These include costs that are classified as both direct and indirect. Recognizing the limitations  of its cost data, DOE and NNSA are implementing the Institutional Cost  Reporting initiative, but this initiative may only provide limited  improvements over existing data. Differences in How M&O Contractors Allocate Indirect Costs Limit the Comparability of Program Costs across Laboratories

M&O contractors’ differ in how they allocate indirect costs to specific  programs, as allowed by Cost Accounting Standards. M&O contractors differ in how they classify costs as  direct or indirect. DOE and NNSA Are Taking Additional Steps to Standardize the Reporting of Certain Indirect Costs, but These Efforts May Provide Only Limited Improvements

DOE and NNSA are taking steps to standardize the reporting of certain  costs; however, these efforts may provide only limited improvements  because the data will continue to only be reported at an aggregate level. OFFM works with laboratory M&O contractors to try to bring cost  allocation models into compliance with Cost Accounting Standards and  has identified instances when a laboratory’s cost allocation model did not  comply with Cost Accounting Standards. NNSA Generally Relies on M&O Contractors’ Internal Audits to Assess Whether Day-to-day Cost Allocation Practices Conform to Disclosed M&O Contractor Models

Officials with NNSA’s OFFM told us that they generally rely on the M&O  contractors’ internal audit efforts to assess whether M&O contractors’  day-to-day cost allocation practices conform to their disclosed cost  allocation models. Following are examples:
Los Alamos. Lawrence Livermore. Sandia. NNSA’s Efforts to Independently Assess M&O Contractors’ Day-to- day Cost Allocation Practices for Compliance With Cost Accounting Standards Are Limited

Although NNSA’s OFFM has responsibility for supporting contracting  officers in the day-to-day oversight of M&O contractors’ management of  indirect costs, its role does not include conducting independent audits to  assess compliance with Cost Accounting Standards, according to OFFM  officials. OIG officials stated that the frequency and scope for conducting audits for  contractors’ compliance with Cost Accounting Standards should be based  on the level of risk. However, OFFM and OIG officials and M&O  contractors hold varying opinions regarding the level of risk of inaccurate  indirect cost allocation practices at the laboratories. Without a formal, periodic risk assessment  regarding the level of risk posed by noncompliance, NNSA may not have  a well-documented basis for its decisions regarding the type, timing, and  extent of future monitoring or oversight. NNSA Reviews M&O Contractor Information and Uses Other Means to Help Ensure the Reasonableness of Indirect Costs

NNSA reviews M&O contractor information to assess the reasonableness  of M&O contractor costs, including indirect costs, at the laboratories. NNSA also uses other means to help ensure the reasonableness of  costs, such as requiring M&O contractors to compare costs with other  laboratories and industry, but these efforts vary across laboratories. Although contracts for the three laboratories do require that  benchmarking be performed, the contract provisions do not specify the  areas that should be examined, how frequently benchmarking should  occur, and what process should be used for implementing any needed  corrective actions. Recognizing these  challenges, DOE has been developing the Institutional Cost Reporting  initiative to separately collect data on certain costs, including many  indirect costs, in an effort to improve its ability to oversee M&O  contractors’ costs, including, indirect costs, at the NNSA laboratories. Appendix I: Objectives, Scope, and Methodology

This report examines (1) whether laboratory Management and Operating  (M&O) contractors' practices differ for allocating indirect costs and, if so,  how; (2) the extent to which National Nuclear Security Administration  (NNSA) ensures that laboratory M&O contractors’ allocated indirect costs  are accurate; and (3) the extent to which NNSA ensures that laboratory  M&O contractors’ indirect costs are reasonable.
Why GAO Did This Study

NNSA, a semiautonomous agency within DOE, oversees the nations nuclear security programs. M&O contractors manage NNSAs facilities, including its national security laboratoriesLawrence Livermore, Los Alamos, and Sandia. Each year, M&O contractors spend billions of dollars to manage and operate these laboratories. Costs include both direct costswhich can be identified with a specific objective or programand indirect costs, such as management, administrative, and facility costs. Federal Cost Accounting Standards give M&O contractors flexibility in how costs are classified as direct or indirect and allocated to programs.
GAO was asked to review M&O contractor indirect cost management. GAO examined (1) whether laboratory M&O contractors' practices differ for allocating indirect costs and, if so, how; (2) the extent to which NNSA ensures that laboratory M&O contractors allocated indirect costs are accurate; and (3) the extent to which NNSA ensures that laboratory M&O contractors indirect costs are reasonable. GAO reviewed NNSA and laboratory M&O contractor data and documents and spoke with DOE and NNSA officials and M&O contractors.

What GAO Found

The National Nuclear Security Administrations (NNSA) management and operating (M&O) contractors differ in how they classify and allocate indirect costs at NNSA laboratories. Although different approaches are allowed by Cost Accounting Standards, these differences limit the ability to compare program costs across the laboratories. Recognizing the limitations of its current cost data, the Department of Energy (DOE) and NNSA are implementing the Institutional Cost Reporting initiative intended to create a standardized report of certain costs, including many indirect costs. However, DOE is uncertain how it will use the data gathered by this initiative, and these efforts may provide only limited improvements because the data will continue to only be reported at an aggregate level.
NNSA examines M&O contractors models for allocating indirect costs for compliance with Cost Accounting Standards requirements at least annually, which helps ensure accuracy. NNSA has identified instances when these models did not comply with these requirements, but NNSA has worked with M&O contractors to address these issues. NNSA generally relies on the M&O contractors internal audits, however, to assess whether M&O contractors day-to-day cost allocation practices conform to disclosed cost allocation models. NNSA reviews some summary data to independently assess day-to-day compliance with Cost Accounting Standards but does not conduct independent audits. DOEs Office of Inspector General (OIG) has audit authority at NNSA laboratories. OIG officials stated that the frequency and scope for conducting audits to assess contractors compliance with Cost Accounting Standards should be based on the level of risk. However, NNSA and OIG officials and M&O contractors hold varying opinions regarding the level of risk that inaccurate indirect cost allocation practices at the laboratories pose. In the absence of formal, periodic risk assessments, NNSA may not have a well-documented basis for its decisions regarding the type, timing, and extent of future monitoring or oversight.
NNSA reviews M&O contractors cost data and other information to assess the reasonableness of their costs, including indirect costs. NNSA also uses other means to help ensure the reasonableness of these costs. For example, NNSAs contracts require M&O contractors to regularly benchmark their costs to other contractors and industry. These requirements, however, do not specify the areas that should be examined, how frequently benchmarking should occur, and what process should be used for implementing any needed corrective actions. As a result, M&O contractor efforts to benchmark costs varied across laboratories.

What GAO Recommends

GAO recommends DOE clarify the uses of the data gathered through the Institutional Cost Reporting initiative, conduct periodic risk assessments, and incorporate more specific requirements for benchmarking in its laboratory M&O contracts. DOE generally agreed with GAOs recommendations.