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Special Review: OAS-RA-13-20

May 13, 2013

Cost Incentives for the Department's Cleanup Contract in Idaho

In Fiscal Year 2005, the Department of Energy (Department) awarded a Cost-Plus-Incentive-Fee contract to CH2M ♦ WG Idaho, LLC (CWI) to lead environmental cleanup of its Idaho National Laboratory site.  The contract originally ran from May 1, 2005 through September 30, 2012, and has been extended for 3 years to September 30, 2015.  The contract had a target cost of $2.7 billion and a target fee of $196 million (7.36 percent of target cost).  The contract includes an additional incentive if work is completed under target cost. In addition to the target work to be completed within the contract, additional non-target work was allowed under Section B.5 of the contract.  The contractor initially anticipated that the amount of additional non-target work would be approximately $89 million; however, the amount of non-target work completed ultimately increased to about $510 million, with the largest increase attributable to work funded under the American Recovery and Reinvestment Act of 2009 (Recovery Act).  The Department and CWI are now negotiating to close out the agreed upon scope of work covered by the contract performance period that ended September 30, 2012, and to calculate fee based upon the cost to complete this work. During our review, nothing came to our attention to indicate that General and Administrative (G&A) costs had not been properly allocated to the non-target work.  In accordance with its Cost Accounting Disclosure Statement, CWI allocated about $128 million in G&A expenses to its non-target work, about $88 million more than originally planned, which reduced the G&A expense allocated to CWI's target work and thereby reducing the total costs of target work. Additionally, the contractor contends the allocation served to reduce the actual cost of target work scope, and as a consequence, it is entitled to earn fee at the target work scope rate on the allocated amount.  However, we learned that the Department disagreed with impact of the G&A allocation on the incentive fee and was in a dispute with CWI regarding its overall fee. Based on the totality of the information we reviewed, we concluded that the contract modifications accepted by CWI disclosed that its fee earning potential in this area was undefinitized.  Management concurred with our recommendation and indicated that corrective action has been initiated.

TOPIC: Management & Administration