We frequently discuss subcontractor management on this site.  Whether we are pointing out that prime contractors need to embrace lean principles in their proposal preparation processes, in order to ensure that cost and/or price analyses are being performed, or noting that DCAA has taken the position that unsupported subcontractor prices result in unreasonable (and hence unallowable) costs, we are frequently writing about the importance of this topic.  Often we call it “supply chain management” rather than “subcontractor management” (for example, here), because we think that phrase is a more accurate description of the situation.  And we can’t think of a single factor that influences program execution more than effective management of the multiple tiers of the supply chain.

Today’s rather sad (if not outright pathetic) tale of ineffective subcontractor management comes to us via the U.S. Department of Energy (DOE)’s Inspector General, who recently issued a “special report” in which it identified $175 million in “questioned, unresolved and potentially unallowable costs” incurred by the prime contractor (Bechtel SAIC Company, LLC) at the nuclear waste repository site at Yucca Mountain, Nevada.  The site is managed by DOE’s Office of Civilian Radioactive Waste Management (OCRWM).  The Yucca Mountain site was identified decades ago (in 1987) as the repository for the nation’s nuclear waste and hundreds of millions of dollars have been spent to prepare the site to receive the waste and store it safely.  In addition, more millions of dollars of legal fees have also been spent in efforts to prevent the site from opening, and even more millions of dollars have been spent by nuclear power plants and electricity companies in litigating breach of contract claims against the Federal Government because of lengthy delays in opening the site to accept the waste by written commitment dates. 

The fact is that the nation needs to safely store its nuclear waste, and the Federal government promised to take care of the problem long ago.  In the meantime, the waste is stored locally throughout the country, in “temporary” repositories that risk environmental damage as well as the health and safety of the public.  Regardless of the obvious need to solve the problem on a permanent basis, one of President Obama’s earliest official decisions (made in February, 2009, less than a month after taking office) was to stop funding the project and to close down the site. 

Interestingly, in early July, 2010, a three-judge Nuclear Regulatory Commission panel ruled that the Obama Administration lacked the authority to unilaterally close the site, because doing so required an act of Congress.  So the future of the site is up in the air at this time.  But that didn’t save the Bechtel SAIC Company (BSC) from having its management and operating (M&O) contract ended by the DOE in March, 2009, after eight years of effort.  The DOE has announced its intention to shut down all project activities by September 30, 2010.  Part of DOE’s shut-down activities is to negotiate the final contract value of BSC’s M&O contract.  In the words of the DOE Inspector General, OCWM “needs to address” contractor costs that have been questioned in prior audits, as well as “ensure that disallowed costs are settled and funds recouped; required audits of costs incurred are completed; and, that all excess funds are deobligated.”

The DOE IG’s “special report” on the status of BSC’s costs asserts that—

We identified over $175 million in questioned and unresolved costs claimed by BSC during Fiscal Years (FY) 2001 through 2009. Specifically,

• $19,024,410 in questioned costs that had been identified in audits and reviews and had not been resolved; and,
• $159,955,538 in subcontract costs that we consider to be unresolved because necessary audits had not been requested or performed.

$18.8 million of “unresolved costs” related to costs questioned by BSC’s own internal audit function.  The majority of this amount related to “unsupported” subcontractor and other supplier costs.  For example, the DOE IG stated that amount included (among other items), “payments to Department of Energy national laboratories, BSC's parent company, and an array of suppliers and vendors.”

The special report noted that some of the unresolved costs were first identified as early as 2002, yet OCRWM has yet to resolve them with BSC, either through negotiation or through unilateral disallowance.  No particular reason is given for OCRWM’s negligence in executing its contractor oversight function.

Moreover, the DOE IG noted that its concern with subcontractor costs should not be a surprise to OCRWM or to DOE leadership.  It reported—

Our concern with contractor/subcontractor incurred costs issues at OCRWM is not new. In a 2005 OIG audit report on Assessment of Changes to the Internal Control Structure and their Impact of the Allowability of Cost claimed by and Reimbursed to Bechtel SAIC Company, LLC (OAS-V-05-03, January 2005), we questioned subcontractor costs totaling $95,552,645 that had not been audited.

As of the current tally, the DOE IG states that there is now $160 million in subcontractor costs awaiting audit.  The DOE IG did address a potential root cause for the lack of subcontractor cost audits.  It reported that—

As we understand it, the OCRWM contracting officer is waiting for the Defense Contract Audit Agency (DCAA) to complete three audit reports and for BSC to provide additional information before determining the allowability of the remaining questioned costs. We reported the $82,588,449 as unresolved costs pending audit.

In addition, the DOE IG made sure to note that OCRWM is working the process. It stated that, “OCRWM committed to requesting the appropriate audit for those subcontracts for which it determines an incurred cost audit or close-out audit is required.”  In other words, after eight years, DOE still has trouble identifying BSC’s flexibly priced subcontractors and requesting DCAA audits of them.  And even after they figure out which subcontracts require audit, they still need to wait for DCAA to complete the work and issue the reports.  And we all know how long that will take …  Good luck with that 9/30/2010 final close-down date.

In the words of OCRWM’s management response to the DOE IG audit findings—

For those subcontracts for which OCRWM determines an incurred cost audit or close-out audit is required, then OCRWM will request the appropriate audit.

Estimated date of closure: Contingent upon the Defense Contract Audit Agencies' (DCAA) response time.

Regardless of the foregoing, the DOE IG noted that “The Department [of Energy] has placed closure of the Office of Civilian Radioactive Waste Management on an expedited fast track.”  Yeah, right.

It strikes us that there are two parties worthy of blame for this debacle.  First, BSC had the responsibility to review invoices it received to ensure that only reasonable and allowable costs were being reimbursed on flexibly priced subcontracts.  It had the responsibility to identify subcontracts requiring audit, and to ensure that the required audits were carried out on a timely basis.  It had the responsibility to identify to OCRWM the subcontracts that required DCAA audit.  It is not clear from the DOE IG report to what extent (if any) they fulfilled their responsibilities in this area of supply chain management.

But it seems to us that OCRWM bears quite a bit of the responsibility here.  It had the responsibility to timely request audits of both BSC and BSC’s subcontractors; it had the responsibility to push DCAA for timely audit reports; and it had the responsibility to disposition timely the audit findings it received.  It appears to us that OCWRM fulfilled none of its oversight responsibilities in this area.

We keep harping on the importance of supplier management.  In addition to ensuring that suppliers perform their work, prime contractors must also ensure that administrative and oversight functions are executed as well.  Those administrative/oversight functions are as integral to contract performance as execution of the statement of work.

Post-Script

On September 23, 2009, then DCAA Director April Stephenson told the Senate Committee on Homeland Security and Governmental Affairs that existing DCAA funding “provides for only about 65% of the audits that are required to be completed.”   In other words, more than a third of required DCAA audits go unperformed because the audit agency lacks the funding to hire the necessary audit workforce. Although DCAA has since initiated a hiring program, nothing has changed significantly since that time—too many DCAA audits still go unperformed, and those that are performed take three times as long to complete as they used to.

Which leads us to the question, why is DCAA expending its scarce audit resources performing audits for non-DOD agencies? Why does DCAA accept work from DOE when it can’t complete the work it already has on its plate?

Rather than blaming DCAA for untimely audits, in our view DOE ought to “man-up” and take on the audit work internally, either through DOE IG audit resources or through hiring outside auditors. DOE should simply stop relying on DCAA to perform its audits, and DCAA should stop accepting work from outside DOD.