Department of Energy Contracting: Actions Needed to Strengthen Subcontract Oversight

DOE, including NNSA, is the largest federal civilian contracting agency, spending about 90 percent of its appropriations on contracts with companies, universities, and others for federal research and development, engineering, and production. DOE headquarters and local offices oversee contractors’ activities, including their management of subcontracts.

GAO was asked to review contracting at DOE, including the use of subcontractors. This report examines, for fiscal year 2016, (1) the parties that participated in DOE’s largest prime contracts and the extent to which they subcontracted their work; (2) the extent to which DOE ensured that those contractors audited subcontractors’ costs, as required; and (3) the extent to which DOE ensured that contractors met other subcontract oversight requirements. GAO reviewed DOE’s fiscal year 2016 data and documents, analyzed regulations, and interviewed federal officials and contractor representatives for DOE’s 24 largest fiscal year 2016 prime contracts.

In fiscal year 2016, 28 entities participated in the Department of Energy’s (DOE) and its National Nuclear Security Administration’s (NNSA) 24 largest prime contracts, which totaled $23.6 billion of DOE’s fiscal year 2016 obligations. The contractors awarded about $6.9 billion (nearly 30 percent) of those obligations to thousands of subcontractors. Further, multiple companies, universities, and other entities can join together to bid on a contract (i.e., become a “party to” a contract). GAO’s review of data about these contracts and subcontracts identified complex ownership relationships among the contractors and subcontractors. For example, GAO found that almost all of the 28 parties to the prime contracts in its review were also subcontractors to some prime contracts, holding a total of nearly 3,000 subcontracts with fiscal year 2016 obligations totaling about $927 million (see figure). GAO found that it can be difficult to track changes in the ownership of parties to the contracts and to understand the relationships between parties.

DOE and NNSA did not always ensure that contractors audited subcontractors’ incurred costs as required in their contracts. GAO’s review of 43 incurred-cost assessment and audit reports identified more than $3.4 billion in subcontract costs incurred over a 10-year period that had not been audited as required, and some subcontracts remained unaudited or unassessed for more than 6 years. Completing audits in a timely manner is important because of a 6-year statute of limitations to recover unallowable costs that could be identified through such audits. DOE headquarters has not issued procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the 6-year limitation period of the Contract Disputes Act, preventing DOE from recovering those costs.

DOE and NNSA perform several reviews to ensure that contractors meet other subcontract oversight requirements. For example, DOE’s local offices review proposed subcontracts to ensure they are awarded consistent with policies related to potential conflicts of interest. However, local officials do not independently review information on subcontractor ownership because doing so is not required, although such information could alert officials to potential conflicts of interest. By requiring contracting officers to independently review subcontractor ownership information, DOE and NNSA would have better assurance that contractors are adequately identifying and mitigating organizational conflicts of interest.

GAO is making six recommendations, including that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits, and require local DOE officials to independently review subcontractor ownership information to identify potential conflicts of interest. DOE partially concurred with five of GAO’s six recommendations but did not agree to independently review subcontractor ownership information. GAO maintains that the recommended actions are valid.

The Department of Energy (DOE) is the largest civilian contracting  agency in the federal government. DOE spends approximately 90 percent  of its annual appropriations—which in fiscal year 2018 totaled about $30  billion—on contracts to manage and operate its scientific laboratories,  engineering and production facilities, and environmental restoration sites,  or to construct facilities. We first designated aspects of DOE’s contract  management as a high-risk area for the government in 1990 because  DOE’s record of inadequate management and oversight of contractors left  the department vulnerable to fraud, waste, abuse, and mismanagement.  Additionally, in its fiscal year 2018 identification of management  challenges, DOE’s Office of Inspector General (OIG) added subcontract  management as a component of its previously identified management  challenges for DOE contract oversight, in part because the OIG’s  investigative work and referrals to the OIG hotline identified continued  vulnerabilities from inadequate oversight of subcontracts.

Several recent high-profile incidents have involved fraudulent activity by  subcontractors at DOE. In the case of one prime contract, a contractor  entered into a subcontract worth hundreds of millions of dollars with a  subsidiary of a company that was a party to the prime contract. From  March 2010 through February 2012, an employee of the company  allegedly drafted false statements to DOE regarding rates charged by the  subsidiary, as well as the company’s anticipated profit in providing the  subcontracted services. The employee allegedly received illegal kickback  payments from the company to improperly obtain or reward favorable  treatment in connection with the subcontract or prime contract. In August  2018, the Department of Justice announced that the employee had  agreed to pay a settlement and to cooperate with the ongoing Department  of Justice investigation. In the case of another prime contract, from June  2011 through July 2013, a subcontractor channeled payments to the son  of the president of a contractor through an elaborate system of false  invoices and cash payments while failing to identify the potential conflict  of interest to the contractor. In January 2018, the subcontractor was  sentenced to serve just over 12 months in prison for conspiring to defraud  the Internal Revenue Service and DOE.

DOE oversees its contractors’ activities, including their management of  subcontracts, through headquarters offices and local federal field and site  offices (local offices) collocated at each contractor’s location. At the  headquarters level, DOE’s Office of Acquisition Management is  responsible for (1) establishing procurement-related policies and  guidance for the department and (2) managing DOE’s acquisition system.  In fulfilling these responsibilities, the Office of Acquisition Management  develops, issues, maintains, and interprets acquisition regulations,  policies, and guidance; provides assistance and oversight for DOE  acquisition activities exclusive of the National Nuclear Security  Administration (NNSA)—a separately organized agency within DOE— and provides operational acquisition services to DOE headquarters and  staff organizations, among other responsibilities. The key official  responsible for setting direction and policy for DOE is the Director of the  Office of Acquisition Management.

NNSA’s Office of Acquisition and Project Management focuses on  construction project delivery and prime contract oversight. Its objective is  to ensure that NNSA implements DOE’s acquisition and project  management policies and regulations as well as NNSA’s own  supplemental directives and procedures. The key official responsible for  setting direction and policy for NNSA is the Associate Administrator for  Acquisition and Project Management. Contracting officers at DOE’s and NNSA’s local offices oversee contractors and seek to ensure, among  other things, that prime contract awards are appropriate, that all  requirements of law and regulation are met prior to executing a prime  contract action, and that both DOE and the contractor comply with the  terms of the prime contract. Throughout this report, references to DOE  include both DOE and NNSA. When practices differ, we may separately  discuss NNSA.

Prime contracts can be held by a single entity, such as a company or  university, or by multiple entities that have combined to form a limited  liability corporation (LLC) or other type of business combination. The  entities that are parties to these prime contracts can change during the  life of the prime contract due to changes in ownership, such as mergers  or acquisitions.

DOE’s oversight of contractors is subject to the Federal Acquisition  Regulation (FAR), the Department of Energy Acquisition Regulation  (DEAR), and other internal DOE directives. Furthermore, provisions of  individual prime contracts may contain additional oversight requirements,  such as requirements to audit subcontractor costs. Additional  requirements are intended to, among other things, provide reasonable  assurance that the contractor is using efficient methods and effective cost  controls, ensure that the contractor’s accounting and purchasing systems  are operating as intended, and that the contractor is following policies and  procedures.

You requested that we review aspects of contracting at DOE, including  oversight of subcontracting. This report examines, for fiscal year 2016, (1)  the parties that participated in DOE’s largest prime contracts, the extent  to which they subcontracted their work, and the parties and other entities  that participated in those subcontracts; (2) the extent to which DOE  ensured that those contractors audited subcontractors’ incurred costs, as  required; and (3) the extent to which DOE ensured that those contractors  met other requirements for subcontract oversight.

To identify the parties that participated in DOE’s largest prime contracts,  the extent to which they subcontracted their work, and the parties and  other entities that participated in those subcontracts during fiscal year  2016, we reviewed a list of all DOE prime contracts active in that year  provided by DOE headquarters officials. That list included information  about contract type, total contract value, fiscal year 2016 obligations, and  DOE’s local offices responsible for overseeing the contractors. We  selected fiscal year 2016 for review because it was the most recent fiscal  year for which complete data were available at the start of our review.  Based on our review of data on more than 5,400 contracts that comprised  the $28.2 billion in DOE’s total contract obligations for fiscal year 2016,  we selected all prime contracts for which DOE obligated at least $300  million in fiscal year 2016. The selection consisted of 24 prime contracts  that, in total, represented approximately $23.6 billion, or about 84 percent,  of DOE’s fiscal year 2016 contract obligations.

To identify the parties to DOE’s largest prime contracts, we reviewed  documents and statements provided by the DOE local offices about each  of the prime contracts in our selection. In some cases, we determined this  information was outdated; however, for purposes of this report, we are  providing the information that DOE provided to us. To identify the  subcontractors to the contracts in the selection, we requested and  reviewed information from the contractors on their subcontracts valued at  $10,000 or more that were active in fiscal year 2016. To assess the  reliability of the data, we took several steps, including reviewing  information from each of the contractors about the systems used to  capture the data, and we determined that the data were sufficiently  reliable to use in analyses of subcontract information from these  contractors. We analyzed data about the amount of fiscal year 2016 funds  obligated to the subcontracts, the number of subcontracts, the type of  subcontracts, and the names of the parties and other entities that were  awarded subcontracts. We summarized the results of these analyses and  identified cases in which a party to a prime contract was also a  subcontractor. We developed shortened versions of the parties’ names  and compared these shortened names to prime contracts and  subcontracts to identify cases in which a party to the prime contract was  also a subcontractor. This provided us with a conservative estimate of the  number of parties to both prime contracts and subcontracts in fiscal year  2016; however, this analysis would not identify any cases in which a party  to a prime contract used a different name when party to a subcontract.

To examine the extent to which DOE ensured that contractors in our  selection audited subcontractors’ incurred costs and met other  requirements for subcontract oversight, we reviewed the FAR, DEAR,  DOE policies and guidance, the prime contracts, and Performance  Evaluation and Measurement Plans for the contractors to identify and  understand DOE and prime contract requirements and guidance for  subcontract oversight. Based on our analysis, we confirmed that the  contractors in our sample were all required to audit subcontractors’  incurred costs and determined that other requirements for oversight of the  relevant subcontractors generally fell into two broad categories: (1) the  review and approval of contractor business systems, including the  accounting and purchasing systems; and (2) DOE’s approval of  subcontracts through consent reviews, which are intended to assess the  contractors’ adherence to subcontracting requirements and provide  assurance against conflicts of interest. We collected documentation from  DOE officials and contractor representatives on DOE’s oversight of the  contractor’s management of subcontracts, including the two most recent  incurred cost audits for each of the contractors, peer reviews of the  contractors, and other external audits and assessments of the  contractors. We also interviewed officials from DOE’s local offices  responsible for oversight of the contractors in our selection, including  DOE contracting officers, and contractors’ representatives. See appendix  I for more information about our scope and methodology.

We conducted this performance audit from May 2017 to March 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

This section discusses DOE’s use of management and operating (M&O)  and non-M&O contracts, DOE’s contracting structure, and federal and  DOE requirements for oversight of contractors’ subcontract management.

Since World War II, DOE and its predecessor agencies have depended  on the expertise of private firms, universities, and others to carry out  federal research and development work and to manage and operate  government-owned facilities. DOE relies on contracts to accomplish most  of its work. DOE mainly uses M&O contracts, which are agreements  under which the government contracts for the operation, maintenance, or  support, on its behalf, of a government-owned or government-controlled  research, development, special production, or testing establishment  wholly or principally devoted to one or more of the major programs of the  contracting federal agency.

DOE and other agencies with sufficient statutory authority and the need  for contracts to manage and operate their facilities may use the M&O  form of contract; however, according to DOE, it is the only agency using  such contracts. According to the DOE Acquisition Guide, DOE generally  requires that the M&O contractors be subsidiaries of their corporate  parents, dedicated to performance at the specific location, and supported  by performance guarantees from their corporate parents. According to  DOE officials, in fiscal year 2016, DOE obligated nearly $21 billion on 22  M&O prime contracts—about three-quarters of its total contract  obligations for that year.

DOE also used non-M&O contracts for some contracts that were active in  fiscal year 2016. For example, DOE used non-M&O contracts for the  Mixed Oxide Fuel Fabrication Facility (MOX) construction project at the  Savannah River Site in South Carolina, for construction and cleanup at  the Hanford Site in Washington State, and for cleanup at the Oak Ridge  Reservation in Tennessee. Figure 1 shows the site or project, and  contract type, for the 24 largest DOE prime contracts as of fiscal year  2016, in our selection.

DOE uses a variety of contract types for its M&O and non-M&O contracts,  including cost-reimbursement contracts, time-and-materials contracts,  and fixed-price contracts. Under cost-reimbursement contracts, the  government reimburses a contractor for allowable costs incurred, to the  extent prescribed by the contract. Cost-reimbursement contracts are  considered high risk for the government because the government agrees  to reimburse the contractors allowable costs, regardless of whether the  work is completed. The DEAR states that cost-reimbursement plus  award fee contracts are generally the appropriate contract type for M&O  contracts, but agencies can choose among a number of different contract  types for M&O contracts. A time-and-materials contract provides for  acquiring supplies or services on the basis of direct labor hours at  specified fixed hourly rates that include wages, overhead, general and  administrative expenses, profit, and actual cost for materials. According to  DOE’s General Guide to Contract Types for Requirements Officials, this  type of contract can fulfill a special need that no other contract type can  serve, but it places a heavy burden on technical personnel to perform  surveillance to preclude inefficiency or waste, and there is no positive  profit incentive for a contractor to control costs. Under fixed-price  contracts, the government and contractor agree on a firm pricing  arrangement that is subject to adjustment only according to the terms of  the contract, and the contractor generally must deliver the product or  service for that price.

A contractor, for purposes of this report, is a party that has signed a  contract with DOE (known as a prime contract), while a subcontractor is a  party that has signed a contract with a DOE contractor (or another  subcontractor). For example, a contractor may enter into a subcontract to  obtain access to a specific set of skills or services that it may not  possess, such as construction expertise, equipment services, or  technology support. According to the FAR and the DEAR, contractors  may subcontract with affiliates or parties to their prime contract under  certain circumstances. Subcontracts with M&O contractor affiliates for  performance of contract work itself—as distinguished from the purchase  of supplies and services needed in connection with the performance of  work—require DOE authorization and may involve an adjustment of the  contractor’s fee. If the contractor seeks authorization to have some part of the contract work performed by a party to the contract, and the party’s  performance of the work was a factor in the negotiated fee, DOE would  normally require (1) that the party perform such work without fee or profit;  or (2) an equitable downward adjustment to the M&O contractor’s fee, if  any.

Requirements for DOE’s Oversight of Contractors’ Subcontract Management

DOE’s oversight of contractors’ subcontract management generally falls  into three broad categories: (1) reviewing subcontract costs, including  conducting certain subcontract audits, to ensure that subcontract costs  are appropriately charged to prime contracts; (2) reviewing and approving  contractor business systems, including contractor accounting and  purchasing systems, to ensure validity of data and sufficiency of  subcontract oversight policies and procedures; and (3) performing  subcontract consent reviews to consider, among other things, whether the  contractor is complying with contract provisions and assuring against  conflicts of interest, such as close working relationships or ownership  affiliations between the contractor and subcontractor, which may preclude  free competition or result in higher prices.

The DOE OIG and other federal agencies or external audit organizations  conduct periodic incurred cost audits and assessments of DOE’s prime  contracts. The purpose of incurred cost audits is to determine whether  such incurred costs are reasonable; applicable to the contract;  determined under generally accepted accounting principles and cost  accounting standards applicable in the circumstances; and not prohibited  by the contract, statute, or regulation.

For its M&O contracts, the contractors’ own internal audit staff performs  incurred cost audits under a process known as the “cooperative audit  strategy.” Under this strategy, each M&O contractor’s internal audit  organization is responsible for performing periodic operational and  financial audits, assessing the adequacy of management control systems,  and conducting an audit of its own incurred cost statements. Each year,  the DOE OIG performs an assessment of incurred costs for the 10 M&O  contractors that incurred and claimed the most costs that year, according  to the DOE OIG’s audit manual. For the remaining M&O contractors, the  OIG performs assessments based on risk. These assessments do not  follow standards for independent third-party audits; rather, they follow  standards for review-level engagements, which are substantially narrower  in scope than an audit. These assessments consist of determining  whether the contractor’s internal audits complied with professional  standards and could be relied upon; the contractor conducted or arranged  for audits of its subcontractors when costs incurred were a factor in  determining the amount payable to a subcontractor; and the contractor  adequately resolved any questioned costs and internal control  weaknesses affecting allowable costs that had been identified in prior  reports and reviews.

For non-M&O prime contracts, DOE has generally relied on the Defense  Contract Audit Agency (DCAA), an independent third party, to audit  contractors’ incurred costs that they invoiced to DOE. However,  resource issues at DCAA have delayed audits and led to a backlog of  prime contract audits. Further, the National Defense Authorization Act  for Fiscal Year 2016 prohibited DCAA from providing nondefense audit  support until DCAA addressed its backlog of incurred cost audits at the  Department of Defense. To try to address its audit backlog that  accumulated as a result of DCAA’s delays, DOE has used independent  public accounting firms, expanded internal audit functions, and relied  more heavily on invoice reviews and OIG audits and assessments.  However, in February 2015, DOE’s OIG reported that at the time of that  report, these methods were not completely effective and did not meet  audit standards in some cases. DCAA has since resumed performing  audits for civilian agencies. However, while DCAA has made some  progress in reducing its backlog of audits, it did not meet its initial goal of  eliminating the backlog by fiscal year 2016, and as we found in  September 2017, DCAA officials stated that they were unlikely to meet  the agency’s revised goal by the end of fiscal year 2018.

According to the DEAR, each of DOE’s M&O contracts should include a  clause that requires the contractor to conduct or arrange for audits of its  subcontractors’ incurred costs when costs incurred are a factor in  determining the amount payable to the subcontractor to ensure that  subcontract costs are allowable. This subcontract audit requirement  includes cost-reimbursement and time-and-materials type subcontracts.  This requirement is also included in some of DOE’s large non-M&O  contracts, including the seven non-M&O prime contracts in our selection.  According to DOE headquarters officials, they included this requirement  in the non-M&O contracts because of the large dollar amount of the prime  contracts. The DOE OIG, DCAA, or other entities generally include  information about the status of required subcontract audits in their audits  and assessments of the prime contracts.

In March 2017, we found that DOE generally completed audits or  assessments of contractors’ incurred costs after DOE had reimbursed the  contractors for the costs for DOE’s M&O and non-M&O contracts,  including those contractors’ subcontract costs. If, as a result of these  audits or assessments, DOE detects fraud or other improper payments— such as reimbursements for costs determined to be unallowable under  the contract—DOE will question these costs and work with the contractor  to resolve them. Sometimes, this can result in DOE recovering funds.

DOE’s oversight of business systems includes oversight of accounting  systems and purchasing systems. With regard to accounting systems,  under the FAR, agency contracting officers are required to obtain  information concerning the adequacy of the contractors’ accounting  systems prior to determining whether a prospective contractor is  responsible with respect to the contract. Under the FAR, the adequacy  and suitability of these systems affects the quality and validity of the  contractor data, including subcontract data, on which the government  relies to oversee the contractors’ performance. DOE grants approval of  the accounting system through headquarters-level reviews, local office  reviews, or external audits of the system.

With regard to purchasing systems, under the FAR, DOE should review  and approve contractors’ purchasing systems, including their  procurement policies and procedures. If the contractor does not have an  approved purchasing system, the contracting officer is required to  approve all cost-reimbursement, time-and-materials, and labor-hour  subcontracts (among other types) above the simplified acquisition  threshold. According to DOE headquarters officials, an approved  purchasing system signifies that the contractor’s purchasing policies and  practices are efficient and provide adequate protection of the  government’s interests, including the contractor’s ability to award some  subcontracts without the need to seek review and consent by the local  DOE contracting officers. Local contracting officials use a formal  contractor purchasing system review or a combination of other monitoring  techniques to grant or extend approval of the contractor’s purchasing  system.

DOE monitors contractors’ compliance with subcontracting requirements  primarily by providing consent to the contractors to award certain  subcontracts. DOE determines the subcontracts that require consent  prior to award with criteria the agency develops for each prime contract,  such as subcontract dollar value and type of contract. Under the FAR,  agencies should consider whether a proposed subcontract is appropriate  to the risks involved and consistent with current policy when conducting a  consent review. DOE officials told us that they generally use these  reviews to ensure that the contractor’s accounting and purchasing  systems are continuing to operate as intended and that the contractor is  following its policies and procedures, including policies to safeguard  against conflicts of interest, such as issues precipitated by shared  ownership interests. Under the FAR, where consent is required, the  consenting official must give particularly careful and thorough  consideration to potential conflicts of interest, such as where close  working relationships or ownership affiliations between the contractor and  subcontractor may preclude free competition or result in higher prices.  For subcontracts that are subject to a consent review, the contractor  submits a package of information to the local DOE contracting officer. The  contracting officer either provides consent or raises issues that the  contractor must address before awarding the subcontract. According to  DOE documents we reviewed, the package typically includes summary  information such as: what the contractor is buying,  the type of contract to be used (i.e., cost-reimbursement, fixed-price), who the subcontract will be awarded to, a general description of the scope of work, a summary of the basis for making the award, documentation that shows the contractor conducted a cost and price  analysis prior to award and that the contractor adhered to its internal  policies and procedures, and  conflict of interest determinations and mitigations.

Eleven Entities Participated in Multiple DOE Prime Contracts, with Complex Ownership Relationships among the Contractors and Subcontractors

In fiscal year 2016, 28 entities were party to DOE’s 24 largest prime  contracts. Specifically, DOE awarded 15 prime contracts to contractors  composed of groups of two to five entities and awarded the remaining  nine of the 24 prime contracts in our selection to contractors composed of  a single entity. Our review found that 11 of the 28 participating entities  were parties to multiple prime contracts. The prime contracts in which  these 11 entities participated represented about 69 percent, or $19.3  billion, of DOE’s total prime contract obligations in fiscal year 2016.  Figure 2 shows the relationships among the 11 entities that are parties to  multiple prime contracts included in our selection. For example, Battelle  Memorial Institute and Bechtel National, Inc. each were party to six prime  contracts, based on ownership information DOE provided.

It can be difficult to track changes in the ownership of entities that are  parties to the prime contracts to understand the entities’ relationships, if  any. Our review found that changes in ownership of the parties to six of  the 24 prime contracts in our selection occurred prior to fiscal year 2016  but were not reflected in the information DOE provided to us. Therefore,  our analyses do not reflect the modified ownership information. The fact  that one entity could be party to multiple prime contracts and could  acquire other entities that are parties to prime contracts complicated our  ability to understand the relationships among them.

AECOM—which was identified as a party to three prime contracts in  our selection—acquired URS Corporation in 2014, and URS had  previously acquired Washington Group International in 2007. This  resulted in AECOM becoming a party to the Lawrence Livermore  National Security, LLC; Washington River Protection Solutions, LLC;  Los Alamos National Security, LLC; and Battelle Energy Alliance,  LLC, prime contracts, making AECOM a party to seven of the  contracts in our selection. However, the documents DOE provided  show it as a party to three of the contracts in our selection.

Our review of contractor Lawrence Livermore National Security, LLC’s  website showed that BWX Technologies, Inc. split from the Babcock  and Wilcox Company in 2015 and replaced it as a party to the  contract, making BWX Technologies party to four of the prime  contracts in our selection rather than the three reported in DOE’s  documents. These changes in ownership occurred prior to fiscal year  2016, the time period we reviewed, but the changes were not  reflected in the ownership information DOE provided to us for these  prime contracts.

Such acquisitions can also complicate DOE’s review of contract  proposals. For example, in August 2016, NNSA awarded the contract for  the management and operation of the Nevada National Security Site to  Nevada Site Science Support and Technologies Corporation. The  contractor identified itself as a wholly owned subsidiary of Lockheed Martin. However, after awarding the contract, the NNSA contracting  officer was notified that the awardee had been acquired in its entirety by  Leidos Innovations Corporation prior to the award. According to NNSA,  the request for proposals required offerors to disclose ownership changes  that occur during the proposal process, but NNSA was not notified about  the ownership change until after the proposal had been awarded. Once  the Nevada Site Science Support and Technologies Corporation’s  ownership changed from Lockheed Martin to Leidos, its proposal was not  compliant with the requirements and NNSA rescinded the award.

The 24 contractors in our selection reported obligating funds to more than  169,000 subcontracts to about 23,000 different entities in fiscal year  2016. Contractors subcontracted more than $6.9 billion, an amount  equivalent to nearly 30 percent of DOE’s obligations to its prime contracts  in fiscal year 2016. The extent to which contractors obligated funds to  subcontracts in fiscal year 2016 varied widely, from 13 percent of prime  contract obligations to 83 percent, as shown in table 1.

The contractors in our selection reported that they awarded about 54  percent, or about $3.7 billion, of their subcontract obligations in fiscal year  2016 as fixed-price contracts and 46 percent, or about $3.2 billion, as  cost-reimbursement contracts, cost-reimbursement contracts with no fee  earned, or time-and-materials contracts. See figure 3 for the distribution  of subcontract obligations by type.

We found that in fiscal year 2016, at least 24 of the 28 entities that were  parties to the prime contracts were also subcontractors to the prime  contracts in our selection. Specifically, these 24 entities held nearly 3,000  subcontracts with fiscal year 2016 subcontract obligations totaling about  $927 million. Table 2 shows the parties to prime contracts that also held  subcontracts in fiscal year 2016.

Further, we found that, in some cases, entities held subcontracts on the  specific prime contracts to which they were a party. As discussed  previously, subcontracting to an entity that is also a party to the prime  contract is allowable under the FAR and DOE regulations. Figure 4 shows  the 15 contractors that obligated funds in fiscal year 2016 to subcontracts  with parties to their prime contracts. For example, UT Battelle, LLC—the  contractor for the Oak Ridge National Laboratory prime contract in fiscal  year 2016—had 416 active subcontracts with two parties to that prime  contract (University of Tennessee and Battelle Memorial Institute). UT  Battelle, LLC obligated more than $34 million for subcontracts to these  two entities in fiscal year 2016. In another example, Savannah River  Remediation, LLC, the liquid waste contractor for the Savannah River  Site, had 30 active subcontracts with three parties to that prime contract  (AECOM, Inc.; Bechtel National, Inc.; and CH2M Hill Constructors, Inc.).  The contractor obligated about $12 million for subcontracts to these three  entities in fiscal year 2016. For more information about the relationships  among DOE’s prime contracts, parties to the prime contracts, and  subcontractors, see an interactive graphic at  https://www.gao.gov/products/GAO-19-107.

DOE Did Not Always Ensure That Contractors Conducted Required Subcontract Audits, and Some Unallowable Subcontract Costs May Be Unrecoverable Because Audits Are Not Timely

Each of the 24 prime contracts in our selection required contractors to  conduct or arrange for audits of their subcontractors’ incurred costs for  certain subcontract types, including cost-reimbursement and time-and- materials contracts, among others. Contracting officers at DOE’s local  offices are responsible for overseeing contractors and for ensuring,  among other things, that both DOE and the contractor comply with the  terms of the prime contract. However, officials from DOE’s local offices  have not always ensured that contractors completed the required  subcontract audits.

DOE relies on the contractors’ subcontract audits to identify unallowable  subcontract costs. As previously discussed, the DOE OIG, DCAA, or third  parties complete incurred cost audits or assessments of DOE’s prime  contracts, which generally report on the extent to which the contractor has  completed required audits of subcontract costs. We requested the  reports for the two most recent incurred cost audits or assessments that  the DOE OIG or third parties conducted, as of February 2018, for the  prime contracts in our selection to determine whether contractors had  conducted required subcontract audits for the period covered by the  reports. In response to our request, the 24 contractors provided a total of  43 reports, 11 of which were audit reports and 32 of which were  assessment reports:

Twenty contractors provided both requested reports.

Three contractors provided only one report each that had been  completed.

One contractor did not provide the two requested reports because of  pending litigation.

Of the 43 incurred cost assessment and audit reports we reviewed, 21  reports indicated that contractors had not audited more than $3.4 billion in  costs incurred by subcontractors over the 10-year period covered by the  reports. These reports documented various reasons that the  subcontracts had not been audited, including that a contractor did not  appropriately recognize that time-and-materials subcontracts needed to  be audited, or that a contractor relied on internal controls or a non-audit  procedure to meet subcontract audit requirements. For example, an April  2013 assessment by the DOE OIG found that subcontractor costs of  more than $12 million incurred over a 4-year period for two multi-year  time-and-materials contracts had not been audited by the contractor, as  required by its prime contract, because the local DOE office did not  submit a request to DCAA to perform the audits due to the DCAA  backlog. In another example, a March 2014 DOE OIG assessment  found that a contractor did not conduct required audits of $155 million in  subcontract costs incurred during 1 fiscal year because the contractor  believed its internal controls met the intent of the requirement to conduct  the subcontract audits.

Some audit or assessment reports we reviewed included some  questioned subcontract costs. For example, in an assessment for fiscal  year 2013, the DOE OIG reported that an M&O contractor’s internal audit  department performed audits of 78 subcontracts for 30 different  subcontractors and questioned nearly $900,000 in subcontractor costs  incurred from fiscal year 2009 through fiscal year 2013. As of June  2016, most of the questioned amount had been resolved, and the  remaining amount—about $7,900—was deemed unallowable and applied  against an invoice from the contractor. In another assessment of an M&O  contractor for fiscal year 2013, the DOE OIG questioned subcontract  costs identified by the contractor of more than $725,000, with about  $8,000 ultimately deemed unallowable. We have previously found that  DOE sometimes negotiates questioned costs with its contractors to settle  on an amount—potentially lower than the amount initially questioned— ultimately deemed unallowable. Although the amounts of unallowable  costs in these examples are small, DOE does not know the full extent of  unallowable subcontractor costs that it has reimbursed because required  subcontract audits were not always conducted.

For some contractors, the issue of unaudited subcontract costs is long- standing and extensive. For example, DOE documents show that, at the  time of our review, one contractor had never completed an adequate  audit of its subcontractors’ incurred costs over the 16 years of the prime  contract period, although its prime contract with DOE requires such  audits. In June 2016, the contractor placed the value of its unaudited  subcontracts at more than $1.3 billion. This amount included some  subcontracts that were closed without being audited, meaning the work  had been completed and the final costs under the prime contract had  been paid. DOE has been working with the contractor since 2013 to  implement corrective actions to resolve the issue; in October 2018, DOE  officials told us they reached an agreement with the contractor to  complete current audits and address the backlog.

We identified three key differences in how contractors and DOE’s  headquarters and local office officials interpreted the subcontract audit  requirements included in the prime contracts we reviewed that contributed  to DOE not always ensuring that contractors audited their subcontractors’  incurred costs. Specifically:

Extent of subcontracts that must be audited. We identified differing  interpretations of whether the prime contract required contractors to  audit all cost-reimbursement and time-and-materials contracts.  Specifically, some contractors told us that they had developed risk- based approaches to selecting subcontracts for audit based on  thresholds, such as the amount of the subcontract. However, using  such a strategy could exclude significant subcontract costs from audit.  For example, according to an April 2012 DOE OIG audit, one  contractor increased its subcontract audit threshold from $1 million to  $15 million in annual incurred costs, thereby excluding from audit  nearly $343 million in subcontract costs incurred during fiscal years  2008 and 2009. In its report, the DOE OIG questioned whether the  contractor’s subcontract audit strategy provided sufficient audit  coverage to ensure that DOE did not pay unallowable costs. In that  case, the DOE OIG found that the audit strategy, which was supposed  to be based on DCAA requirements, did not meet a key DCAA  requirement to audit incurred costs of at least one-third of all  subcontracts under $15 million at least once every 3 years.

Definition of an audit. Some contractors used invoice reviews in  place of audits to meet the requirement. As discussed previously,  DOE documents showed that one contractor had never completed an  adequate audit of its subcontractors’ incurred costs over the 16 years  of the contract. According to contractor representatives, the term  “audit” was not defined in their contract, and therefore they performed  detailed subcontractor invoice reviews instead of conducting  subcontract audits to meet the requirement. DOE found that these  invoice reviews did not meet generally accepted government auditing  standards.

Responsibility for arranging for audits if DCAA is unable to  conduct audits. Some contractor representatives we interviewed  reported that their subcontracts remained unaudited as a result of the  DCAA backlog. Representatives from one contractor told us that they  believed that they were not responsible to conduct the audits if DCAA  was unable to do so, and another said that they tried to engage a  third-party auditor to conduct the audits themselves, but their  subcontractor would not allow the third-party auditor to access their  records despite specific language establishing the contractor’s  responsibilities for audits.

Differences in the interpretation of the subcontract audit requirements  have continued to occur because DOE has not clearly defined—in  guidance or other documents—how these contract requirements should  be met, which could eliminate confusion about which subcontracts should  be audited, how an audit is defined, and how to meet subcontract audit  requirements if DCAA is unable to conduct the audit. Federal internal  control standards state that management should externally communicate  the necessary quality information to achieve the entity’s objectives so that  external parties can help the entity achieve its objectives and address  related risks. Until DOE clearly defines how contractors should meet  subcontract audit requirements, contractors may not perform subcontract  audits as intended and unallowable costs may not be identified or  recouped.

In addition, we found that audits or assessments of a contractor are  usually not conducted immediately after the fiscal year in which funds are  spent, partly because of the availability of DCAA staff or third-party  auditors to complete the work. Our review of the 43 audit and assessment reports identified reports covering 7 fiscal years that were audited or  assessed 6 or more years after the fiscal year in which the costs were  incurred; more than $557 million in subcontract costs in those fiscal years  had not been audited as required by the prime contracts. The Contract  Disputes Act of 1978 imposes a 6-year statute of limitations for the  government to seek recovery of unallowable costs that could be identified  through subcontract audits, so it is important for audits to be completed in  a timely manner.

We also found that local offices’ efforts to monitor contractors’ completion  of subcontract audits have not ensured that contractors have completed  required subcontract audits and that those audits are completed in a  timely manner. Officials from the local offices said their approaches for  overseeing whether contractors performed required subcontract audits  included reviewing and approving the contractors’ internal audit plans,  reviewing monthly or quarterly reports from the contractors’ internal audit  departments, or reviewing the contractors’ internal audits and reviews of  subcontractors’ costs. Additionally, several DOE officials from the local  offices said they relied on the DOE OIG and external auditors’  assessments and audits of the contractor to monitor the status of  subcontract audits, even though these assessments and audits may be  infrequent.

Federal internal control standards state that management should  implement control activities through policies, such as by documenting  such policies in the appropriate level of detail, to allow management to  effectively monitor the control activity. These standards state that  policies may be further defined through procedures, including the timing  of when a control activity occurs, to help personnel implement the control  activities for their assigned responsibilities. However, we found that DOE  headquarters has not issued documented procedures or guidance that  requires local offices to monitor the contractors’ progress in completing  the required audits or to specify the time period during which an audit  must be completed. Without such procedures or guidance, unallowable  costs may go unidentified beyond the 6-year period set by the Contract  Disputes Act, preventing DOE from identifying and recovering  unallowable costs.

DOE Did Not Always Ensure That Contractors Met Other Subcontract Oversight Requirements and Does Not Assess Subcontractor Management in Performance Evaluations

In addition to ensuring that contractors conduct required audits of  subcontract costs, DOE must meet other requirements to ensure its  contractors are effectively overseeing subcontracts, specifically by  approving contractors’ accounting and purchasing systems and  performing consent reviews to monitor subcontracting actions. With  respect to approval of contractors’ accounting and purchasing systems,  DOE generally ensures that reviews and approvals of these systems  occur, but the frequency of some accounting system reviews varies. With  respect to performance of consent reviews to monitor subcontracting  actions, most subcontracts are not reviewed by DOE, and we found that  while DOE’s local officials could independently review available  information on ownership to assist them with their assessment of  contractors’ identification of potential conflicts of interest in the consent  review process, they generally do not. Further, DOE’s thresholds for  conducting consent reviews are inconsistent and there is no requirement  to reevaluate the thresholds. In addition, DOE’s annual contractor  performance evaluations do not explicitly measure its contractors’  performance in managing or overseeing subcontracts.

DOE Generally Approves Contractors’ Accounting Systems, but the Frequency of Some Reviews Varies

Under the FAR, federal agencies are to determine the adequacy and  suitability of contractors’ accounting systems. The adequacy and  suitability of these accounting systems affects the quality and validity of  the contractor and subcontractor data upon which the government must  rely for its management and oversight of the contractor and contract  performance. DOE local contracting officers responsible for the prime  contracts in our selection stated that they rely on contractor accounting  system approvals to help them determine the contractor’s suitability to  appropriately place and manage subcontracts. The FAR provides that the  contractor’s accounting system should be adequate during the entire  period of contract performance, but does not specify a minimum  frequency for performing accounting system reviews.

According to interviews with local DOE officials and our review of  documentation they provided, DOE may grant accounting system  approval through headquarters-level reviews, local office reviews, or  external audits of the accounting system. Headquarters-level reviews  occur at a level above the local office, such as through NNSA’s Office of  Management and Budget. In addition, the contracting officers or other  subject matter experts at DOE’s local offices can conduct the reviews of  the accounting systems themselves or employ an external audit  organization, such as DCAA, to conduct the reviews. DOE conducted at  least one review of the accounting systems used for each of the 24 prime  contracts in our selection: eight accounting systems were reviewed  through headquarters-level organization reviews, nine were reviewed by  local offices, and seven were reviewed through external audits. DOE  headquarters officials said that no method for review is considered more  rigorous or preferred over another, and it is left to the discretion of the  contracting officers at DOE’s local offices to determine which method to  use.

According to our review of documents from DOE’s local offices and  interviews with DOE officials from the local offices, 22 of the 24 prime  contracts in our selection had approved accounting systems in fiscal year  2016. Contracting officers from the local DOE offices responsible for  oversight of the two prime contracts for which there was no approved  accounting system for fiscal year 2016 told us that they maintained  oversight of the contractors’ accounting systems through mechanisms  other than the traditional review and approval process. Specifically:

Local DOE officials responsible for oversight of one prime contract,  which was awarded in December 2000, told us that they did not have  to review or approve the contractor’s accounting system at the local  level after the contract was awarded because the contractor’s  corporate office was required to have an approved accounting system  to enter into its contract with DOE. The officials were not sure  whether an approval of the corporate accounting system had been  performed since 2000, but DCAA was scheduled to perform a review  of the system in late 2018. In a 2017 letter to the DOE local office,  DCAA stated that its review of the accounting system was delayed  due to staffing issues, and it was the agency’s opinion that the  contractor’s internal audits and reviews demonstrated that the  contractor was adhering to the criteria of an adequate accounting  system.

A local official responsible for oversight of another prime contract  stated that they had not approved the contractor’s accounting system  because it was adopted from the site’s former contractor. The officials  told us the former contractor’s accounting system had already been  approved and no additional review or approval was necessary.  Officials at DOE headquarters agreed that the use or transfer of an  existing DOE-approved accounting system satisfies the review  requirement. According to the officials responsible for overseeing this  prime contract, the local office annually reviews and approves the  contractor’s Financial Management System Plan, which would identify  any major planned enhancements and upgrades to the current  financial management systems and subsystems, including the  accounting system.

In addition to differences in how accounting system approvals were  conducted, local DOE officials said there are differences in the frequency  of the contractor accounting system reviews and approvals across local  offices. Some accounting systems are approved only at the time the  prime contract is awarded, while others are approved annually, on a 3- year cycle, or only if there are major changes to the accounting system.  DOE headquarters officials we interviewed said that the frequency of  reviews and approvals was determined on a contract-by-contract basis,  and for the prime contracts for which the accounting system was  approved at the time of contract award, the officials were unaware of what  might necessitate an additional review. Figure 5 shows the frequency of  accounting system approvals for the 24 prime contracts in our selection  as of fiscal year 2016.

The DOE Acquisition Guide states that the creation and maintenance of  rigorous business, financial, and accounting systems by the contractor is  crucial to ensuring the integrity and reliability of the cost data used by  DOE officials. Further, the FAR provides that the contractor’s  accounting system should be adequate during the entire period of  contractor performance. In addition, DOE headquarters officials said  that periodic reviews and approvals of the accounting systems are  important to ensuring these requirements are met. However, there is wide  variation in the frequency of these reviews, in part because DOE has not  reviewed the differences in the frequency of its accounting system  approvals and whether the basis for these differences is appropriate.

Prime contracts can last for decades, so many years may pass without  further review of the adequacy of the accounting systems. For example,  local officials responsible for overseeing a prime contract with an accounting system that was approved at the time the contract was  awarded said that the approval occurred 12 years ago, and they had  questions about the adequacy of the system.

DOE officials said that they do not have guidance to help contracting  officers at local offices determine the appropriate frequency for reviewing  accounting systems’ adequacy. Instead, local DOE contracting officers  that oversee each prime contract have discretion to determine the  manner and frequency of reviews based on their knowledge of the  contractor. Under federal standards for internal control, management  should design control activities to achieve objectives and respond to risks,  including by clearly documenting internal control in management  directives, administrative policies, or operating manuals. When reviews  are infrequent, or it is unclear when a review should be conducted,  subsequent changes to the accounting system may not be promptly  evaluated and DOE may not have adequate assurance that contractors’  accounting systems can be relied upon. By reviewing the differences in  the frequency of its accounting system reviews and approvals and  developing guidance that provides criteria to determine the appropriate  frequency of such reviews, DOE could better ensure that adequate  accounting systems are in place during the entire period of the contract.

DOE Generally Reviews and Approves Contractors’ Purchasing Systems and Plans More Consistent Reviews Going Forward

Under the FAR, the federal agency should maintain a sufficient level of  surveillance to ensure that the contractor is effectively managing its  purchasing program. Each of the contractors for the 24 prime contracts  in our selection had an approved purchasing system in fiscal year 2016. If  a local DOE contracting officer determines that a contractor does not  have an approved purchasing system, under the FAR, the office should  review and decide whether to approve (i.e. consent to) all cost- reimbursement type subcontracts and unpriced actions for fixed-price  subcontracts that exceed the simplified acquisition threshold of $150,000  prior to award. Under the FAR, the contractor is to continue to seek  approval for every proposed subcontract that meets these criteria until the  issues with the purchasing system that led to the withdrawal of approval  are resolved and the system is again approved. Our review of subcontract  information provided by DOE’s contractors indicates that, without an  approved purchasing system, more than 6,600 of the subcontracts that  were active in fiscal year 2016 would have required review and approval  prior to award, according to the existing simplified acquisition threshold.

According to DOE officials at local offices and headquarters, DOE  contracting officers may use a formal contractor purchasing system  review or a combination of surveillance and other monitoring techniques  to grant or extend approval of a contractor’s purchasing system. DOE  headquarters officials told us that the variation in the source and method  of purchasing system reviews is intentional to allow the local offices to  meet the requirement in a way that works best for their location and  contractor, and that the most important aspect of the purchasing system  review is the ongoing surveillance of the system.

Contracting officers from DOE’s local offices told us they had approved  the purchasing system for each of the 24 prime contracts in our selection  in a variety of ways:

Seven local offices approved contractors’ purchasing systems based  on the local contracting officer’s knowledge of the contractor’s work;

Six local offices relied on the results of a peer review program;

Five local offices considered the results from a combination of internal  and external audits and reviews (including peer reviews);

Four local offices performed a formal purchasing system review but  did not provide specifics as to the source of information, such as  internal or external audits or peer reviews; and

Two local offices relied on the results of external audits.

One of the contractors in our selection of 24 prime contracts, Bechtel  National, Inc., had a DOE-approved purchasing system for the  construction of the Hanford Waste Treatment and Immobilization Plant at  the Hanford Site in Washington State, which was subsequently withdrawn  for a 3-month period in 2018. Specifically, in fiscal year 2018, the Defense  Contract Management Agency (DCMA) performed a review of the  contractor’s corporate purchasing system and identified a number of  significant deficiencies—such as inadequate advance notice of  subcontract awards, missing subcontractor disbarment disclosures, and  general documentation issues with the contractor’s procurement files— that resulted in Bechtel National, Inc.’s corporate purchasing system  being disapproved until the identified deficiencies could be resolved.  DOE officials said they lifted the restrictions on the contractor in October  2018 following DCMA’s validation that Bechtel National, Inc. implemented  the required updates to its purchasing system and procedures.

In June 2018, DOE headquarters officials told us they encouraged the  local offices to focus on the use of a peer review program to review and  approve purchasing systems. NNSA officials further explained that they  expected the peer reviews would encourage contractors to remain diligent  in the administration of their systems. As a part of this new approach,  DOE headquarters officials told us that local officials will be required to  assess the need for a purchasing system review every 3 years, and if the  local office did not conduct a review, then a peer review would be  required at least every 6 years.

According to DOE’s November 2018 updated peer review handbook and  officials responsible for the handbook, the peer review program is DOE’s  preferred method for conducting purchasing system reviews and is now  mandatory for DOE’s M&O contracts at least every 6 years and for non- M&O contracts, with a contract length of 5 years or less, at the 3-year  mark. NNSA headquarters officials stated that they expect all of their local  offices to use the peer review program to assess contractors’ purchasing  systems going forward, regardless of the type of contract. According to  documents provided by DOE headquarters and local offices, as of July  2018, contractors for 18 of the 24 prime contracts in our selection  participated in the peer review program, and six did not participate,  including two NNSA contractors. Figure 6 shows the date of the most  recent peer review for the 24 prime contracts in our selection, as of July  2018.

DOE Uses Consent Reviews to Monitor Some Contractors’ Subcontract Actions but Does Not Independently Assess Potential Conflicts of Interest

According to contracting officers and headquarters officials we  interviewed, DOE’s local offices use subcontract consent reviews to  monitor contractors’ compliance with subcontracting requirements. In  addition, local officials told us that they use these reviews to review and  assess any reported potential conflicts of interest on the part of the  contractor and subcontractors. However, we found that local DOE officials  generally do not request additional information on ownership to  independently ensure contractors are mitigating these conflicts, nor do  they routinely make use of various databases available to government  employees that report ownership information for many government  contractors. In addition, local offices conduct a limited number of consent  reviews for subcontracts, based on a dollar threshold that varies among  local offices, which makes it difficult for DOE to ensure that local offices  have sufficient visibility into contractors’ subcontracting actions.

DOE Uses Consent Reviews to Monitor Contractor Compliance with Subcontracting Requirements

According to local DOE officials we interviewed, subcontract consent  reviews are the primary control method used to monitor contractors’  compliance with subcontracting requirements. Under the FAR, in  conducting a consent review, agencies should consider whether a  proposed subcontract is appropriate to the risks involved and consistent  with current policy. Specifically, local DOE officials told us that they use  the consent reviews to monitor contractors’ accounting and purchasing  systems between formal reviews of these systems; as well as to monitor  their compliance with policies and procedures for subcontracting,  including ensuring that subcontracts are awarded competitively, are of  appropriate types, and that the contractor adheres to requirements to  safeguard against conflicts of interest.

According to officials we interviewed, local DOE contracting officers often  receive a notice from the contractor of its intention to solicit subcontracted  work and, if the proposed subcontract value exceeds an agreed-upon  dollar threshold, contracting officers typically will review a consent  package from the contractor before the final award of the subcontract.  The contractor is to obtain DOE’s consent to the proposed action before  proceeding.

NNSA’s local offices have a standard consent checklist that directs the  contracting officer to consider certain factors before granting consent for  the contractor to issue a particular subcontract. These factors include the  contractor’s past performance, whether the solicitation for subcontracted  work was appropriately competed, the type of subcontract selected, and  whether the proposed prices are reasonable for the intended work,  among other things. In comparison, individual DOE local offices generally  use consent checklists they develop. These checklists have similar review  topics to the NNSA checklist, but the specific items and formats vary.

According to DOE officials we interviewed, subcontract consent reviews  are DOE’s only opportunity to review subcontract pricing and to ensure  best value for the government before the contractor awards the  subcontract. Furthermore, because fixed-price subcontracts do not have  the same audit requirements as cost-reimbursement subcontracts, these  consent reviews may be the only opportunity for DOE to review the cost  and pricing of fixed-price subcontracts to be awarded by the contractor.  As mentioned previously, the contractors for the 24 prime contracts in our  selection awarded 54 percent of their fiscal year 2016 subcontract  obligations as fixed-price subcontracts, and these contracts may be  awarded to parties to the prime contract, subject to certain conditions.

DOE contracting officials we interviewed noted a number of ways in which  consent reviews have helped them oversee contractors’ compliance with  subcontracting requirements. For example, an official described one case  in which the contractor was proposing a cost-reimbursement subcontract  for items that could have been purchased more favorably under a fixed- price contract. The consent package did not support why the contractor  chose the more costly contract type, so the contracting officer denied  consent and asked the contractor to review and reissue the solicitation. In  another example, the contractor had to renegotiate a subcontract before  award, after the contracting officer identified inherent safety concerns in  the description of the proposed work upon review of the consent package.

DOE Uses Consent Reviews to Ensure Contractors Mitigate Potential Conflicts of Interest Contractors Identify, but DOE Does Not Independently Assess Ownership Conflicts

DOE requires certain provisions to be included in the prime contracts that  require both DOE and the contractor to safeguard against personal and  organizational conflicts of interest. Among other things, these contract  provisions include requirements from the FAR that prohibit former officials  of a federal agency from accepting compensation from a contractor within  a year of awarding a contract to that contractor; prohibit contractors from  soliciting, accepting, or attempting to accept any kickbacks; and generally  prohibit federal agencies from subcontracting with debarred entities. All of the local DOE officials we interviewed said they rely on the contractor  to identify and mitigate potential conflicts by including these requirements  in contract clauses in their subcontracts and in the contractor’s internal  policies and procedures. Headquarters and local DOE officials said they  rely on the consent review process to ensure that contractors are  following these policies and procedures, and that contractors identify and  mitigate subcontract ownership conflicts, such as those that may occur in  connection with subcontracts to related parties.

If the contractor has identified a conflict of interest in connection with a  proposed subcontract, the consent package checklists we reviewed  request the contractor to also include in the package either a simple  conflict of interest disclosure statement, which would include steps the  contractor claims to have taken to mitigate the conflict, or a conflict of  interest analysis conducted by the contractor. In both cases, the  contracting officer is expected to check that the information is included in  the package, but no additional action or assessment by local DOE  contracting officers is required. Local DOE officials performing consent  reviews told us that subcontracting with related parties is their main  concern when assessing conflicts of interest; however, they generally did  not independently assess information on subcontractor ownership during  their reviews, beyond the information that the contractor reported.  Information on subcontractor ownership could alert local contracting  officers to potential conflicts of interest, such as preferential treatment in  the awarding of subcontracts to parties of the prime contract, and could  help DOE to determine if the mitigation plan included in the consent  package is adequate to address the potential conflict of interest.  However, local DOE officials told us that they generally do not request or  review subcontractor ownership information in available databases when  reviewing proposed subcontracts because there is no requirement to do  so. (See appendix III for a description of data systems available to DOE  officials that may contain relevant ownership information about existing  contractors or entities.)

Local DOE officials told us they have identified instances, through their  consent reviews, in which the contractors’ reporting of potential conflicts  of interest was inadequate. For example, DOE officials reviewing consent  packages at a local office noticed that a number of subcontracts were  awarded to a single company. The officials subsequently determined that  the contractor’s former president was currently sitting on the board of the  subcontracting company, but the contractor had not disclosed this  information during the consent review process. According to DOE  officials, this case is currently under review.

In addition, according to a Department of Justice press release, an  employee of one contractor created an entity and then, on behalf of the  contractor, ensured that a multimillion-dollar subcontract was awarded to  the new entity, and this employee received payments under the  subcontract from May 2011 to April 2016. The subcontractor did not  disclose this conflict of interest while working for the contractor.

As previously discussed, contractor ownership can be complicated, with  complex relationships between and among entities. Further, contractor  ownership may change over time through various mergers and  acquisitions. These relationships and changes can make it difficult for  DOE to monitor contractors’ ownership, such as in the previously  discussed example in which an awardee did not notify NNSA of an  ownership change prior to contract award as required by the request for  proposals. In this case, NNSA would have been unable to identify or  mitigate potential conflicts of interest in connection with the owner, had  the contracting officer not been notified separately of the change in  ownership.

Nevertheless, according to officials from DOE’s local offices, because  DOE is not a party to the subcontracts, agency officials generally do not  maintain or request subcontractor ownership information beyond the  information that contractors provide during consent reviews. Although  DOE has the right to access information about the subcontractors’ costs  and performance—through contract clauses that generally allow DOE to  request and review information relevant to costs and performance under  the prime contract, including the costs and performance of subcontractors  as well as through multiple databases available to government  employees—officials stated there is no requirement for contracting  officers to request or search such information during reviews. According  to DOE headquarters officials, depending on the type of prime contract,  the government may request direct access to subcontractor records as  required. For example, DOE officials from one local office told us that they  have access to the contractor’s subcontract information through a direct  link to the contractor’s internal restricted network, but they do not routinely  access the network to review ownership information. Like data available  through other databases, these internal data maintained by the  contractors have the potential to be useful to local officials during consent  reviews for identifying the risks imposed by potential conflicts of interest  between parties to the prime contract and potential subcontractors.

Federal internal control standards state that management should identify,  analyze, and respond to risks related to achieving the defined objectives,  such as analyzing identified risks to estimate their significance, which  provides a basis for responding to the risks. As noted above, local  officials said that their main concern when assessing conflicts of interest  is the contractor subcontracting with related parties. However, local DOE  officials told us that they generally do not request or review subcontractor  ownership information because there is no requirement to do so. By  requiring contracting officers to independently review subcontractor  ownership information as part of consent reviews and assess potential  conflicts of interest, DOE would have better assurance that contractors  are adequately identifying and mitigating organizational conflicts of  interest.

DOE Does Not Periodically Reevaluate Consent Thresholds to Ensure Sufficient Visibility into Contractors’ Subcontracting Actions

Although consent reviews have the potential to provide contracting  officers with important information on the contractor’s compliance with  requirements, the number of reviews conducted by local offices each year  varies due to different thresholds at each location. DOE headquarters and  local officials told us the numbers of consent reviews conducted by local  offices are based on dollar-amount thresholds or other criteria established  by the local DOE offices, and these criteria vary among DOE locations.  According to DOE officials, consent review thresholds vary for a number  of different reasons. For example, a senior agency official and some local  DOE officials said that small staff sizes and other oversight  responsibilities may limit the number of consent reviews that contracting  officers conduct. DOE guidance recommends that when establishing the  threshold for consent reviews, the contracting officer should aim to review  enough subcontracts annually to provide the local office with sufficient  visibility into subcontracting actions without being overly burdensome on  either the contractor or the federal staff.

The consent review thresholds for the 24 prime contracts in our selection  varied widely, and contracting officers performed few reviews for some  prime contracts. For example, as shown in table 3, one local office set its  subcontract consent threshold at $250,000, which led the local  contracting officer to review about 175 consent packages in a year, and  another set the threshold at $25 million, which led the local office to  review 1 consent package in a year. Local DOE officials told us that most  subcontracts are not subject to consent reviews because they fall below  the consent threshold. One of the prime contracts with a $25 million  consent threshold is held by Bechtel National, Inc., the contractor  constructing the Hanford Waste Treatment and Immobilization Plant. As  previously discussed, Bechtel National, Inc.’s purchasing system was  disapproved for a 3-month period in fiscal year 2018 and, during that  time, the contracting officer was required to review and consent to all  subcontracts above $250,000. A DOE official told us that the local office  reviewed 48 subcontract consent packages during this time period, and  the office would not have reviewed any if the purchasing system had not  been disapproved.

In some cases, DOE contracting officers have adjusted the consent  review thresholds during the contract period based on concerns they  have identified with subcontracts that the contractor awarded. For  example, one local office had concerns that the subcontractor was not  disclosing potential conflicts of interest to the contractor and, therefore,  the contractor did not mitigate these conflicts of interest. As a result, the  contracting officers reduced the consent threshold to increase the number  of consent packages they reviewed until they could be certain the  contractor was managing subcontracting risks adequately. According to  the local DOE officials, part of the reason they did not identify the  deficiencies sooner was that high thresholds resulted in the local officials  conducting few consent reviews. In another example, a DOE contracting  officer from a different local office lowered the consent review threshold in  2017 due to documentation issues—such as files with inadequate  documentation to explain or justify proposed prices—as well as the  contractor not sending a subcontract to the local office for approval, as  required. Local DOE officials told us they requested a peer review of the  contractor to see if this was a systemic issue, and they reduced the  consent threshold to send a message to the contractor that DOE  expected the contractor to improve its subcontracting practices.

For more than half of the contracts in our selection, thresholds for  required consent reviews have not been reevaluated since the contracts  were awarded because, according to DOE officials, there has not been a  requirement to do so. Federal internal control standards state that  management should design control activities to achieve objectives and  respond to risks. As discussed in the examples above, without an  appropriate number of subcontract reviews, deficiencies, such as  inadequate documentation, have persisted. By requiring contracting  officers to periodically reevaluate the thresholds for consent reviews,  DOE may be able to better ensure that local offices have sufficient  visibility into contractors’ subcontracting actions to ensure that proposed  subcontracts are appropriate to the risks involved and consistent with  current policy and sound business judgment.

After we provided our preliminary results from our review of the consent  review process to DOE headquarters officials, the officials told us they  planned to reevaluate consent thresholds as part of the peer review  process described above, with respect to purchasing system reviews.  NNSA headquarters officials stated that they would implement a similar  change to its process, based on DOE’s guidance, once DOE implements  its changes in the November 2018 update. However, we reviewed the  November 2018 update and found that it did not include a requirement to  reevaluate consent thresholds as part of the peer review process.

DOE Does Not Explicitly Evaluate Its Contractors’ Performance on Subcontract Management

According to local DOE officials and documents provided, DOE develops  Performance Evaluation and Measurement Plans at the beginning of  each fiscal year to establish expectations for contractor performance and  to describe how the local office will evaluate the contractors’ performance  against those expectations. According to DOE guidance, the plans  provide a standard to assess whether the contractors are meeting the  mission requirements and performance expectations for goals stipulated  within the contracts. In addition, according to DOE guidance, the plans  should describe the incentives available, such as award fees, and the  methodology for determining the amount of incentives earned by the  contractor for the year, based on the evaluation of the contractor’s  performance. In general, Performance Evaluation and Measurement  Plans we reviewed included goals and performance criteria. Goals are the  broad, high-level categories and benchmarks that local DOE officials use  to assess the contractor’s annual performance and reflect what local  officials consider most important in the contractor’s performance.  Performance criteria, also included in the plans we reviewed, refer to the  elements officials should consider when reviewing to determine whether  the contractor has met the goals. Not all performance criteria need to be  met for a contractor to show adequate performance toward a goal.

None of the fiscal year 2016 Performance Evaluation and Measurement  Plans for the 24 prime contracts we reviewed included goals explicitly  related to subcontractor management, and only 3 of the 24 plans included  performance criteria that were related to the contractor’s management of  subcontractors. According to DOE officials, there is no requirement to  include specific goals or performance criteria related to subcontractor  management in these plans because the contractor is responsible for  completing the scope of work in the prime contract, regardless of whether  it was performed by the contractor or a subcontractor. The fiscal year  2016 Performance Evaluation and Measurement Plans we reviewed for  18 of the 24 prime contracts in our selection included a goal for effective  and efficient business operations, which includes the contractor’s  accounting and purchasing systems. DOE headquarters officials stated  that they would expect any subcontract management issues that affected  the scope, schedule, or cost of the contract to be identified and  addressed within this goal. However, of the three plans that included  performance criteria on subcontract management, none of the criteria  were included under the business operations goal, as DOE officials said  they would have expected. Rather, these performance criteria were  included under goals such as “project performance and technical issue  resolution” or a “special emphasis area.”

The fiscal year 2016 Performance Evaluation and Measurement Plans we  reviewed did not reflect the expectations DOE headquarters officials  described to us that subcontract management would be reflected in the  business operations goal of contractor evaluations, and the plans do not  acknowledge the importance of subcontract management and oversight,  particularly in light of the high percentage of contract obligations— frequently for cost-reimbursement contracts—that subcontractors  ultimately execute. As we mentioned above, contractors in our selection  subcontracted out nearly 30 percent of their fiscal year 2016 obligated  funds, making subcontract management a key part of the contractors’  work.

According to DOE guidance, DOE should use performance-based  management as a strategic contract management tool to plan for,  manage, and evaluate contractor performance under the prime contract  and to align performance with costs. A March 2018 study of NNSA’s  M&O contractors and a February 2019 GAO report on DOE performance  measures found that performance evaluations tend to be subjective and  do not focus on potentially important areas, such as the contractors’ cost  performance. The Deputy Secretary of Energy also issued a statement  in September 2018 noting the importance of properly incentivizing  performance as part of contract management to ensure that the most  important performance measures are identified and that incentives are  appropriately aligned to those measures. However, the plans we  reviewed do not reflect the importance of subcontract management  because there is no requirement to include assessments of the  contractors’ management of its subcontractors in the plans. By requiring  that explicit performance criteria that assess the contractors’  management of subcontractors be included as part of the annual  Performance Evaluation and Measurement Plans, DOE would have more  reasonable assurance that the agency is emphasizing the importance of  subcontract management and providing contractors an additional  incentive to properly manage their subcontractors.

Contracting officers at DOE’s local offices are responsible for, among  other things, ensuring that contractors complete required subcontract  audits. DOE’s headquarters and local offices have taken some steps to  ensure that contractors comply with their subcontracting requirements.  However, differences in how contractors, local DOE offices, and DOE  headquarters offices interpret subcontract audit requirements and perform  subcontract audits persist because DOE has not clearly defined—in  guidance or other documents—how these requirements should be met.  Until DOE clarifies which subcontracts should be audited, how an audit is  defined, and how to meet subcontract audit requirements if DCAA is  unable to conduct the audit, contractors may not perform subcontract  audits as intended and unallowable costs may not be identified or  recouped. Additionally, DOE’s local offices did not always ensure that  contractors audited their subcontractors’ incurred costs for cost- reimbursement and time-and-materials subcontracts as required because  DOE headquarters has not issued documented procedures or guidance  that requires local offices to monitor contractors’ progress in completing  the required subcontract audits in a timely manner. Without such  procedures or guidance, unallowable costs may go unidentified beyond  the 6-year limitation period of the Contract Disputes Act, preventing DOE  from recovering those costs.

In addition, the timing of contractor accounting system reviews differs  among DOE’s local offices. DOE has not reviewed the differences in the  frequency of the reviews and whether the basis for these differences is  appropriate, nor provided guidance that includes criteria to determine the  frequency of reviews. By reviewing the differences in the frequency of its  accounting system reviews and approvals and developing guidance that  includes criteria to determine the appropriate frequency of such reviews,  DOE acquisition officials could better ensure that adequate accounting  systems are in place during the entire period of the contract.

DOE uses consent reviews to ensure that other subcontracting  requirements are met, including that subcontracts are appropriate to the  risks involved and that there are appropriate safeguards related to  personal and organizational conflicts of interest. Nevertheless, DOE  generally does not independently request or review subcontractor  ownership information or assess potential conflicts of interest related to  ownership between contractors and subcontractors as part of their  consent reviews—beyond information disclosed by the contractor— because there is no requirement to do so. Recent criminal investigations  into conflicts of interest, local offices’ own findings of unreported conflicts,  and the complex ownership relationships among contractors and  subcontractors that we identified emphasize the need for oversight in this  area. By establishing such a requirement, DOE would have better  assurance that contractors are adequately identifying and mitigating  conflicts of interest.

DOE’s local offices set thresholds to determine which subcontracts to  review. The thresholds often are set at the beginning of the contract and  are not reevaluated because there is no requirement to do so. We  observed a small number of instances in which DOE local offices  decreased thresholds after identifying concerns during consent reviews.  We were encouraged that DOE intended to incorporate evaluation of  consent review thresholds in their peer review process as part of their  planned update to their guidance, but upon subsequent review, the  guidance did not contain the requirement. By requiring local offices to  periodically reevaluate consent review thresholds, DOE and NNSA  acquisition officials may be able to better ensure that local offices have  sufficient visibility into contractors’ subcontracting actions to ensure that  proposed subcontracts are appropriate and consistent with current policy.

Finally, DOE uses Performance Evaluation and Measurement Plans to  establish expectations for contractor performance, including performance  criteria, used to evaluate contractor performance. However, few of the  plans we reviewed included explicit goals or performance criteria related  to subcontract management because there is no requirement to do so. By  requiring inclusion of explicit performance criteria for assessing the  contractors’ management of subcontractors in these plans, DOE and  NNSA acquisition officials would have more reasonable assurance that  the agency is emphasizing the importance of subcontract management  and providing contractors an additional incentive to properly manage their  subcontractors.

We are making the following six recommendations to DOE:  The Director of the DOE Office of Acquisition Management should clearly  define—in guidance or other documents—which subcontracts should be  audited, how an audit is defined, and how to meet subcontract audit  requirements if DCAA is unable to conduct the audit.(Recommendation 1)

The Director of the DOE Office of Acquisition Management should  develop documented procedures or guidance that requires DOE’s local  offices to monitor the contractors’ progress in completing required  subcontract audits in a manner that ensures unallowable costs can be  recovered within the 6-year limitation period in the Contract Disputes Act.  (Recommendation 2)

The Director of the DOE Office of Acquisition Management should review  the differences in the frequency of DOE’s accounting system reviews and  approvals and develop guidance that includes criteria to determine the  appropriate frequency of such reviews for prime contracts.  (Recommendation 3)

The Director of the DOE Office of Acquisition Management should require  local officials to independently review subcontractor ownership  information as part of DOE consent reviews and assess potential conflicts  of interest to ensure contractors are mitigating them. (Recommendation  4)

The Director of the DOE Office of Acquisition Management should require  local offices to periodically reevaluate consent review thresholds.  (Recommendation 5)

The Director of the DOE Office of Acquisition Management should require  contracting officers to include assessments of the contractors’  management of subcontractors as part of annual Performance Evaluation  and Measurement Plans, as appropriate. (Recommendation 6)

We provided a draft of this report to DOE for comment. In our draft report,  we made twelve recommendations—each of our six current  recommendations was made to both DOE and NNSA. In response to  DOE’s comments, we consolidated our original twelve recommendations  into six recommendations addressed to DOE. We did so with the  understanding that NNSA follows DOE guidance and would develop  supplemental guidance, as needed, to implement these  recommendations. With regard to the remaining six current  recommendations, DOE partially concurred with five of the  recommendations and did not concur with one of the recommendations.  DOE’s written response is reproduced in appendix IV. In addition, DOE  provided technical comments which we incorporated as appropriate.

DOE did not concur with our fourth recommendation to require local  officials to independently review subcontract ownership information as  part of DOE consent reviews and assess potential conflicts of interest to  ensure contractors are mitigating them. In response to the  recommendation, DOE said that it plans to issue guidance emphasizing  the importance of contracting officers’ reviewing contractors’ disclosure  and mitigation of issues created by potential conflicts of interest or  ownership affiliations between contractors and subcontractors, and NNSA  plans to evaluate the need for additional action upon issuance of the  guidance. DOE officials said they rely on the consent review process to  ensure that contractors identify and mitigate subcontract ownership  conflicts as required, such as those that may occur in connection with  subcontracts to related parties. Local DOE officials told us they have  identified instances, through their consent reviews, in which the  contractors’ reporting of potential conflicts of interest was inadequate.  Furthermore, we have identified several recent high-profile incidents that  have involved fraudulent activity by subcontractors related to conflicts of  interest that were not disclosed to DOE. DOE officials—including those in  local offices—have access to several databases and other sources of  information that would allow them to independently verify ownership  information that could allow the local offices to identify potential conflicts  of interest that were not disclosed. We continue to believe that requiring  local officials to independently review subcontractor ownership  information as part of consent reviews and assess potential conflicts of  interest could provide DOE with greater assurance that the contractors  are identifying and mitigating conflicts of interest.

In response to our other five recommendations, DOE stated that it  partially concurred with each. For each recommendation, DOE said that it  would review existing regulations, procedures, guidance, or contract  provisions and assess the need for supplemental guidance. We believe  that DOE’s plans to further examine the issues raised in our report is a  positive step toward resolving the issues; however, we believe that the  actions called for in our recommendations remain valid and that DOE  could more efficiently resolve the issues by proceeding to implement  those actions.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Energy, the Administrator of the National  Nuclear Security Administration, and other interested parties. In addition,  the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or bawdena@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix V.

To address our objectives, we reviewed relevant laws, regulations, and  guidance, including the Federal Acquisition Regulation (FAR); the  Department of Energy Acquisition Regulation (DEAR); Department of  Energy (DOE) policies and guidance on contract management and  subcontract oversight; and individual prime contracts to identify  requirements that explicitly apply to subcontracting, including DOE’s roles  and responsibilities and requirements for the contractor. We also  reviewed relevant documentation and interviewed officials from DOE and  the National Nuclear Security Administration (NNSA), as well as  representatives of DOE’s largest prime contracts and officials from the  local DOE offices that oversee these prime contracts.

To identify the entities that participated in DOE’s largest prime contracts,  the extent to which they subcontracted their work, and the entities that  participated in those subcontracts during fiscal year 2016, we reviewed a  list of all DOE prime contracts active in that year provided by DOE  headquarters officials. That list included information about prime contract  type, total prime contract value, fiscal year 2016 obligations, and DOE’s  local offices responsible for overseeing the contractors. We selected  fiscal year 2016 for review because it was the most recent fiscal year for  which complete data were available at the start of our review. DOE’s total  prime contract obligations for fiscal year 2016 were $28.2 billion. We  determined that an appropriate threshold for establishing our selection  would be all single prime contracts for which DOE obligated at least $300  million (about 1% of all contract obligations) in fiscal year 2016, and this  resulted in a list of 24 prime contracts that represented about $23.6 billion  in obligations, or about 84 percent of DOE’s fiscal year 2016 prime  contract obligations. The resulting selection of 24 prime contracts  consisted of both management and operating (M&O) and non-M&O prime  contracts from the three major program offices within DOE: NNSA, Office  of Science, and Office of Environmental Management. We took several  steps to determine the reliability of the prime contract data provided by  DOE, including interviewing agency officials and reviewing individual  prime contract documents, as well as verifying, through contractor and  local office interviews, the amount of funds obligated to the prime contract in fiscal year 2016. We determined that the data provided by DOE on the  prime contracts, in terms of prime contract obligations in fiscal year 2016,  were sufficiently reliable for identifying DOE’s largest prime contracts.

To identify the parties to DOE’s largest prime contracts, we reviewed  documents and statements the DOE local offices provided about the  parties to each of the 24 prime contracts in our selection. For consistency,  we used only the information local DOE officials provided about prime  contract ownership, either from their direct statements or from the prime  contract documents they provided as our source for the information,  although we observed that in some cases more recent ownership  information was available through the contractors’ websites. In addition to  the documents and statements officials from DOE’s local offices provided,  we also reviewed contractors’ websites and information from the parties’  websites about acquisitions and mergers to better understand the  complicated relationships among all of the contractors and the parties to  the prime contracts. Because of changes in entity ownership or the  structure of these prime contracts, more entities than we identified in our  analysis may be parties to these prime contracts.

To identify the subcontractors to the 24 prime contracts in our selection,  we requested and reviewed data from the 24 contractors about their  active subcontracts in fiscal year 2016. Each contractor provided data on  their subcontracts that were $10,000 or more and that were active in  fiscal year 2016, including: the subcontractor’s name, Dun & Bradstreet’s  Data Universal Numbering System (DUNS) number, location of  subcontractor’s office, total award amount, total obligated amount for  fiscal year 2016, type of subcontract, contract award date, and contract  term. There were some cases in which the contractors did not provide all  of the requested subcontract data, or the data provided were not clear,  such as the meaning of the type of subcontract. To resolve these issues,  we conducted contractor-specific follow-up requests to either collect the  missing information, identify the reasons that information was not  available, or to clarify data they provided. We were able to collect missing  information and clarify the data with two exceptions. First, many  contractors did not have DUNS numbers for all of their subcontractors  and therefore we did not use this identifier in our analyses. Second,  contractor Brookhaven Science Associates, LLC did not track the obligated dollar amount for fiscal year 2016 for its active subcontracts. As  a result, we were not able to include it in our analysis of the dollar amount  of subcontracted funds, and we indicated that this analysis was therefore  based on 23 of the 24 prime contracts in our selection.

We took several steps to determine the reliability of the subcontract data  provided by the contractors, including requesting and reviewing  information from each of the contractors about the systems used to  capture the data, and we determined that the information was sufficiently  reliable to use in analyses of subcontract information from these 24  contractors in fiscal year 2016. We identified the amount of funds  subcontracted, the number of subcontracts, and the number of unique  entities subcontracted to during fiscal year 2016. We also identified the  amount subcontracted for each contractor by type of subcontract, as  defined in the FAR: (1) fixed-price; (2) cost-reimbursement; (3) cost- reimbursement, no-fee; and (4) time-and-materials. In addition, we used  the names of the subcontractors to identify any cases in which a party to  the prime contract was also a subcontractor to any of the prime contracts  in our selection. We used shortened versions of the parties’ names to  perform the matching between parties to the prime contract and  subcontractors. For example, the party to the Battelle Energy Alliance,  LLC prime contract—Battelle Memorial Institute—was shortened to  “Battelle,” and we included any subcontract that included the word  “Battelle” in its name in our match list. This allowed us to identify a  conservative estimate of the number of parties who were also  subcontractors in fiscal year 2016. However, this analysis would not have  identified any cases in which the subcontractor was a party to the prime  contract but had a different name.

To develop graphical representations of (1) figure 2, Entities That Were  Party to More than One of the 24 Largest Department of Energy Prime  Contracts, Fiscal Year 2016 (which explores ownership relationships  between parties and prime contracts) and (2) figure 4, Selected  Department of Energy Contractors That Awarded Subcontracts to Parties  to Their Prime Contract, Fiscal Year 2016 (which explores contracting  relationships between prime contracts and subcontractors that were also  parties), we performed the name-matching exercise described in the  previous paragraph to first structure the data and then develop graphical  prototypes using the UCINet network analysis tool, including its NetDraw  graphics tool, which were then further refined for GAO publication. For  each of the static representations, the graphics juxtaposed two sets of  entities in columnar format: (1) for the party-prime contract graphic, we  arrayed parties to two or more prime contracts in the first column of  entities and the prime contracts in which these parties had ownership in a  second column, and (2) for the prime contract-party as subcontractor  representation, we arrayed the prime contracts in the first column and the  subcontractors who were also parties to their prime contract in the second  column. Lines between parties and prime contracts in the first graphic  represented the presence of an ownership relationship. The parties were  sized according to the number of contracts that the entity was a party to,  and the contracts were sized according to the number of parties to that  contract. Lines between prime contracts and parties as subcontractors in  the second graphic represented the value of subcontracts between the  two, with the lines taking on one of four weights corresponding to dollar  value ranges.

To examine the extent to which DOE ensured that the 24 contractors in  our selection audited subcontractors’ incurred costs and met other  requirements for subcontract oversight, we developed a structured  interview and a request for data and documents, which we administered  to representatives of the 24 prime contracts in our selection and to DOE  officials at local offices who were responsible for the oversight of the  contractors. To develop the list of requested documents and structured  interview questions, we reviewed the FAR, DEAR, DOE policies and  guidance, and individual prime contracts to identify both DOE’s roles and  responsibilities and requirements for the contractor regarding  subcontracting. From these sources, we confirmed that the review of  subcontract costs, including subcontract audits and DOE access to  subcontractor records, was a key requirement and identified two other  broad categories that covered the requirements we identified for DOE and  the contractor related to subcontracting: (1) the review and approval of  contractor business systems, including the accounting and purchasing  systems; and (2) DOE’s approval of subcontracts through consent  reviews, which are intended to assess the contractors’ adherence to  subcontracting requirements and provide assurance against conflicts of  interest, including personal and organizational conflicts, and issues with  kickbacks, foreign influence, and disbarment.

We designed the structured interview questions and document requests  to identify how DOE officials met subcontract oversight requirements. We  pretested the structured interview questions and document requests at  three of DOE’s local offices that included both M&O and non-M&O prime  contracts from three major program offices—the Hanford Site in  Washington State, Lawrence Livermore National Laboratory, and Pacific  Northwest National Laboratory—and made changes to the request for  documents and the interview guide as appropriate. We then conducted  the structured interviews with DOE’s local officials responsible for  oversight of the 24 contractors in our selection, including contracting  officers, and with representatives from the 24 contractors during  February, March, and April 2018. We also collected documents that  addressed DOE’s oversight of the contractors’ management of  subcontracts, including, as of February 2018, the two most recent  incurred cost audits or assessments of the prime contract—which  spanned the 10-year period from 2007 to 2016—the contract  management plans, annual contractor performance reviews, peer  reviews, and information about the subcontractors and entities that were  parties to the prime contracts. We conducted a content analysis of DOE  and contractor officials’ responses provided through the structured  interview process and on the data and documentation we received, and  we summarized the extent to which DOE ensures that contractors were  auditing subcontractors’ incurred costs and meeting other requirements  for subcontract oversight.

We conducted this performance audit from May 2017 to March 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: The Department of Energy’s 24 Largest Prime Contracts in Fiscal Year 2016

Table 4 provides information on the Department of Energy’s (DOE) 24  largest prime contracts in fiscal year 2016, including the name of the site  or project, the name of the contractor, entities that were party to the prime  contract, and the amount obligated on the contract in fiscal year 2016.  Local DOE officials provided information on parties to the prime contract,  either from direct statements or from the prime contract documents. We  used information DOE provided as our source for the information in the  table, although we observed that in some cases more recent information  was available through the contractors’ websites or other sources.

Appendix III: Summary of Key Data Systems Used to Collect Data on Department of Energy Contractors

There are several key federal data systems that include information on  Department of Energy (DOE) contractors. Additionally, DOE has internal  systems that include information on contractors. These data systems are  available to federal employees and can be used to differing extents to  identify information about contractor ownership.

Appendix IV: Comments from the Department of Energy

Appendix V: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Hilary Benedict (Assistant  Director), Kathy Pedalino (Analyst in Charge), Caitlin Dardenne, and  Jeffrey (Chris) Wickham made key contributions to this report. Also  contributing to this report were Enyinnaya David Aja, David Dornisch,  Farrah Graham, Richard P. Johnson, Cynthia Norris, Dan Royer, and  Tatiana Winger.

Almost the entire $30 billion Department of Energy budget goes to contracts, most of which have subcontracts.

What sort of scrutiny do these subcontracts get?

In a 10-year look back, we found more than $3.4 billion in subcontract costs that had not been audited as required—some of which was already past the 6-year statute of limitations to recover unallowable costs.

Yet Energy has not clarified which subcontracts should be audited and what an audit should entail.

We made 6 recommendations to address these and other issues we found with Energy's subcontract oversight.