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TESTIMONY OF JOHN C. LAYTON, INSPECTOR GENERAL, U.S. DE

PARTMENT OF ENERGY; ACCOMPANIED BY MICHAEL CONLEY, ASSISTANT INSPECTOR GENERAL FOR INSPECTIONS; AND RONALD K. STITH, DIRECTOR, PROGRAM REVIEW DIVISION

Mr. LAYTON. Thank you, Mr. Chairman. Also, thank you for the compliments.

I am here today to testify on the Office of the Inspector General's report entitled “General Management Inspection of the San Francisco Operations Office." The report was issued in September 1990.

Before I go further, I would like to introduce Mike Conley, the Assistant IG for Inspections, who oversaw this job, and Ron Stith, our Director of Program Review Division, who was the manager of the job to accomplish this task.

The Department of Energy has management and operation contracts with about 52 contractors to operate DOE facilities and carry out a major part of its mission. These contractors spend approximately 70 percent of the Department's procurement funds. Since first established, M&O contractors have been reimbursed for virtually all costs incurred in return for performing as the Department directed.

DOE recently issued regulations designed to increase the accountability of for-profit M&O contractors. However, the fundamental policy of completely indemnifying and reimbursing almost all costs remains unchanged for its nonprofit M&O contractors, such as the University of California and Stanford.

Because of this fundamental policy, effective contract administration is the primary method that the Department has of assuring that funds are spent as intended and are not wasted. Within DOE, field offices have the primary responsibility for administering M&O contracts. For these reasons, my office decided to conduct general management reviews of field offices focusing on how they administer M&O contracts. The first general management review was of the San Francisco field office.

Our report on the San Francisco field office identified four impediments to the Department's ability to effectively administer its M&O contracts. The four areas are: First, nonstandard contract clauses limit DOE's authority to direct its contractors to follow DOE policy and procedures; second, a lack of visibility of indirect costs at DOE facilities limits DOE's control over how its funds are spent for indirect services; third, staffing problems limit SAN's ability to administer its contracts; and fourth, DOE policies and management agreements limit SAN's authority to administer its contracts.

As I stated, the first impediment is that nonstandard contract clauses limit DOE's authority to direct its M&O contractors. Some of these clauses are based on the concept of mutuality.

This concept means that the Department cannot unilaterally require its contractors to follow DOE policies and procedures. Under the concept of mutuality, the University of California is not required to follow the Department's property management and procurement rules and regulations.

We found that Livermore and Berkeley did not have approved property management systems. A 1990 audit report issued by my

office found that, due to the lack of property management procedures, Livermore improperly stored and retained over $30 million in excess personal property. Some of the property became obsolete and deteriorated.

A 1987 SAN management report on Livermore procurement included 20 recommendations to correct deficiencies in their procurement system. Under the UC contracts, SAN could not direct that Livermore implement these recommendations.

Even though SAN was aware of the deficiencies, SAN allowed Livermore to enter into subcontracts up to $2.5 million without SAN's review and approval. These subcontracts totalled $432 million in fiscal year 1987, of which over $230 million were sole source.

The UC contracts also include an allowable costs clause which deviates from the standard Department of Energy acquisition regulation clause. As a result, DOE cannot disallow costs based on unreasonableness. DOE cannot require UC to follow Generally Accepted Accounting Principles. DOE cannot disallow certain costs that can be disallowed under the standard contract clause. The UC contract includes only 12 of 35 standard unallowable costs. And even when UC fails to obtain required prior approval, DOE cannot disallow such costs.

Examples of costs incurred by DOE under this nonstandard allowable cost clause include: $5 million in interest costs, which usually would be unallowable and a $6.6 million cost for a voluntary separation program that Livermore instituted without DOE's required prior approval.

The SAN manager has agreed with our recommendations to negotiate to include more standard clauses in its M&O contracts. The procurement director agreed with our recommendation to provide more detailed documentation of headquarters' involvement in negotiating M&O contracts in the official files.

The second impediment is the lack of visibility of the indirect costs at DOE facilities. DOE officials lack the information needed to review and consider all indirect costs in the budget planning process. These costs are substantial.

At Livermore, indirect costs represented $350 million of its funding in 1987. These costs were incurred for indirect services such as operations and maintenance, exploratory research, and safety and health.

Unless DOE reviews these proposed costs in the budget process, there is no assurance the funds for indirect services will be spent as the Department intends. The comptroller agreed with our recommendations to require that DOE officials review components of the M&O contractors' indirect costs and identify these costs in the budget process.

The third impediment is SAN's difficulty in recruiting and retaining staff. At the time of our review, SAN had 42 vacant positions. SAN officials gave staffing shortage as the reason for several of the findings in our report. For example, the office was behind in over 90 contractor personal property management reviews, and SAN only had 1.5 staff persons who were assigned to monitor $1.3 billion in contractor-held personal property.

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Industrial relations reviews for over $1 billion of non-M&O contracts were not being performed as required. Also, $120 million of $200 million in defense programs work-for others projects were not being monitored by SAN. Also, Environment, Safety and Health oversight staff personnel were performing line functions.

The SAN manager, in response to our recommendations, obtained authority to directly hire staff for 19 technical positions, reorganized several offices to more effectively use his existing staff, and doubled his personal property management staff.

The fourth impediment is that DOE policies and management agreements limit SAN's authority to administer its contracts. The SAN manager's mission and function statement charged him with the responsibility for managing the operations of SAN's M&O contractors. However, certain policies limited his authority to manage the M&O contractors.

For example, SAN performs services for the Office of Energy Research Programs at Berkeley, in most cases, only as required and requested. Similarly, SAN management of contractor activities for the Office of Defense Programs was limited by a management agreement.

Under this agreement, Defense Programs' request for Livermore resource requirements did not have to be processed through SAN. At the time of our inspection, SAN was unable to obtain a copy the Livermore budget request before it was sent to the headquarters office of Defense Programs.

The SAN manager and the Assistant Secretary for Defense Programs agreed with our recommendation to update their management agreement defining SAN's role in the Defense Programs areas. The Office of Energy Research stated that they believed that SAN's role was appropriate, and its memoranda of agreement with SAN did not impede SAN's ability to administer its M&O contracts.

In addition to the four impediments and the related examples I've just discussed, the report includes a number of other findings that are examples of the need for the Department and SAN to administer its contracts better. These findings include the following.

One, in fiscal year 1989, the Lawrence Berkeley Laboratory performed $13 million in National Institutes of Health-funded work in a manner that was contrary to DOE's policies and procedures.

Two, Lawrence Livermore National Lab gave priority to processing patents for the University of California, the contractor, that they had automatic rights to, instead of processing patents to which the government had rights.

Three, the Department had no standard criteria for justifying a management allowance and the UC management allowance was incr

ed from $8 million to $12 million in fiscal year 1987 without adequate justification.

Four, M&O contracts, including SAN's contracts, did not require the contractors to comply with DOE environmental orders.

Five, the Department was liable for over $340 million of Berkeley and Livermore employees' post-retirement health benefits, yet, SAN did not know the eligibility requirements for these benefits.

Six, SAN did not know whether the $6 billion pension fund for employees at Livermore and Berkeley was properly funded. Accord

ing to a SAN consultant's 1987 report, the pension fund may be over-funded.

The Department has taken action in regard to our report, issued in September 1990. The Secretary immediately tasked the directors of Procurement and Administration to provide him with recommendations for corrective actions. He also requested the status of actions already underway. He established a task force to review and make recommendations on the management and contractual relationship between DOE and UC.

In closing, the Department-not its M&O contractors-is ultimately responsible for operating its facilities and assuring that funds are properly spent. Therefore, as I stated before, effective M&O contract administration is essential to DOE's carrying out of its responsibilities.

This concludes my statement. I will be pleased to answer any questions you or other members of the committee might have.

[The prepared statement of Mr. Layton plus the DOE report follows:]

STATEMENT OF JOHN C. LAYTON

INSPECTOR GENERAL

DEPARTMENT OF ENERGY

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT

COMMITTEE ON SCIENCE, SPACE AND TECHNOLOGY

UNITED STATES HOUSE OF REPRESENTATIVES

JULY 31, 1991

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