Energy Department’s fixed-price contracts fall short of savings goals

The Energy Department exaggerated the savings it could achieve by using fixed-price contracts for environmental cleanup projects, the agency's inspector general concluded in a recent report. Energy had planned on saving $1.7 billion on 11 fixed-price contracts written by its Office of Environmental Management since 1994. But the department will miss this target by at least $160 million because of problems with the fixed-price contracting method, according to the report. Fixed-price contracts require contractors to complete projects within budget, thus creating an incentive for the contractor to finish projects quickly and at a lower cost to the government. While the method has yielded savings at several agencies, including Energy, it also puts pressure on contracting officers to come up with realistic cost estimates for work to be performed. Energy officials produced unrealistic savings estimates and failed to account for expected cost increases on nine of the 11 contracts, the IG concluded. "We found that the department had not consistently developed comparable and supportable cost comparisons, and officials, in several cases, chose to award fixed-price contracts where uncertainties associated with the work increased the risk of cost increases," said Phillip Holbrook, deputy inspector general for audit services at Energy. For example, Energy officials claimed savings of $75 million on a $217 million fixed-price contract to design an Idaho facility for storing nuclear fuel. Energy assumed this bid was low by $75 million because the General Accounting Office had found that such projects usually cost 30 to 50 percent more than original estimates. The IG dismissed this reasoning, noting that an independent estimate had put the cost of the project at $208 million. Energy had no reason to suspect the contractor would miss its own cost estimate, meaning the department had no reason to claim savings, according to the IG. "Because the $75 million in estimated savings was based on the assumption that the management contractor would significantly exceed its own estimate, there was no detailed support for the estimated savings," the report said. Savings estimates for five of the 11 contracts were unrealistic because the scope of work changed after the original contract had been signed, according to the IG. In one case, Energy projected savings of $5.5 million on a project to design containers to ship nuclear waste. But the containers also had to be certified safe by the Nuclear Regulatory Commission, a process that eventually added costs to the project. Given the uncertainty of the project, Energy should not have assumed it would produce any savings, according to the IG. "The effectiveness of the [fixed-price] contracting approach in terms of realizing cost savings is limited when technical uncertainties remain at the time of contract award which can lead to cost increases," the report said. To develop more accurate cost figures, the IG recommended that Energy strictly adhere to its own guide for estimating the costs of environmental cleanup. Energy generally agreed with the IG's finding, although it did contend that the savings estimate for the Idaho nuclear fuel project was realistic. The report shows the challenges involved in fixed-price contracting, a point that advocates of the method should consider as they propose new procurement reforms, said Dan Guttman, a fellow with the National Academy of Public Administration. "Fixed-price contracts are quintessential 'performance contracts,'" he said. "The IG report again shows that current reforms must be predicated on the evaluation of the successes and failures of past reforms that proceeded under the banner of similar premises."