National Nuclear Security Administration: Analyzing Cost Savings Program Could Result in Wider Use and Additional Contractor Efficiencies

NNSA relies on M&O contracts to manage and operate its eight laboratory and production sites. In 2013, NNSA awarded a consolidated M&O contract to CNS for the Y-12 and Pantex sites to reduce costs. In the contract, NNSA required that CNS create a Cost Savings Program. CNS proposed it would save about $2.9 billion over the contract's potential 10-year term.

The Senate committee report accompanying a bill for the National 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 2018 and (2) NNSA identified benefits associated with the Cost Savings Program and used that information to improve its M&O contracts.

GAO reviewed documentation and data on the Cost Savings Program from NNSA and CNS, interviewed NNSA headquarters and field office officials as well as representatives from M&O contractors, and toured the Y-12 site to understand examples of cost savings initiatives.

The National Nuclear Security Administration (NNSA) verified about $515 million in cumulative cost savings claimed by Consolidated Nuclear Security, LLC, (CNS) from fiscal year 2014 through fiscal year 2018 (see figure). CNS was awarded the management and operating (M&O) contract for both the Y-12 National Security Complex (Y-12) in Tennessee and the Pantex Plant (Pantex) in Texas. Those savings represented about 80 percent of the approximately $640 million CNS proposed it would save through the end of fiscal year 2018. CNS achieved most of the savings through labor savings—for example, by reducing positions. While CNS's and NNSA's methods for calculating and verifying savings evolved in the early years of the contract, GAO concluded the $515 million in reported cumulative savings represents a reasonable estimate. However, due to differences between proposed and achieved savings through fiscal year 2018, and annual savings projections that are lower for the remaining years of the contract, it may be difficult for the contractor to achieve its total proposed $2.9 billion in savings over the potential 10-year contract that would end in 2024.

NNSA officials identified three key benefits of the Cost Savings Program—achieving savings, reinvesting in site infrastructure, and increasing financial transparency—but has not determined whether the program could be implemented at other sites to improve its M&O contracts. For example, NNSA officials said achieving cost savings at other sites could be useful, and most M&O contracts include a clause under which sites could implement a Cost Savings Program 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 of it—at other sites. NNSA officials and contractor representatives were uncertain about whether the Cost Savings Program could be exported to other existing or future contracts because NNSA has not gathered information on nor documented its analysis of the Cost Savings Program. GAO has previously found that leading organizations gather and analyze data to identify opportunities to reduce costs, among other reasons. By performing such an analysis, NNSA officials and contractors' representatives could make better-informed decisions about whether to implement aspects of the Cost Savings Program under existing contracts or as part of future M&O contracts to achieve additional savings in the future.

GAO is making four recommendations, including that NNSA document its analysis of the Cost Savings Program to determine whether it is exportable to other contracts. NNSA generally agreed with the four recommendations.

The National Nuclear Security Administration (NNSA)—a separately  organized agency within the Department of Energy (DOE)—is responsible  for, among other things, (1) enhancing national security through the  military application of nuclear energy; (2) maintaining and modernizing  infrastructure for the U.S. nuclear weapons stockpile; and (3) supporting  the 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 its  eight laboratory and production facilities, known as the nuclear security  enterprise. According to officials from NNSA’s Office of Management and  Budget, NNSA obligated $15.1 billion in fiscal year 2019, with $13.1  billion—about 90 percent—obligated to M&O contracts.

In January 2013, NNSA awarded a consolidated M&O contract for the Y- 12 National Security Complex in Oak Ridge, Tennessee, (Y-12) and the  Pantex Plant in Amarillo, Texas, (Pantex) to Consolidated Nuclear  Security, LLC (CNS). NNSA’s Production Office (NPO) is the federal field  office that provides local oversight of CNS operations at both sites. NNSA  entered into the consolidated contract at Y-12 and Pantex with several  objectives, one of which was to reduce the cost of performing work at  both sites. As a result, NNSA required that the contractor create a Cost  Savings Program to reduce costs and operate facilities in a more efficient  and effective manner, where process improvement is continuously  emphasized. CNS proposed that it would be able to save approximately  $2.9 billion over the potential 10-year contract. According to the terms of  the contract, the verified savings are to be split into three portions: one for  the government; one for the contractor; and one for other activities under  the contract, which NNSA uses for reinvestment in the sites.

DOE and NNSA rely on M&O contracts and must employ strong contract  management to successfully and cost-effectively meet their goals. DOE’s  history of inadequate management and oversight of its contractors led  GAO, since 1990, to designate aspects of the department’s contract  management as a high-risk area vulnerable to fraud, waste, abuse, and  mismanagement. As cost-reimbursement-type contracts, M&O contracts  are considered high risk for the government because of the potential for  cost escalation and because the government pays a contractor’s costs of  performance regardless of whether the work is completed. The CNS  contract includes an annual award fee based on certain performance  criteria, and a cost-savings incentive fee based on a share of the savings  NNSA verifies every year.

The Senate committee report accompanying S. 2987, a bill for the  National Defense Authorization Act for Fiscal Year 2019, includes a  provision for GAO to review the cost savings achieved, among other  issues, from the competition and award of NNSA’s M&O contract to CNS  for Y-12 and Pantex. Our report addresses the extent to which:  (1) CNS has achieved the cost savings it proposed for the consolidated  contract for Y-12 and Pantex, from fiscal year 2014 through fiscal year  2018, and  (2)  NNSA has identified benefits of the Cost Savings Program and used  that information to improve other M&O contracts.

To determine the extent to which CNS has achieved the cost savings it  proposed for the consolidated contract for Y-12 and Pantex from fiscal  year 2014 through fiscal year 2018, we reviewed relevant contract and  Cost Savings Program requirements, as well as other relevant  assessments of the Cost Savings Program, such as the December 2017  review by DOE’s Office of the Inspector General. We interviewed NNSA  officials from NPO and NNSA’s Offices of Acquisition and Project  Management and Management and Budget, as well as representatives  from CNS, to learn about the processes and procedures related to the  Cost Savings Program. For example, we interviewed NNSA and CNS  officials about how CNS implements cost reduction initiatives—actions  taken to reduce costs—and calculates the savings associated with those  initiatives, as well as how NNSA verifies that the implemented cost  reduction initiatives have produced savings. We also interviewed NNSA  officials and CNS representatives about how these processes may have  evolved over time and how such changes could affect reported savings.

We conducted a site visit to Y-12, during which time we observed parts of  NNSA’s interim cost-savings review process that occurs throughout the  year. Additionally, we reviewed and analyzed NNSA and CNS documents  relevant to these processes for fiscal years 2014 through 2018. Key  documents 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 data  contained in these key documents, we (1) interviewed knowledgeable  officials concerning the data and the system that produced them, (2)  traced information from 22 of about 90 cost reduction initiatives for which  CNS claimed savings to source documents and reconciled discrepancies  with NNSA and CNS officials, (3) reviewed NNSA’s documented  procedures for verifying CNS’s reported data and obtained samples of  supporting documentation for NNSA following its documented  procedures, and (4) reviewed independent third-party Defense Contract  Audit Agency (DCAA) audits of CNS’s fiscal years 2016, 2017, and 2018  cost savings data. We did not independently confirm the labor hours  charged to establish the baseline or determine cost savings at Y-12 and  Pantex during the scope of our review. Instead, we relied on NNSA’s  verification of the initial baseline used to describe the scope of work, cost,  and schedule that NNSA uses to evaluate whether CNS achieved  savings. We also relied on NNSA’s verification process for ensuring the  proper number of labor hours had been charged as the basis for  determining whether cost savings were achieved. We interviewed NNSA  officials about the agency’s verification process and analyzed NNSA  documentation related to the process. We determined that the data were  sufficiently reliable for the purposes of this report. We then compared  NNSA’s verified savings to CNS’s proposed savings to examine changes  across time and any factors that could affect CNS’s ability to reach its  proposed savings.

To determine the extent to which NNSA has identified benefits of the Cost  Savings Program and used that information to improve other M&O  contracts, we reviewed and analyzed NNSA and CNS documents and  data related to the Cost Savings Program. We interviewed NNSA officials  from NPO and NNSA’s Office of Acquisition and Project Management  about the costs of developing, implementing, and overseeing the Cost  Savings Program. We also interviewed NNSA officials from NNSA’s  Office of Management and Budget, and five other NNSA sites in the  nuclear security enterprise, as well as CNS representatives and  representatives from the M&O contractors at five other sites.

Additionally, we visited the Y-12 facility and observed cost reduction  initiatives and toured site reinvestment projects to better understand  some of the benefits associated with the Cost Savings Program.

We conducted this performance audit from January 2019 to June 2020 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

NNSA’s nuclear stockpile missions are largely executed at eight sites that  are managed by seven M&O contractors and that comprise the nuclear  security enterprise. These eight sites include:  three national security laboratories—Lawrence Livermore National  Laboratory in California, Los Alamos National Laboratory in New  Mexico, and Sandia National Laboratories in New Mexico and other  locations;  four nuclear weapons production plants—the Pantex Plant in Texas,  the Y-12 National Security Complex in Tennessee, the Kansas City  National Security Campus in Missouri, and tritium operations at DOE’s  Savannah River Site in South Carolina; and  the Nevada National Security Site, formerly known as the Nevada  Test Site.

As shown in figure 1, each of NNSA’s eight sites has specific  responsibilities within the nuclear security enterprise.

NNSA’s sites are owned by the federal government but managed and  operated by M&O contractors. According to DOE, the use of M&O  contracts is supported by an underlying principle: the federal government  employs highly capable companies and educational institutions to  manage and operate government-owned or government-controlled  scientific, engineering, and production facilities because these companies  and educational institutions have greater flexibility in bringing scientific  and technical skills to bear than the government. As we previously found,  an M&O contract is characterized by, among other things, a close  relationship between the government and the contractor for conducting  work of a long-term and continuing nature.

To support its missions, NNSA is organized into program offices that  oversee the agency’s numerous programs, such as the B61-12 Life  Extension Program—overseen by the Office of Defense Programs—and  the Nuclear Smuggling Detection and Deterrence Program—overseen by  the Office of Defense Nuclear Nonproliferation. Mission-related activities  are primarily overseen by these program offices, which are responsible  for integrating the activities across the multiple sites performing work.  NNSA’s program offices are:

NNSA receives four different appropriations, which it is responsible for  allocating to programs that are managed by the program offices. The program offices obligate these funds to the M&O contracts to execute  specific program functions. Obligated funds that are not “costed,” or  expended, by the contractor at the end of the fiscal year can carry over  for expenditure in a subsequent fiscal year, or the program offices can  deobligate the funds and obligate them to a different contract for work in  that same program area. In order for funds to be reallocated to a  different program, NNSA may need to reprogram funds; such  reprogramming may be subject to congressional notice and approval  requirements.

NNSA headquarters offices generally are to provide leadership, develop  policy and budgets, or provide other functional support across NNSA.  NNSA headquarters offices include the offices of:

Cost Estimating and Program Evaluation,  Information Management and Chief Information Officer,

NNSA has seven field offices across the country. Field office managers  report directly to the NNSA Administrator. NNSA field offices, such as  NPO, are collocated at the laboratory, plant, and testing sites and are  responsible for overseeing NNSA’s M&O contractors, including ensuring  compliance with federal contracts. To provide oversight of the M&O  contractors, each field office employs subject matter experts in areas  such as emergency management, physical security, cybersecurity, safety,  nuclear facility operations, environmental protection and stewardship,  radioactive waste management, quality assurance, business and contract  administration, public affairs, and project management. NNSA’s field  offices are:

Savannah River Field Office in South Carolina.

Before awarding the consolidated contract at Y-12 and Pantex, NNSA  took steps to consolidate its field offices that oversee the contractor at  these two sites. Specifically, NNSA combined the former Y-12 Site Office  and former Pantex Site Office into the NPO Field Office in 2012. One  NPO manager oversees both the Y-12 and Pantex sites, and each site  has a deputy manager. The deputy managers oversee their respective  sites as well as certain programs at both sites. The NPO Cost Savings  Program Manager provides overall administration of the Cost Savings  Program. As of fiscal year 2018, NPO had about 130 federal full-time  equivalent employees at both sites, according to an NPO official.  According to CNS officials, the contractor employs over 9,000 employees  at Y-12 and Pantex. According to an NPO official, NPO acts as a single  office because the two sites are closely integrated.

Consolidated Contract History and Requirements

In December 2011, NNSA issued a request for proposals for a  consolidated M&O contract for the Y-12 and Pantex sites. NNSA awarded  the M&O contract to CNS in January 2013. However, the award was the  subject of three protests to GAO under our bid protest authority. NNSA  ultimately reaffirmed its award of the contract to CNS, and CNS began  contract performance in July 2014. The consolidated contract includes a  total of 10 years, including the base period and all option terms. The  contract requires CNS to meet certain performance requirements, and  NNSA is to evaluate CNS’s accomplishment of these performance  requirements before exercising each option term.

During the first 2 full fiscal years of the contract, CNS focused on merger  and consolidation activities—that is, merging the two sites under one  contractor—and on achieving savings from those activities, according to  CNS’s Merger Transformation Plan. Merger savings are associated with  efficiencies and reductions in the workforce resulting from the  consolidation of the contract. During the third and fourth fiscal years of the  contract, CNS focused on transformation savings—or savings based on  changing underlying processes to increase standardization, and improve  quality and efficiency within and across the organization. From the third  full fiscal year of the contract onward, CNS focused on continuous  improvement, which constitutes incremental efficiency within established  processes.

The original contract required CNS to achieve at least 80 percent of its  proposed savings and score 80 percent or higher on its performance  evaluations in order to have additional option terms exercised. In  September 2017, however, NNSA and CNS modified the contract so that  delivery of cost savings is only taken into consideration in conjunction  with CNS’s performance, as documented in NNSA’s annual Performance  Evaluation Reports, when deciding whether to extend CNS additional  option terms, also known as gateway decision points. NNSA officials  told us they made this modification prior to the first gateway decision in  September 2017 because CNS was very close to achieving 80 percent of  its proposed cost savings, but it was unclear if CNS would achieve 80  percent. In addition, the initial contract requirements placed equal  emphasis on cost savings and the contractor’s performance in meeting  the mission, but NNSA officials said they do not view those two goals as  equal. Cost savings in and of themselves are only helpful—and only  creditable under the contract—if they do not negatively affect the mission,  and therefore NNSA officials do not view achieving cost savings as equal  to the contractor’s performance in meeting the mission. Following the  contract modification in September 2017, NNSA exercised the first 2-year  option term, ensuring the contractor will manage and operate Y-12 and  Pantex through fiscal year 2021. The gateway decision for the second 2- year option term will occur by the end of June 2020, according to NNSA  officials (see fig. 2).

Implementation and oversight of the Cost Savings Program involves  contractor representatives and NNSA officials at several levels. CNS  manages the Cost Savings Program using a matrixed organization that  includes several executives such as vice presidents of the Business  Management and Transformation and Program Integration departments,  according to CNS officials. Throughout each fiscal year, these officials  lead various efforts associated with developing and implementing cost  reduction initiatives as well as other key aspects of the Cost Savings  Program. One CNS Cost Savings Director is responsible for overseeing  much of the company’s cost savings efforts, including coordinating  between different program offices.

Within NNSA, NPO conducts much of the oversight of the Cost Savings  Program while NNSA’s Offices of Management and Budget, and  Acquisition and Project Management also have some oversight functions.  Within NPO, the Cost Savings Program Manager coordinates among  different NPO program offices that help review and conduct oversight of  the cost reduction initiatives throughout the year as well as with NNSA  headquarters offices. NNSA’s Office of Management and Budget provides  NNSA with administrative, human resources, and financial support.  NNSA’s Office of Acquisition and Project Management is responsible for  acquisition support and contracting oversight for the agency throughout  the acquisition lifecycle.

NNSA established an Executive Steering Committee, comprised of high- ranking officials from different NNSA program areas, as well as the NNSA  Associate Principal Deputy Administrator, the NPO Manager, and the  NPO Cost Savings Program Manager (as a non-voting member), to  provide leadership and guidance for the governance of the cost savings  element of the CNS contract. The steering committee members are to  set cost savings policy; resolve disputes; and recommend and approve  the cost savings amounts to be shared between the government, the  contractor (through a cost-savings incentive fee), and site reinvestment  projects.

The Cost Savings Program is divided into six processes or phases that  CNS and NNSA implement and oversee (see fig. 3):  the Annual Controlled Baseline phase,  the Cost Reduction Proposal phase,  the Change Control phase,  the Verification phase, and  the Disposition phase.

Annual Controlled Baseline phase. CNS develops and maintains the  Annual Controlled Baseline, which is a document that describes the  current scope of work and its cost and schedule. Among other things,  NNSA uses the Annual Controlled Baseline to evaluate whether CNS  achieved savings from implementation of prior years’ cost reduction  initiatives. CNS is expected to submit the Annual Controlled Baseline no  later than August 15 prior to the upcoming fiscal year, and NNSA reviews  and approves the document.

Cost Reduction Proposal phase. CNS develops cost reduction  initiatives and updates the Cost Reduction Proposal, which describes  CNS’s proposed cost reduction initiatives for the upcoming fiscal year and  the expected cost savings to be validated from activities within the current  fiscal year. The Cost Reduction Proposal is to be updated annually, no  later than September 1 prior to the upcoming fiscal year. Each cost  reduction initiative has a defined lifecycle, from identification and  development to validation and sustainment. NNSA reviews and approves  the document; approval authorizes CNS to begin implementing the  initiatives.

Change control phase. The change control phase is continuous  throughout the fiscal year and allows CNS and NNSA to document and  trace changes to the scope, schedule, and cost that affect the Annual  Controlled Baseline and the Cost Reduction Proposal. Changes made  during this phase to the Annual Controlled Baseline and the Cost  Reduction Proposal are generally limited to changes outside of the control  of the contractor, including congressional direction or reprogramming,  changes to the programmatic mission, additional contractual  requirements, and any NNSA-directed or approved changes.

Performance phase. During the performance phase, which is also  continuous throughout the year, the contractor is to report interim  performance against the approved cost reduction initiatives for NNSA to  evaluate accordingly, according to NNSA Cost Savings Program  procedures. This interim reporting allows NNSA to monitor potential  effects on the mission and offer feedback and course correction as  needed. NNSA and CNS officials responsible for the Cost Savings  Program collaborate regularly via biweekly meetings and tri-annual  reviews to monitor CNS’s progress on cost reduction initiatives  throughout the fiscal year. CNS generates a year-end Validation Report,  which is the final of three tri-annual reports provided throughout the fiscal  year. These reports detail the performance of the M&O contractor and  progress made against proposed cost savings targets, and list the  amount of savings CNS is claiming to have achieved in that fiscal year, to  include both annual new savings and savings sustained from prior years.  CNS is to submit the Validation Report for each previous fiscal year no  later than November 15.

Verification phase. After the end of the fiscal year, between November  and January, NNSA uses verification checklists to review and verify  CNS’s claimed savings for each cost reduction initiative. NNSA can use  these verification checklists to record, among other evidence, any  observations, interviews, document reviews, analyses, and  measurements that NNSA has undertaken to confirm the savings claimed  by CNS in the Validation Report. For each cost reduction initiative, NNSA  is to verify, among other things, that CNS implemented the initiative, that  the initiative resulted in efficiencies that produced cost savings, and that  the initiative did not negatively affect the mission. NNSA is also to verify  that CNS set aside the claimed savings. Additionally, NNSA is to verify  that CNS sustained savings claimed in prior years. NNSA documents its  determination of verified annual new and sustained savings in a  Verification Report.

Disposition phase. Upon completion of the verification phase, in January  and February, the distribution, or disposition, of net savings occurs in  accordance with the contract. Net savings are verified savings after  accounting for execution costs. The contract allows those verified net  savings to be shared among the government, the contractor, and site  reinvestment projects to improve Y-12 and Pantex.

Under the contract provisions, NNSA is to verify and distribute only those  savings that remain after deducting the execution costs required to  administer, develop, or implement the cost reduction initiatives. For  example, the cost of purchasing a machine to automate a process that  will, in turn, save labor hours from the previous non-automated process  would be an execution cost. Therefore, NNSA-verified savings for each  cost reduction initiative should reflect net savings from having  implemented the initiative—that is, the gross savings minus the execution  costs associated with the initiative.

Verified net savings are to be distributed to the contractor, the  government, and for site reinvestment projects.

Contractor. The contractor is generally to receive a cost-savings  incentive fee of about 35 percent of the verified net savings. For new  savings related to employee benefits, however, the contractor is not to  receive a share, and the savings are to be split between the  government (50 percent) and site reinvestment projects (50  percent). The contractor’s cost-savings incentive fee is to be paid  out of cost savings that NNSA has verified. The contract requires CNS  to reimburse the government for the cost-savings incentive fee in the  event that CNS does not sustain the savings for the remainder of the  contract performance period. According to CNS’s proposed savings  estimates, CNS planned to earn approximately $222 million in cost- savings incentive fees over the potential 10-year contract. Per the  contract, the contractor may also receive award fees annually based  on NNSA’s evaluation of its performance. The available award fee  for each potential year of the contract ranges from approximately $20  million to approximately $40 million.

Government. The government generally is to receive 35 percent of  the verified net savings. For new savings related to employee  benefits, however, the government is to receive 50 percent of the  verified net savings. The portion of verified savings that is available for  the government allows NNSA to return those savings to the programs  for which funds were originally obligated, and the funds can be spent  within the same program at Y-12, Pantex, or another site within the  nuclear security enterprise.

Site reinvestment. The remaining approximately 30 percent of the  verified net savings is for site reinvestment projects. As noted above,  however, the site reinvestment share for savings related to employee  benefits is 50 percent. Site reinvestment projects may include:  projects (such as a parking structure, an office building or a cafeteria)  that serve the M&O site as a whole rather than a discrete program or  implementation costs for future cost savings initiatives, among other  things.

Types of potential savings associated with the Cost Savings Program  include, for example:

Annual new savings. In each fiscal year, CNS validates and NNSA  verifies annual new savings for the cost reduction initiatives  implemented in that year. Examples of annual new savings include  positions that were reduced in a certain program area, in a given fiscal  year. As discussed previously, cost savings are only creditable under  the contract if they do not negatively affect the mission.

Sustained savings. In each fiscal year, CNS validates and NNSA  verifies sustained savings resulting from cost reduction initiatives  implemented in prior years. For example, CNS can claim sustained  savings for each year it does not hire back employees into positions  that were reduced in a prior year and for which CNS claimed savings.

Cumulative contract savings. Cumulative contract savings is the  sum of all contract savings that have accumulated from annual new  savings and the sustainment of savings produced in prior years. For  example, annual new savings verified in fiscal year 2015 would be  multiplied by 10 if they are sustained through the life of the potential  10-year contract. Likewise, annual new savings verified in fiscal year  2016 would be multiplied by 9 if they are sustained through the life of  the potential 10-year contract, and so forth. These cumulative contract  savings are also known as “gateway savings” because NNSA  considers the verified cumulative contract savings when making  gateway decisions on whether or not to extend the contract for  possible option terms. Table 1 shows how CNS proposed it could  achieve approximately $2.9 billion over the life of the 10-year contract  using this method of calculating cumulative contract savings.

Hard savings—savings that directly reduce the overall cost of  operations—are the only creditable type of savings under the contract.  NNSA is only to verify savings if they do not negatively affect the mission.  Examples of hard savings include a reduced number of personnel  working to conduct the same scope of work or fewer labor hours required  to complete a process due to operational efficiencies achieved, as well as  savings in benefits packages (e.g., by requiring employees contribute  more to their benefits). NNSA and CNS classify hard savings into four  categories: (1) labor, (2) benefits, (3) supply chain, and (4) non-labor (see  sidebar). generated by leveraging collective buying  power agreements, utilizing competitive  sourcing tools, and taking other actions to  reduce the price of goods purchased. For  example, in fiscal year 2016, CNS noted  in its Validation Report that it used  strategic sourcing to realize procurement  savings. known as demand management  savings—are savings generated through  reductions in purchased materials  quantities, subcontract costs, or licenses.  For example, in fiscal year 2016, CNS  assumed responsibility for some  information technology work—including,  among others, help desk support and  network administration—that had been  previously handled by subcontractors.  Doing so reduced contract costs because  CNS was able to perform the work at a  lower cost than the subcontractor. products or services such as, for example, slowing the rate of a cost  increase. NNSA officials said another example of a cost avoidance  would be if the contractor has the option to buy more expensive  airplane tickets for travel between the two sites but chooses to buy  less expensive airplane tickets; the difference between the most  expensive option and the actual tickets purchased is a cost avoidance  and not considered hard savings that would be creditable under the  contract.

CNS Has Achieved Most of Its Proposed Savings, and Changes to Oversight and Methodologies Have Addressed Some Problems That May Affect Actual Savings

NNSA verified approximately $170 million in annual new savings and  approximately $515 million in cumulative contract savings from fiscal year  2014 through fiscal year 2018. The $515 million in cumulative contract  savings that NNSA verified from fiscal year 2014 through fiscal year 2018  is about 80 percent of the approximately $640 million CNS proposed it  would save through that fiscal year. NNSA’s oversight of the Cost  Savings Program has improved and methods for calculating and verifying  cost savings have evolved to address some problems encountered in the  early years of the contract that may affect actual contract savings.

NNSA Has Verified Hundreds of Millions of Dollars of CNS’s Claimed Savings

NNSA verified between approximately $8 million and $63 million in annual  new savings each year from fiscal year 2014 through fiscal year 2018,  totaling approximately $170 million in annual new savings over this  period. Of the $170 million in NNSA-verified annual new savings for fiscal  years 2014 through 2018, roughly 10 percent (approximately $17 million)  is attributed to the merging of the Y-12 and Pantex sites into a  consolidated management structure, according to CNS and NNSA  documentation. The remaining roughly 90 percent (approximately $153  million) is attributed to transforming site operations to create a more  efficient and sustainable enterprise.

Under the contract, savings from the previous year that have been  sustained, and for which sustainment has been verified by NNSA, are  added to the current year’s verified annual new savings amount, resulting  in cumulative contract savings. As of the end of fiscal year 2018, NNSA  verified approximately $515 million in cumulative contract savings (see  table 2).

We found that this $515 million in cumulative contract savings represents  a reasonable estimate of the cumulative savings achieved. As part of our  review, we traced information from 22 of about 90 cost reduction  initiatives for which CNS claimed savings to source documents and  reconciled discrepancies with NNSA and CNS officials to understand how  NNSA verified the cost savings. Further, we reviewed NNSA’s  documented procedures for verifying CNS’s reported data and  interviewed officials about that process. Additionally, other reviews  provide support that NNSA’s reported $515 million in cumulative contract  savings is a reasonable estimate of savings achieved. Specifically, as  part of the savings verification process, NNSA’s federal cost accountants  ensured that CNS had set aside the money associated with the cost  savings and confirmed that the funds were available for distribution under  the cost-savings sharing arrangement. DCAA also reviewed CNS’s  claimed cost savings for fiscal years 2016 through 2018 and NNSA and  DCAA officials said the two entities used similar methods and came to  similar conclusions.

Labor savings, which include reductions in positions, comprised the  largest portion of savings, at nearly two-thirds of the cumulative contract  savings achieved from fiscal year 2014 through fiscal year 2018. Savings  through changes to employee benefits comprised nearly a quarter of total  cumulative contract savings over the period (see fig. 4).

NNSA documents we examined showed that CNS, the government, and  site reinvestment projects received a certain share of the $515 million in  cumulative contract savings that NNSA verified from fiscal year 2014  through fiscal year 2018 in accordance with the terms of the contract.  According to NNSA, approximately $262 million of the $515 million was  available for the three parties to share during this period. The amount  available to the three parties is determined by sharing periods of no more  than 2 years negotiated for different categories of savings under the  contract. According to NNSA documents, CNS earned about $78 million  in cost-savings incentive fees, the government received about $97 million  in savings, and site reinvestment projects received about $88 million of  the available savings from fiscal year 2014 through fiscal year 2018 (see  fig. 5). According to NNSA, the remaining approximately $253 million in  cumulative savings was not available for sharing between the three  parties because it accumulated outside of the savings sharing period.

CNS Has Achieved about 80 Percent of Its Proposed Savings from Fiscal Year 2014 through Fiscal Year 2018

The $515 million in cumulative contract savings that NNSA verified from  fiscal year 2014 through fiscal year 2018 is about 80 percent of the  approximately $640 million in cumulative contract savings CNS proposed  it would save through that fiscal year. CNS achieved more in cumulative  contract savings than it proposed through fiscal year 2015. Specifically,  CNS proposed approximately $67 million in cumulative contract savings  through fiscal year 2015 and NNSA verified approximately $78 million.

From fiscal years 2016 through 2018, however, CNS achieved less in  cumulative contract savings than it proposed (see fig. 6).

As described above, achieving approximately $2.9 billion in savings over  the life of the contract assumed meeting all proposed annual new savings  targets and fully sustaining those savings in each year of the contract.  According to the terms of the contract, NNSA considers achievement of  cost savings when evaluating overall contract performance, and  therefore, achievement of proposed cost savings may factor into NNSA’s  decision of whether to exercise further contract option terms.

Two key issues—benefits savings and fiscal year 2016 labor savings— contributed to CNS not meeting its proposed cost savings targets through  the end of fiscal year 2018 and may affect CNS’s ability to achieve its  proposed cumulative contract savings of approximately $2.9 billion over  the life of the contract.

Benefits savings. CNS proposed it could save $594 million over the  life of the contract through adjustments to employee benefits, but as  of March 2020, CNS officials told us that CNS’s projected benefits  savings would total $399 million over the entire 10-year contract, a  decrease of almost $200 million from its proposal. According to these  officials, several factors have contributed to CNS’s decreased benefits  savings estimate, including delays in bargaining unit transition to  benefit plans and rates and a decrease in employee contributions to  pensions, among other reasons.

Fiscal year 2016 labor savings. In fiscal year 2016, CNS claimed  approximately $30 million in new labor savings based on a claimed  reduction of 283 full-time equivalent employees, but NNSA rejected all  of those savings. According to the fiscal year 2016 NNSA Verification  Report, CNS failed to realize efficiencies that resulted in full-time  equivalent growth in other areas, which offset CNS’s claim of new  labor savings. Rejection of these fiscal year 2016 labor savings  could result in a loss of approximately $270 million in cumulative  savings through the end of the potential 10-year contract period when  factoring in potential sustained savings.

NNSA officials emphasized that any amount of cost savings is beneficial  to the government and that NNSA’s priority for CNS is safe and secure  performance of its mission. NNSA officials noted that if CNS does not  implement any additional cost reduction initiatives and sustains the  savings from all previously-implemented cost reduction initiatives, CNS  will still save about $1.7 billion through fiscal year 2024.

CNS officials told us that CNS will continue to work toward its cumulative  proposed savings of approximately $2.9 billion and hopes to meet or  exceed that estimate. According to these officials, doing so will allow CNS  to realize its proposed savings and provide the maximum benefit to the  government and taxpayers. To achieve its proposed savings, CNS would  need to sustain all previously implemented savings, achieve verified  annual new savings of approximately $57 million per year every year, and  sustain those additional savings through 2024. However, CNS’s  proposed annual new savings are substantially lower for fiscal year 2019  through the end of the contract (averaging about $30 million per year)  than they were from fiscal year 2014 through fiscal year 2018. This  decrease is, in part, because many cost reduction initiatives with high  savings potential—such as labor streamlining and changes to employee  benefits—have been implemented. For example, CNS eliminated 270  positions and provided voluntary separation severance packages to  another 182 employees in fiscal year 2014. This accounted for more than  40 percent ($221 million) of the cumulative contract savings because  CNS sustained those savings in fiscal years 2015 through 2018. CNS has  already implemented many cost reduction initiatives with high savings  potential, so it may be difficult for CNS to meet its proposed cumulative  contract savings.

Methodologies for Calculating Cost Savings and NNSA’s Oversight of the Program Have Evolved to Address Factors That May Affect Actual Contract Savings

CNS and NNSA initially encountered problems with calculating and  verifying cost savings—problems that may affect actual contract  savings—but methods for calculating and verifying savings have evolved,  and NNSA’s oversight of the Cost Savings Program has improved.  Specifically, CNS and NNSA initially encountered problems—which have  largely been addressed—with:  (1) calculating and verifying execution costs;  (2) calculating and verifying labor savings; and  (3) communicating and collaborating about the Cost Savings Program  throughout the year.

Calculating and verifying execution costs. NNSA encountered early  problems with verifying execution costs for CNS’s cost savings initiatives,  but CNS changed its methodology for calculating execution costs each  year that ultimately addressed those problems. Since the contract’s  inception, CNS has relied on a subcontractor to operate much of the Cost  Savings Program. In fiscal year 2014, costs for this subcontractor  totaled approximately $7 million. CNS believed that approximately  $546,000 of the $7 million should be considered execution costs and  counted against the cost savings for that year, but NNSA believed the  entire $7 million should be considered execution costs. NNSA and CNS  reached agreement that a proportional factor—19.3 percent—of the  subcontractor’s time was spent on activities that would qualify as  execution activities under the contract for fiscal years 2014 and 2015.  NNSA instructed CNS to capture and report the subcontractor’s actual  execution costs beginning in fiscal year 2016. CNS began using the  subcontract’s actual execution costs in fiscal year 2016, according to  NNSA officials. However, NNSA officials said CNS used a proportional  factor of the subcontract’s execution costs from previous years to  estimate the execution costs of CNS employees for fiscal year 2016.  NNSA noted in its fiscal year 2016 Verification Report that using the  proportional factor approach for estimating execution costs may not  reflect the actual execution costs. CNS officials said they believe this  estimation was conservative because it resulted in higher CNS  administrative and development costs than subsequent years.

Additionally, in fiscal years 2015 and 2016, CNS reported estimates for its  total execution costs rather than tracking the actual execution costs for  each individual cost reduction initiative, which NNSA officials said made it  difficult to verify net savings. In fiscal year 2017, CNS developed a  methodology for allocating execution costs—administrative costs,  implementation costs, and development costs—to individual cost reduction initiatives and began reporting execution costs at this level in  the fiscal year 2017 Validation Report. According to NNSA officials, CNS  also began reporting execution costs by individual cost reduction initiative  for its subcontractor beginning in fiscal year 2017. In fiscal year 2018,  CNS developed execution cost charge codes that allowed CNS to report  actual hours spent on cost reduction initiative execution activities— including amounts for its subcontractor—for the first time since the  contract began. NNSA officials told us that they are generally satisfied  with the way CNS is now capturing execution costs and that the use of  charge codes has improved their confidence in CNS’s reporting of certain  execution costs. However, CNS’s use of the proportional factor of 19.3  percent of the subcontractor’s execution costs, lack of detail on execution  costs for individual cost reduction initiatives, and use of estimated—rather  than actual—execution costs could mean that the actual execution costs  for fiscal years 2014 through 2017 are not fully captured in reported  cumulative savings and actual contract savings could be higher or lower  than the reported amount. Even if the actual contract savings are higher  or lower than the reported amount, we believe $515 million is a  reasonable estimate of the savings achieved to date.

Calculating and verifying labor savings. In fiscal years 2014 and 2015,  CNS used a headcount methodology to calculate labor savings and  demonstrate sustainment of those savings. Using a headcount  methodology, CNS could claim labor savings if it could demonstrate and  maintain a reduced number of employees to conduct the same scope of  work. According to NNSA and CNS officials, one potential problem with  using a headcount approach is that CNS could maintain a reduced  number of staff but have those staff work overtime. If this occurred, it  would result in overall increased contract costs, thereby reducing the net  savings from the cost reduction initiative. In fiscal year 2016, CNS  modified its methodology for calculating labor savings to use labor hours  rather than employee headcounts. Under this modified approach, CNS  could claim labor savings if it could demonstrate and maintain reduced  labor hours regardless of the number of employees, a method that NNSA  and CNS officials said is a better measure of labor savings. However,  under this methodology, CNS calculated labor savings based on planned,  rather than actual, reductions in labor hours. In fiscal year 2017, CNS  modified its methodology again to begin using actual reduced labor hours  rather than planned reduced labor hours. However, CNS’s use of  headcounts and planned, rather than actual, reduction in labor hours  could mean that the labor savings for fiscal years 2014 through 2016 are  not accurately reflected in the verified cumulative contract savings, and  actual contract savings could be higher or lower than the reported  amount. As noted above, even if the actual contract savings are higher or  lower than the reported amount, we believe $515 million is a reasonable  estimate of the savings achieved to date.

Communicating and collaborating about the Cost Savings Program.  According to NNSA officials, early years of the contract were marked by  limited oversight and poor communication between NNSA and CNS. CNS  delegated responsibility for the Cost Savings Program to a subcontractor,  and according to NNSA and CNS officials, CNS had limited involvement  in the Cost Savings Program and did not communicate with NNSA about  cost savings matters. Similarly, NNSA officials told us that one or two  individuals at NNSA managed the cost savings component of the contract  for the federal government and that communication was poor between  those individuals and the technical personnel responsible for evaluating  the implementation of CNS’s cost reduction initiatives. As a result of this  limited oversight and communication, NNSA officials said CNS did not  understand NNSA’s expectations for cost savings data and had to submit  five iterations of its first Validation Report.

In fiscal year 2017, NNSA established a collaborative working team— known as the Integrated Project Team and consisting of personnel from  NNSA and CNS—which meets biweekly to discuss issues related to the  Cost Savings Program. Also in fiscal year 2017, NNSA began conducting  tri-annual reviews of active cost reduction initiatives. For these reviews,  CNS submits performance reports and briefs knowledgeable NNSA  officials on the status of individual cost reduction initiatives. NNSA uses  this information to identify potential gaps in cost-savings reporting data  and, among other things, informs CNS of any concerns with its  methodology or NNSA’s ability to verify the cost savings. NNSA officials stated that the increased collaboration and more frequent communication  has resulted in improved Validation Reports and fewer revisions. For  example, NNSA stated in its fiscal year 2017 Verification Report that the  quality and completeness of CNS’s fiscal year 2017 Validation Report  “demonstrated substantial improvement” over the fiscal year 2016 report.

While CNS’s and NNSA’s methods for calculating and verifying savings  and conducting oversight evolved in the early years of the contract to  improve the accuracy of cost savings calculations, we believe the $515  million in reported cumulative savings represents a reasonable estimate  of the contract savings achieved to date for reasons we described  earlier.

NNSA Identified Benefits of the Cost Savings Program but Has Not Fully Used Them to Improve M&O Contracts

NNSA Identified Three Key Benefits of the Y-12 and Pantex Cost Savings Program but Has Not Planned on How Best to Use Site Reinvestment Funds

NNSA officials said three key benefits of the Cost Savings Program are  (1) achieving savings;  (2) increasing financial transparency; and  (3) funding site reinvestment projects.

Achieving savings. As discussed previously, the Cost Savings Program  resulted in total new annual savings of approximately $170 million and  $515 million in cumulative contract savings, from fiscal year 2014 through  fiscal year 2018. According to NNSA officials, these cost savings would  not have materialized without the Cost Savings Program. We have  previously found that DOE could better assess M&O contractors’ cost  performance—i.e., their performance on spending, budgeting, strategic  sourcing, and cost-effectiveness—to help strengthen contractor oversight  and better inform acquisitions decisions. Demonstrating contractors’  efforts to achieve cost savings and NNSA’s associated efforts to evaluate  contractors’ cost effectiveness provides evidence that for the CNS  contract, NNSA is placing importance on cost performance while overall  resource needs are increasing. For example, NNSA has identified an  increasing weapons program workload and a need to recapitalize or  replace aging facilities and equipment to meet nuclear weapons  modernization programs over the next decades. To help achieve these  goals, NNSA’s fiscal year 2021 budget request included a 25 percent  increase for NNSA’s weapons activities appropriation, which funds  programs at NNSA sites including Pantex and Y-12. Identifying cost  savings could help NNSA minimize budget increases in an era of  increasing workload and assure congressional decision-makers that  NNSA is working to effectively steward federal resources.

Increasing financial transparency. Because of the Cost Savings  Program, which required the establishment of the Annual Controlled  Baseline in order to measure potential savings, NNSA has better and  more thorough information on the costs of running the two sites, NPO  officials said. The Annual Controlled Baseline provides more information  because in order to demonstrate savings CNS had to first establish a cost  baseline, which required complete information on funding streams as well  as how certain rate structures are established, according to NPO officials.  Officials from NNSA’s Office of Acquisition and Project Management also  said this was the first time that NNSA has been able to gain insight into  the actual costs of certain activities at Y-12 and Pantex, as a result of the  Annual Controlled Baseline being established. None of the other M&O  sites have an established site-wide baseline against which to measure  costs or cost savings, according to NNSA and M&O officials we  interviewed. Officials from the Office of Acquisition and Project  Management said having an Annual Controlled Baseline at other sites would give them additional insight into the cost of certain activities, as  opposed to the traditional budget-based view they have into M&O  activities. At other M&O sites, NNSA uses a budget-based model, which  consists of the government obligating a certain amount of money and  getting as much product or service for that amount of money as the sites  will provide, NNSA officials said. Instead, NNSA is employing a cost- based model at Y-12 and Pantex, which involves determining the cost to  produce a certain amount of product, NNSA officials explained.

Funding site reinvestment projects. As part of the Cost Savings  Program, a certain percentage of the achieved savings is reinvested back  into the sites. According to NNSA officials, this process has allowed  NNSA to allocate funds to site reinvestment projects to improve the Y-12  and Pantex sites’ aging infrastructure. As of fiscal year 2019, NNSA  reported about a $4.8 billion deferred maintenance backlog throughout  the nuclear security enterprise. We previously found that facilities  considered not mission dependent—such as cafeterias, parking  structures and excess facilities—comprised about 40 percent of the  deferred maintenance backlog. NNSA officials said addressing deferred  maintenance at these types of facilities is low priority, beyond keeping  facilities in a safe condition, because the agency targets scarce budgetary  resources to mission critical facilities. According to NNSA officials, NNSA  would not likely have allocated funds for these site reinvestment projects  at Y-12 and Pantex without the Cost Savings Program because they are  often considered lower priority projects. As a result, the nuclear security  enterprise as a whole potentially benefits from these site reinvestment  projects at Y-12 and Pantex since those reinvestment projects serve to  reduce overall deferred maintenance and potentially make funds available  for projects to address aging infrastructure at other sites.

Site reinvestment projects may lead to additional cost savings as well,  NNSA officials said, if, for example, NNSA uses site reinvestment funds  to purchase a machine that automates a process and saves labor hours  as a result. For example, NNSA invested in a machine to replace three  different machines that were previously required to produce a screw. This  improved throughput and turnaround time and saved labor hours,  according to NNSA documentation.

NNSA approved a total of 80 site reinvestment projects at Y-12 and  Pantex as of April 2020, for a total of approximately $75 million that was  available for reinvestment into the sites. For example, CNS used about  $1.2 million in site reinvestment funds to replace analog cameras along  Y-12’s perimeter fencing with digital cameras (see fig. 7). This site  reinvestment project improved physical security and reduced camera  maintenance costs, as well as the security team’s ability to assess alarms  and manage alarm response, according to NPO documentation. Because  the analog cameras were still functioning, they may have otherwise been  a lower priority to replace without the site reinvestment funding, NPO  officials said.

In addition, the John C. Drummond Center, a new administrative support  complex at Pantex, was partially built with savings from the Cost Savings  Program (see fig. 8). According to NNSA documentation, the new facility  helps eliminate approximately $20 million in deferred maintenance costs  of the older administrative buildings it replaced.

Although NNSA identified site reinvestment projects as one of the key  benefits of the Cost Savings Program, NNSA and CNS had not  committed approximately $13 million of site reinvestment funds available  at Y-12 and Pantex as of April 2020. NNSA and CNS had not yet  committed the site reinvestment funds to specific project efforts, in part  because they have not evaluated how best to use the remaining available  site reinvestment funds or developed a plan for doing so. The $13 million  is currently distributed across several different layers of accounts, in  some cases in amounts too small to execute a site reinvestment project.  To aggregate the funds in amounts large enough for certain projects,  NNSA may need to move funding from one account to another.

The funds for site reinvestment projects are distributed in accordance with  the terms of the contract and are spread across different programs,  projects, or activities (PPA). Beneath the PPA is the DOE budget and  reporting code level, which DOE also tracks in its official accounting  system (see fig. 9).

According to NNSA officials, there were 68 PPAs with 97 budget and  reporting codes underneath them that, as of April 2020, had funds  available for site reinvestment. According to NNSA officials and CNS  representatives, this distribution makes it difficult to use all of the site  reinvestment funds. This difficulty is because a given site reinvestment  project may require funds to be aggregated across budget and reporting  codes in order to have enough funds for executing the project, and while  NNSA can move funds between budget and reporting codes that are  within the same PPA, movement of funds among PPAs (reprogramming)  could require congressional approval.

As of April 2020, of the 68 PPAs with available funds for site  reinvestment, 17 (or about 25 percent) had multiple budget and reporting  codes underneath them, according to NNSA officials. Those 17 PPAs had  between 2 to 6 budget and reporting codes underneath them, according  to those officials (see fig. 10).

We have previously found that comprehensive plans can help  organizations identify potential problems before they occur and target  limited resources. A comprehensive plan can also detail milestones and  key goals, which provide meaningful guidance for planning and  measuring progress. Such plans can establish deadlines for achieving  objectives and assign responsibility for any implementation. Most of  NNSA’s appropriations are “no-year funds” and are, therefore, available  for obligation until expended. Without evaluating and developing a plan  for how best to use funds for site reinvestment projects—to include  determining whether to reprogram funds—NNSA and CNS are not fully  utilizing available site reinvestment funds, and the funds could be  rescinded from NNSA’s appropriations in later years if the unspent  balances persist.

NNSA has not sought congressional approval to combine site  reinvestment money across different PPAs in order to aggregate these  funds to execute larger site reinvestment projects, officials said. Also,  while NNSA moves funds weekly between budget and reporting codes  that are within the same PPA to execute its work, officials said NNSA has  not moved any site reinvestment funds from different budget and  reporting codes within the same PPA to fund site reinvestment projects.  Once NNSA develops a plan on how best to aggregate or use the  remaining and potential future site reinvestment funds, it would be better  positioned to: move some funds between budget and reporting codes within the  reprogram funds between PPAs, including seeking congressional  approval where it may be required.

NNSA Is Not Fully Using Information on the Benefits of the Cost Savings Program to Improve M&O Contracts

NNSA Has Not Analyzed Whether to Implement the Cost Savings Program in Other Existing or Future M&O Contracts

NNSA officials identified the achievement of cost savings as a benefit of  the Cost Savings Program that could be useful at other sites and to the  nuclear security enterprise generally; however, the officials said they are  not planning to implement the Cost Savings Program as part of other  future or existing M&O contracts. Most existing NNSA M&O contracts  include a “Cost Reduction” clause, under which sites could implement a  Cost Savings Program with some attributes of the program at Y-12 and  Pantex. According to GAO’s Framework for Assessing the Acquisition  Function at Federal Agencies, leading organizations gather and analyze  data to identify opportunities to reduce costs, among other reasons.  Further, the framework states that incomplete data can prevent an  agency from maximizing information tools for strategic acquisition  planning and analysis.

According to officials from the Office of Acquisition and Project  Management, they do not plan to implement the Cost Savings Program or  anything similar to it as part of future M&O contracts because of  uncertainties regarding (1) the opportunities for similar savings at other  sites and (2) the federal costs involved in implementing and overseeing  the Cost Savings Program—including the time and effort needed to verify  cost savings—and how these costs affect the overall net savings.

NNSA site officials and contractor representatives we interviewed also  raised questions about these issues. For example, according to NNSA  officials and representatives at two sites, the Cost Savings Program may  not be exportable to other sites, in part because other sites may not be  able to identify cost savings initiatives that would yield the same level of  savings as at Y-12 and Pantex. The officials believed that much of the  savings identified at those sites resulted from merger savings—savings  stemming from consolidating the two sites—that would not be possible  without combining two sites under one contract. However, as mentioned  previously, our analysis found that the majority—about 90 percent—of  annual savings at Y-12 and Pantex resulted from transformation  initiatives, or savings based on improving standardization, quality, and  efficiency. Merger savings contributed only about 10 percent of the total  new annual savings identified from fiscal year 2014 through fiscal year  2018.

NNSA officials and contractor representatives at other NNSA sites also  raised questions about whether the cost of implementing and maintaining  a formal cost savings program might outweigh the benefits at a site.  According to NNSA officials, a large number of government employees  are involved in implementing and overseeing the Cost Savings Program.  According to an official from the Office of Acquisition and Project  Management, NNSA has not analyzed the total costs of implementing the  Cost Savings Program, including the costs associated with the  government effort to oversee the program. For the Cost Savings  Program, NNSA verifies net savings after accounting for CNS’s execution  costs. However, the verified savings do not take into consideration federal  costs for implementing, maintaining, and overseeing the Cost Savings  Program. To provide a sense of the scope of the oversight effort, NPO  officials said about 100 of the approximately 130 employees at NPO at  the end of fiscal year 2018 had some role in the Cost Savings Program,  although only one full-time position is dedicated to the Cost Savings  Program.

Further, NNSA is likely to start its acquisition planning for some M&O  contracts in 2022 and 2023. However, NNSA officials, as well as site  officials, were uncertain about whether the Cost Savings Program could  be exported to other existing or future contracts, including the cost  effectiveness of the program, because NNSA has not gathered  information on and documented analysis of the costs and potential  benefits of the Cost Savings Program. By gathering information on and  documenting the analysis of data on the costs and benefits of the Cost  Savings Program, NNSA officials and contractor representatives could  make better-informed decisions about whether to implement aspects of  the Cost Savings Program at other sites.

NNSA Has Not Evaluated or Shared Information on Specific Benefits of the Cost Savings Program That Could Be Applied Elsewhere

CNS achieved cost savings at Y-12 and Pantex by implementing a variety  of cost savings initiatives. Even without a formal Cost Savings Program in  place, some efficiencies may be applicable at other sites as a way to save  money across the enterprise, according to officials we interviewed from  NPO. For example, at Pantex, the contractor discovered it could conduct  fewer recurring injections of treatment wells but still achieve the same  technical results and comply with standards, according to NNSA officials.  This initiative saved over $500,000, according to NNSA’s Verification  Report. If other sites experience similar recurring costs, then sharing this  initiative might lead to cost savings at those sites.

According to DOE’s Order 210.2A on the DOE Corporate Operating  Experience Program, each DOE organization is required to submit  lessons learned to the DOE Corporate Lessons Learned Database when  the operating experience has relevance to other DOE sites and the  information has the potential for cost savings. Although NPO did not  enter information about lessons learned from the Cost Savings Program  into the database, NPO officials said they shared lessons learned with the  Executive Steering Committee and that they presumed the Committee  had passed information along to other sites. Contractor representatives  and NNSA officials from all five of the other NNSA sites we interviewed  noted that NNSA has not shared any information about specific  successful cost savings initiatives from Y-12 and Pantex that could be  applicable to them. Almost half of the NNSA officials and contractor  representatives from other sites we interviewed said they were not very  familiar with the Cost Savings Program. However, officials at Y-12 and  Pantex told us they believe there are certain initiatives that could be  useful at other sites and that other sites have asked for information about  certain initiatives.

Officials from the Office of Acquisition and Project Management said they  believe there will be a request for a lessons learned evaluation from  NNSA headquarters once the current Y-12 and Pantex contract expires;  however, such an effort would begin in several years—as late as 2024 if  all option terms are exercised and NNSA began this evaluation  immediately. According to NNSA officials, the Cost Savings Program was  a new concept and required maturity and proven concepts before sharing  any lessons learned. However, by sharing information on potentially  beneficial efficiencies and lessons learned from the Cost Savings  Program at Y-12 and Pantex throughout the enterprise, NNSA could help  achieve cost savings enterprise-wide even without implementing formal  cost savings programs at other sites.

NNSA Has Not Evaluated Whether an Annual Controlled Baseline May Be Beneficial at Other Sites

The Annual Controlled Baseline is another specific aspect of the Cost  Savings Program that could be beneficial to implement at other sites, or  programs at a site, NNSA officials said. Currently, none of the other  NNSA sites have an established site-wide baseline that would allow  NNSA to understand the costs involved in running those sites or  implementing their programs, according to officials from NNSA’s Office of  Acquisition and Project Management. According to NPO officials, the  Annual Controlled Baseline provides NNSA with better and more  thorough information on the costs of running the two sites.

As discussed previously, employing a cost-based model at Y-12 and  Pantex—as opposed to the budget-based model at other sites—allows  NNSA to understand the contractor’s cost to produce a certain amount of  product. Although officials from NNSA’s Office of Acquisition and Project  Management said it would be beneficial to have the Annual Controlled  Baseline at other sites in order to gain additional insight into the cost of  certain activities, they believed a drawback to requiring other sites to  institute such a baseline would be deploying the considerable effort and  resources to establish the baseline similar to those that were required at  Y-12 and Pantex.

NNSA has not evaluated whether to require the other sites to have an  Annual Controlled Baseline, either for the entire site or for certain  programs at different sites. The 2019 DOE Acquisition Guide states that  in the context of acquisition planning, good technical, schedule, and cost  baselines are essential for developing realistic and measureable targets.  By evaluating whether to require all sites to implement an Annual  Controlled Baseline, either for the entire site or for certain programs at the  different sites, NNSA may be in a better position to achieve greater  financial transparency at sites across the nuclear security enterprise. This  action, in turn, could potentially identify opportunities for cost savings,  help NNSA better understand their contractors’ cost performance, and  help the agency administer its sites more efficiently.

In recent years, the Cost Savings Program at Y-12 and Pantex has  realized hundreds of millions in savings to the nuclear security enterprise,  dozens of site reinvestment projects, and increased financial  transparency. Although NNSA has identified site reinvestment projects as  one of the key benefits of the Cost Savings Program, NNSA and CNS  have not committed approximately $13 million of site reinvestment funds  available at Y-12 and Pantex, in part because they have not evaluated  and developed a plan on how best to aggregate and use the funds. If  NNSA develops a plan on how best to use the remaining and potential  future available site reinvestment funds, it would be better positioned to  aggregate funds for site reinvestment projects. Further, if funds for site  reinvestment projects persist in PPAs for too long, NNSA risks their  rescission in future years’ appropriations.

NNSA officials were uncertain about whether the Cost Savings Program  could be exported to other existing or future contracts, including the cost  effectiveness of the program, because NNSA has not gathered  information on and documented its analysis of the costs and potential  benefits of the Cost Savings Program. By gathering information on and  documenting its analysis of the results of the Cost Savings Program,  NNSA officials and contractor representatives could make a better- informed decision about whether to implement aspects of the Cost  Savings Program under existing contracts or as part of future M&O  contracts.

NNSA has not shared information on specific efficiencies that could be  applicable to other sites because NNSA officials have not submitted such  lessons learned to DOE’s Corporate Lessons Learned Database. By  sharing information on potentially beneficial efficiencies and lessons  learned from the Cost Savings Program at Y-12 and Pantex throughout  the enterprise, NNSA could help achieve cost savings enterprise-wide  even without implementing formal cost savings programs at other sites.

Additionally, none of the other NNSA sites have an established site-wide  baseline. NNSA has not evaluated whether it should require the other  sites to have such a baseline. By evaluating whether to require other sites  to institute a baseline—either in whole or in part for certain programs at  the different sites—NNSA could increase financial transparency agency- wide.

We are making the following four recommendations to NNSA:  The NPO Cost Savings Program Manager should work with CNS to  evaluate the remaining site reinvestment funds and develop and  implement a plan for how best to aggregate and use them.  (Recommendation 1)

The Associate Administrator for Acquisition and Project Management  should gather data on and document an analysis of the Cost Savings  Program, including its cost effectiveness, to determine whether it is  exportable to existing or future contracts. (Recommendation 2)

The NPO Cost Savings Program Manager should share relevant lessons  learned with other NNSA sites so that those sites can determine if  efficiencies CNS has achieved can be implemented at other sites.  (Recommendation 3)

The Associate Administrator for Acquisition and Project Management  should evaluate whether to require all other sites to institute an Annual  Controlled Baseline. (Recommendation 4)

We provided a draft of this report to NNSA for review and comment. The  agency provided written comments, which are reproduced in appendix I;  the agency also provided technical comments that we incorporated in the  report as appropriate. NNSA agreed with three of the recommendations  and agreed in principle with the fourth.

Regarding our second recommendation that NNSA gather data on and  document an analysis of the Cost Savings Program, including its cost  effectiveness, to determine its exportability to existing or future contracts,  NNSA agreed that the potential benefits of a Cost Savings Program  should be considered for future contracts, as applicable. However, in its  written comments, NNSA stated that the Cost Savings Program was  uniquely intertwined with the consolidation of the two sites, Y-12 and  Pantex, under one contract. As we discussed in the report, roughly 90  percent of the savings from the Cost Savings Program were attributed to  transforming site operations to create a more efficient and sustainable  enterprise, and not associated with merging the two sites. We continue to  believe that by gathering data and documenting an analysis of the Cost  Savings Program for its exportability, NNSA will be able to make better- informed decisions about whether to implement the program at other  existing or future contracts.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Energy, the Administrator of NNSA, and  other interested parties. In addition, this report is available at no charge  on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-3841 or bawdena@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made significant contributions  to this report are listed in appendix II.

Appendix I: Comments from the National Nuclear Security Administration

Appendix II: GAO Contact and Staff Acknowledgments

Allison B. Bawden, (202) 512-3841, or bawdena@gao.gov.

In addition to the individual named above, key contributors to this report  included Hilary Benedict (Assistant Director), Jessica Lewis (Analyst in  Charge), Antoinette Capaccio, Cindy Gilbert, Dan Royer, Holly Sasso,  Sheryl Stein, Breanna Trexler, and Monique Williams.

The National Nuclear Security Administration (NNSA) spends billions on contracts to manage and operate its 8 laboratory and production sites.

We reviewed an effort to reduce costs under one contract. Consolidated Nuclear Security, LLC, created a cost savings program it estimated would save about $2.9 billion over 10 years. NNSA verified about $515 million in savings through fiscal year 2018—about 80% of what was proposed through that year. We found this to be a reasonable estimate.

However, NNSA is not planning to implement this savings approach at its other sites. We recommended that it analyze data to determine whether to do so.