Audit Report on the Department of Energy's Management of Contractor Fines, Penalties and Legal Costs

DOE/IG-0825
October 5, 2009

Why we performed this review...

The Department of Energy's (Department) contractors incur and are reimbursed for significant legal expenses each year. Thus, we initiated this audit to determine whether the Department's process for managing contractor fines, penalties and other legal costs was effective.

Background

The Department reimburses its facility contractors for millions of dollars in settlement costs and for fees paid to outside law firms for legal research, litigation and consulting activities. Because of contract reform initiatives, the Department increased contractor financial responsibility for certain legal costs. For example, fines and penalties for violations of laws and regulations, which totaled almost $12 million over the five-year period of our review, were found to be unallowable and were not reimbursed by the Department. The Department specifically considers certain other costs to be unallowable, such as those for punitive damages or in cases where contractor management officials are found to have engaged in willful misconduct or have failed to exercise prudent business judgment. Legal costs may also be disallowed if they are not properly coordinated with Department officials.

What we found...

Our audit testing revealed that the Department did not fully implement processes for managing the cost of legal services and settlements. We identified instances where payments were made for costs that, in certain cases, were potentially unallowable. Specifically, two of the four facility contractors we reviewed were permitted to claim almost $300,000 in legal costs directly associated with unallowable fines and penalties. We also identified other instances where facility contractors incurred questionable costs paid to outside legal firms. For example, some contractors paid law firms for expenses that had not been reviewed and approved as required, including first class airfare, travel expenses where no receipts were provided, and other costs normally treated as unallowable.

The Department also allowed payment to contractors for a number of unauthorized settlements and for settlements that were made without a review of the facts and circumstances surrounding alleged contractor "managerial personnel" misconduct. The term "managerial personnel" generally describes a very limited group of specifically identified senior level contractor managers. The Department of Energy Acquisition Regulation and the Department's Legal Management Requirements at 10 CFR 719, permit the Department to review these cases for cost allowability. Such action was not taken in these cases. Several responsible officials, in discussing this issue, argued that, as an alternative, the government has the option of questioning costs based on the results of subsequent audits or reviews. We concluded, however, that controls designed to prevent or detect payments that may not be allowable on a real time basis are a more effective means of reducing or eliminating such payments.

We concluded that these activities occurred because of weaknesses in controls at certain contractor locations. In particular, Federal officials at some sites had not always considered applicable regulations that prohibit payment of certain costs that are directly associated with otherwise unallowable costs. Additionally, Department officials had not: (1) required facility contractors to enforce the terms and conditions of legal Engagement Letters; (2) fully considered the circumstances of legal actions before agreeing to settlements; and, (3) conducted reviews to identify instances of "defined" senior contractor management personnel misconduct or analyze recurring lawsuits and ensure corrective actions were being taken to prevent future lawsuits for systemic problems.

Management did not agree with the need to implement all corrective actions we proposed, but did agree that some actions were necessary and proposed alternative actions in each case. Management also did not completely concur with a number of the conclusions presented in the report. We believe, however, that management's suggested alternative actions are generally responsive to our recommendations.

To view the full report, click on the following link:

http://www.ig.energy.gov/documents/IG-0825.pdf

For more information, contact judy.garland-smith@hq.doe.gov