April 9, 2021

Fiscal Year 2018 Evaluation of Incurred Cost Coverage at Sandia National Laboratories

In 1994, the Office of Inspector General (OIG), Department of Energy officials, and internal audit directors from selected sites with management and operating contractors implemented the Cooperative Audit Strategy, which allows management and operating contractors to audit their own incurred costs.  Based on recent work conducted by the OIG and concerns expressed by external stakeholders, such as the Government Accountability Office, the OIG is evaluating the Cooperative Audit Strategy.  As part of that effort, the OIG commenced six audits in fiscal year 2020 to review certain contractors’ incurred cost coverage of selected areas.  We initiated this audit to evaluate incurred cost coverage of selected areas during fiscal year 2018 at Sandia National Laboratories (SNL).

We found that SNL’s allowable cost audits for fiscal year 2018 did not adequately evaluate incurred costs for allowability, allocability, and reasonableness.  We noted weaknesses in SNL Internal Audit’s design of the audit risk assessment, sampling approach, and incurred cost reconciliation process.  We also identified issues with SNL’s year-end indirect rate variance disposition practice.

Given the large amount of taxpayer funding used for Department management and operating contracts and the reliance on contractor internal audit functions to audit such funds, weaknesses in the annual evaluation of incurred costs could result in significant amounts of unallowable costs being charged to the Department and going undetected.

The results of this audit will be used in conjunction with the results of multiple other audits, inspections, and investigations in arriving at conclusions regarding the Cooperative Audit Strategy and providing recommendations to the Department in an upcoming report.