GAO-20-451, NATIONAL NUCLEAR SECURITY
United States Government Accountability OfficeReport to Congressional CommitteesJune 2020NATIONAL NUCLEARSECURITYADMINISTRATIONAnalyzing CostSavings ProgramCould Result in WiderUse and AdditionalContractor EfficienciesGAO-20-451
June 2020NATIONAL NUCLEAR SECURITYADMINISTRATIONHighlights of GAO-20-451, a report tocongressional committeesAnalyzing Cost Savings Program Could Result inWider Use and Additional Contractor EfficienciesWhy GAO Did This StudyWhat GAO FoundNNSA relies on M&O contracts tomanage and operate its eightlaboratory and production sites. In2013, NNSA awarded a consolidatedM&O contract to CNS for the Y-12and Pantex sites to reduce costs. Inthe contract, NNSA required thatCNS create a Cost Savings Program.CNS proposed it would save about 2.9 billion over the contract’spotential 10-year term.The National Nuclear Security Administration (NNSA) verified about 515 millionin cumulative cost savings claimed by Consolidated Nuclear Security, LLC,(CNS) from fiscal year 2014 through fiscal year 2018 (see figure). CNS wasawarded the management and operating (M&O) contract for both the Y-12National Security Complex (Y-12) in Tennessee and the Pantex Plant (Pantex) inTexas. Those savings represented about 80 percent of the approximately 640million CNS proposed it would save through the end of fiscal year 2018. CNSachieved most of the savings through labor savings—for example, by reducingpositions. While CNS’s and NNSA’s methods for calculating and verifyingsavings evolved in the early years of the contract, GAO concluded the 515million in reported cumulative savings represents a reasonable estimate.However, due to differences between proposed and achieved savings throughfiscal year 2018, and annual savings projections that are lower for the remainingyears of the contract, it may be difficult for the contractor to achieve its totalproposed 2.9 billion in savings over the potential 10-year contract that wouldend in 2024.The Senate committee reportaccompanying a bill for the NationalDefense Authorization Act for FiscalYear 2019 includes a provision forGAO to review the cost savingsachieved from the competition andaward of the CNS contract. GAO’sreport examines the extent to which(1) CNS achieved proposed costsavings from fiscal year 2014 throughfiscal year 2018 and (2) NNSAidentified benefits associated with theCost Savings Program and used thatinformation to improve its M&Ocontracts.GAO reviewed documentation anddata on the Cost Savings Programfrom NNSA and CNS, interviewedNNSA headquarters and field officeofficials as well as representativesfrom M&O contractors, and touredthe Y-12 site to understand examplesof cost savings initiatives.What GAO RecommendsGAO is making fourrecommendations, including thatNNSA document its analysis of theCost Savings Program to determinewhether it is exportable to othercontracts. NNSA generally agreedwith the four recommendations.View GAO-20-451. For more information,contact Allison Bawden at (202) 512-3841 orbawdena@gao.gov.NNSA-Verified Cumulative Contract Savings Achieved by Consolidated Nuclear Security, LLC,from Fiscal Year 2014 through Fiscal Year 2018NNSA officials identified three key benefits of the Cost Savings Program—achieving savings, reinvesting in site infrastructure, and increasing financialtransparency—but has not determined whether the program could beimplemented at other sites to improve its M&O contracts. For example, NNSAofficials said achieving cost savings at other sites could be useful, and most M&Ocontracts include a clause under which sites could implement a Cost SavingsProgram with some attributes of the program at Y-12 and Pantex. However,NNSA is not planning to implement the Cost Savings Program—or a variation ofit—at other sites. NNSA officials and contractor representatives were uncertainabout whether the Cost Savings Program could be exported to other existing orfuture contracts because NNSA has not gathered information on nor documentedits analysis of the Cost Savings Program. GAO has previously found that leadingorganizations gather and analyze data to identify opportunities to reduce costs,among other reasons. By performing such an analysis, NNSA officials andcontractors’ representatives could make better-informed decisions about whetherto implement aspects of the Cost Savings Program under existing contracts or aspart of future M&O contracts to achieve additional savings in the future.United States Government Accountability Office
ContentsLetter1BackgroundCNS Has Achieved Most of Its Proposed Savings, and Changesto Oversight and Methodologies Have Addressed SomeProblems That May Affect Actual SavingsNNSA Identified Benefits of the Cost Savings Program but HasNot Fully Used Them to Improve M&O ContractsConclusionsRecommendations for Executive ActionAgency Comments633444546Appendix IComments from the National Nuclear Security Administration49Appendix IIGAO Contact and Staff Acknowledgments5223TablesTable 1: Consolidated Nuclear Security’s, LLC, Proposed AnnualNew Savings and Cumulative Contract Savings over theLife of the Potential 10-Year Contract (Dollars in Millions)Table 2: Annual New, Sustained, and Cumulative ContractSavings the National Nuclear Security Administration(NNSA) Verified for the Y-12 and Pantex ConsolidatedContract, Fiscal Years 2014 through 20182024FiguresFigure 1: National Nuclear Security Administration’s (NNSA)National Security Laboratories, Production Plants, andTesting SitesFigure 2: Timeline of Key Events in NNSA’s ConsolidatedContract for the Y-12 National Security Complex (Y-12)and Pantex Plant (Pantex), since 2011Figure 3: Consolidated Nuclear Security’s, LLC, and NationalNuclear Security Administration’s Phases forImplementing and Overseeing the Cost Savings ProgramPage i71315GAO-20-451 National Nuclear Security Administration
Figure 4: Amount of Savings NNSA Verified by Savings Category,as a Percentage of Cumulative Contract Savings, FiscalYear 2014 through Fiscal Year 2018Figure 5: Savings Shared among the Contractor, Government,and Site Reinvestment Projects from Fiscal Year 2014through Fiscal Year 2018Figure 6: Comparison of Cumulative Contract Savings Proposedby Consolidated Nuclear Security, LLC (CNS) andSavings Verified by NNSA, Fiscal Years 2014 through2018Figure 7: Comparison of Analog and Digital Security CameraFootage at Y-12 National Security Complex in OakRidge, Tennessee, a Site Reinvestment ProjectFigure 8: John C. Drummond Center at the Pantex Plant nearAmarillo, Texas, Was Partially Built with SiteReinvestment Funds in 2018Figure 9: Overview of National Nuclear Security Administration’sBudget Structure and Authority to Move FundsFigure 10: Number of Programs, Projects, and Activities andBudget and Reporting Codes with Funds Available for Y12 National Security Complex’s and Pantex Plant’s SiteReinvestment ProjectsPage ii25262736373839GAO-20-451 National Nuclear Security Administration
onsolidated Nuclear Security, LLCDefense Contract Audit AgencyDepartment of EnergyFederal Acquisition Regulationmanagement and operatingNational Nuclear Security AdministrationNNSA’s Production OfficePantex Plant (Amarillo, Texas)programs, projects, or activitiesY-12 National Security Complex (Oak Ridge, Tennessee)This is a work of the U.S. government and is not subject to copyright protection in theUnited States. The published product may be reproduced and distributed in its entiretywithout further permission from GAO. However, because this work may containcopyrighted images or other material, permission from the copyright holder may benecessary if you wish to reproduce this material separately.Page iiiGAO-20-451 National Nuclear Security Administration
Letter441 G St. N.W.Washington, DC 20548June 24, 2020Congressional CommitteesThe National Nuclear Security Administration (NNSA)—a separatelyorganized agency within the Department of Energy (DOE)—is responsiblefor, among other things, (1) enhancing national security through themilitary application of nuclear energy; (2) maintaining and modernizinginfrastructure for the U.S. nuclear weapons stockpile; and (3) supportingthe nation’s nuclear nonproliferation efforts. To execute its missions,NNSA relies on management and operating (M&O) contracts—recognized as a special contracting method—to manage and operate itseight laboratory and production facilities, known as the nuclear securityenterprise. 1 According to officials from NNSA’s Office of Management andBudget, NNSA obligated 15.1 billion in fiscal year 2019, with 13.1billion—about 90 percent—obligated to M&O contracts.In January 2013, NNSA awarded a consolidated M&O contract for the Y12 National Security Complex in Oak Ridge, Tennessee, (Y-12) and thePantex Plant in Amarillo, Texas, (Pantex) to Consolidated NuclearSecurity, LLC (CNS). 2 NNSA’s Production Office (NPO) is the federal fieldoffice that provides local oversight of CNS operations at both sites. NNSAentered into the consolidated contract at Y-12 and Pantex with severalobjectives, one of which was to reduce the cost of performing work atboth sites. As a result, NNSA required that the contractor create a CostSavings Program to reduce costs and operate facilities in a more efficientand effective manner, where process improvement is continuouslyemphasized. CNS proposed that it would be able to save approximately1M&Ocontracts are agreements under which the government contracts for the operation,maintenance, or support, on its behalf, of a government-owned or government-controlledresearch, development, special production, or testing establishment wholly or principallydevoted to one or more of the major programs of the contracting agency. 48 C.F.R. §17.601. The nuclear security enterprise is defined at 50 U.S.C. § 2501.2CNSis comprised of member companies Bechtel National, Inc.; Leidos; ATK LaunchSystems; and SOC LLC, with Booz Allen Hamilton, Inc. as a teaming subcontractor. CNSbegan its administration of the consolidated contract on July 1, 2014, following threeprotests of NNSA’s award of this M&O contract to CNS.Page 1GAO-20-451 National Nuclear Security Administration
2.9 billion over the potential 10-year contract. 3 According to the terms ofthe contract, the verified savings are to be split into three portions: one forthe government; one for the contractor; and one for other activities underthe contract, which NNSA uses for reinvestment in the sites. 4DOE and NNSA rely on M&O contracts and must employ strong contractmanagement to successfully and cost-effectively meet their goals. DOE’shistory of inadequate management and oversight of its contractors ledGAO, since 1990, to designate aspects of the department’s contractmanagement as a high-risk area vulnerable to fraud, waste, abuse, andmismanagement. 5 As cost-reimbursement-type contracts, M&O contractsare considered high risk for the government because of the potential forcost escalation and because the government pays a contractor’s costs of3Thisfigure represents CNS’s revised proposal as of 2017. In its original bid, CNSproposed it would save approximately 3.27 billion. CNS’s proposed savings decreasedby approximately 360 million due to two changes. The proposed savings decreased byabout 93 million because of changes in actual site operations between the request forproposals in December 2011 and when CNS took over administration of the contract inJuly 2014. The remaining 267 million change is related to NNSA directing CNS toremove all potential savings associated with incorporating certain operations performed atanother nuclear security enterprise site, the Savannah River Site in South Carolina, anoption under the CNS contract that NNSA has not exercised. For the purposes of thisreport, “proposed savings” will refer to the 2.9 billion in savings identified in 2017.4Theportion of verified savings that is available for the government allows NNSA to returnthose savings to the programs for which funds were originally obligated. The portion ofverified savings the contractor receives is in the form of a cost-savings incentive fee. Theportion of verified savings that are for other activities under the Y-12 and Pantex contractare available for implementation costs for future cost savings initiatives; program, project,or indirect cost activities to finance additional approved mission work; projects that servethe M&O site as a whole, such as a parking structure or an office building; and for certainemployee compensation for non-key personnel.5InJanuary 2009, GAO narrowed the focus of DOE’s high-risk designation to contractswithin NNSA and DOE’s Office of Environmental Management, and in February 2013,GAO further narrowed this focus to major projects (those with an estimated cost of 750million or more) to acknowledge progress made in managing nonmajor projects. SeeGAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: February 2013) and,High-Risk Series: An Update, GAO-09-271 (Washington, D.C.: Jan. 22, 2009). For themost recent high-risk report, see GAO, High-Risk Series: Substantial Efforts Needed toAchieve Greater Progress on High-Risk Areas, GAO-19-157SP (Washington, D.C.: Mar 6,2019).Page 2GAO-20-451 National Nuclear Security Administration
performance regardless of whether the work is completed. 6 The CNScontract includes an annual award fee based on certain performancecriteria, and a cost-savings incentive fee based on a share of the savingsNNSA verifies every year. 7The Senate committee report accompanying S. 2987, a bill for theNational Defense Authorization Act for Fiscal Year 2019, includes aprovision for GAO to review the cost savings achieved, among otherissues, from the competition and award of NNSA’s M&O contract to CNSfor Y-12 and Pantex. 8 Our report addresses the extent to which:(1) CNS has achieved the cost savings it proposed for the consolidatedcontract for Y-12 and Pantex, from fiscal year 2014 through fiscal year2018, and(2) NNSA has identified benefits of the Cost Savings Program and usedthat information to improve other M&O contracts. 9To determine the extent to which CNS has achieved the cost savings itproposed for the consolidated contract for Y-12 and Pantex from fiscalyear 2014 through fiscal year 2018, we reviewed relevant contract andCost Savings Program requirements, as well as other relevantassessments of the Cost Savings Program, such as the December 20176Cost-reimbursement-type contracts allow the agency to contract for work whencircumstances do not allow the agency to sufficiently define its requirements or estimateits costs to allow for a fixed-price contract. Under a fixed-price contract, a contractoraccepts responsibility for completing a specified amount of work for a fixed price. Incontrast, under cost-reimbursement contracts, the government reimburses a contractor forallowable costs incurred, to the extent prescribed by the contract. The government mayalso pay a fee that is either fixed at the outset of the contract or adjustable based onperformance criteria set out in the contract.7The contract also included a fixed fee in its first year. Incentive fees are commonly usedin M&O contracts and are generally used to motivate achieving specified cost objectives,though they may be used to motivate performance toward specific delivery (e.g.,schedule) targets or technical goals. NNSA refers to this type of fee as the cost-savingsincentive fee under the CNS contract, and for the purposes of this report, we use NNSA’sterm.8S.Rep. No. 115-262, at 411 (2018).9NNSAwas in the process of reviewing the fiscal year 2019 savings at the time we werecompleting our review. Therefore, we excluded fiscal year 2019 data from our review.Because CNS began its administration of the contract on July 1, 2014, the time period wereviewed is the fourth quarter of fiscal year 2014 through the end of fiscal year 2018.Page 3GAO-20-451 National Nuclear Security Administration
review by DOE’s Office of the Inspector General. 10 We interviewed NNSAofficials from NPO and NNSA’s Offices of Acquisition and ProjectManagement and Management and Budget, as well as representativesfrom CNS, to learn about the processes and procedures related to theCost Savings Program. For example, we interviewed NNSA and CNSofficials about how CNS implements cost reduction initiatives—actionstaken to reduce costs—and calculates the savings associated with thoseinitiatives, as well as how NNSA verifies that the implemented costreduction initiatives have produced savings. 11 We also interviewed NNSAofficials and CNS representatives about how these processes may haveevolved over time and how such changes could affect reported savings.We conducted a site visit to Y-12, during which time we observed parts ofNNSA’s interim cost-savings review process that occurs throughout theyear. Additionally, we reviewed and analyzed NNSA and CNS documentsrelevant to these processes for fiscal years 2014 through 2018. Keydocuments we reviewed included CNS’s Merger Transformation Plan,Annual Controlled Baseline, Cost Reduction Proposal annual updates,Validation Reports, and NNSA’s Verification Reports.To assess the reliability of NNSA’s and CNS’s cost savings datacontained in these key documents, we (1) interviewed knowledgeableofficials concerning the data and the system that produced them, (2)traced information from 22 of about 90 cost reduction initiatives for whichCNS claimed savings to source documents and reconciled discrepancieswith NNSA and CNS officials, 12 (3) reviewed NNSA’s documentedprocedures for verifying CNS’s reported data and obtained samples ofsupporting documentation for NNSA following its documentedprocedures, and (4) reviewed independent third-party Defense Contract10Department of Energy, Office of Inspector General, National Nuclear SecurityAdministration’s Oversight of the Consolidated Nuclear Security, LLC, Cost SavingsProgram at the Y-12 National Security Complex and the Pantex Plant, DOE-OIG-18-11(Washington, D.C.: Dec. 13, 2017).11According to a CNS planning document, cost reduction initiatives are merger,transformation, and continuous improvement actions that CNS takes to reduce the currentbaseline cost in a particular program, project, or organizational area.12We selected the 22 cost reduction initiatives based on the savings category theyrepresented, the amount of savings involved, and whether NNSA accepted or rejected thesavings, among other things, in order to choose initiatives that represented differentcategories, large amounts of savings, and illustrated NNSA’s verification processes. Thefindings from the 22 cannot be generalized to those we did not review.Page 4GAO-20-451 National Nuclear Security Administration
Audit Agency (DCAA) audits of CNS’s fiscal years 2016, 2017, and 2018cost savings data. 13 We did not independently confirm the labor hourscharged to establish the baseline or determine cost savings at Y-12 andPantex during the scope of our review. Instead, we relied on NNSA’sverification of the initial baseline used to describe the scope of work, cost,and schedule that NNSA uses to evaluate whether CNS achievedsavings. We also relied on NNSA’s verification process for ensuring theproper number of labor hours had been charged as the basis fordetermining whether cost savings were achieved. We interviewed NNSAofficials about the agency’s verification process and analyzed NNSAdocumentation related to the process. We determined that the data weresufficiently reliable for the purposes of this report. We then comparedNNSA’s verified savings to CNS’s proposed savings to examine changesacross time and any factors that could affect CNS’s ability to reach itsproposed savings.To determine the extent to which NNSA has identified benefits of the CostSavings Program and used that information to improve other M&Ocontracts, we reviewed and analyzed NNSA and CNS documents anddata related to the Cost Savings Program. We
Defense Authorization Act for Fiscal Year 2019 includes a provision for GAO to review the cost savings achieved from the competition and award of the CNS contract. GAO’s report examines the extent to which (1) CNS achieved proposed cost savings from fiscal year 2014 through fiscal year
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