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Mr. LAYTON. We don't think it does. We don't think there is adequate justification for that increase.

Mr. WOLPE. Under the old contract, how did the University of California receive this management allowance?

Mr. LAYTON. It was paid out annually, based on information provided to the Department of Energy which was auditible.

Mr. WOLPE. With the 50 percent increase to $12 million, how does the management allowance work?

Mr. LAYTON. It is paid monthly, drawn down on the letter of credit, and there is no DOE approval process.

Mr. WOLPE. And there is a $250,000 annual increase built into the contract?

Mr. LAYTON. That's correct.
Mr. WOLPE. No requests? No justification?
Mr. LAYTON. That's my understanding.

Mr. WOLPE. There is no process then whereby the DOE says, to your knowledge, based on annual reviews of proposed expenses?

Mr. LAYTON. That is not in the current contract.
Mr. WOLPE. Is it audited?
Mr. LAYTON. No, sir.

Mr. WOLPE. Is the University of California's position that the Department of Energy has no ability to withhold any of the set amount?

Mr. LAYTON. I think that is evidenced by the civil suit where the Department attempted to withhold or has withheld $595,000 and the University is unhappy with that.

Mr. WOLPE. That is in connection with the Rocky Flats Model Shop issue?

Mr. LAYTON. Yes, sir.

Mr. WOLPE. Should we establish criteria in the DEAR for determining and justifying management allowances?

Mr. LAYTON. I believe that was our recommendation.

Mr. WOLPE. The University of California has already hinted that it wants an increase in its management allowance again; is that correct?

Mr. LAYTON. I don't know that.
Mr. WOLPE. Mr. Rezendes?
Mr. REZENDES. I don't know that either.

Mr. WOLPE. Some documents that have been supplied to the Committee would seem to suggest that.

One reason the University of California is advancing for the need of increase is the need for improved oversight-refreshing. [Laughter.]

This is my last set of questions and that will complete the formal testimony. I will say that I would like to ask if representatives of both the Inspector General's Office and the GAO would stay in the room while we hear from the next panel in case we need to clarify any points that are raised by the witness that will be testifying at that point.

What would you say needs to be done to change the contract with the University of California?

Mr. REZENDES. I'll take a stab at that first of all. First, I'd like to put this in context. I think that GAO is pretty much on record saying that DOE has a contract problem across the board.

GAO has identified DOE's contracting as an area that is at high risk for fraud, waste, and abuse. We have tallied a lot of work there. We see that the Secretary has basically agreed with that and has identified this as a major weakness, and is starting to change the culture in terms of how he manages his contractors, particularly the M&O contractors.

Specifically, as it gets down to the nonprofits and this contract with the University of California, I think that DOE needs to take a hard look at all the standard clauses that are in standard Federal contracts that are already in the DOE's standard contracts with other contractors and do a section by section to determine what needs to be included in the University of California's contract to make sure that the Government's best interests are protected.

This whole hearing this morning has covered a number of areas: property management, the accounting system, the purchasing systems. Those kinds of provisions are the ones we're talking about, basically relating to the business side of how you manage a contract.

Mr. WOLPE. Basically, what you are suggesting is that the concept of mutuality should be replaced with standard contract clauses? Mr. REZENDES. Right. Mr. LAYTON. That's correct.

Mr. WOLPE. Mr. Layton, would you have any other thoughts on that?

Mr. LAYTON. I would also agree that the mutuality provisions in the administrative areas need to be reviewed, considered for change, and in any case, no matter what kind of contract results, we need to do better contract administration. We need to be on top of the contractor and do that jawboning when it's necessary.

Mr. WOLPE. When you talk about the need for the standard clauses to be substituted for what now exists within the contract, you are talking about property management?

Mr. REZENDES. Correct.
Mr. WOLPE. Accounting and financial records?
Mr. REZENDES. Purchasing systems.

Mr. WOLPE. Purchasing systems. What about internal audit clauses and the cost allowability clause?

Mr. LAYTON. We believe that the internal audit clause needs to be enhanced and more consideration given to in conclusion of the unallowable costs, the reasonableness provisions, and if that doesn't happen, then a good explanation of why it's not, needs to be provided.

Mr. WOLPE. That concludes the first panel. I want to express my appreciation to both the Inspector General and to the General ACcounting Office for testimony and for the reports that have been supplied to the committee. I think it has been very helpful, and I just hope that there will be more than lip-service given by the Department of Energy to the recommendations that have been made in the body of these two very important reports.

Action is pending on the Floor momentarily, so I am going to recess this hearing for about 15 minutes. We will resume then with the witness from the Department of Energy, from the head of the SAN office as our next panel.

Thank you very much.
Recess.]
Mr. WOLPE. The hearing will resume.

We are pleased now to have before the Committee Mr. Donald Pearman, Jr., the manager of the San Francisco Operations Office of the United States Department of Energy.

Mr. Pearman, in order not to prejudice any past or future witnesses, it is our policy to swear all witnesses in. Do you have any objection to being sworn in?

Mr. PEARMAN. None at all.
Witness sworn.

Mr. WOLPE. Would you please identify the others who have also been sworn in who are accompanying you today?

Mr. PEARMAN. Yes, I will.

Mr. Chairman, I have brought with me members of my staff to answer any questions that you might have that they might be more expert in. To my extreme left is John Morgan, the Chief of Business Services at the San Francisco Field Office. To my immediate left is James Hirahara, the Assistant Manager for Administration. To my right is Susan Brechbill, the Assistant Chief Counsel for General Law.

Mr. WOLPE. We will now entertain your verbal statement. The full text of the written statement that you have supplied to the Committee will be made part of the Committee hearing record. Please proceed.

TESTIMONY OF DONALD W. PEARMAN, JR., MANAGER, SAN FRAN

CISCO OPERATIONS OFFICE, U.S. DEPARTMENT OF ENERGY; ACCOMPANIED BY: JOHN MORGAN, CHIEF OF BUSINESS SERV. ICES; JAMES HIRAHARA, ASSISTANT MANAGER FOR ADMINISTRATION; AND SUSAN R. BRECHBILL, ASSISTANT CHIEF COUNSEL FOR GENERAL LAW

Mr. PEARMAN. Mr. Chairman and members of the committee, I am pleased to appear before you today. My name is Donald W. Pearman, Jr., and I am the manager of the San Francisco Field Office of the Department of Energy.

Pursuant to your request of July 15th of this year, I am here to discuss the actions that DOE is taking specifically in my office in response to several reports that have been conducted by the Inspector General and GAO as we have discussed and heard this morning. In addition, I would like to share with you additional actions that I have taken with my organization since I have become manager to strengthen that organization and make it more responsive to the needs, again, as discussed this morning.

Things that I've done involve setting up written procedures, making expectations clear, establishing clear lines of accountability, and making sure that there is specific authority. In this manner, I think that we have made significant progress toward the oversight of the various contractor sites that are within the cognizance of the San Francisco field office.

To accomplish the oversight, my organization has 301 people assigned to it. During the past year, I have redeployed my existing

staff so that the number of DOE on-site personnel at the contractor sites has been increased from 29 to 113.

I believe that for oversight to take place in the very best fashion, people have to be on site. In that fashion, they have access to information, they have access to the laboratory personnel, and they can observe what is going on. The bottom line is that they become smarter and they can do their job, therefore, in an excellent manner. That's why I am doing this.

During the past two years under the leadership of Secretary Watkins and his administration, there has been a significant shift in priorities within the Department of Energy toward a more active stewardship of funds that go into our M&O contractor sites. I became the manager of SAN at the outset of the shift in priorities, and I fully support the Admiral's call for a changing culture, both within DOE and within our contractor population.

I have already noted how I have set up site offices at all of our major contractor sites. In addition to this, I have done some other things. For example, I have established regularly scheduled management meetings between my organization and the laboratories. In doing this, we have improved the communication, and in doing this, we were able to take and deal with problems and issues resolution on a real-time basis.

I am not talking about meetings just between myself and contractor management. I am talking about meetings that involve a lot of my staff and a lot of the contractor staff.

In this manner, there is a flow-down. This results in literally thousands of interfaces on a weekly basis, hundreds of interfaces on a daily basis. This is different than the case was before. Again, I believe that this is beginning to represent the foundation of effective oversight.

In a similar matter, I have strengthened the relationship between my organization and the University of California officials for the same purpose; so that we can improve communication, so that they can be aware of what our expectations are, and so that there can hopefully be an earlier resolution of the issues and concerns that typically pop up in the administration of these kinds of operations.

I have already mentioned that I have implemented a major reorganization to strengthen line manager accountability, but in addition to simply reorganizing my organization, I have written statements, formalized statements, so that people understand what their roles and responsibilities are. Where possible, I have redeployed staff to high priority tasks.

I have a relatively small organization; in fact, the smallest in DOE. But again, I think it's important that I do this.

What I would like to do now is spend just a few moments to address the reports that you mentioned in your July 15th request.

In several instances, these reports point out things that we have already found in our assessments. In every instance, I think these reports support Admiral Watkins' desires and goals to have a better oversight on the part of DOE and, certainly, to have contractor organizations where there is a strong management presence and where there is more responsiveness to the issues and concerns that have been expressed and have been reflected here today. Certainly,

these are some of the same issues and concerns that we in DOE have.

The most comprehensive report of the ones that you have identified is the DOE Inspector General's report. This essentially covers the entire management of the San Francisco operations and its assigned contractors.

As Mr. Layton noted this morning, there are four basic and major impediments to our fully effective administration and oversight of the contracts. First is the fact that there are nonstandard clauses. Second is the fact that we have limited visibility with regard to indirect costs. Third is the fact that there is a concern over the lack of staffing in my organization. Finally, there is a situation where the missions and functions of the organization are not clear.

With respect to the first of the issues—and that is the nonstandard clauses that exist in the contract between DOE and the University of California-I think that Secretary Watkins' comments in his July 24th letter to you express and sum up my position. I would like to quote just two or three sentences from that where the Secretary has stated that the task of concluding the contract negotiations remains ahead of us.

“I am confident, however, that the increased attention already devoted by senior officials of the university to the Department's management concerns regarding these laboratories holds considerable promise. In my view, this development warrants negotiations of restructured contracts. We will be pleased to provide any additional information the committee may wish on this subject when the Department has concluded its task of negotiating these contracts with the University of California."

In the meantime, I'd like to point out that there are positive actions that I have taken as the manager of SAN. For example, I have taken the initiative to correct deficiencies in the weaknesses in our internal controls. Also, I have taken actions, as I think you have seen in my written testimony, to recover costs associated with the Rocky Flats activities that were discussed with the last panel.

I have also required that there be the development and implementation of an improved property management system. I hope that the subcommittee recognizes that all of this was accomplished within the current UC contractual framework. It doesn't mean that I don't support and am not looking forward to a restructured contract, but we're not waiting for a restructured contract; we're making improvements at this point. I believe that real administrative reforms are being accomplished, and I think to a large extent, it is because of the fact that I have the backing of senior Departmental officials up to and including the Secretary.

To correct the problems associated with the limited visibility of indirect costs, there are several things that we are doing that represent new actions since the IG’s report. First, we are now obtaining estimated budgets and projections of laboratory overhead rates and we are performing periodic monitoring of the actual cost as it relates to the estimated cost. We are looking at brand new items, very new components in the indirect costs. We are looking at those costs that are deleted. We are looking at significant changes so that

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