DOE improved its ability to compare laboratories’ costs in fiscal year 1997,  when it began requiring contractors to report all functional support costs,  regardless of how they were classified. Functional support cost data  facilitate comparisons of laboratories’ costs because they are intended to  include all costs that support laboratory missions, regardless of whether a  particular laboratory has classified the support costs as direct or indirect. Two DOE Laboratories’ Indirect Cost Rates Have Increased and Three Have Decreased, but These Rates Are Not Comparable across Laboratories

From fiscal years 2000 through 2004, indirect cost rates increased at two  laboratories operated by DOE contractors and decreased at three. While functional support cost rates facilitate improved analysis of  laboratory costs, several DOE and contractor officials told us that the  definitions for some categories are somewhat unclear, leading to confusion  in how to categorize certain costs. The laboratory’s indirect cost rate cannot be compared  with those of DOE laboratories without a detailed understanding of  differences in (1) contract provisions and other requirements; (2) how  contractors classify costs as direct or indirect; and (3) research missions  and activities, such as the added costs at the DOE laboratories associated  with safety requirements for handling radioactive and other hazardous  materials. DOE and Its Contractors Have Taken Actions to Reduce Indirect and Other Support Costs, but Opportunities Exist for Further Reductions

DOE and its contractors have numerous efforts under way to reduce  indirect and other support costs; however, we identified several efforts that  could be strengthened to further reduce costs. DOE Is Increasingly Using Contractual Incentives to Encourage Cost Savings but Is Expanding a Key Program without Evaluating Its Effectiveness

Recently, NNSA has taken several actions to improve business operations  and achieve support cost savings through contractual incentives. For example, the Los Alamos contract’s  performance measures that focused on business operations increased from  about 28 percent in fiscal year 2002 to 40 percent in fiscal year 2005. DOE did not require prompt action to adjust benefits at the three  laboratories that exceeded the benchmarked value. Furthermore, while  DOE has begun to address the $1.9 billion backlog of deferred maintenance  to reduce long-term costs and improve the safe, efficient, and reliable  operation of equipment and buildings, only Lawrence Livermore and  Sandia have demonstrated sustainable approaches that successfully  reduced their backlogs. DOE, however, does not  require laboratories to have such programs, and some laboratories have  not instituted one. To assess the efforts of DOE and its laboratory contractors to reduce  support costs and identify additional opportunities for savings, we visited  each of the five laboratories to interview senior managers and obtain  supporting documentation, interviewed DOE officials, and examined prior  GAO and DOE Inspector General reports.
Why GAO Did This Study

In fiscal year 2004, about two-thirds of the Department of Energy's (DOE) $26.9 billion in spending went to 28 major facilities--laboratories, production and test facilities, and nuclear waste cleanup and storage facilities. DOE spent about $2.9 billion in fiscal year 2004 to support the mission of its five largest laboratories. GAO was asked to examine (1) recent trends in indirect and functional support cost rates for these five laboratories, noting key differences in how contractors classify costs, and (2) the efforts of DOE and its contractors to reduce indirect and other support costs and identify additional opportunities for savings.

What GAO Found

For fiscal years 2000 through 2004, laboratory-reported rates for indirect costs--those not charged directly to a specific program--increased at two laboratories and decreased at three. However, indirect cost rates cannot be compared across laboratories because contractors classify different portions of support costs as indirect. To facilitate analysis, DOE requires the laboratories to report what it called "functional support costs," or costs that support missions, regardless of whether they are classified as direct or indirect costs. Using this measure, three laboratories' rates--that is, functional support costs divided by total costs--increased and two laboratories' rates decreased over the 5-year period. While functional support cost rates improved comparability, several DOE and contractor officials said that the definitions for some categories of support costs, such as "facilities management," are unclear, leading to confusion and inconsistent reporting. DOE and its contractors have initiated several steps to reduce indirect and other support costs but can take additional actions to improve their implementation. First, DOE's laboratory contracts have increasingly included incentives to encourage cost reductions. In fiscal year 2004, for example, the National Nuclear Security Administration began an "award-term" pilot program that allows a contractor to earn extra contract years based on performance and cost-saving achievements. However, DOE is expanding use of this incentive without evaluating it. Second, DOE requires its contractors to benchmark employee benefits and to reduce benefits if they exceed the benchmark, but DOE did not promptly enforce these requirements at one laboratory and exempted two others. Third, DOE has begun to address a $1.9 billion backlog of deferred maintenance to reduce long-term costs. However, without a more rigorous approach, the backlog will persist well into future decades. Lastly, while some laboratories have used process improvement programs to streamline business processes and reduce costs, others do not have such programs, nor are they required to have them.