Contractor Loses Out on Significant Profits due to "Marginal" Performance Reports

The U.S. Department of Energy's Office of Inspector General's latest Semiannual Report to Congress (April 1 - September 30, 2019) included CPAR (Contractor Performance Assessment Ratings) summaries for the contractor responsible for building its $17 billion vitrification plant at the Hanford Nuclear Site, Bechtel National. Specifically, the report included the following summary:

Downgraded Contractor Performance Rating in False Claims Act Investigations: As a result of ongoing OIG (Office of Inspector General) criminal and civil investigations, the Department’s Office of River Protection issued and published downgraded Contractor Performance Assessment Ratings for calendar year (CY) 2018 and the beginning of CY 2019 regarding a prime contractor at the Hanford Site’s Waste Treatment and Immobilization Plant. Specifically, the prime contractor was downgraded from “satisfactory” to “marginal” for the “schedule” category. Consistent with the previously issued CY 2017 Contractor Performance Assessment Ratings, the prime contractor’s “cost control” category was evaluated and remains at a “marginal” rating. The assessing official also stated that “given what is known about the contractor’s ability to perform in accordance with the contract or order’s most significant requirements, I would NOT recommend them for similar requirements in the future.” The ongoing investigations are being coordinated with the U.S. Attorney’s Office, Eastern District of Washington. 

We don't know what those ongoing investigations entail but we do know back in 2017 that the Justice Department notified all Bechtel (and employees of its subcontractors) to preserve all information and emails regarding charging for labor, recording time worked, overtime, and related matters.

Perhaps another factor in these downgraded ratings is Bechtel's failure to audit its subcontracts as required by the terms of its prime contract. The OIG issued a report last September that found Bechtel had failed to audit subcontracts as far back as 18 years putting taxpayers at risk for overpayments. The OIG estimated the potential overpayments could approach $160 million.

What do these downgraded classifications mean to Bechtel (or any Government contractor, for that matter). It could jeopardize future work and it could reduce incentive payments (profits).

In this case, as noted above, the contracting officer stated that he/she would not recommend Bechtel for similar requirements in the future. Perhaps this threat is a bit hollow as there are not too many $21 billion vitrification plant construction projects going on right now or planned.

The reduced fee is a viable threat. For the last two years, Bechtel has received less than half of the available incentive fee pool which equates (if reports are accurate) to about $200 million per year.

Incurred Cost Audit Coverage at Department of Energy Contractors

Last week, the Department of Energy (DOE) Office of Inspector General (IG) issued a special report on the state of contract auditing at many of its contractors. The report describes how at one time, DCAA (Defense Contract Audit Agency) performed most of the required audits of incurred costs for Energy but for the past several years, DCAA has been unable to perform its audits on a timely basis. As a result, the backlog of audits of contracts and subcontracts has reached "billions of dollars". To illustrate, the IG reported that of the 16 largest DOE contractors, seven had never had an incurred cost audit, six were behind by more than four years and only three were relatively current with incurred cost audits covering 2012 or later. The report noted that:

DCAA has been unable to meet the ... contract audit needs of the Department and has asserted that it simply does not have the resources to meet all Department of Defense and civilian agency audit requests. As it pertains to the Department, this situation was exacerbated by the fact that the Department lacked a comprehensive strategy to ensure that ... contractor costs were subjected to necessary audits. Instead, the Department employed alternative means for conducting a portion of required audits. In several instances, (the Department) contracted with independent public accounting firms for these services. At least some effort to fill the void lefty by declining DCAA audit coverage had also been made by one large ... contractor that expanded its internal audit function to conduct audits of costs incurred. (One organization within the Department) had also explored the possibility of developing its own audit capability. While laudable, these efforts were not well coordinated, in some instances did not comploy with professional audit standards, and do not, in our judgment, close the significant gap in audit coverage for ... contractors.

 The IG report goes on to explain that given the billions of dollars committed to contracting, the intricacies of contractor accounting systems, and the inherent inability of Federal contracting/reviewing officials to gain complete transaction level knowledge of contractor operations, comprehensive periodic audits are critically important. Timely incurred cost audits are an essential part of the system of safeguards to identify internal control weaknesses and detect and prevent reimbursement of unallowable costs.

To put the situation into perspective, the IG reported that at contracts where there have been systematic reviews of incurred costs (22 contractors), questioned costs as a result of those reviews have totaled $1.1 billion. It is important to note that "questioned costs" is not the same as "sustained questioned costs". Just because costs are questioned, doesn't mean that those costs are unallowable under FAR cost principles or contract terms. It could be that the auditors couldn't satisfy themselves through audit means as to the propriety of claimed costs. It is just as likely that questioned costs are ultimately settled in the contractor's favor as it is that they are settled in the Government's favor.

DCAA wants it job back

Because of DCAA's inability to provide timely audits, DOE has begun to rely upon outside CPA firms to conduct its audits. However, as the report explains, these options for supplementing DCAA audit coverage "are not inexpensive". DCAA audit coverage is not inexpensive either but probably much more cost effective than outsourcing. The report states that DCAA wants to continue providing audit support to DOE and will work with the Department to develop a viable solution to reduce the backlog. DOE doesn't necessarily believe that bringing DCAA back into the fold is a short term solution. "DCAA's ling-term intentions notwithstanding, it does not appear that any resolution of this problem is likely for a number of years.

DOE has initiated discussions with DCAA to implement a strategy for reducing the backlog of unaudited incurred costs. However, no one is confident that whatever plan they come up with will quickly and efficiently reduce the backlog of unaudited contractor incurred costs. In recognition of DCAA's inability to fulfill DOE requirements, the IG has recommended that the Department develop a comprehensive strategy to ensure necessary audit coverage until such time as DCAA can catch up.

DOE management supports the idea however they are cautious to assume any significant changes to the way DCAA operates.

We fundamentally agree with the report's recommendations ... however it is important to recognize that whatever good intentions DCAA has, its track record makes it prudent to avoid assuming a marked change in DCAA's support.

The IG report is available for downloading and reading here.

DOE Inspector General Report on Contract Performance

The Department of Energy (DOE) Office of Inspector General issued a report yesterday that was critical not only of one of the Department's contractors but of the Department itself for failing to adequately monitor the progress of a clean-up contract.

The contract required demolition of a highly radioactive building. Initially, it was going to cost $581 million and completed by September 2013. Later, the cost estimate rose to $753 million with a completion date pushed out to September 2014. Well, September 2014 is pretty much gone and the building is still standing. The current estimate for completion is $932 million and a completion date of September 2016.

The DOE-IG was duly concerned about this cost growth and program extension so it set out to find the problems. It identified several and made some recommendations. Among the problems identified were:

1. Unavailable or deficient work packages. In 2012, there were at least 40 instances where work shifts were not worked due to either unavailable or deficient work packages. Project officials commented that (Union) workers were encouraged to stop work when uncertain on how to proceed, and that in some cases, worker preferences on how work packages should be written, stopped the work. Really? This makes us wonder about who is managing who. Who is really calling the shots here, management or the union?
2. Insufficient labor resources to perform work. Also in 2012, the DOE reported 47 instances where work shifts involving 9 to 12 employees per team, were not worked. The report doesn't say why those shifts did not work. By our estimate, this works out to $250 thousand (with fringes).
3. Employees not always productively employed. Report identified employees reading books, playing chess and visiting on cell-phones for several hours. Sounds like they're running a tight management ship.
4. Productivity issues. A 2013 study noted that 80 percent of planned work was not performed when scheduled in 2012. There were delayed starts, rescheduled work, and other events that impacted the schedule. Management acknowledged that this was a major concern. 

The report laid most of the blame for the delays and cost growth at DOE's management. DOE did not fully enforce contract requirements. DOE did not adequately track, trend, and resolve issued. DOE did not require the contractor to develop corrective action plans. DOE did not perform necessary QA audits and assessments.

The DOE-IG made some recommendations which DOE management concurred with. That really means that DOE management is going to get tougher on its contractors.

To read the full IG report, click here.