On January 14, 2010, the Government Accounting Office (“GAO”) issued a report recommending that the Department of Energy (“DOE”) develop better cost estimates for construction and environmental cleanup projects.

The leaders of the U.S. House Subcommittee on Energy and Water Appropriations asked the GAO to review: (1) DOE’s cost-estimating policies and guidance, (2) the ways in which projects’ cost estimates demonstrate best practices compiled in the GAO’s guide to cost-estimating, and (3) recent efforts by DOE to improve cost-estimating.  GAO submitted a report entitled “Actions Needed to Develop High-Quality Cost Estimates for Construction and Environmental Cleanup Projects” to the subcommittee.  The GAO reviewed four major DOE projects, including three construction projects over $750 million dollars and one environmental cleanup project.  The report concluded that the DOE’s cost-estimating guidelines are outdated and that the agency lacks internal controls necessary to oversee the development of high-quality cost estimates by its contractors. 

The GAO identified several key areas for improving DOE’s cost estimates.  First, GAO found that DOE officials do not use independent cost estimates (“ICEs”) in order to check their own estimates before construction begins.  Though the DOE set up an Office of Cost Analysis (“OCA”), GAO found that this office is not independent because it reports to the DOE Chief Financial Officer.  Next, GAO found that DOE contractors often underestimated the cost of construction projects by failing to implement best practices when assessing project needs and miscalculating the budget specifications or contingency costs.  These underestimates can create large gaps between budgets and actual cost of large construction projects.  The GAO conducted an ICE of one of DOE’s construction projects, the Salt Waste Processing Facility, which revealed that it would cost $2.7 billion, or twice the estimate by the contractor who was actually building the facility.  The GAO review also revealed that estimates failed to include specific costs associated with projects, making it difficult for Congress and the DOE to make funding decisions based on accurate information.

The GAO issued several recommendations that would enable DOE to produce more reliable cost estimates.  The GAO recommended that the Secretary of Energy create a cost-estimating policy and update the agency’s guidance procedures to ensure that DOE and related contractors produce cost estimates that conform to best practices.  The report also suggested that ICEs be conducted for major projects at key milestones.  In addition, the GAO recommended that the Secretary of Energy (1) combine the functions of the OCA and Office of Engineering and Construction Management; (2) consider adopting the structure of the cost-estimating office at the Department of Defense; and (3) conduct ICEs for the four major projects that the GAO reviewed for its report. 

A copy of the GAO report (GAO-10-199) can be found at: http://www.gao.gov/new.items/d10199.pdf