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AGI GAP Update and Hearing Summary on DOE's Pit 9 Contract (9-24-97)

Most recent action
On September 22, Lockheed Martin announced a change in the management and reporting structure for the Pit 9 environmental remediation project at the Department of Energy's Idaho National Engineering and Environmental Laboratory. Peter Teets, president and CEO of Lockheed Martin stated, "these actions will ensure that this vitally important national program receives all necessary corporate support toward our ultimate goal....and allows the project to succeed." The decision comes amid congressional criticism of the cleanup, the first private cleanup on a federal site that has fallen more than two years behind schedule.

House Hearings on the Department of Energy's Pit 9 Contract

House Committee on Commerce
Subcommittee on Oversight and Investigations
July 28-29, 1997

The House Commerce Subcommittee on Oversight and Investigations began a two-day series of hearings on July 28, 1997 addressing the problems associated with the Department of Energy's (DOE) contract to clean up Pit 9, a radioactive waste site located in southeastern Idaho. As part of its ongoing privatization efforts, DOE contracted with Lockheed (now Lockheed Martin Corp.) to clean up the site. Because of differing contractual interpretations and alleged failed management and technology schemes, the cleanup is at least two years behind schedule. Contractor Lockheed Martin Corp. has already spent $250 million at the site without having moved any waste. The company, which signed a fixed-price contract to clean up the site by 1998 for $179 million, now sets the price of successful completion at more than $400 million, while some estimates exceed $600 million. Lockheed began a work slowdown at the site in June and will initiate further work stoppages by late August unless the DOE agrees to renegotiate. Portrayed as the centerpiece of DOE's privatization efforts, the Pit 9 project's failure thus far may have serious implications for DOE's overall privatization effort, as well as the Congressional funding required for the success of that effort.

Congressional hearings were held on July 28 and July 29, 1997. Subcommittee Chairman Joe Barton (R-TX) stated his goals of both understanding what went wrong with the Pit 9 contract and discerning the direction to go in now to ensure a safe and efficient cleanup. Instead, Rep. Barton and his fellow subcommittee members were greeted by finger-pointing and disagreement, yielding little information on future directions. The first hearing, held on July 28, 1997, included witnesses representing the General Accounting Office, which completed a study on the Pit 9 problem, as well as the chief project regulators, the EPA and Idaho authorities. Witnesses for the second hearing, held on July 29, 1997, included Secretary of Energy Federico Pena as well as representatives from Lockheed Martin Corp., the primary contracting firm, the subcontracting firm, and the Idaho Operations Office of the DOE. Summaries of these two hearings can be accessed below:

House Commerce Subcommittee on Oversight and Investigations Hearing on the Pit 9 Cleanup (Part I); June 28, 1997

House Commerce Subcommittee on Oversight and Investigations Hearing on the Pit 9 Cleanup (Part II); June 29, 1997

Background
Pit 9 is part of the Idaho National Engineering and Environmental Laboratory (INEEL) facility in Idaho Falls. The site is an inactive waste disposal pit that covers slightly more than an acre of ground surface. From November 1967 to June 1969, various wastes ranging from contaminated rags to storage drums with hazardous chemicals, organic solvents, and plutonium-contaminated sludge, many of which derived from DOE's Rocky Flats Plant in Colorado, were dumped and covered with a layer of soil. The DOE estimates that Pit 9 contains approximately 250,000 cubic feet of transuranic wastes, hazardous wastes and contaminated soil needing treatment. Transuranic wastes are man-made radioactive elements produced from uranium during a nuclear reactor's operations which emit alpha particles. The pit contents of primary concern include plutonium and americium (from weapons production), and volatile organics such as trichloroethylene and carbon tetrachloride.

Pit 9 is just one acre of a much larger subsurface disposal area. The site is part of an 88 acre landfill at the INEEL contaminated with transuranic waste and organic solvents. Pit 9 measures 127 feet in length, 379 feet in width, and approximately 18 feet in depth. An approximately eight foot thick layer of wastes is thought to be four to six feet below the surface. For waste deposition, the site was scraped down to the bedrock, materials were buried in boxes and barrel drums, and the pit was then overfilled. No barriers such as are used in current waste disposal were employed. According to Idaho officials, with the regulations that are now in place, Pit 9 would never have been selected as a waste disposal site due to its location 580 feet above the sole-source Snake River aquifer. Although there appears to be no immediate threat to water quality, contamination could affect future generations if the landfill remains untreated.

The Pit 9 cleanup effort was conceived to demonstrate cleanup technologies over a relatively small area prior to selecting a treatment system for the entire INEEL landfill. Of all the sites within the 88 acres, researchers know the most about Pit 9. DOE and its regulators agreed to clean up Pit 9 as an interim action under Superfund by retrieving soil and wastes from the pit, separating those materials that could be returned to the pit without treatment, treating the remaining soil and wastes to achieve at least a 90% reduction in volume, and packaging the remaining concentrated materials for on-site storage until final disposal.

The Contract
In 1994, the DOE's Management and Operations (M&O) contractor for INEEL, EG&G Idaho, Inc., was replaced by a subsidiary of Lockheed Martin, Lockheed Martin Idaho Technologies Co. (LMITCO). The subcontractor selected to handle the cleanup of Pit 9 was also a subsidiary of Lockheed, Lockheed Martin Advanced Environmental Systems (LMAES). In order to mitigate the conflict of interests associated with having both the contracting and subcontracting companies answering to the same parent company, the LMITCO oversight team was sequestered from the Lockheed Martin lines of authority. The DOE selected a fixed-price contract for the arrangement. Under a fixed-price contract, the contractor is paid a specified amount that is not subject to adjustment on the basis of actual costs incurred. Additionally, the contractor is only paid for a successful cleanup. Fixed-price contracting appears to be a great improvement in terms of efficiency over the previous contracting method utilized by the DOE, cost-reimbursement or cost-plus contracting. Under this scheme, the DOE selected the method for cleanup and paid the contractor regardless of what was actually accomplished. However, fixed-price contracting is not recommended in cases where there is significant uncertainty regarding project costs. Since there is no way to definitively know the types and amounts of waste involved in a cleanup project, contractors having to rely on estimates, a fixed-price contract in these cases can pose a significant financial risk.

In 1994, Lockheed Martin signed a fixed-price contract to clean up Pit 9 in four years for approximately $200 million ($179 million plus a provision allowing Lockheed to allocate $21 million in equipment to future work). Lockheed Martin also gave their corporate guarantee in order to receive advanced payments for design and construction, as well as to quell DOE reservations about the proposed technology. By offering a corporate guarantee, Lockheed agreed to return all payments received if its treatment system failed to work properly. The winning technology design involved a chemical treatment system housed in a building equipped to move over the one acre site. The subcontractor, LMAES, undertook a fast-track approach and commenced design and construction efforts concurrently.

The Problems
Since the beginning, the Pit 9 cleanup project has been plagued by uncertainties and failures. LMAES has had four different project managers on the task as of May 1997; their so-called "A-Team" was assigned to the task in October of 1996. The first complete technical baseline was completed early this year, almost two years after work at the site began. The baseline revealed that the proposed chemical treatment system is not suitable to the conditions and contents of the pit, forcing further design work and the possibility of changing the applied technology altogether. Lockheed Martin claims that they were not fully apprised of the pit contents, and recent estimates are in excess of the initial claims. LMAES began a work slowdown at the site in June, and will impose further delays by late August if the DOE does not agree to renegotiation. The subcontractor estimates that its costs have already exceeded the subcontract price and has requested $257 million for its work through June 30, 1997, as well as a new cost-based subcontract to reimburse the company for all future costs. The DOE has been assessed $940,000 in fines by its regulators, the EPA and the State of Idaho, for failure to meet deadlines for submitting acceptable design documents. More than two years into the project, work has not yet begun and costs have already exceeded those provided for in the contract.

Despite the difficulties associated with the project thus far, all parties involved favor continuing with the current Record of Decision. Regulators are encouraged by the newest management team provided by LMAES. However, the discrepancies in contract interpretation between the DOE and Lockheed Martin must be ironed out before constructive work will begin at the site. Both contractees have suggested that third party mediation and binding arbitration may be the action to pursue from here.

Meanwhile, the inaction at Pit 9 does not bode well for DOE's privatization efforts. Problems at the site have contributed to "waning enthusiasm" for privatization among congressional leaders. The DOE requested $1 billion for privatized contracts in FY 1998, up from $330 million last year. But citing the DOE's "poor track record" in managing contracts, the House Appropriations Committee refused to fund any new privatization efforts in FY 1998. The Committee referred to their "serious programmatic concerns" and attributed the lack of funding to "the sloppy work done in developing the project proposals, inadequate and inconsistent answers to questions, and skepticism that the Department is capable of managing technically complex, fixed-price contracts." The Senate earmarked $343 million, noting that their action was "taken without prejudice, but in recognition that the new privatization concept has yet to be proven effective." Senate appropriators also noted that "management, regulatory, and budget issues must be overcome" if the privatization effort is to be a success. The two committees will resolve the funding level in conference in September.

Congressional Hearings

Part I: General Accounting Office (GAO) and Regulatory Representatives
July 28, 1997

Panel I

Mr. Victor S. Rezendes, the Director of Energy, Resources, and Science Issues in the Resources, Community, and Economic Development Division of the U.S. General Accounting Office, was the sole witness for the first panel. When news of the contractual problems at Pit 9 reached Congress in November of 1996, the GAO undertook a review of the situation. Mr. Rezendes presented the results of the GAO report, Department of Energy's Project to Clean Up Pit 9 at Idaho Falls is Experiencing Problems, to the Subcommittee. Mr. Rezendes offered the general background of the contractual relationship in question, noting that the DOE was advised that fixed-price contracting was questionable for the Pit 9 project because of significant uncertainties. However, the DOE felt that "the benefits outweighed the risks." He also commented that the DOE had reservations about the technology in both of the final considered proposals, yet was under significant pressure to sign a contract and begin the cleanup. Rezendes concluded his testimony by emphasizing the current status of the project... "The project is currently stalled, and already 26 months behind schedule. The costs have already exceeded $200 million and could more than double. The project cannot be completed within the time and financial constraints agreed to in the subcontract."

Questions from the subcommittee focused on the future implications of the Pit 9 difficulties for DOE's privatization efforts and attempts to understand which of the involved entities was most at fault. Mr. Rezendes stated that the GAO still feels that privatization is the right way to go with DOE cleanup projects, and added that fixed-price contracts are also the preferred contracting method. "The contracting mechanism itself was not the problem. Implementation was the problem." According to Rezendes, fixed-price contracts, when properly managed and adequately detailed, represent the most efficient way to accomplish cleanup efforts. Thus, the GAO continues to support DOE privatization and fixed-price contracting. Rezendes pointed to the concurrent implementation policy of the subcontractor as a major contribution to the Pit 9 problems.

Though pressed multiple times by subcommittee members to point a finger, Rezendes only commented that the matter is likely to be litigated. He added that he was not surprised by the turn of events at Pit 9, suggesting that some contracts are more nebulous and bring even less favorable outcomes. Rezendes acknowledged that the site could have been cleaned up for $200 million had all gone as planned. Subcommittee Chairman Joe Barton (R-TX) suggested that Lockheed Martin had higher hopes for the project than were indicated, expecting to "get their foot in the door" for additional DOE contracts. Rezendes commented that DOE agreed to the contract despite technological reservations because they were "under significant pressure to get things done and because Lockheed really believed they could do it." His recommendations to improve the contracting process included requiring greater clarity in the proposals for both technology and timetables. "Here, we could've avoided problems with more up-front planning." Ranking Member Ron Klink (D-PA) pointed out how serious the potential technological problems were at the Pit 9 site, noting that Lockheed's selection of inadequate pipes could have led to criticality. When asked what message the subcommittee should send to Lockheed Martin, Mr. Rezendes replied, "we need accountability."

Panel II

The witnesses present for the second panel included: Ms. Kathleen E. Trever, Coordinator-Manager of the INEEL Oversight Program, and Mr. Randall F. Smith, Director of the Office of Environmental Cleanup for Region 10, EPA. The EPA and the State of Idaho are the regulators for the Pit 9 cleanup project. Ms. Trever set the Pit 9 project apart from others she's been involved in, commenting that the lines of communication were not as open as they typically are. She was not informed of the extent of cost overruns for the project until October of 1996. Trever acknowledged that the State of Idaho is increasingly concerned that the DOE is "losing sight of their obligations." An agreement between the State of Idaho and the DOE reached in March of 1997 requires the DOE to provide a changed design and a revised timeline for the project by September of this year. Trever concluded, "Idaho should not bear the costs because of DOE's contractual shortcomings." Mr. Smith also set the Pit 9 project aside, noting that all other INEEL projects currently underway (10 in total) are "right on schedule." He added that, in his capacity as regulator, he has no input into the contractual process, including technology selection. Smith concluded his testimony with a glance towards the future, adding, "there are no unresolvable technological impediments to this project."

In response to comments regarding contractor complaints of excessive oversight, both Ms. Trever and Mr. Smith stated that their involvement was entirely typical. Mr. Smith commented that "the quantity of comments is a function of the quality of the initial design information." Both Trever and Smith stated that working relationships with Lockheed Martin personnel have greatly improved since the A-Team of managers were brought on at the site. In response to inquiries from Rep. Barton, Trever stated that there are two downsides to being in her position as an Idaho resident: there has been no cleanup, and they are now paying added costs. Still, both Trever and Smith agreed that the Pit 9 Record of Decision is still the best way to achieve the site cleanup. Trever concluded the comments by emphasizing that "DOE still has and always will have an obligation to clean up even if technology is proven ineffective or too expensive."

Part II: Secretary of Energy and Lockheed Martin Representatives
July 29, 1997

Panel I

The second of the Pit 9 hearings began with extensive opening remarks from the Subcommittee. Chairman Barton commented that the "currently disastrous situation is not a surprise...[the DOE] barreled ahead with their eyes closed." Rep. Klink offered his own analysis of current circumstances and their likely repercussions for the taxpayers, noting, "I suggest we grab our umbrellas, for we and the taxpayers are about to get soaked." Full Committee Chairman Thomas Bliley (R-VA) chastised the DOE for failing to fulfill their primary duty, "to protect the interests of the American people."

Witnesses for the first panel included: The Honorable Federico F. Pena, Secretary of Energy; The Honorable Eric Fygi, Acting General Counsel, DOE; The Honorable Alvin Alm, Assistant Secretary for Environmental Management, DOE; and Mr. James Owendoff, Deputy Assistant Secretary for Environmental Restoration, DOE. Secretary Pena began by acknowledging the "numerous weaknesses" in the DOE's contractual policies, especially the cost-plus contracts of the past which offered "little incentive to contractors for cost efficiency and work quality." Pena characterized the Pit 9 contract as a "pilot" in fixed-price contracting. He commented that the DOE must continue to reform their contracting practices. In this respect, Pena has instituted a number of changes including the following: adding more interim milestones and reviews to cleanup projects, recruiting a senior DOE official to oversee the privatization effort as a whole, and providing for a 30-day waiting period prior to signing contracts to allow Congressional review of proposals and conditions. To conclude, Pena added that he is strongly committed to holding contractors accountable. "I expect our contractors to meet their commitments and will take every step to ensure that they do."

Pena responded to Congressional concerns about additional funds to be spent by stating that "we have a legally-enforceable fixed-price contract with a corporate guarantee. Our liability to the subcontractor is $179 million." Pena did add that the DOE has paid a number of fines to the regulators. Responding to criticisms of DOE's contract history, Pena acknowledged that circumstances should have been managed better, and noted that during his tenure he has terminated a significant contract because of mismanagement and has implemented better training for DOE personnel, in addition to the changes mentioned in his testimony. While Rep. Klink insisted that the DOE knew of problems such as the lack of a complete technical baseline prior to signing the contract, Pena commented that it took subcontractor LMAES two years to bring the problems to his attention. The Secretary added that the slowdown at the site is "very troubling," and maintained that the contractor has not defaulted because some work is still being done. DOE's possible contributions to the cost overruns and scheduling delays are currently under review. He noted that should any evidence be uncovered establishing that the subcontractor was misinformed regarding the pit contents, adjustments would be made. Pena stated that the DOE is "willing to do all in its power to ensure that the taxpayers get their due." In response to Chairman Barton's inquiries about forcing Lockheed Martin to "eat the loss," Secretary Pena acknowledged that DOE could choose to force the company to swallow the loss.

Pena maintained throughout his testimony that Lockheed Martin is most responsible for cost overruns and delays, though added that the DOE will not again undertake a contract in which the contractor and subcontractor are subsidiaries of the same parent company. Pena emphasized that the DOE has no interest in converting the contract nor in providing transition costs, repeating that the contract is legally enforceable and Lockheed Martin will be held accountable.

Panel II

Witnesses present for the second panel included: Dr. Albert Narath, President and Chief Operating Officer for Energy and Environment for Lockheed Martin Corporation; Dr. James A. Tegnelia, President of Lockheed Martin Advanced Environmental Systems (LMAES); Mr. Steve Winston, Vice President of Technical and Management Integration for Lockheed Martin Idaho Technologies Co. (LMITCO); and Mr. John M. Wilcynski, Manager of the Idaho Operations Office for the DOE. Dr. Narath testified that Lockheed Martin is now "in an untenable position," because the contracting parties cannot agree on the project's technical specifics and the matter has been "compounded by profound changes in the site inventory." Narath stated that "Lockheed Martin has repeatedly attempted to engage the DOE in constructive discussions, but it seems unlikely that they'll agree without the help of an impartial third party." He acknowledged that Lockheed must shoulder some of the blame, but qualified his remarks by stating that the corporation has offered several proposals, none of which have been accepted by the DOE.

Mr. Winston began by acknowledging up-front that LMITCO should have done things differently and accepting his share of the blame. "I don't want to offer any excuses." He emphasized that LMAES was given no preferential treatment because of a common parent corporation, and roundly criticized the subcontractor for failing to establish a technical baseline and choosing a fast-track method. Alluding to accusations of excessive interference made by the subcontractor, Winston noted that comments were offered only when subcontract requirements were not being met. He also referred to accusations about pit inventory changes, commenting that the more recent estimating methods are not necessarily more accurate than those initially used. "We have the best available information. The pit inventory has not changed." Winston concluded, "the oversight team intends to hold LMAES to the terms of the subcontract."

Mr. Wilcynski stated that "LMAES has thus far failed to perform." He attributed that failure to management and engineering shortcomings, adding that the DOE and alleged inventory changes had little to do with creating the current situation. Wilcynski stood by the terms of the contract, concluding "They're accountable. If they don't clean it, they don't get paid."

Mr. Wilcynski responded to criticisms that the DOE signed off on a fast-track approach by clarifying that the fast-track option was not a part of the contract and was entirely the choice of the subcontractor. Chairman Barton, himself an engineer, offered his input on the technology selection, insisting that the project would have been considerably cheaper had the subcontractor chosen a "negative-pressure dome structure" rather than their mobile building. Dr. Narath stated that Lockheed Martin is committed to finishing the cleanup, but should not be held responsible for "changes in scope and interpretation." One example of a change in scope that Narath offered involved the overburden. At the time of signing, Lockheed was informed that the overburden was not contaminated. However, recent tests show that the overburden is in fact contaminated. Mr. Winston countered this claim, noting that "there is no reason to believe it would remain clean. Overburden becomes contaminated over time." He suggested that Lockheed should have known better. Narath responded to questions about the four separate management teams put on the project since May 1996, stating that Lockheed saw the need to strengthen their management team when the "true complexity of the job became clear."

Narath restated his assertion that Lockheed is committed to completing the job, but added that "we need agreement as to the specifications before we can do anything." Lockheed has limited current action to the specifics that have been agreed upon. All of the witnesses agreed that the worst course of action to take now is litigation. However, Mr. Wilcynski noted that "Lockheed Martin's behavior in the last month indicate that that's where we're going." Mr. Winston suggested binding arbitration as a potential solution to the contractual differences. Dr. Narath reiterated that "the key is to get a baseline we agree on. Then, we can move on to addressing everything else." He added that "with what we know now, we never would have signed the contract." Rep. Burr (R-NC), frustrated with the progress of the hearing, stated, "we've seen only a circus between two Lockheed companies. We still don't know when [the cleanup] will happen or who'll do it." Rep. Klink shared these sentiments, adding that he is "very pessimistic that Lockheed Martin is trying to resolve this dilemma."

In response to allegations that Lockheed waited too long (two years) to signal distress, Narath commented, "we consistently transmitted that the project was in trouble." After continued finger-pointing and disagreement, Chairman Barton concluded the hearing by recommending that the parties pursue a course of action involving binding arbitration so that the cleanup process can finally begin.

Sources: Energy and Environment Weekly, Greenwire, GAO Report (GAO/RCED-97-180)


Please send any comments or requests for information to the AGI Government Affairs Program at govt@agiweb.org.

Contributed by Jenna Minicucci, AGI Government Affairs Intern
Last updated September 24, 1997

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