2

Contracts

Throughout their existence, all three of the NNSA laboratories have been operated as government-owned/contractor-operated (GOCO) federally funded research and development centers (FFRDC). In this arrangement the government defines its needs, funds the work, and owns the facilities; while the M&O contractor operates the facilities and works in partnership with the government to create solutions to problems defined by the government needs1. One of the reasons the government establishes GOCO relationships is so government can take advantage of the management skills and knowledge of U.S. industry and universities. GOCO relationships have been used by several federal agencies.

Congress expects that NNSA will provide oversight of activities at each of the three laboratories, and will ensure that the work is done safely, in an environmentally sound manner, and with high standards of security and fiscal integrity. To that end NNSA has Site Offices at each of the laboratories that oversee all aspects of laboratory operations. The Los Alamos Site Office (LASO), Livermore Site Office (LSO), and Sandia Site Office (SSO) report to the Deputy NNSA Administrator for Defense Programs (NA-10).

Until the recent contract changes, the University of California had managed the LANL and LLNL since they were formed. Since 1949, SNL has had two contractors. The first contractor was AT&T. When AT&T gave up the contract in 1993, Martin Marietta (later Lockheed Martin) was awarded the contract and remains the contractor today.

Some of the concerns associated with the new contracts at LANL and LLNL are about the much higher management fees contained in the current contracts. When the University of California alone managed these laboratories, the annual fee for each was less than $10 million. NNSA related to the study committee that in order to attract industrial bidders the management fee was significantly increased. As a result, the annual fee for managing LANL and LLNL grew to about $60 million and $40 million, respectively.2 Moreover, in the case of LANL, private contractors in New Mexico are required to pay a gross receipts tax which the University of California, as a public entity, was not required to pay. These costs—and others associated with the contract changes, in particular the need for the federal government to contribute $30 million to the employee pension funds at each of these two laboratories—had impacts on the budgets of both laboratories, on the order of $100 million per year. These pension costs are contained in separate DOE appropriations accounts from laboratory management costs. A summary of major costs is provided in the Appendix F section, “Costs Associated with LANL and LLNL Contract Changes.” However, it is difficult to create an apples-to-apples comparison of costs before and after these contract changes. For example, then-LLNL Director George Miller told the study committee that he estimated the change at LLNL increased overhead costs by $130 million, in contrast to the study committee’s estimate of $70 million (see the Appendix F section “Costs Associated with LANL and LLNL Contract Changes”). In addition, it is important to compare these changes to the total operating budgets of the two laboratories. In FY2010, LLNL received $1.153 billion and LANL received $1.681

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1 The FFRDC arrangement is specified in the M&O contracts for each of the three laboratories.

2 The fee at each laboratory varies by year according to a schedule specified in each contract. The fee at SNL is about $25 million per year and has been roughly the same since 1993.



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2 Contracts Throughout their existence, all three of the NNSA laboratories have been operated as government-owned/contractor-operated (GOCO) federally funded research and development centers (FFRDC). In this arrangement the government defines its needs, funds the work, and owns the facilities; while the M&O contractor operates the facilities and works in partnership with the government to create solutions to problems defined by the government needs 1. One of the reasons the government establishes GOCO relationships is so government can take advantage of the management skills and knowledge of U.S. industry and universities. GOCO relationships have been used by several federal agencies. Congress expects that NNSA will provide oversight of activities at each of the three laboratories, and will ensure that the work is done safely, in an environmentally sound manner, and with high standards of security and fiscal integrity. To that end NNSA has Site Offices at each of the laboratories that oversee all aspects of laboratory operations. The Los Alamos Site Office (LASO), Livermore Site Office (LSO), and Sandia Site Office (SSO) report to the Deputy NNSA Administrator for Defense Programs (NA-10). Until the recent contract changes, the University of California had managed the LANL and LLNL since they were formed. Since 1949, SNL has had two contractors. The first contractor was AT&T. When AT&T gave up the contract in 1993, Martin Marietta (later Lockheed Martin) was awarded the contract and remains the contractor today. Some of the concerns associated with the new contracts at LANL and LLNL are about the much higher management fees contained in the current contracts. When the University of California alone managed these laboratories, the annual fee for each was less than $10 million. NNSA related to the study committee that in order to attract industrial bidders the management fee was significantly increased. As a result, the annual fee for managing LANL and LLNL grew to about $60 million and $40 million, respectively. 2 Moreover, in the case of LANL, private contractors in New Mexico are required to pay a gross receipts tax which the University of California, as a public entity, was not required to pay. These costs—and others associated with the contract changes, in particular the need for the federal government to contribute $30 million to the employee pension funds at each of these two laboratories—had impacts on the budgets of both laboratories, on the order of $100 million per year. These pension costs are contained in separate DOE appropriations accounts from laboratory management costs. A summary of major costs is provided in the Appendix F section, “Costs Associated with LANL and LLNL Contract Changes.” However, it is difficult to create an apples-to-apples comparison of costs before and after these contract changes. For example, then-LLNL Director George Miller told the study committee that he estimated the change at LLNL increased overhead costs by $130 million, in contrast to the study committee’s estimate of $70 million (see the Appendix F section “Costs Associated with LANL and LLNL Contract Changes”). In addition, it is important to compare these changes to the total operating budgets of the two laboratories. In FY2010, LLNL received $1.153 billion and LANL received $1.681 1 The FFRDC arrangement is specified in the M&O contracts for each of the three laboratories. 2 The fee at each laboratory varies by year according to a schedule specified in each contract. The fee at SNL is about $25 million per year and has been roughly the same since 1993. 10

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billion from DOE for activities involving S&E. 34 Each laboratory also received funds from other federal agencies for work for others. In any case, the increase in fee—about $35 million additional in FY11, according to the Livermore Site Office manager, who also said that 30 percent of the fee is fixed and 70 percent is linked to performance—is a small fraction of the total operating budget of the laboratories and not likely to be the dominant cause of financial changes at the laboratories, contrary to some narratives. Following competition, the contracts for LANL and LLNL were awarded to two separate Limited Liability Corporations (LLCs). The parent corporations of Los Alamos National Security are the University of California, Bechtel, Babcock and Wilcox, and URS Corporation. The same four, plus Battelle Memorial Institute, are the parents of Lawrence Livermore National Security. At all three laboratory site visits, and at other open study committee meetings, the study committee heard presentations and discussions of management-related matters that make the conduct of science and engineering more difficult, or at least have the potential to do so. Some presenters (and others) attribute these problems at LANL and LLNL to the new contract. The study committee noted that many of the most significant problems are common to all three laboratories, and for that and other reasons concluded that such problems are not the result of the contract changes (see Chapter 4). In fact, the Livermore Site Office reported to the study committee that at LLNL increased fees and pension costs were offset significantly by reduced costs of government contributions to the University of California pension system under the new contract arrangements. 5 Some laboratory S&E staff, and former staff and managers have voiced strong concern that the increased fees have and/or will influence management decisions in a way that may be deleterious to the quality of S&E. However, when the study committee asked for details of specific deleterious effects, it did not receive any. When the study committee examined the M&O contracts, it found very little that prescribes the management of S&E. During its site visits with dozens of scientists and engineers at all levels of the three laboratories, the study committee asked again for specific illustrations of such problems but did not receive any data suggesting that the contractor fees are affecting management decisions with respect to S&E. Because this is an important issue that merits continued vigilance, the study committee discussed incentives at length with the three laboratory directors. The study committee was convinced that their primary objective remains to manage the laboratories in the public interest. This view was also asserted by NNSA senior management, who told the study committee that the pursuit of incentive award fee was not a significant motivator for the laboratories. The study committee concluded, though, that there are serious management issues. It is concerned that the overall management relationship between NNSA and its national security laboratories is becoming dysfunctional. In part, increasing government focus on the details of both operations and technical work is a symptom of declining trust (by government) of laboratory managers and S&E staff, and contributes to increasing aversion to risk in the conduct of S&E. An increasing amount of the available time of both laboratory managers and S&E staff is spent on details of operational and administrative matters—such as gathering approvals to work at home, to remove laboratory computers from the premises, to purchase office supplies and to bring uncleared visitors into the laboratory - thus reducing time available for mission science and engineering. If left unaddressed, this will erode scientific initiative. The study committee also shares the concern, voiced by several presenters at study committee meetings, that these trends and problems may lead to a decline in experimental work. (See more discussion of these matters in Chapter 4.) Despite hearing concerns about conditions at the labs, 6 the study committee did not find increased turnover of the S&E staff apart from the reduction in force at LLNL after the change in contract. A LANL 3 See FY2012 DOE Budget Justification; http://www.mbe.doe.gov/crorg/cf30.htm#Justifications. 4 Funds were also received from DOE for environmental cleanup. 5 Private communication to the study director. The savings were to the government, and not shared by the laboratory, because they were matters under the government contract with University of California. 6 This includes, but is by no means limited to, candid statements to the committee at laboratory visits and elsewhere. There have been blogs (see “LLNL: The True Story” at http://llnlthetruestory.blogspot.com/; “LANL: 11

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Fellow told the study committee that the attrition rate in recent years has been about 4 percent per year; a senior LLNL manager estimated that staff turnover peaked at about 5 percent per year after the contract transition and layoffs, and has now dropped. Meanwhile, the laboratories still seem to be successful in recruiting. The study committee was told that SNL hired on the order of 700 people in 2010 and that the LANL postdoctoral program, which is a primary tool for recruiting new S&Es, is at its largest ever. A LANL Fellow said that the quality of postdocs—as measured by publications and citations—has been increasing in recent years. A senior SNL person who is involved in recruiting provided an anecdote that, where the laboratories might have in the past received 40 applicants in response to a posting, now they might only hear from 10-12, many of who have some past connection to a national laboratory. But that staffer thinks part of the problem is the shrinkage in the U.S.-citizen pipeline. An LLNL manager who recruits primarily for computing expertise still has a success rate of about 80 percent, but it used to be 98 percent (although 80 percent is a more typical historical acceptance rate across the entire laboratory). Some noted competition in recent years from companies like Google, and others observed that the recent pay freeze has made it a bit harder to recruit new people. The study committee also expects that current economic conditions might discourage career changes, and that improving job prospects elsewhere could put pressures on recruitment of new staff and retention of experienced scientists and engineers. Finding 2.1. The study committee found that the current M&O contracts for LLNL and LANL have significantly increased the cost of operating those laboratories. Specifically, they have added costs that have to be absorbed within the top-line laboratory budgets, thereby decreasing funds available to support science and engineering. However, the study committee has not found evidence that the management of the scientific enterprise has been biased in the pursuit of award fee. If the incentive fee becomes too high, or the criteria upon which the fee is measured discourage experimental science or innovation, however, the scientific enterprise at the laboratories could well deteriorate over time. Changes associated with the new contracts at LANL and LLNL—including both uncertainties associated with the competition and actual changes in employment conditions and status (e.g., retirement and healthcare benefits)—have had negative effects on laboratory personnel, as has the LLNL reduction in force. While there is a widespread national trend toward less generous pension and healthcare benefits, laboratory personnel underwent an abrupt change in status from employees of the University of California to employees of LANS or LLNS, and the change in benefits was similarly abrupt. There is widespread perception among laboratory personnel that the new contracts are not to their benefit. 7 On the other hand, the study committee found that the staff at LANL and LLNL, as well as SNL, remains highly motivated and enthusiastic about the S&E work at the laboratories. Staff and management at all three of the laboratories expressed concern that, in their view, the managerial relationship between NNSA and the laboratories has lost the FFRDC/GOCO partnership character. They assert that it is now primarily a contractor relationship in which the government specifies tasks rather than making full use of the laboratories’ skills in directing and executing S&E. This is in contrast to NNSA’s statement that they manage with “eyes on and hands off.” The Real Story” http://www.parrot-farm.net/lanl-the-real-story/), press articles (see “The Assault on Los Alamos National Laboratory: A drama in three acts,” Bulletin of the Atomic Scientists, by Hugh Gusterson at http://bos.sagepub.com/content/67/6/9.full, and “Analyst Sees Lasting Damage to Los Alamos, Livermore,” The Livermore Independent, by Jeff Garberson at http://www.independentnews.com/news/article_dcc64e10-1c8b-11e1- b5c0-001871e3ce6c.html), and statements to state and federal representatives and senators (see presentation by UPTE representative Jeff Colvin to the committee at http://www.upte.org/NAStestimony.pdf). 7 H. Gusterson, 2011, “The Assault on Los Alamos National Laboratory: A Drama in Three Acts,” Bulletin of the Atomic Scientists, at http://bos.sagepub.com/content/67/6/9; J. Garberson, (2011, “Analyst Sees Lasting Damage To Los Alamos, Livermore Labs”; testimony in meetings at Los Alamos and Lawrence Livermore by staff and presentation by Jeff Colvin. 12

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Appendix D summarizes selected contract provisions related to the quality of science and engineering. Each of the three contracts states that the performance of quality of S&E is important to the laboratory. However, typically 10 percent or less of the performance fee is tied specifically to the quality of S&E. 13