In 2008, a Limited Liability Company called “Savannah River Nuclear Solutions” (SRNS) became the management and operating (M&O) contractor for the Department of Energy (DOE) at the Savannah River site. Fluor Federal Services, Newport News Nuclear, and Honeywell International are the three parent companies of SRNS, “who is responsible for environmental cleanup, national security activities and operation of the Savannah River National Laboratory.”

The DOE Inspector General recently reviewed SRNS’s procurement activities related to acquisitions of services from its three parents. As the DOE IG reported—

To help ensure that procurements from affiliates are free from conflicts of interest, adequately competed and reasonable in cost, the Department's contractors are required to obtain approval of related party procurements from Federal officials. For the SRNS contract, the Department established a requirement that procurements from the parent or an affiliate, regardless of type or amount, be submitted for approval prior to award.

The DOE IG reported that, in 2009, SRNS had entered into non-competitive contracts for personnel services from both Fluor and Newport News. In the first fourteen months of activity, “126 purchase orders … valued at approximately $26 million” had been issued to the two parent companies. The DOE IG had a problem with this. Specifically, the DOE IG found—

Although specifically required under the terms of its contract, SRNS also did not obtain approval for subsequent modifications that increased the budget ceilings for those contracts from $5 million to $40 million in one case, and, from $500,000 to $15 million in the other; [failed to demonstrate] that the affiliates were the only sources capable of providing the expertise necessary to perform the needed services, a pre-requisite for noncompetitive awards to affiliate companies; and [failed to perform] cost analyses to ensure the reasonableness of the cost of affiliate personnel services, as required.

The DOE IG provided details regarding its findings. Here’s one snippet from the report—

For example, SRNS issued noncompetitive purchase orders to obtain the services of an internal auditor and a project controls scheduler from a parent company, Fluor. In the first order, the period of performance was approximately 21 months, at an estimated cost of $400,412, which included $310,013 in labor and $90,399 in estimated travel related to temporary living expenses and periodic trips home. In the second order, the period of performance was approximately 24 months, at an estimated cost of $408,515, which included $285,406 in labor and $123,109 in estimated travel. In neither case did SRNS demonstrate that the individuals solely possessed special expertise or that the acquisitions were reasonable in cost.

How did this situation happen? The DOE IG had the answer—

The noncompetitive acquisitions occurred and persisted because the Department did not effectively administer the SRNS contract as it pertains to the procurement of affiliate personnel services. For example, Department contracting officials were apparently unaware that they had approved, in June 2010, an exemption from Federal requirements for the acquisition of affiliate personnel services as part of a multiple modification initiative to SRNS' procurement manual.

Furthermore, Department contracting officials stated that they were aware that SRNS had proposed using affiliate personnel services, but they were unaware of how extensively the services were being used. Additionally, the Department was not notified of a potential OCI because SRNS' General Counsel determined that SRNS did not need to submit a representation regarding such a potential conflict to the Department for these two noncompetitive contracts with parent companies. According to senior contractor officials, SRNS had tacit approval to use affiliate personnel services because the intention had been disclosed in the contract proposal prior to award of the management and operating contract. As a result, even though specifically required under the terms of its contract, SRNS never submitted its affiliate personnel service contracts with Fluor and Newport News to the Department for approval.

With respect to whether or not disclosure of use of affiliated services created a “tacit approval” on the part of DOE, the DOE IG had this to say—

SRNS sought to rely on inclusion of its intent to acquire personnel services as tacit approval for the process, yet violated a major condition of its original proposal. Specifically, the SRNS proposal stated that ‘Should the availability of critical skills become an issue … we will fill any short-term gaps by drawing from the qualified personnel of our member companies.’ SRNS defines short-term assignments as work expected to last less than 12 months. However, of the 42 purchase orders in our sample, 22 contain assignments that have lasted 12 months or longer.

Oops!

We have discussed the operation of joint ventures in this blog before. Companies wishing to enter into JVs for performance of government contracts should consider the following words of the DOE IG report—

We also noted that SRNS officials directly involved in the overall management and administration of the two affiliate contracts had what we considered to be an apparent conflict of interest in that they were assigned to SRNS but remained employees of the parent companies. The relationship of these SRNS employees to the affiliates, coupled with their responsibilities associated with administering the two affiliate contracts, calls into question SRNS' ability to provide assurance that it was performing objectively and without bias, and, as a result, preventing the affiliates from receiving an unfair competitive advantage. No instance of personal enrichment came to our attention during the course of our review. In our opinion, however, the appointment of affiliate personnel to key management positions, whose roles include administering the two affiliate contracts, creates a potential conflict of interest that had not been evaluated by SRNS, had not been brought to the attention of the Department, and was contrary to the very explicit terms of the master contract.

DOE’s Environmental Management team did not fully agree with the findings in the DOE IG report. In particular—

… EM concluded that corporate reachback is not a procurement action and is not subject to a determination that the affiliate is the sole-source of needed expertise. Finally, EM stated that corporate reachback costs are subject to the same requirements for reimbursement as any other costs and only reimbursed to the extent that the costs are allowable and reasonable.

The fact of the matter is that many joint ventures and M&O teams are largely unpopulated and use employees badged to their home companies. This DOE IG audit report points out some significant problems with that approach. We still think such an approach is viable; however, we also think that companies need to be explicit in the management approach and provide details in their proposal regarding exactly how they intend to operate after contract award.