November 12, 2019

Bechtel National, Inc.’s Subcontract Audit Program

Bechtel National, Inc. (Bechtel) is responsible for construction of the Department of Energy’s $16.8 billion Waste Treatment and Immobilization Plant.  The Waste Treatment and Immobilization Plant’s mission is to treat and vitrify a majority of the 56 million gallons of waste amassed from decades of plutonium production at the Department’s Hanford Site.  To achieve its mission, Bechtel procures services and equipment, often using subcontractors.  The Department’s Office of River Protection manages the Bechtel contract while the Richland Operations Office provides administrative and financial oversight support to the Office of River Protection for Bechtel.

Many of these subcontracts are “flexibly-priced,” where the costs incurred are a factor in determining the amount payable to the subcontractor.  Between the start of the contract on December 11, 2000, and June 15, 2018, Bechtel paid $1.98 billion for 392 flexibly-priced subcontracts.  For its flexibly-priced subcontracts, Bechtel’s contract with the Department contains a requirement to audit the subcontractors’ costs.  Specifically, the contract requires Bechtel “to either conduct an audit of the subcontractor’s costs or arrange for such an audit to be performed by the cognizant Government audit agency through the Contracting Officer.”  The Defense Contract Audit Agency typically performs audits requested through the Contracting Officer.

Several factors have led to concerns regarding the performance of subcontract audits and the associated costs.  First, since 2013, the Department has had concerns about arranging for audit assists from the Defense Contract Audit Agency due to a backlog of audits it had not been able to perform.  This backlog resulted in the Defense Contract Audit Agency being prohibited from performing non-Department of Defense work for nearly a year beginning in November 2015.  It also resulted in the Department formally reminding Bechtel in April 2013 of the contractual requirement to perform subcontract audits and requested Bechtel to submit audit results.  Second, the Contract Disputes Act of 1978 established a 6-year statute of limitations on the ability of the Government to make claims against a contractor.  Because of these concerns, we initiated this audit to determine whether Bechtel is fulfilling its requirement to audit its flexibly-priced subcontracts.

We determined that Bechtel had not fulfilled the requirement within its contract to audit flexibly-priced subcontracts.  Specifically, we found that since the start of the contract on December 11, 2000, a significant number of flexibly-priced subcontracts have not been audited; subcontract audits performed by Bechtel officials had not always been effective or reliable; Bechtel had not identified all flexibly-priced subcontracts that were subject to audit; and while Bechtel met a Department-established performance goal of completing at least 20 audits by the end of calendar year 2018, its efforts were not focused on those subcontracts that were at risk of exceeding the statute of limitations for submitting claims, as required by the Department.

Although both Bechtel and the Department have taken actions to improve the performance of subcontract audits, the issues we identified occurred because of weaknesses in Bechtel’s administration of its subcontract audit program as well as deficiencies in the Department’s oversight.  By not fulfilling the requirement to audit its flexibly-priced subcontracts, Bechtel increases the risk that it is passing on unallowable costs from its subcontractors to the Department.  We made three recommendations to address these concerns.  Management concurred with the report’s recommendations and identified specific actions that were already in place to address them.

Topic: Management & Administration