Specifically, we determined (1) what conditions need to be present in order to successfully use fixed-price contracting for EM privatization cleanup projects, (2) what alternative financing approaches could be used for EM privatization contracts, and (3) how alternative financing methods for EM privatization projects might affect budget scoring. To evaluate how alternative financing and contracting approaches might affect budget scoring of EM’s privatization projects, we analyzed the scoring guidelines in the Office of Management and Budget’s (OMB) Circular A-11. Certain Key Conditions Need to Be Present in Order to Use Fixed-Price Contracting

Fixed-price contracts can be used for cleanup projects, including privatization projects, when certain conditions in the Federal Acquisition Regulation are met. However, private financing increases the performance risk borne by the contractor, and as a result, private financing costs can be significant. Other financing options exist that would leave some performance risk with the government by increasing the use of government financing. Other Construction Financing Options Are Available

Total private financing represents only one end of a continuum of construction financing options. Total government financing, as traditionally used in EM’s cost-reimbursement management contracts, represents the opposite end of the continuum. In between these two extremes, other financing options exist that attempt to strike a balance between financing cost and performance risk. However, as the amount of government financing increases, the amount of performance risk assumed by the government also increases. The consideration of the cost of added risk under a progress payment option is similar to the partial payment aspect of the option discussed above. Changing How EM’s Privatization Projects Are Financed Could Affect the Interpretation of the Scoring Guidelines

Currently, OMB scores EM’s privatization projects as service contracts. For this option, EM also would need additional budget authority upfront for the subsidy cost. Under all of the alternative financing scenarios we analyzed, except possibly full-government financing, scorekeeping guidelines could result in EM needing more budget authority earlier in the projects and incurring outlays sooner than under OMB’s current method of scoring privatization projects as service contracts. With respect to scoring, how these projects are scored will depend on how certain key aspects of the scoring rules are interpreted. As our analysis shows, a complex matrix of decision factors needs to be considered when deciding how to contract for and finance a cleanup. Once a contract type and financing method are chosen, DOE and the contractor would need to carefully develop a contract that clearly defines each party’s roles and accountability through provisions that allocate project risk between the parties, define DOE’s oversight role, and identify appropriate measures against which the contractor’s performance will be judged.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed whether privatization will achieve the nuclear weapons waste clean-up goals expected by the Department of Energy (DOE), focusing on: (1) what conditions need to be present in order to successfully use fixed-price contracting for the Office of Environmental Management's privatized clean-up projects; (2) what alternative financing approaches could be used for Environmental Management's privatization contracts; and (3) how alternative financing methods for Environmental Management's privatization projects might affect budget scoring.

What GAO Found

GAO noted that: (1) fixed-price contracting, one key aspect of Environmental Management's privatization program, can successfully be used for environmental clean-up projects when certain conditions in the Federal Acquisition Regulation are met; (2) when these conditions exist, GAO found that the Office of Environmental Management has successfully used fixed-price contracts for a variety of activities ranging from cleaning up contaminated soils to decontaminating workers' uniforms; (3) however, when these conditions do not exist, GAO found instances in which clean-up projects being performed under fixed-price contracts encountered cost increases and schedule delays; (4) in addition, risks and issues that could affect the eventual performance of the contract must be clearly defined; (5) total private financing represents one end of a continuum of construction financing options; (6) private financing transfers performance risk from the government to the private contractor, but costs for this approach are significant because of the increased risk assumed by the contractor; (7) total government financing represents the other end of the continuum of options; (8) with government financing, financing costs are minimized, but performance risk which has also proven to be costly, remains with the government; (9) in between these two extremes, other financing options exist that attempt to strike a balance between performance risk and financing costs; (10) how Environmental Management's privatization projects are scored for budget purposes depends on the way certain key aspects of the scoring rules are interpreted; (11) Environmental Management's privatization projects are currently scored as service contracts; (12) the use of alternative financing methods may change the interpretation of the scoring guidelines for these projects; (13) as a result, under all of the alternative financing options that GAO analyzed, the Office of Environmental Management would need more budget authority earlier in the projects and would also incur outlays sooner than under the Office of Management and Budget's method; (14) a complex matrix of decision factors needs to be considered when deciding who to contract for and finance a cleanup project; and (15) once a contract type and financing method are chosen, DOE and the contractor would need to carefully develop a contract that clearly defines each party's roles and accountability through provisions that allocate the project's risks between parties.