With acting National Nuclear Security Administration chief Bruce Held signaling a shift in M&O contracting across the weapons complex, industry officials gathered at the Nuclear Deterrence Summit last week suggested just taking aim at the large fees being paid might not be the answer to the agency’s problems. In a speech at the summit, Held said the Department of Energy and NNSA were planning to move to more of a “public interest” model of M&O contracting and away from higher fees that have been paid in recent years, especially at the two most recently awarded contracts: at Los Alamos and Lawrence Livermore national laboratories.

During a summit panel featuring senior industry officials later in the conference, Booz Allen Hamilton Principal Richard Goffi said the issue is the value brought by the corporate parents to the M&O contracts. “How do you put a value on that, how do you reward that?” Goffi said. “I think there’s probably room for different models there that may be different. But to just simply say we need to attack the fee line and make it smaller because smaller is better I think is a naive and kind of shortsighted solution to it.”

Is Fee Architecture the Problem?

At the summit, Held called the “creeping privatization” of the national laboratories “unwise” and suggested that future NNSA contracts be aligned with what can improve research and science at the labs. “If what we’re trying to motivate is really scientific excellence to take on issues we can’t deal with, we need other options,” Held said. “We need to create an incentive structure that actually motivates the people who do that. I don’t think that’s a big fee.”

CB&I Federal Services President Bob Cochran said the fees aren’t necessarily the problem, but the “fee architecture” is. “The fee architecture has turned into this three dimensional game,” Cochran said. “And what you end up doing is you have measurements on measurements on measurements that yield nothing in the way of real value. They just simply yield measurements.” Cochran suggested narrowing the measures on which contractors are evaluated to a few meaningful criteria. “That could be used in order to determine the effectiveness of the management of the laboratory, the science delivered and the support, the stewardship and other aspects that the lab and the production enterprise provide to the country,” he said.

Newport News Nuclear Vice President for Energy Programs Peter Diakun suggested that there also might need to be more fine-tuning between objective and subjective measurements for fee. He said there’s a “propensity … for more subjectivity toward the fee and its earnings, which really clouds the issue between real performance and then political performance.”

‘Our Customers are Not Happy’

John Howanitz, Bechtel’s General Manager for Nuclear Security & Allied Governments, said Bechtel is still digesting the Department’s push toward a “public interest” contracting model. “It’s very obvious that our customers are not happy and they’ve expressed that to the Board of Governors on numerous occasions and in other formats,” Howanitz said. Bechtel is the lead contractor for LLCs that

run Los Alamos and Livermore, which are capable of earning two of the highest fees in the weapons complex. For Fiscal Year 2013, that meant up to $66.9 million could have been earned at Los Alamos and $47.4 million could have been earned at Livermore compared with $26.8 million at Sandia National Laboratories. Sandia hasn’t been recompeted since the early 1990s, but Lockheed Martin’s contract to run the lab expires at the end of March, and if Sandia is recompeted, it is expected to be the first example of the Department’s new approach.

Howanitz noted that even though the margins at Los Alamos and Livermore are higher than at other sites, the work brings in some of the lowest margins for Bechtel. Howanitz noted that unallowable costs come out of the fees, as do gaps in salaries, other unapproved expenses, and community contributions. Some of the fee also goes back to the labs for research and development. “It’s not a lucrative business,” he said. “But regardless, our customer has an expectation that we demonstrate value. That’s our job. We plan to do that, and if we’re unable to do so, come up with a plan to address their concerns.”

Goffi noted that other sectors in the “public interest” bring in more money. “From my personal opinion, I would challenge the notion that profit or fee is antithetical or somewhat inconsistent with public service,” he said. “There are broad sectors of the economy that arguably provide a public service, whether it’s the health sector, whether it’s the food production sector, that do it at significantly higher margins than those in the national security enterprise.” —Todd Jacobson