND
ARE BASED ON EXCEPTIONS TO
DOE'S POLICIES
-------------------------------------------------------- Chapter 0:4.2
DOE has substantially increased the compensation it pays the
university annually, in large part on the basis of the additional
financial risks the university assumed. Most of the $17 million
annual increase is directly attributed to these financial risks.
However, DOE has reported that a similar approach of paying
for-profit contractors higher fees to incur greater financial risk if
they take inappropriate actions has not been cost-effective,
primarily because the contractors' risks--which are greater than
those of the university--were still too limited to bring about
improved performance. Also, for the University of California
contracts, DOE followed its fee policy for nonprofit contractors
rather than its policy for educational institutions, permitting
higher fees without the restrictions that would normally apply. It
did so because the university would not agree to increased financial
risks without increased fees. Furthermore, DOE did not comply with
some applicable fee policies, weakening the support and justification
for the amounts it agreed to pay.
DOE'S PROPOSED CONTRACT
REFORMS ALLOW FOR WAIVERS IN
SOME CASES
-------------------------------------------------------- Chapter 0:4.3
In its February 1994 proposal, DOE calls for developing more
stringent reimbursement policies for its profit-making contractors
and applying these same policies to its nonprofit contractors.
Because the contractors' financial risks would increase, the
Department proposes to modify its official policy against paying fees
to nonprofit educational contractors, a policy it has waived in the
contracts with the university. This change could eliminate the
double standard DOE has created by waiving its policy for the
University of California, its largest nonprofit educational
contractor. DOE is also proposing to open contracts to competition
after no more than one extension and to negotiate the terms of any
contract before the decision to extend is made. Thus, the university
contracts could be subject to competition for the first time since
the laboratories were established more than 40 years ago. However,
the proposed rules allow for waivers from the policies in some cases.
Given the number of policy waivers that DOE has granted the
university, it is not certain that the proposed policies will be
applied to the university contracts. Inconsistent application of the
proposed contracting reforms could reduce DOE's potential negotiation
gains and place at a disadvantage other contractors that are not
treated similarly.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5
GAO recommends that the Secretary of Energy require (1) the
Department's Chief Financial Officer and the Deputy Assistant
Secretary for Procurement and Assistance Management to review the
nonstandard clauses in the university contracts in which DOE has less
authority than is provided in DOE's standard clauses and propose
contract modifications as appropriate and (2) the University of
California to obtain DOE's advance approval for laboratory staff to
conduct research for the university. GAO further recommends that the
Secretary require the Deputy Assistant Secretary for Procurement and
Assistance Management to ensure that (1) paying contractors fees for
incurring increased financial risks is cost- effective and (2) the
new policies for nonprofit contractors apply to DOE's largest
nonprofit contractors, such as the University of California.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
As requested, GAO did not obtain written agency comments on a draft
of this report. GAO discussed the facts in this report with DOE
officials in the offices of General Counsel, Procurement, Laboratory
Management, Field Management, and Defense Programs, including the
Deputy Assistant Secretary for Procurement and Assistance Management
and the Deputy General Counsel. GAO also discussed the facts with a
Special Assistant to the President of the University of California,
who offered suggestions for improving accuracy and clarity. The
comments from the agency and the university tended to minimize the
potential impact of the nonstandard clauses on DOE's ability to
effectively oversee the contracts. GAO believes that (1) the
standard terms are designed to protect the government's interests,
(2) the nonstandard terms affect important areas of contract
oversight, and (3) the justifications for the deviations are weak.
INTRODUCTION
============================================================ Chapter 1
The University of California has been the contractor for the
Department of Energy's (DOE) Los Alamos National Laboratory, Lawrence
Livermore National Laboratory, and Lawrence Berkeley Laboratory since
these federal laboratories were established in the 1940s and 1950s.
The Los Alamos and Livermore laboratories are dedicated primarily to
nuclear weapons research and development, while the Berkeley
laboratory focuses on civilian energy research and development, such
as energy conservation. DOE's total expenditures at the three
laboratories in fiscal year 1993 were about $2.5 billion. The three
contracts are substantially the same and typically have been renewed
for 5-year periods. During the most recent contract negotiations, in
1991, DOE attempted to incorporate major changes in the new contracts
following a series of negative audit reports that documented a number
of contract deficiencies. The current contracts, signed in 1992,
will expire in 1997.
DOE'S CONTRACTING POLICIES AND
PRACTICES
---------------------------------------------------------- Chapter 1:1
DOE uses management and operating (M&O) contracts for its research,
development, production, and testing facilities, including the Los
Alamos, Livermore, and Berkeley laboratories.\2 The M&O contract
approach, conceived by a predecessor agency that developed atomic
weapons in the Manhattan Project during World War II, is
characterized by limited interference in the contractors' work and
indemnification (reimbursement) of almost all the contractors' costs.
Under the Manhattan Project, typical procurement methods, such as the
requirement for competitive bidding, were relaxed in order to produce
atomic capability under emergency conditions and under circumstances
of extreme urgency, risk, and security.
After the war, such management contracts were continued for the
operation, maintenance, or support of government-owned research,
development, production, or testing facilities, both nuclear and
nonnuclear. Currently, the majority of DOE's 52 M&O contracts are
with for-profit contractors, which received funding of $11.2 billion
in fiscal year 1993.\3 However, 18 of these contracts are with 14
different nonprofit organizations, primarily educational
institutions, which received $5.1 billion in funding in fiscal year
1993. Based on the level of contract expenditures, the University of
California is DOE's largest nonprofit M&O contractor and second
largest M&O contractor overall.
The M&O contracting approach envisions a long-term relationship for
the operation of government-owned facilities in a spirit of
partnership, rather than the typical arm's length relationship
between buyers and sellers of products and services. To protect the
government's interests, DOE's policy is to use the standard contract
clauses established for federal contracts in the Federal Acquisition
Regulation (FAR) and the DOE Acquisition Regulation (DEAR). The FAR
establishes uniform policies and procedures for contracting by all
executive agencies, and the DEAR contains DOE's regulations
implementing and supplementing the FAR. In the DEAR, DOE has
established standard clauses specifically for its M&O contracts that
may be used in place of some standard FAR clauses. As a result,
DOE's M&O contracts contain both FAR and DEAR clauses, some of which
apply only to M&O contracts.
DOE manages its M&O contracts through a headquarters organization
that sets contract policy; the organization is headed by the Deputy
Assistant Secretary for Procurement and Assistance Management, who is
also DOE's procurement executive. Field offices award and administer
the contracts. DOE's Oakland Operations Office\4 administers the M&O
contracts for the Livermore and Berkeley laboratories, while the
Albuquerque Operations Office administers the contract for the Los
Alamos laboratory. DOE's Chief Financial Officer is responsible for,
among other things, (1) developing and maintaining departmental
policy on the oversight of contractors' financial management and (2)
directing and conducting special reviews.
--------------------
\2 DOE had 52 M&O contracts in 1993.
\3 The funding reported here represents contractual obligations to
the contractors.
\4 Formerly called the San Francisco Operations Office.
NONSTANDARD CLAUSES IN PREVIOUS
UNIVERSITY OF CALIFORNIA
CONTRACTS RESULTED IN LOSSES
AND INEFFICIENCIES
---------------------------------------------------------- Chapter 1:2
A number of reports by GAO and DOE's Inspector General have shown
that DOE's previous M&O contracts with the University of California
did not adequately protect the government's interests.\5
Congressional hearings have also addressed management problems at the
laboratories that can be attributed, in part, to the nonstandard
contract clauses. For example, the Subcommittee on Investigations
and Oversight, House Committee on Science, Space, and Technology,
held a hearing on July 31, 1991, on the administration of the
Livermore, Los Alamos, and Berkeley contracts.\6 GAO and DOE's
Inspector General discussed various management problems and
shortcomings, such as significant losses of government-owned property
and classified documents, as well as numerous procurement
deficiencies, including the extensive use of costly sole-source
subcontracts. In addition, in August 1991 hearings before the Senate
Committee on Governmental Affairs, GAO discussed the inappropriate
use of sole-source contracts at the Livermore laboratory and the
excessive costs that resulted.\7
The contracts contained many special clauses that (1) reduced or
eliminated DOE's authority to direct the university's actions and (2)
reduced incentives for the university to be accountable. For
example, nonstandard clauses in the contracts restricted DOE from
unilaterally requiring the university to make policy and procedural
changes in the laboratories' operations, unless the changes were
required by law or executive order. These restrictions were referred
to as "mutuality requirements" because DOE and the university had to
mutually agree to any changes. The clauses on procurement and
property management contained these mutuality requirements, and for
years the university did not correct significant deficiencies in
procurement and property management identified by DOE and GAO because
it could not reach agreement with DOE on corrective actions.
The nonstandard property management clause, together with a clause
that generally protects the university against liability for losses
of government property, fostered a lack of contractor accountability
that resulted in the loss of millions of dollars worth of government
property. For example, in April 1990 we reported that the Livermore
laboratory could not account for about $45 million in
government-owned property.\8 Although the university told the press
that it subsequently found approximately 99 percent of the missing
property, we reported in May of 1991 that about 13 percent of the
inventoried equipment, acquired at a cost of $18.6 million, was still
missing.\9
Similarly, a deviation from the standard procurement clause provided
the university with a rationale for not obtaining DOE's approval of
costly vehicle leases. For example, we found that 58 vehicles were
leased from the university at rates that were substantially
higher--about $600,000 more for all the vehicles--than the General
Services Administration's (GSA) vehicle leasing rates. Under the
leases, a van leased from the university cost $439 per month, while a
similar vehicle leased from GSA would have cost $151. Furthermore,
the fees paid to the university included an administrative fee of $70
per vehicle each month, primarily for the university's service of
submitting monthly bills to the laboratory.
Overall, a 1990 report by DOE's Inspector General identified 21
standard DOE clauses that were either omitted or modified in the
University of California contracts, including the procurement and
property management clauses.\10 Some other significant deviations
omitted or narrowed the limited instances in which DOE's policies
would have required the university to incur a financial liability.
As a result, the university was not held to the same standards as
other nonprofit contractors when DOE evaluated its contract costs.
For example, under DOE's historical contracting policies for
nonprofit contractors, the only contract costs not paid are those
resulting from willful misconduct or lack of good faith by the
contractor's top-level management personnel; costs found not to be
reasonable on the basis of, among other factors, the exercise of
prudent business judgment; and costs specified in the contracts as
unallowable. However, DOE's contracts with the university specified
only 13 unallowable cost categories, while the standard federal
clause included 35 items. As a result, costs that are not allowable
under standard federal contracts, such as interest on debt, were paid
under the university's contracts.
A special clause included in the contracts also eliminated the
university's liability for some unallowable costs if the university
certified that the expenditures were made "in good faith." In
addition, the contracts did not require contract costs to meet the
standard prudent business judgment criterion. Therefore, the
university could not be held to this criterion in determining whether
costs should be reimbursed.
The contracts also did not include the standard clause that requires
M&O contractors to conduct, to DOE's satisfaction, annual internal
audits of allowable costs. This deviation led DOE's Inspector
General to report a material internal control deficiency in 1991.
Another important standard clause, the standard disputes resolution
clause, was omitted from the University of California contracts; this
clause provides DOE's contracting officer with the authority to
resolve disputes that arise under the contract.\11
--------------------
\5 See "Related Reports by DOE's Office of Inspector General" in app.
I and "Related GAO Products" at the end of this report.
\6 See DOE Management: Management Problems at the Three DOE
Laboratories Operated by the University of California
(GAO/T-RCED-91-86, July 31, 1991) and Hearing before the Subcommittee
on Investigations and Oversight of the Committee on Science, Space,
and Technology, U.S. House of Representatives, No. 57, July 31,
1991.
\7 DOE Management: DOE Needs to Improve Oversight of Subcontracting
Practices of Management and Operating Contractors (GAO/T-RCED-91-79,
Aug. 1, 1991).
\8 Nuclear Security: DOE Oversight of Livermore's Property
Management System Is Inadequate (GAO/RCED-90-122, Apr. 18, 1990).
\9 Nuclear Security: Property Control Problems at DOE's Livermore
Laboratory Continue (GAO/RCED-91-141, May 16, 1991).
\10 General Management Inspection of the Department of Energy's San
Francisco Operations Office (DOE/IG-0290, Sept. 20, 1990).
\11 The contracting officer's decisions may be appealed or litigated.
IN PREVIOUS CONTRACTS, THE
UNIVERSITY OPPOSED MANY
STANDARD CLAUSES
---------------------------------------------------------- Chapter 1:3
The university rejected DOE's attempts to incorporate more standard
clauses into its contracts during negotiations for the 5-year
contracts in effect from October 1987 through September 1992. The
university, which views its role as the contractor for the
laboratories as a public service, required contract terms and
conditions that reflected mutual interest and intentions and did not
expose the University of California or the state of California to
financial risks. The university objected to DOE's standard terms,
which give DOE authority to direct the contractor's actions,\12 and
threatened not to renew the contracts if the standard clauses were
included. Because of the weight this threat carried in the contract
negotiations with DOE, the university did not accept DOE's
negotiation proposals.
Similarly, in 1990 the University of California's President would not
agree to a request by the Secretary of Energy to modify the contracts
to incorporate the standard clauses on allowable costs and property
management. According to the President, such changes would
fundamentally alter the nature of the university's relationship with
DOE and "carry profound consequences for the University's ability to
sustain this relationship." The President indicated that the
university would only agree to standard clauses that would preserve
the university's "no-risk, no-reward" position, in which the
university does not accept either financial risks or benefits.
--------------------
\12 The university described the standard clauses as creating "an
unacceptable superior-subordinate relationship."
DOE CONSIDERED OPTIONS AND
STUDIED ISSUES REGARDING
CONTRACT RENEWALS
---------------------------------------------------------- Chapter 1:4
In an August 1990 memorandum to DOE's General Counsel, the Secretary
of Energy acknowledged that the Board of Regents of the University of
California could vote in September 1990 to discontinue operating the
three DOE laboratories beyond the termination of the contracts in
1992. Believing it would be prudent to study alternatives to the
operations of the laboratories, the Secretary requested a study to
evaluate the options available for managing the laboratories if DOE
did not renew its contracts with the university. Completed in
September 1990, the study recommended, among other things, that DOE
conduct a market survey of possible replacement contractors and
solicit proposals as required under the competitive selection
process. The report indicated that DOE should start the competitive
process immediately because competing the contracts would take at
least 2 years.
However, in September 1990 the university's Board of Regents voted to
continue operating the laboratories, and DOE's focus shifted from
opening the contracts to competition to developing a negotiation
strategy for extending the contracts with the university. For
example, in November 1990 DOE formed a committee--referred to as the
"Steering Committee for Renewal of Contracts at LBL, LANL, and
LLNL"--to identify improvements needed in the university's management
of the laboratories. The committee identified six such areas. DOE
sought to obtain from the university, before the Secretary decided
whether to extend the contracts or open them to competition, a
commitment to improve two areas that were of major importance to DOE:
management oversight of the laboratories and compliance with
environmental, safety, and health laws and regulations.
In early 1991, the steering committee held several meetings with the
university to determine (1) whether the university was committed to
improving its management of the laboratories and (2) how the
improvements that the university agreed to make should be
implemented. These prenegotiation discussions resulted in the
steering committee's recommendation to the Secretary that DOE extend
the three contracts and immediately enter into negotiations with the
university. They also resulted in a set of ground rules for both
parties to use during contract negotiations.
In July 1991, the Secretary authorized the renewal of the
university's contracts, and in September 1991, DOE began formal
negotiations with the university. In our December 1991 report on the
University of California contracts,\13 we recommended changes in the
contracts to ensure that adequate policies, procedures, and controls
were in place to protect the government's interests. Specifically,
we recommended that (1) the new M&O contracts with the University of
California contain DOE's standard clauses on procurement and property
management and (2) clauses that deviated from any other standard
clauses provide DOE with authority at least equivalent to that
provided in DOE's standard clauses.
--------------------
\13 Energy Management: DOE Has an Opportunity to Improve Its
University of California Contracts (GAO/RCED-92-75, Dec. 26, 1991).
THE UNIVERSITY ACCEPTED MORE
STANDARD CLAUSES IN THE CURRENT
CONTRACTS
---------------------------------------------------------- Chapter 1:5
The university agreed to accept several specific standard clauses at
the inception of negotiations for the 1992-97 contracts. This change
in position occurred after the negative audit reports, discussed
above, documented the government's risk under the previous contracts.
The university agreed that any deviation from the standard clauses
must be appropriately explained by the university and approved by DOE
headquarters on the basis of criteria specified at the beginning of
the negotiation process. An important element in the university's
change in position was DOE's agreement, at the outset of the
negotiations, to the university's criteria for justifying deviations
from standard clauses. Specifically, DOE agreed to allow
modifications in instances in which standard clauses would (1) have
an unacceptable impact on the quality of science or academic freedom,
(2) be incompatible with the "no-risk, no-reward" operation of the
laboratories, (3) result in exposing the university to "unacceptable
legal risk," or (4) not sufficiently specify a standard against which
DOE would evaluate the university's management performance. Two of
the criteria relate to the university's belief that DOE's standard
clauses were developed primarily for application to profit-making
contractors.\14
According to a university official, the university took earlier
reports of management problems at the laboratory very seriously. As
a result of the congressional hearings in 1991, for example,
university management increased its involvement in overseeing the
contracts and set out to establish a businesslike approach to respond
to DOE's concerns. In examining DOE's demands for more
accountability, the university wanted to strike a balance between
implementing controls to ensure that business aspects were managed in
an acceptable manner and providing an environment in which science
was not hampered.
The negotiations were concluded in November 1992, when the contracts
were executed. According to both university and DOE officials, the
negotiations for the 1992 contract involved real negotiations, with
compromises on both sides.
--------------------
\14 DOE has separate clauses for nonprofit contractors in key areas
such as financial and legal risk but does not have a comprehensive
set of standard clauses for nonprofit contractors.
DOE HAS ALSO RECOGNIZED THAT IT
NEEDS TO CHANGE ITS M&O
CONTRACTING POLICIES
---------------------------------------------------------- Chapter 1:6
In addition to documenting specific problems with the University of
California contracts, GAO and others have identified fundamental
weaknesses in DOE's contracting practices. For example, we reported
in April 1992 that DOE's contracting approach has fostered an
environment that provides opportunities for waste, fraud, abuse, and
mismanagement.\15 The problems we found under the M&O contracts
included widespread mismanagement of federal property and funds, DOE
reimbursements to contractors for money and materials stolen by
contractors' employees and for fines that the contractors had
incurred for violating environmental laws, missing secret documents,
and excessive subcontracting costs. Some of these issues are broader
than the specific contracting problems identified with the University
of California's contracts, which relate to omitting or altering DOE's
standard clauses.
The former and current Secretaries of Energy have taken steps to
correct the problems identified by GAO, DOE's Inspector General, and
others. For example, under the former Secretary, DOE changed its
policies on cost reimbursement for profit-making contractors to make
the contractors more accountable to DOE. Also, in June 1993 the
current Secretary established a Contract Reform Team to evaluate
DOE's contracting practices and formulate specific proposals for
improving those practices. The advance copy of the report of the
Contract Reform Team, issued in February 1994, proposes a number of
changes in contracting policy. We discuss these initiatives further
in chapter 3.
--------------------
\15 Energy Management: Vulnerability of DOE's Contracting to Waste,
Fraud, Abuse, and Mismanagement (GAO/RCED-92-101, Apr. 10, 1992).
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:7
As requested by the Chairman, Subcommittee on Oversight and
Investigations, House Committee on Energy and Commerce, the overall
objective of this review was to examine the terms of DOE's current
contracts with the University of California for the Los Alamos,
Livermore, and Berkeley laboratories, which went into effect in 1992.
As agreed, this report addresses (1) DOE's efforts to add standard
clauses typical of other DOE contracts and eliminate requirements
that weakened DOE's contract authority, (2) the compensation that DOE
negotiated for the current contracts, and (3) proposed changes in
contracting policy announced by DOE in February 1994 that may apply
to the contracts with the university.
To evaluate the current contracts, we compared the clauses in these
contracts with the standard FAR and DEAR clauses and the clauses in
the earlier contracts. We also examined DOE's negotiation records
and interviewed DOE's chief negotiators. Because the university's
chief negotiator has retired, we interviewed university officials who
attended the negotiations. We relied primarily on previous GAO and
DOE Inspector General reviews for assessments of the university's
performance under the earlier contracts and the performance of DOE's
M&O contractors in general. Our evaluation of nonstandard contract
clauses in the contracts focused on whether the terms protected the
government's interests; for example, by providing DOE with the
authority to direct the university's actions. We did not evaluate
the implementation of the terms of the contracts as part of this
review.
To examine contract compensation, we compared the fee payments under
the current contracts with the maximum fees payable to nonprofit and
for-profit organizations under DOE's guidelines and the compensation
paid under the previous contracts. We reviewed and discussed DOE's
policy and criteria for paying fees to nonprofit institutions with
appropriate DOE officials. We also reviewed the February 1994 report
of the Contract Reform Team to determine how the proposed changes in
contracting policy would affect the University of California
contracts.
We performed our work at DOE's headquarters, Albuquerque Operations
Office, and Oakland Operations Office from July 1993 to June 1994 in
accordance with generally accepted government auditing standards. As
requested, we did not obtain written agency comments on a draft of
this report. However, we discussed the facts in this report with DOE
officials in the offices of General Counsel, Procurement, Laboratory
Management, Field Management, and Defense Programs, including the
Deputy Assistant Secretary for Procurement and Assistance Management
and the Deputy General Counsel, who generally agreed with the
report's accuracy. We also discussed the facts with a Special
Assistant to the President of the University of California, who did
not provide an overall assessment of the facts in the report but
offered specific suggestions for improving accuracy and clarity. We
have incorporated comments from DOE and the university where
appropriate.
CURRENT CONTRACTS INCLUDE MORE
STANDARD CLAUSES, BUT OTHER
CLAUSES WEAKEN DOE'S CONTROL
============================================================ Chapter 2
In negotiating its current contracts with the University of
California, DOE was partially successful in achieving its goals of
(1) increasing the number of standard contract clauses in the
contracts and (2) removing provisions that reduced or eliminated
DOE's authority to direct the university's actions in business
management areas, such as property management. For example, the
contracts contain the standard clauses for property management,
procurement systems, and internal audits--replacing nonstandard
clauses in the earlier contracts that had limited DOE's authority to
direct policy and procedural changes at the laboratories. However,
DOE's authority under the standard clauses may be weakened by the
addition of a new, nonstandard clause establishing an "issues
resolution process" aimed at avoiding the serious communications
problems and stalemates that occurred under the earlier contracts.
The process calls for up to three rounds of negotiations to resolve
contractual disputes but does not specify time limits for the
negotiations. Because DOE and the university have not yet used the
new process to resolve a disagreement, it is too early to determine
whether it will result in the timely resolution of disputes.
DOE reported that it agreed to deviate from the standard clauses in
instances in which the university expressed strong opposition. As a
result, several new provisions in the present contracts provide DOE
with less control over the university than the standard clauses or
clauses in the previous contracts. For example, DOE does not have
authority over some university-sponsored research projects conducted
at the laboratories and may not have access to communications between
the laboratory attorneys and the university attorneys. Because
nonstandard clauses were used, DOE's research projects may not
receive sufficient effort and attention, and management problems or
deficiencies may not come to DOE's attention.
CURRENT CONTRACTS INCLUDE MORE
STANDARD CONTRACT CLAUSES
---------------------------------------------------------- Chapter 2:1
DOE believes its negotiations have accomplished the goals of (1)
incorporating the maximum use of standard contract clauses, including
standard financial requirements, and (2) eliminating mutuality
requirements in business management areas. For example, the
contracts now contain the standard clauses for property management,
procurement systems, and internal audits. In the previous contracts,
nonstandard clauses requiring DOE and the university to mutually
agree on any changes DOE wanted in these important business
management areas limited DOE's authority to direct the university's
actions. The current contracts also contain the standard clauses for
accounting standards and the resolution of contractual disputes.
As a result, the laboratories must maintain property management
systems that comply with sound business practices and DOE's
regulations. They must also implement formal policies, practices,
and procedures for subcontracting that are acceptable to DOE and in
accordance with DOE's policies. In addition, annual internal audits
of costs incurred at the laboratories are required and must be
satisfactory to DOE. The laboratories are also required to comply
with generally accepted accounting principles and practices. On the
whole, these changes affect business management, establishing
specific standards and criteria for the university to follow in
significant management areas such as accounting.
The current contracts also include more standard criteria for cost
allowability\16 and maintain the narrow liability limits that reflect
DOE's historical policy of reimbursing nonprofit M&O contractors for
almost all costs. As a result, cost allowability criteria in the
University of California contracts are now more similar to the
standards applied to other nonprofit contractors. For example, the
contracts now include 30 of the 35 standard unallowable cost
items.\17 In addition, the contracts eliminate the special exemption
in the previous contracts allowing the university to avoid liability
for some unallowable costs by certifying that the expenditures were
made in good faith. Finally, the contracts now include the
reasonableness standard for cost allowability; if DOE determines that
the university has not exercised prudent business judgment for some
expenditures, these costs could be unallowable under the
contracts.\18
The current contracts also continue to reflect DOE's policy of
reimbursing nonprofit M&O contractors for property losses and for
fines and penalties incurred in the performance of their contracts,
except for those caused directly by bad faith or willful misconduct
on the part of a few top-level officials. Under these contracts, the
liability is limited to six officers of the regents of the University
of California and the three laboratory directors. In addition, the
contracts reflect the financial risk requirements imposed on all
government contractors by the Major Fraud Act of 1988. This act
limits the allowability of costs incurred by contractors in
connection with defending legal actions brought against them by the
federal government or states. As a result, under the current
contracts, the university may be liable for the costs of legal
actions in some cases.
--------------------
\16 Such criteria are contract terms that define DOE's general
criteria for cost allowability as well as the costs that are
specifically allowable and unallowable under the contracts.
\17 DOE determined that five of the standard unallowable cost items,
such as research and development costs, did not apply to these
contracts, and eight of the standard items were modified somewhat.
\18 This outcome is subject to the issues resolutions process
discussed in the following section.
NEW CLAUSE ON RESOLVING
DISPUTES MAY WEAKEN AUTHORITY
OF STANDARD CLAUSES
---------------------------------------------------------- Chapter 2:2
A new, nonstandard clause establishing an issues resolution process
that DOE added to the contracts may minimize its success in
incorporating standard clauses for business management issues and
eliminating provisions that limited its authority. This process
calls for up to three rounds of negotiations to resolve disputes and
may be applied to any issue that either DOE or the university wants
to raise. According to the contracts, this process may be used to
resolve conflicts involving claims; policy, operational, management,
or procedural issues; and the applicability of DOE's orders\19 or
other directives. The intent of the process is to get the right
parties together to resolve problems in a timely manner.
The negotiations to resolve disputes are to include officials from
DOE, the university, and the laboratories. The first round of
negotiations is to include DOE's deputy procurement director, the
deputy managers of DOE's Oakland and Albuquerque field offices, and
the deputy or associate directors for administration from the
laboratories. If these parties cannot reach agreement, they elevate
the disagreement to the next level. The subsequent round involves
higher-ranking officials, and the third round is negotiated by the
Secretary of Energy and the President of the University of
California. The process relies on the parties to reach mutual
agreement on how to resolve a dispute and is the basis for the
university's conclusion that mutuality requirements were retained in
the contracts.
Under the process, none of the parties--including the Secretary of
Energy--has the authority to direct the way to resolve the conflict.
In addition, the contract does not specify when or how to elevate
disputes to the next stage. For example, the process does not set
time limits for the negotiations at any of the stages.
According to DOE and the university, they needed a process for
resolving disputes to overcome the "chronic" communication problems
that existed in the past. These problems have led to long-term
stalemates. For example, DOE and the Livermore laboratory disagreed
for more than 5 years over the appropriate size of the vehicle fleet
for the laboratory. Similarly, for years the Livermore laboratory
would not agree to establish property management systems that
complied with DOE's policies. During this time, we found poor
property management controls that resulted in the laboratory's being
unable to account for millions of dollars worth of government
property.\20
DOE and the university view the issues resolution process as
experimental and have not yet invoked this process to resolve a
dispute. While establishing a clear means of resolving contractual
conflicts is a sound management approach,\21 the process DOE adopted
could diminish the success of its effort to incorporate more standard
clauses into the contracts and eliminate contract provisions that
reduced the Department's authority to direct the university's
actions. For example, while the current contracts contain the
standard clause on disputes, which gives DOE's contracting officer
the authority to make decisions on contract disputes, the issues
resolution clause states that this process must be used first at
either party's request. More importantly, the clause does not give
DOE the authority to determine that it has spent sufficient time and
effort to resolve a dispute and to elevate it to DOE's contracting
officer for resolution. As a result, DOE may be required to
negotiate with the university for unspecified periods of time.
In addition, the broad scope of the issues resolution process could
subject the newly added standard clauses to negotiation. For
example, while the contracts contain the standard clause on property
management, which establishes the property management systems to be
complied with, disagreements could arise over implementation of the
requirements.
DOE officials told us they believe that including the standard clause
on property management precluded the use of the issues resolution
process on this subject. However, we do not find a basis for this
opinion since the contracts (1) do not limit the applicability of the
process and (2) specify that operational, management, and procedural
issues may be resolved through the issues resolution process.
DOE and university officials told us they did not believe the issues
resolution process would hamper DOE's ability to oversee the
contracts. DOE said that its working relationship with the
university has improved and that both sides are communicating more
effectively. They noted that the university has been willing to meet
with DOE to resolve disagreements to DOE's satisfaction. For
example, the officials said that the university made changes to a
voluntary separation program in response to objections raised by DOE.
This issue was resolved informally without resorting to the issues
resolution process. However, DOE officials did acknowledge that the
lack of time limits for the process could result in lengthy
disagreements.
The improved working relationship between the university and DOE is a
noteworthy achievement considering the difficulties of the recent
past. We have concerns, however, about what may happen if the
university and DOE cannot readily resolve a dispute. For example,
the lack of any time limits or mechanism for DOE to terminate
negotiations could prolong disagreements, resulting in a delay in
DOE's recovery of moneys that are disputed.
--------------------
\19 DOE's orders establish its policies and procedures.
\20 GAO/RCED-90-122 and GAO/RCED-91-141.
\21 Government contracting policies encourage "alternate dispute
resolution" techniques to avoid costly contract litigation.
OTHER CONTRACT PROVISIONS
WEAKEN DOE'S CONTROLS OVER
THESE CONTRACTS
---------------------------------------------------------- Chapter 2:3
While some of the clauses added strengthen DOE's controls over the
current contracts, several provisions provide DOE with less control
over the university than the standard or previous contract clauses.
These provisions affect core areas of contract oversight, including
the management of laboratory projects, records, inspections, costs,
and employment. These nonstandard clauses weaken DOE's ability to
effectively oversee the contracts and protect the taxpayers'
investment in these laboratories. DOE's official summary of the
contract negotiations states that in every case in which DOE agreed
to deviations from standard clauses, the basis was to "accommodate a
strongly-held negotiating position of the University."
DOE'S AUTHORITY TO DIRECT
LABORATORY PROJECTS IS
WEAKENED
-------------------------------------------------------- Chapter 2:3.1
Although the current contracts contain a clause requiring DOE's
approval for laboratory staff to work on projects for other federal
agencies and private institutions, the university believes another
nonstandard clause allows it to assign staff to its own projects at
the laboratories without DOE's advance approval. The purpose of
requiring such approval is, among other things, to ensure that DOE's
own work requirements are met and are not inappropriately relegated
to a lower priority than work done for other entities.\22
In the university contracts, the contractual authority to perform
work for other entities is set out in a clause entitled "work for
others," which is a standard requirement in DOE's other M&O
contracts. If the university had DOE-approved laboratory policies on
work for others, it would not need approval on a case-by-case basis.
This provision applies to work done for entities other than DOE.
However, another clause in the contracts, termed "university-directed
research and development," gives the university the right to direct
and fund its own research at the laboratories. This clause states
only that the work will be within the contract's general scope of
work and performed in accordance with the terms of the contract.
University officials told us that the university is entitled to fund
any research project it wishes at the laboratories if the project
falls within the scope of work of the contracts. In March of 1994, a
university official said that while the university had not funded any
research projects at the laboratories in either fiscal year 1993 or
1994, it did plan to begin some projects in the following months.
The university does not believe the contract requires it to submit
its projects to DOE for approval under the work-for-others clause and
was not planning to do so.
During our review, DOE negotiators told us that under the
work-for-others clause in the contracts, the university would have to
obtain DOE's approval for its university-directed research.
Nonetheless, in May 1994 DOE officials told us that (1) it was not
DOE's intent to require the university to submit its research
projects to DOE for approval and (2) management controls over project
staffing in place at the laboratory would ensure that DOE's work
would not be negatively affected by research projects sponsored by
the university. However, it is not clear why the university alone
would be exempt from evaluation to ensure, among other things, that
DOE's own requirements will be met, when all other outside projects
at the laboratories are subject to such scrutiny.
The potential to disrupt or delay DOE's own research efforts exists
whether the party sponsoring the laboratory research is a corporation
or small business, another federal agency, or the university. For
example, a laboratory scientist working on the Human Genome Project,
a major federal biological research project to identify all of the
human genes--which is being carried out, in part, at the DOE
laboratories managed by the University of California--could also work
on a gene project for another entity, potentially at the expense of
the government's research efforts.
As a result of our discussions with DOE on this issue, a DOE official
subsequently told us that the agency has decided to develop a policy
to ensure that the university reports its research projects to DOE
before the work starts, similar to the work-for-others process
followed by other contractors. In addition, DOE will require that
the money for such projects be accounted for separately.
--------------------
\22 As a further deviation from DOE policy, the contracts also
provide that the case-by-case approval of work-for-others projects
would not be needed if the university develops DOE-approved polices
and procedures.
DOE'S ACCESS TO LABORATORY
RECORDS MAY BE RESTRICTED
-------------------------------------------------------- Chapter 2:3.2
Although the previous and current contracts with the university
contain standard access-to-records provisions allowing DOE to inspect
and audit all records, access is limited by other nonstandard
clauses. In the previous contracts, DOE's right to make copies of
some administrative records was limited.\23 In the current contracts,
DOE agreed to restrict the government's access to records by
exempting some records created at the laboratories from government
scrutiny.\24 For example, under the "contract records" clause, DOE
may not examine privileged or confidential communications between
university attorneys and laboratory attorneys related to the
university's management and operation of the laboratories. As a
result, communications between university and laboratory attorneys
that DOE should be aware of may not be disclosed--for example, a
legal opinion on compliance with DOE's requirements on such subjects
as property management. DOE therefore would not be in a position to
ensure that the university takes appropriate corrective actions, if
warranted, in a timely manner.
According to one of DOE's chief negotiators, DOE had difficulty
obtaining access to attorneys' documents under the previous
contracts. He said the limits in the current contracts were the
result of extensive negotiations with the university and were viewed
as an acceptable compromise of the university's broad position that
all legal documents should be protected. However, in our opinion,
the terms of the current contracts do provide for broad protection of
legal documents. By agreeing to this new limit, DOE ceded oversight
authority that is part of a standard clause in its M&O contracts. In
effect DOE agreed to restrict its access to documents that may relate
directly to the management and operation of the laboratories--the
task under contract. In addition, the restriction applies to
documents prepared by laboratory attorneys, probably at the
government's expense.
Other records that the university may restrict under the contract
include personnel and medical records,\25 such as files pertaining to
employees' qualifications, grievances, discipline, and charges of
discrimination; investigations of employees' misconduct; compensation
and benefits; and internal health and safety. For these, DOE must
make written requests for specific records, identify the federal law
that requires such disclosure, and provide the basis for the
requested access. DOE also agreed that the university would not
release records relating to employee assistance programs, including
alcohol and drug abuse programs and psychiatric evaluations, without
a court order.
The contracts state that the university will reply to DOE's requests
for records "within a reasonable time." The contracts also state that
if the university's general counsel denies access to the requested
records, the parties may pursue the request through the issues
resolution process discussed earlier.
According to DOE, the process for requesting personnel records was
developed to expedite decisions on access to records that may be
subject to California's privacy law. Although this law allows the
release of information to federal agencies when required by federal
law, DOE agreed to abide by the university's judgment about whether
or not it can provide a record and to resolve any dispute through the
issues resolution process.
By agreeing to these limitations, DOE may have hampered its ability
to meet its oversight responsibilities. For example, if DOE wanted
to evaluate discrimination charges filed against the university at
the laboratory to determine if systemic problems existed, it is not
clear whether the university would grant DOE access to the
appropriate records in a timely fashion if DOE had to invoke the
issues resolution process to obtain access. Delays in receiving
these records could occur even though another standard clause in the
contracts, entitled "equal opportunity," states that the university
will provide DOE with all necessary information to evaluate
compliance with all applicable rules, regulations, and orders. Under
the contracts, however, special clauses like the contract records
clauses have priority over standard clauses.
--------------------
\23 The contracts cited records required to be kept confidential
under state law or any written university policy that applied
universitywide.
\24 This clause is at variance with GAO's statutory right of access
to documents and therefore cannot be enforced against GAO.
\25 Records of personnel's radiation exposure are not restricted,
however.
DOE AGREED TO NOTIFY
LABORATORY MANAGEMENT IN
ADVANCE OF "SURPRISE"
INSPECTIONS
-------------------------------------------------------- Chapter 2:3.3
Although the contracts contain the standard clause that permits
inspection of all work at such time and in such a manner as DOE deems
appropriate, this right is restricted by another clause covering
research and development work. Specifically, DOE has agreed to
conduct surprise inspections--referred to as "no-notice"
inspections--only after it has notified laboratory management. This
notification requirement, incorporated in the "inspection of research
and development" clause, defeats the purpose of surprise inspections
and could compromise the ability of auditors to certify that their
work meets the requirements of generally accepted government auditing
standards. Government auditing standards make an auditor responsible
for designing steps and procedures to provide reasonable assurance
that abuse or illegal acts will be detected. In some cases, surprise
inspections may be the only way to ensure the detection of illegal
acts or abuses. DOE's agreement with the university has thus removed
an important oversight tool.
DOE's negotiators and university officials told us that they put this
provision in place to prevent injuries to auditors during reviews of
the laboratories' internal guard forces. The rationale is that
laboratory guards are armed, and therefore an auditor on a surprise
inspection could get hurt. However, under the contracts, the
requirement for giving notice is not limited to inspections of the
guard forces. Instead, the requirement is broadly defined, and all
work at the facilities could potentially fall under the restriction.
That is, if inspections of the guard force are considered to fall
under the contracts' research and development provision, it is not
clear what type of reviews, if any, would fall under the standard
inspections clause that permits surprise inspections.
In subsequent discussions, one of DOE's chief negotiators said that
he does not believe DOE would be prevented from conducting
appropriate surprise inspections at the laboratories. However, he
agreed that the contract terms could be interpreted broadly as
limiting DOE's ability to conduct such inspections. He said that DOE
could use the issues resolution process if it needed to resolve the
issue.
DOE'S ABILITY TO RECOVER
FUNDS FROM IMPROPER
TRANSACTIONS IS HINDERED
-------------------------------------------------------- Chapter 2:3.4
In the current contracts, DOE limited its authority to recover
improper expenditures made by the university in a timely fashion or,
in some cases, at all. DOE negotiators told us that in the earlier
contracts, DOE had the authority to deduct from future payments to
the university any money the government believed the university had
spent improperly. This procedure enabled DOE to reduce (offset) new
funding by amounts that were determined to be unallowable. For
example, DOE used this authority to withhold $595,000 from the
university's management fee to recover funds for unallowable costs.
In response, the university filed a lawsuit against DOE in 1991 over
the issue of withholding funds from the management allowance for
disallowed costs.\26
According to DOE, the university viewed DOE's withholding of funds as
a breach of faith, and this became a major issue during the
negotiations. In response, DOE agreed to restrict its right "as part
of the price of the contracts."
A special clause in the current contracts requires DOE to notify the
university of a questionable cost and give the university 60 days to
respond in writing. DOE then has 60 days to decide whether it
believes the cost is unallowable. If DOE determines the cost is
unallowable, the university can either invoke the issues resolution
process or reimburse the cost from its own funds. After the issues
resolution process has been exhausted, if the parties still dispute
the cost, DOE can then offset future funding by the disputed amount.
This process could lengthen considerably the time it takes the
government to recover money improperly spent by the university and
also removes the university's incentive to settle such issues
promptly.
Similarly, DOE has given up authority to recoup money under the
Anti-Kickback Enforcement Act of 1986, as amended. The act provides
the government with a series of remedies when a contractor or the
contractor's employee has received improper compensation in return
for doing business with the person providing the compensation
(kickback). The act gives the government, in this case DOE,
discretionary authority to offset the kickback against future
payments to the contractor.
The current contracts with the university limit DOE's offset
authority to those circumstances in which the university's regents or
a laboratory director have made or received a kickback. In all other
cases involving university employees, the government is limited to
either seeking the money directly from the employee or requiring the
university to obtain the money from the person who gave the kickback,
rather than reducing future contract payments by the amount of the
kickback. The university has effectively shifted the risk of its
employees' misbehavior from the university to the employees or the
parties offering kickbacks, such as subcontractors. However, an
employee may not have the funds to pay the government and could
declare bankruptcy. As a result, DOE's ability to recover any
kickbacks that university employees may receive could be hindered.
--------------------
\26 According to DOE, the suit was dropped as a part of the
settlement of a False Claims Act suit against the university.
RESTRICTION OF DOE'S
AUTHORITY OVER PERSONNEL
MATTERS CONTINUES
-------------------------------------------------------- Chapter 2:3.5
A standard DOE contract clause gives DOE the authority to require
contractors to fire their employees for cause. However, this clause
has not been included in the university contracts.\27 Consequently,
DOE cannot require the university to remove incompetent or careless
employees because the key oversight role for personnel administration
resides with the university. According to DOE's negotiators,
discussion about the standard clause governing this issue did not
even "make it to the table." Under the ground rules agreed to before
formal negotiations were initiated, both parties agreed to allow the
laboratories to manage personnel according to university policy and
with sole discretion to hire and fire employees.
DOE agreed to this broad limit on personnel management despite a
January 1991 internal DOE report prepared to support contract
negotiations that noted major deficiencies in executive compensation
and in overall compensation management at the laboratories managed by
the university. DOE also was not successful in revising contract
terms on pay policies, recommended by DOE's Director of Contractor
Human Resource Management, that would have lowered contract costs.
--------------------
\27 The previous and current contracts only require that the
laboratory directors and deputy directors be acceptable to DOE.
DOE CAN PROPOSE CONTRACT
MODIFICATIONS AT ANY TIME
---------------------------------------------------------- Chapter 2:4
DOE does not need to wait until the current contracts with the
University of California expire to implement policy or any other
changes in the contracts. The contracts for the three DOE
laboratories include a provision that either DOE or the University of
California may propose contract modifications at any time during the
term of the contracts and that such modifications will be negotiated
in good faith.
CONCLUSIONS
---------------------------------------------------------- Chapter 2:5
By including more standard clauses, DOE has made some progress in
obtaining better contract terms in its management and operating
contracts with the University of California for the Los Alamos,
Livermore, and Berkeley laboratories. The university has agreed to
comply with specific standards and criteria in important business
management areas such as property management, procurement, and
accounting. These changes provide greater clarity about DOE's
expectations of performance in these areas, which could result in
better management of the DOE laboratories.
However, other nonstandard clauses in the contracts may constrict
DOE's authority. For example, we are concerned with the new clause
establishing an issues resolution process. We agree that some system
for resolving disputes, in addition to the standard disputes clause,
is an appropriate and worthy idea. In addition, we are encouraged
that DOE and the university have made progress in improving their
working relationship and in resolving disagreements. Nonetheless, we
have some concerns about whether the issues resolution process will
work as planned to overcome the serious communication problems and
stalemates that occurred in the past. The process also may be
unnecessarily lengthy and burdensome. In any event, success will
require continued good faith and a strong commitment on the part of
both parties. We are also concerned that DOE's plans to require the
university to notify DOE of any university-sponsored research at the
laboratories may not provide DOE with adequate controls to ensure
that its own work is not jeopardized if DOE does not have the
authority to approve such projects.
DOE did not adopt GAO's previous recommendation that deviations from
standard clauses should provide DOE with authority at least
equivalent to that provided in DOE's standard clauses. As a result,
DOE's ability to ensure that adequate policies, procedures, and
controls are in place to protect the government's interests is
undermined. In addition, the University of California continues to
be subject to fewer controls than DOE's other nonprofit contractors.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:6
We recommend that the Secretary of Energy require the Department's
Chief Financial Officer and Deputy Assistant Secretary for
Procurement and Assistance Management to review the instances in
which DOE has less authority under the University of California
contracts than is provided in the standard clauses. The officials
should determine whether the bases for allowing the deviations are
sound and whether DOE should use its authority to propose contract
modifications at any time to make the changes needed to better
protect the government's interests.
To ensure that DOE maintains adequate controls over the work
conducted at the laboratories, we also recommend that the Secretary
of Energy require the University of California to obtain DOE's
advance approval for any research projects the university sponsors at
the laboratory.
VIEWS OF DOE AND THE UNIVERSITY
AND OUR EVALUATION
---------------------------------------------------------- Chapter 2:7
Overall, when commenting on the facts presented in this chapter, DOE
officials from the offices of General Counsel, Procurement,
Laboratory Management, Field Management, and Defense Programs
indicated a willingness to reexamine some of the contract terms and
propose contract modifications to better protect the government's
interests. However, the DOE officials, as well as the university
official commenting on the facts, minimized the potential impacts of
the nonstandard clauses on DOE's ability to effectively oversee the
contracts. We do not know whether the nonstandard clauses will, in
fact, cause or contribute to serious problems at the laboratories.
Our view is that (1) the standard terms are designed to protect the
government's interests, (2) the nonstandard terms affect important
areas of contract oversight, and (3) the justifications for the
deviations are weak.
INCREASED FEES MAY NOT BE
COST-EFFECTIVE FOR DOE AND ARE
BASED ON EXCEPTIONS TO DOE'S
POLICIES
============================================================ Chapter 3
Compensation provided to the University of California under the
contracts for the three laboratories increased from $13 million a
year to about $30 million a year under the current contracts. DOE
justified the increase, in large part, on the basis of additional
financial risks the university assumed under the contracts. However,
the contracts continue to reflect DOE's historical contracting
policies for nonprofit contractors and, as such, provide for only
limited financial risks. Furthermore, DOE's program to improve
contractors' operations by paying for-profit contractors higher fees
to incur greater financial risk if they take inappropriate actions
has not been cost-effective or improved the contractors' performance.
This is in large measure because the financial risks borne by the
contractors are still too limited to bring about improved
performance.
DOE used its fee policy for nonprofit contractors for the University
of California contracts rather than its policy for educational
institutions, thus permitting higher fees without the restrictions
that would normally apply. DOE agreed to waive its policies for
educational institutions because the university would not agree to
contract changes that increased its financial risk without higher
fees for such risks. The university could continue to be exempted
from DOE's contracting policies, even under the proposed contract
reform policies that DOE announced in February 1994. The proposed
contracting reforms--including paying fees to all contractors that
assume increased levels of financial risk and opening the M&O
contracts to competition periodically--provide for waivers that DOE
may grant. Given the number of waivers from its policies that DOE
has granted the university in the past, the extent to which these
proposed policies will be applied to the university is unclear at
this time.
DOE IS PAYING THE UNIVERSITY
NEW AND LARGER FEES
---------------------------------------------------------- Chapter 3:1
The current contracts increased the compensation DOE pays to the
university by about $17 million a year, primarily by adding a new fee
relating to financial risks borne by the university. The contracts
also provided for substantial increases in lease payments--justified
in part as compensation to the university for renewing the contracts.
Under the 5-year contracts in effect from 1987 to 1992, DOE paid the
university an annual fee, called a management allowance, ranging from
$12 million to $13 million. The largest component of the management
allowance--$8 million--was for costs incurred by the university in
support of the laboratories, called indirect costs. In addition,
under agreements dating back to 1948, the government paid the
university a nominal rental fee--generally $1 per lease--for the use
of land for the Lawrence Berkeley Laboratory, which is located on the
University of California's Berkeley campus.
DOE provided the balance of the annual management allowance for
"complementary and beneficial" activities, including
university-funded special equipment and facilities to be used by
visiting scientists and graduate students at the laboratories, and
increased oversight by the university and Board of Regents of the
operations of the laboratories. The amount provided for
complementary and beneficial activities was initially $4 million,
increasing each year by $250,000 up to $5 million in the fifth year
of the contracts.
The 5-year contracts that took effect in 1992 provide for annual
payments to the university of about $30 million a year for
a new management fee (referred to as a risk fee in this report),\28
fixed at $14 million and justified on the basis of the
additional financial risks the university agreed to assume under
the new contracts;
the university's indirect costs, fixed at $6 million;
"ground lease" payments for the Lawrence Berkeley Laboratory, fixed
at $5 million; and
the establishment of a new University of California laboratory
management oversight unit, at an estimated first-year cost of $5
million.
The fixed annual payments total $25 million, and the additional
variable amount will cover the actual costs incurred by the
university for the laboratory management oversight unit. According
to the university, first-year expenditures for the management
oversight unit were approximately $3.3 million.
--------------------
\28 While the contracts call this a performance management fee, it is
a fixed fee that does not vary with DOE's assessment of laboratory
performance.
EXPERIENCE WITH OTHER
CONTRACTORS INDICATES THAT THE
UNIVERSITY'S NEW RISK FEE MAY
NOT BE COST-BENEFICIAL FOR DOE
---------------------------------------------------------- Chapter 3:2
DOE has substantially increased the amount it pays in fees to its
for-profit contractors, primarily on the basis of the additional
financial risks the contractors must bear. The objective of these
increases was to improve the performance of contractors by increasing
their financial risk for any inappropriate actions they take, while
providing the opportunity to earn increased fees. Similarly, DOE has
substantially increased its compensation to the University of
California, primarily on the basis of financial risks the university
bears. However, recent reports by DOE and DOE's Inspector General
concluded that increasing fees to compensate for the minimal risks
the for-profit contractors assume was not achieving DOE's objective.
For example, the February 1994 report of DOE's Contract Reform Team
concluded that the risks borne by the contractors were still too
limited to bring about improved performance.\29
Nonetheless, the current University of California contracts include
risk fees of $14 million a year, while continuing DOE's historical
policy of indemnifying almost all the costs incurred by its nonprofit
contractors. DOE officials said that, in negotiating the fee amount,
they took into consideration that the university (1) had in previous
contracts, but gave up, protection against incurring unallowable
contract costs and (2) faced potential financial risk for some legal
costs required by the Major Fraud Act of 1988. DOE officials said
this was the first M&O contract to deal with the limitation on
proceeding (legal) costs under the Major Fraud Act.
We note that, with the exception of the legal costs that all
government contractors are now potentially responsible for because of
the fraud statute, the new cost allowability criteria in the
university contracts only brought these contracts more in line with
DOE's contracting policies. Other nonprofit contractors, such as the
University of Chicago, have not received additional fees for bearing
the limited financial risks required by DOE's policies.\30
Furthermore, DOE did not attempt to quantify the increased financial
risks under the University of California contracts during contract
negotiations or develop criteria to evaluate the costs and benefits
of risk fees paid to contractors to ensure that the policy will be
cost-effective.
DOE's recent experience in paying for-profit M&O contractors higher
fees to assume greater risk provides a perspective for evaluating the
university's increased risk and the potential benefits to DOE. In
1991, DOE took steps to expand the risk and accountability of its
profit-making M&O contractors in managing DOE facilities. Among
other things, DOE promulgated a rule--termed the "accountability
rule"--that revised the fee structure to compensate contractors for
taking greater financial risk and to provide incentives for improved
performance. Under the rule, DOE held contractors rather than the
government responsible for costs that a prudent contractor could have
avoided. The accountability rule added a new category of unallowable
costs, called "avoidable costs." A contractor could be held liable
for the following types of avoidable costs if they resulted from
negligence or willful misconduct by contractors' or subcontractors'
personnel: fines and penalties; unnecessary or excessive program
costs; and damage, destruction, loss, and theft or unauthorized use
of government property.
Recently, DOE's Inspector General examined the implementation of the
accountability rule and found that DOE had paid higher fees but had
not received any measurable benefits in return.\31 The report of
DOE's Contract Reform Team agrees with the Inspector General that the
accountability rule has had little measurable impact on the
accountability or performance of for-profit contractors but has
resulted in significant cost increases to DOE. The report of DOE's
Inspector General concluded that the accountability rule did not
appear to be meeting its objectives because DOE had not evaluated the
potential costs and benefits of the rule before its
implementation.\32 The report also noted that under six contracts
with estimated costs of over $3.7 billion for fiscal year 1992, the
for-profit contractors reported about $1 million in avoidable costs.
However, DOE had paid increased fees of $22.8 million to the
contractors for bearing increased risk for such costs and funded $2.5
million in annual expenses to administer the rule.
In comparing the university's risks and fees with DOE's experience
with for-profit contracts under the accountability rule, it is
important to consider that the potential risks that the profit-making
contractors face are greater than the risks borne by the university
under its current contracts. For example, the university's liability
for property damage and fines and penalties is limited to instances
that can be attributed to the bad faith or willful misconduct of six
top-level University of California officials and the three laboratory
directors. In contrast, for-profit contractors' liability for the
same activities extends to all the contractors' employees, and the
exposure to financial risks is therefore higher. In addition, the
university contracts do not include the "avoidable cost" category of
unallowable costs, which currently applies only to for-profit
contractors. As a result, the university contracts are even less
likely than DOE's approach with for-profit contractors to achieve the
Department's objectives and be cost-beneficial.
In addition, fees paid to the for-profit contractors are linked to
performance assessments, while the fees to the University of
California are not. The university believes the fixed fee provides a
significant incentive to comply with DOE's requirements because it
plans to allocate a portion of the remaining balance of the risk fee,
after paying unallowable costs, to the laboratories with the best
management record in terms of unallowable costs. These funds are to
be used for university-directed research. However, paying a fixed
fee provides DOE with less control over the university than over the
for-profit contractors whose fee amounts depend on DOE's performance
ratings. The fixed-fee structure gives the university the incentive
to avoid unallowable costs but does not give DOE the ability to pay
the fee based on performance measures that reflect DOE's management
priorities.
--------------------
\29 Making Contracting Work Better and Cost Less, Report of the
Contract Reform Team, U.S. Department of Energy, advance copy (Feb.
1994).
\30 The University of Chicago's current contract for DOE's Argonne
National Laboratory provides for about $4 million in compensation
relating primarily to the university's indirect costs.
\31 Audit of Implementation of the Accountability Rule (DOE/IG 0339,
Jan. 21, 1994).
\32 While DOE did not agree with the Inspector General's
recommendation to suspend application of the accountability rule to
other contracts, it did agree to study the costs and benefits of the
rule.
DOE WAIVED ITS POLICY AND PAID
UNRESTRICTED FEES TO THE
UNIVERSITY
---------------------------------------------------------- Chapter 3:3
In the university contracts, DOE waived not only its fee policy for
educational institutions but also the rules the agency would normally
follow for such waivers. The policy states that fees are generally
not paid for M&O contracts with educational institutions, but the
policy does permit the payment of a management allowance "in special
circumstances." In 1991, DOE clarified this policy by requiring that
management allowances paid to educational institutions generally be
provided only for costs that benefit DOE's operations. DOE clarified
the policy in response to questions by DOE's Inspector General about
the size of and increases in the management allowance in the
university's 1987-92 contracts.\33
DOE's fee policies do not state the rationale for treating nonprofit
educational institutions differently from all other nonprofit
entities. According to the Director of DOE's Office of Procurement,
the fee policy for educational institutions reflects the view that
universities would contract with DOE primarily as a public service,
not because of a desire to raise revenues by conducting business
operations. The primary educational mission of universities is
funded through various means, such as endowments, state funding, and
grants. In contrast, the primary mission of other nonprofit entities
can involve business operations, such as waste management, which need
revenues to be sustained.
According to the Director of DOE's Office of Procurement, DOE
followed its fee policy for nonprofit M&O contractors rather than its
policy for educational institutions because the university would not
agree to accept increased financial risks without higher fees for
such risks. The university believes that the nature of the work
conducted at the Livermore and Los Alamos laboratories--particularly
the nuclear weapons design work--carries a greater potential for
liability than the risks borne by other nonprofit M&O contractors.
The nonprofit fee policy authorizes fees for, among other things,
financial risk and does not place any restrictions on the use of the
fees. As a result, DOE was able to negotiate contracts with the
university that included risk fees and generally do not restrict the
university's use of the contract fees.
The nature of the work conducted by some of DOE's other educational
institution contractors may not involve the same level of financial
risk as that borne by the University of California in its weapons
work. However, because other educational institutions are generally
not eligible for risk fees under DOE's policies, the special waiver
of the fee policy for educational institutions granted to the
University of California may put these other contractors at a
disadvantage.\34 DOE's proposed contract reforms, discussed in the
following section, include changes in fee policies that could
eliminate such potential inequities in the payment of fees.
Finally, in addition to waiving its fee policy for educational
institutions, DOE did not follow procedures designed to promote fee
consistency and uniformity. DOE also used an alternative policy to
pay the university's indirect costs. Following DOE's fee procedures
would have required (1) more specific justification of the fee levels
provided for in the contracts and (2) approval of fee amounts in
excess of the maximum allowable fee by DOE's procurement
executive.\35 Since DOE's top management was closely involved in
these negotiations, following the procedures would not necessarily
have resulted in the approval of lower fees. However, at a minimum,
DOE's goal of achieving some degree of consistency and uniformity in
fees is undermined when DOE negotiators do not follow the procedures
designed for this purpose. We have included a more detailed
explanation of the exceptions to DOE's standard policies and
procedures in the university contracts in appendix II.
--------------------
\33 Compensation was 50 percent higher than provided for in the
1982-87 contracts.
\34 If other educational institutions were paid fees, DOE's policies
state that the financial risks borne should be evaluated in
determining the appropriate fees to be paid.
\35 DOE's policies include schedules that establish maximum allowable
fees for its M&O contracts based on certain contract costs.
DOE'S PROPOSED CONTRACT REFORMS
LEAVE THE DOOR OPEN FOR
CONTINUED WAIVERS FOR THE
UNIVERSITY
---------------------------------------------------------- Chapter 3:4
The February 1994 report of DOE's Contract Reform Team acknowledges
the numerous contracting problems identified by DOE's Inspector
General and GAO and contains a number of recommendations to improve
DOE's contracting practices for its M&O contracts. However, the
contracting reforms may not be applied to all contracts, as the
proposed policies include provisions that permit exemptions--for
example, "in unusual circumstances." Among other things, the proposed
changes would increase the financial risks to be borne by all
contractors, both for-profit and nonprofit contractors, and would
periodically subject these long-term contracts to competition. These
changes could have a significant impact on future M&O contracts,
including those between DOE and the University of California.
Specifically, DOE is proposing to establish more stringent cost
reimbursement policies for its profit-making contractors and apply
these same policies to its nonprofit contractors. Because the
changes would call for contractors to assume increased levels of
financial risk, DOE proposes to modify its official policy against
paying fees to educational institutions. Doing so would eliminate
the double standard DOE has created by waiving its policy for the
University of California, its largest nonprofit educational M&O
contractor. According to the Contract Reform Team's report, DOE is
to develop the policies implementing these changes in 1994. As a
result, fees for DOE's nonprofit educational contractors may become
more prevalent.
DOE believes that the development of a fee and risk-sharing policy
for nonprofit educational institutions should address the special
concerns of nonprofits; for example, protecting university endowments
and preserving limited assets. While DOE has already waived its fee
policy for the university contracts, the proposed policy would
generally allow the payment of fees only to nonprofit contractors
that agree to accept the same cost reimbursement rules as for-profit
organizations.
DOE's more stringent proposed changes in its cost reimbursement
policies pertain to fines and penalties, third-party liabilities, and
costs resulting from damage to or loss of government property. Now,
DOE has the burden of proving that such costs are not allowable;
under the proposed change, the contractor would have to show why a
questioned cost should be allowable. For example, costs associated
with losses of government property would be unallowable unless the
contractor could show that the losses did not result from willful
misconduct or a failure to exercise prudent business judgment.
Given the university's historical opposition to assuming risks and
the substantial fee increases in the current contracts to compensate
the university for assuming limited risks, it is unclear (1) whether
the university would agree to accept the additional risks identified
in DOE's proposals or (2) what fee level would be needed to convince
the university to accept such risks. In this regard, the report of
the Contract Reform Team also states that DOE could waive these new
rules for nonprofit contractors if DOE needed to have nonprofit
contractors compete for a contract and the rules made it unlikely
that they would.
Other key policy proposals that could significantly affect the
University of California contracts are (1) opening M&O contracts to
competition after no more than one extension and (2) negotiating the
terms of any extended contract before making the decision to extend
the contracts. If DOE implements these changes across the board, the
university contracts would be subject to competition for the first
time since the laboratories were established more than 40 years ago,
and DOE would be in a stronger negotiating position. In cases in
which DOE plans to extend contracts, rather than opening them to
competition, DOE would also gain negotiating leverage by requiring
that the contract terms be agreed to before DOE commits to the
contract extension. Currently, DOE decides initially whether to
extend a contract or open it to competition. If DOE decides to
extend the contract, it enters into contract negotiations on a
"sole-source" basis, which reduces its negotiating leverage. Under
the proposed policies, DOE would have leverage to respond if a
contractor threatens not to renew a contract.
However, the report of the Contract Reform Team indicates the
competition requirement would not be enforced "in unusual
circumstances." Because the proposed policy acknowledges that DOE may
grant waivers--and because it has historically granted a number of
policy waivers for the university contracts--it is not clear at this
time whether DOE will open the university contracts to competition.
CONCLUSIONS
---------------------------------------------------------- Chapter 3:5
The current university contracts will likely produce the same
disappointing results as DOE's recent accountability program for
profit-making organizations. The university bears even less risk
than the for-profits because its contracts reflect DOE's historical
policy of reimbursing nonprofit contractors for almost all costs. In
addition, the substantial fees paid to the university to cover
increased financial risks may provide an incentive for the university
to avoid unallowable costs but may not provide an incentive to
control costs overall and manage efficiently. Without criteria for
determining whether the benefits of having the university assume such
risks are offset by the fees paid, DOE is perpetuating a costly and
ineffective approach.
In general, we support the recommendations of DOE's Contract Reform
Team. However, the proposals will not achieve their intended
purposes unless rigorous cost-benefit analyses are included in
contract negotiations. Without such analyses, DOE may perpetuate the
conditions under the present contracts, whereby it pays the
university substantially higher fees than the risks appear to
warrant.
Furthermore, because the University of California is the largest of
DOE's M&O nonprofit contractors, imposing fewer requirements on the
university could jeopardize successful implementation of the changes
in policy for nonprofit organizations designed to improve the
contractors' performance. For example, if the university would not
agree to accept the same financial risks as for-profit contractors,
DOE would have to ensure that (1) its other nonprofit educational
contractors could receive waivers from the requirements and (2) all
contractors that do not accept the same risks as for-profit
contractors are subject to the same DOE fee criteria. Similarly, if
DOE were to waive the competition requirements for the university
under its proposed "unusual circumstances" criterion, the
inconsistent application of these requirements would reduce DOE's
potential negotiating gains, place at a disadvantage other current
M&O contractors that must compete to renew their contracts, and
preclude other qualified contractors from competing for the Los
Alamos, Livermore, and Berkeley contracts.
RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:6
We recommend that the Secretary of Energy require the Deputy
Assistant Secretary for Procurement and Assistance Management to
ensure that the (1) fees paid to contractors for incurring increased
financial risks are cost-effective by developing criteria for
measuring the costs and benefits to the government of this approach
and (2) new policies for nonprofit M&O contractors apply to DOE's
largest nonprofit contractors, such as the University of California.
VIEWS OF DOE AND THE UNIVERSITY
OF CALIFORNIA
---------------------------------------------------------- Chapter 3:7
The comments from both DOE and university officials on the facts
presented in this chapter and appendix II generally provided
suggestions for improving clarity and accuracy. We have incorporated
their comments where appropriate.
RELATED REPORTS BY DOE'S INSPECTOR
GENERAL
=========================================================== Appendix I
Audit of Implementation of the Accountability Rule (DOE/IG-0339, Jan.
21, 1994).
Audit of Personal Property Management at Los Alamos National
Laboratory (DOE/IG-0338, Dec. 7, 1993).
Financial Administration of Work for Nonfederal Sponsors--DOE Field
Office, Albuquerque, New Mexico (WR-BC-91-02, Sept. 30, 1991).
Departmentwide Audit of the Visibility over the Status of Nuclear
Materials (DOE/IG-0296, Aug. 30, 1991).
General Management Inspection of the Department of Energy's San
Francisco Operations Office (DOE/IG-0290, Sept. 20, 1990).
Departmentwide Audit of Carrier Selection and Invoice Verification
(DOE/IG-0278, Nov. 29, 1989).
Indemnification of the Department of Energy's Management and
Operating Contractors (DOE/IG-0272, Sept. 22, 1989).
WAIVERS OF DOE'S FEE POLICIES AND
PROCEDURES REFLECTED IN THE
UNIVERSITY OF CALIFORNIA CONTRACTS
========================================================== Appendix II
DOE'S FEE POLICIES AND
PROCEDURES
-------------------------------------------------------- Appendix II:1
Because DOE waived its fee policy for educational institutions for
the University of California contracts and chose to treat the
university as a nonprofit entity, DOE's general fee policies for
management and operating (M&O) contracts became applicable to these
contracts. Under these policies, fees for M&O contracts include
compensation for (1) contract management;\36 (2) use of the
contractor's resources; (3) the financial risk that all contract
costs may not be reimbursable; and (4) the home office's general and
administrative expenses--that is, indirect costs. In addition, the
fees agreed to under M&O contracts are to be commensurate with the
difficulty of the work and the level of required skills, demonstrated
excellence, and the contractors' contributions or use of their own
facilities or investment capital. DOE's policies also state that, in
determining the appropriate fee, negotiators can evaluate alternative
investment opportunities available to a contractor if, for example,
the contractor's resources could be used to make a profit in some
other field.
DOE's policies recommend basing the fees for M&O contractors on
significant factors, such as financial risk and use of the
contractors' resources; these factors are to be evaluated and
assigned appropriate values. To promote a reasonable degree of
consistency and uniformity in the process for determining fees, the
policies include fee schedules that establish maximum allowable fees
for M&O contracts based upon certain contract costs. Any fees in
excess of the allowable amounts are to be justified in writing and
approved by DOE's procurement executive.
For the University of California contracts, DOE's negotiators did not
follow a number of these policies and processes. Consequently, the
negotiators did not have to justify amounts in excess of the fees
allowed under DOE's policies and obtain the approval of DOE's
procurement executive.
--------------------
\36 The policies use the phrase "for the entrepreneurial function of
organizing and managing resources."
LEASE COMPENSATION
------------------------------------------------------ Appendix II:1.1
The negotiators did not include the $5 million annual compensation
for leases covering university-owned land--the contractor's
resource--as a component in the fees. DOE has rented land for the
Lawrence Berkeley Laboratory from the University of California under
long-term agreements with nominal fees.\37 For example, under four
leases, the government paid a one-time fee of $1 for 50-year leases;
under another lease, it paid $1 a year over the 50-year lease term.
The first lease would have expired in 1998, and all of the leases
could have continued in effect for the term of the current contracts.
DOE's negotiation record states that the $5 million annual payment is
for (1) compensation to the university for agreeing to the contracts
and (2) recognition that the university-owned land and facilities\38
have grown substantially in value since the agreements were initiated
in 1948.
According to the university, the university's negotiators determined
that the leases represented assets and that compensation for the use
of these assets was appropriate, as DOE and the university were
defining a more businesslike relationship under the new contracts.
DOE officials provided somewhat different, but not inconsistent,
explanations as to why the lease payments were not viewed as fees.
According to the Director of DOE's Office of Procurement, DOE's
negotiators did not consider the university's request for
compensation for the use of the land as a request for a fee--which in
their view implies a profit. The Director said DOE negotiated in
good faith in response to the university's request for substantial
lease payments for the use of land that the university had been
providing essentially free of charge to DOE for many years. Because
of this perspective, the risk fee and lease payments were not lumped
together and analyzed in terms of the maximum allowable fee that
would be permissible.
Officials at DOE's Oakland office, with whom we discussed
compensation, offered another perspective. They reported that the
lease payments were viewed as contract costs, which may be
reimbursed, rather than as a fee. However, they acknowledged that
DOE's negotiators did not obtain any cost data from the university to
support the $5 million annual fee on a cost-reimbursement basis.
Instead, the fee amount was based on alternative investment
opportunities. DOE officials used an estimate that the annual lease
value of comparable land was about $36 million a year. On the basis
of this estimate, the negotiators determined that the amount the
university requested was fair and reasonable and agreed to an annual
$5 million fixed payment in lieu of reimbursement of the actual cost.
Additionally, DOE's Procurement Director said the negotiators
considered this lease payment to the University of California
comparable to compensation paid to Princeton University for land used
for DOE's Princeton Plasma Physics Laboratory. DOE also does not
view the payment to Princeton as a fee. However, the cases are not
comparable because DOE's general fee policies do not apply to
Princeton University. Princeton is treated as an educational
institution and, unlike the University of California, does not
receive a fee to cover items such as financial risk and the use of
the contractor's resources.
If the lease payments to the University of California had been
included as a component of the management risk fee, as outlined in
DOE's fee policies, the negotiators would have compared $19 million
in proposed fees with the maximum allowable fee of $15.8 million they
computed,\39 instead of limiting the comparison to the $14 million
risk fee. The procurement executive's specific approval would have
been required to exceed the maximum allowable fee.
--------------------
\37 Unlike the Lawrence Livermore and Los Alamos national
laboratories, which are government-owned facilities on government
property, the Lawrence Berkeley Laboratory is located on the
University of California's Berkeley campus.
\38 DOE paid for and owns the facilities constructed for the federal
laboratory on the university's land.
\39 As discussed below, the negotiators did not use the proper
methodology for computing the maximum fee.
INDIRECT COSTS
------------------------------------------------------ Appendix II:1.2
The negotiators did not follow DOE's standard fee policy, which
assumes that the fees paid include compensation for contractors'
indirect costs. Instead, using an alternative policy that allows
indirect costs to be treated as reimbursable costs rather than as
fees, the negotiators agreed to pay additional compensation of $6
million annually for the university's indirect costs. Specifically,
DOE's fee policies state that in instances where the standard fee
allowance may be insufficient to adequately recognize a contractor's
indirect costs and such costs appear to have a directly benefiting
relationship to the DOE program, they may be either (1) the basis for
requesting fee amounts in excess of the maximum allowable fee or (2)
approved by a contract official as a reimbursable contract cost if a
fair and reasonable amount can be agreed upon. The negotiators chose
to justify the costs as reimbursement for fair and reasonable
indirect costs.\40 If the alternative policy had not been used, the
negotiators would have had to ask the procurement executive to
approve additional annual fees in excess of DOE's maximum allowable
amount.
--------------------
\40 This justification was not included in DOE's record of
negotiation. DOE provided us with the rationale in June 1994 in
response to questions we raised throughout our review.
COMPUTATION OF THE MAXIMUM
ALLOWABLE FEE
------------------------------------------------------ Appendix II:1.3
The maximum allowable fee is a percentage of a fee base.\41 DOE's
regulations define this base as the cost of the production or
research and development work to be performed, excluding a number of
contract costs, such as those for land, buildings, and facilities;
those for subcontracts; and those that are reimbursed, for example,
work for others.
For the University of California contracts, DOE's negotiators
computed fees for cost categories such as the reimbursable costs of
work for others. The negotiators used the total estimated
expenditures in fiscal year 1993 as the base, including sizeable
expenditures for reimbursable work. As a result of including
reimbursable work in the fee base, the maximum fee the negotiators
used as a basis for evaluating and justifying the university's risk
fee may have been substantially higher than is appropriate.
--------------------
\41 The percentage applied depends upon the amount of the fee base.
EXPENDITURE OF FEES
------------------------------------------------------ Appendix II:1.4
Because DOE's negotiators used the fee policy for nonprofit
organizations rather than the policy for educational institutions,
the compensation criteria developed as a result of questions about
the management allowance paid to the university under the previous
contracts did not apply. For example, DOE's steering committee for
the renewal of the University of California contracts, discussed in
chapter 1, criticized the fact that previous contracts permitted the
university to spend the management allowance for purposes of "mutual
benefit" to DOE and the university rather than requiring the
university to use the fee for laboratory operations. That is, the
committee was concerned about the funding in the previous contracts
for "complementary and beneficial" activities discussed in chapter 3.
However, DOE's policy on nonprofit entities does not require that
fees cover costs that benefit DOE's operations, and DOE gave the
university the right to spend most of the fees at its discretion.
The university stated that it would spend the $14 million annual risk
fee, less unallowable costs, in support of the laboratory "to the
extent that it is possible to do so." The university indicated it
would use the fees for university-directed research at the
laboratories as well as for complementary and beneficial activities.
The university did not specify to DOE how it would spend the $5
million lease payments. Finally, while the contracts expressly state
that the university has the absolute right to spend the $6 million
annual payment in lieu of indirect costs at its sole discretion, the
contracts also state the understanding of both parties that the
university will pay $5.7 million of that annual payment to the state
of California as compensation for its support of the university
system.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C.
Jim Wells, Associate Director
Doris E.L. Cannon, Assistant Director
Kathleen J. Turner, Assignment Manager
Carol A. Ruchala, Evaluator-in-Charge
Christine M.B. Fishkin, Senior Evaluator
Sandra J. Eggart, Senior Evaluator
Eileen Larence, Report Reviewer
Phyllis Turner, Reports Analyst
DENVER REGIONAL OFFICE
Peter Fernandez, Regional Assignment Manager
OFFICE OF THE GENERAL COUNSEL
Michael Burros, Senior Attorney
RELATED GAO PRODUCTS
============================================================ Chapter 1
Energy Management: Controls Over the Livermore Laboratory's Indirect
Costs Are Inadequate (GAO/RCED-94-34, Nov. 16, 1993).
Energy Management: DOE Has Improved Oversight of Its Work for Others
Program (GAO/RCED-93-111, Apr. 7, 1993).
Department of Energy Contract Management (GAO/HR-93-9. Dec. 1992).
Energy Management: DOE Has an Opportunity to Improve Its University
of California Contracts (GAO/RCED-92-75, Dec. 26, 1991).
Energy Management: Tightening Fee Process and Contractor
Accountability Will Challenge DOE (GAO/RCED-92-9, Oct. 30, 1991).
Energy Management: Contract Audit Problems Create the Potential for
Fraud, Waste, and Abuse (GAO/RCED-92-41, Oct. 11, 1991).
Energy Management: DOE Actions to Improve Oversight of Contractors'
Subcontracting Practices (GAO/RCED-92-28, Oct. 7, 1991).
DOE Management: Improvements Needed in Oversight of Procurement and
Property Management Practices at the Lawrence Livermore National
Laboratory (GAO/T-RCED-91-88, Aug. 20, 1991).
DOE Management: DOE Needs to Improve Oversight of Subcontracting
Practices of Management and Operating Contractors (GAO/T-RCED-91-79,
Aug. 1, 1991).
DOE Management: Management Problems at the Three DOE Laboratories
Operated by the University of California (GAO/T-RCED-91-86, July 31,
1991).
Nuclear Security: Property Control Problems at DOE's Livermore
Laboratory Continue (GAO/RCED-91-141, May 16, 1991).
Nuclear Nonproliferation: DOE Needs Better Controls to Identify
Contractors Having Foreign Interests (GAO/RCED-91-83, Mar. 25,
1991).
Nuclear Security: Accountability for Livermore's Secret Classified
Documents Is Inadequate (GAO/RCED-91-65, Feb. 8, 1991).
Energy Reports and Testimony: 1990 (GAO/RCED-91-84, Jan. 1991).
Energy: Bibliography of GAO Documents, January 1986-December 1989
(GAO/RCED-90-179, July 1990).
Nuclear Security: DOE Oversight of Livermore's Property Management
System Is Inadequate (GAO/RCED-90-122, Apr. 18, 1990).
Energy Management: DOE Should Improve Its Controls Over Work for
Other Federal Agencies (GAO/RCED-89-21, Feb. 9, 1989).