Nuclear Weapons Complex Reform Could Mean Pay Cut For Contractors

A Sandia National Laboratories scientist works on a project related to modernizing U.S. nuclear weapons. A key Energy Department official says reducing the amount of money the government pays to the companies that run the national labs -- and simultaneously increasing the amount of funds available for scientific work -- could improve overall performance at the facilities.
National Journal
Douglas P. Guarino
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Douglas P. Guarino
May 14, 2014, 10:55 a.m.

The for-profit com­pan­ies that run the U.S. nuc­le­ar weapons com­plex might have a pay cut in their fu­ture, though by how much and ex­actly when is still un­clear.

For dec­ades the com­plex — which in­cludes the na­tion­al labor­at­or­ies and oth­er fa­cil­it­ies re­spons­ible for de­vel­op­ing and main­tain­ing the na­tion’s atom­ic ar­sen­al — op­er­ated on a non-profit basis. Tax­pay­er dol­lars sunk in­to it went dir­ectly to­ward sci­entif­ic work re­lated to weapons de­vel­op­ment and non­pro­lif­er­a­tion ef­forts.

Since the early 2000s, however, the sites have been run by for-profit, lim­ited li­ab­il­ity com­pan­ies. A por­tion of the an­nu­al budget for each fa­cil­ity is set aside as an “in­cent­ive fee.” The bet­ter the job a con­tract­or does man­aging a fa­cil­ity’s work in a giv­en year, the lar­ger the per­cent­age of the total avail­able in­cent­ive fee the com­pany gets to take home.

Lately these con­tracts have been un­der in­creased scru­tiny due to re­peated cost over­runs, delays and se­cur­ity fail­ures across the nuc­le­ar weapons com­plex. In one of the most dra­mat­ic ex­amples, an 82-year-old nun and two oth­er peace act­iv­ists in 2012 were able to in­filt­rate the Y-12 Na­tion­al Se­cur­ity Com­plex in Oak Ridge, Tenn., where bomb-grade urani­um is stored.

As­so­ci­ate Deputy En­ergy Sec­ret­ary Bruce Held has been ques­tion­ing wheth­er what he de­scribes as “large fees” cur­rently paid to man­age the weapons sites are the best way to mo­tiv­ate all play­ers in­volved.

Per­form­ance at the na­tion­al labs might ac­tu­ally im­prove, the former CIA of­ficer says, if less money went to­ward the fees meant to mo­tiv­ate the man­age­ment com­pan­ies that run the sites, and if more funds went dir­ectly to the sci­entif­ic work that the fa­cil­it­ies con­duct.

“What mo­tiv­ates the people at the na­tion­al labor­at­or­ies is ex­cel­lence in sci­ence and bring­ing ex­cel­lence in sci­ence to the in­terest of the na­tion “¦ They’re not mo­tiv­ated by profit in­cent­ives,” Held told Glob­al Se­cur­ity News­wire in a re­cent in­ter­view. “They’re hu­man be­ings, they need a salary — you can mo­tiv­ate them at the mar­gins by giv­ing them a pay raise or a pay de­crease or something like that — but their core mo­tiv­a­tion and what makes them tick is sci­entif­ic ex­cel­lence. 

“So if I have a choice between a dol­lar of fee for the “¦ con­tract­or that runs it, or a dol­lar in lab-dir­ec­ted re­search and de­vel­op­ment and I want to mo­tiv­ate sci­entif­ic ex­cel­lence, I’d go with” the dol­lar in lab-dir­ec­ted re­search and de­vel­op­ment, Held con­tin­ued.

It is not com­pletely clear, however, how Held, who says he was coaxed out of re­tire­ment from fed­er­al ser­vice spe­cific­ally to work on the con­tracts ques­tion, would re­con­fig­ure the cur­rent for-profit ap­proach.

Held, who com­pleted a 10-month stint as act­ing head of the En­ergy De­part­ment’s semi­autonom­ous Na­tion­al Nuc­le­ar Se­cur­ity Ad­min­is­tra­tion last month, ad­voc­ates for mov­ing to­ward a “pub­lic in­terest mod­el.” He sug­gests, however, that he and oth­er of­fi­cials work­ing for En­ergy Sec­ret­ary Ern­est Mon­iz are still wrest­ling with ex­actly what that means.

One sig­ni­fic­ant change that ap­pears to be in the works is an ef­fort to make the max­im­um fee po­ten­tially avail­able to the con­tract­or smal­ler, and to have much of that fee be based on a fixed amount.

For ex­ample, in fisc­al 2012, Los Alam­os Na­tion­al Se­cur­ity, a lim­ited li­ab­il­ity com­pany formed by Bechtel, Bab­cock & Wil­cox, URS Corp. and the Uni­versity of Cali­for­nia, had the po­ten­tial to earn up to $74.5 mil­lion for its man­age­ment of the Los Alam­os Na­tion­al Labor­at­ory in New Mex­ico, roughly 3 per­cent of the fa­cil­ity’s $2 bil­lion budget for that year.

Based on an an­nu­al per­form­ance eval­u­ation, the gov­ern­ment ul­ti­mately paid the com­pany $59.7 mil­lion, 80 per­cent of what it could have earned with a per­fect per­form­ance rat­ing.

In the fu­ture, however, a fa­cil­ity like Los Alam­os might be paid a fee that is only 1 per­cent of the site’s budget, or closer to $20 mil­lion, an NNSA of­fi­cial ex­plains. Most of that fee — say, $18 mil­lion — would be a fixed, guar­an­teed pay­ment, mean­ing only a $2 mil­lion por­tion could be re­duced due to less-than-stel­lar per­form­ance.

An­oth­er change En­ergy De­part­ment of­fi­cials are pur­su­ing is one where the fee amount would be fixed over the life of a mul­ti­year con­tract, rather than hav­ing it rene­go­ti­ated an­nu­ally, said the NNSA of­fi­cial, who was not au­thor­ized to dis­cuss the is­sue pub­licly and asked not to be named.

When fees are rene­go­ti­ated an­nu­ally “there’s not an in­cent­ive to re­duce your budget be­cause the [lar­ger the] budget, the more fee you get when you’re basing your fee on the budget,” the NNSA of­fi­cial said. “We’re try­ing to in­centiv­ize them to find ef­fi­cien­cies and have a more ef­fi­cient mis­sion that drives sav­ings.”

Un­der this mod­el, fees paid to the con­tract­or would only be rene­go­ti­ated on an an­nu­al basis if a fa­cil­ity’s costs de­vi­ated from the pres­id­ent’s budget re­quest by more than 10 per­cent, ac­cord­ing to the NNSA of­fi­cial. The semi­autonom­ous En­ergy De­part­ment agency already im­ple­men­ted this change at its Kan­sas City Plant in Mis­souri in 2010 when it ex­ten­ded the con­tract with the Hon­ey­well Corp. to run the fa­cil­ity, the of­fi­cial says.


Held hin­ted at some of these changes dur­ing his brief in­ter­view with GSN.

“San­dia [Na­tion­al Labor­at­or­ies in New Mex­ico and Cali­for­nia — now run by Lock­heed Mar­tin] used to be a dol­lar a year,” Held noted, re­fer­ring to a pri­or ar­range­ment in which the Uni­versity of Cali­for­nia and oth­er or­gan­iz­a­tions man­aged the na­tion­al labs for a nom­in­al fee.

“We’re not go­ing to get back to a dol­lar a year, but I think maybe we should do a fixed fee, not a per­cent of turnover. If you have per­cent of turnover, then you have an in­cent­ive to drive up your over­all turnover rate.”

When, and to what ex­tent, these changes are to oc­cur, is yet to be de­term­ined. Cur­rent con­tracts for Los Alam­os and Lawrence Liv­er­more Na­tion­al Labor­at­ory in Cali­for­nia are in place un­til at least 2018, and they in­clude op­tions that could ex­tend them as far out as 2026. The cur­rent con­tract for San­dia, the third ma­jor lab, is set to ex­pire this year. 

“Typ­ic­ally the best time to [make a change] is when you’re award­ing a new con­tract,” the NNSA of­fi­cial says. “Once you’re in a con­tract, it’s a ne­go­ti­ation with the con­tract­or you have in place, so it would have to be a bi­lat­er­al agree­ment “¦ It’s easi­er in a com­pet­i­tion, of course.”

How the con­tract­ors might re­act to any changes is still un­clear, ac­cord­ing to Held.

“We’re already en­ga­ging” with in­dustry, he said. “We’re start­ing to talk to people but we’re not quite there yet.”

Los Alam­os Labor­at­ory Dir­ect­or Charles Mc­Mil­lan, who also serves as pres­id­ent of the Los Alam­os Na­tion­al Se­cur­ity LLC, de­clined to say much about the is­sue after a Sen­ate hear­ing last month, dur­ing which he raised con­cerns about labor­at­ory budget cuts gen­er­ally.

“I’m not really in a po­s­i­tion to com­ment right now,” Mc­Mil­lan told GSN. “I know Bruce [Held] is think­ing a lot about those is­sues, and at some level this is an is­sue that the gov­ern­ment is the one that has to make the de­cision.”

Mean­while, fail­ures across the nuc­le­ar weapons com­plex — which, in ad­di­tion to the Y-12 break-in also in­clude nu­mer­ous delays and cost over­runs to vari­ous pro­jects — have re­kindled a long-sim­mer­ing de­bate in Con­gress over how the fa­cil­it­ies should be man­aged.

The Re­pub­lic­an lead­er­ship of the House Armed Ser­vices Com­mit­tee in re­cent years has favored le­gis­la­tion that would fur­ther lim­it the En­ergy De­part­ment’s over­sight of the fa­cil­it­ies. Over­sight by the de­part­ment, which owns the sites, was pre­vi­ously scaled back by the cre­ation of the semi­autonom­ous Na­tion­al Nuc­le­ar Se­cur­ity Ad­min­is­tra­tion in the early 2000s. That move fol­lowed a pri­or string of scan­dals across the com­plex.

Re­pub­lic­ans on oth­er House com­mit­tees, along with sen­at­ors from both parties, largely scuttled ma­jor le­gis­lat­ive re­forms in fa­vor of cre­at­ing a new con­gres­sion­al ad­vis­ory pan­el to first study a broad ar­ray of gov­ernance is­sues fa­cing the weapons com­plex. How to best struc­ture the man­age­ment con­tracts is on the agenda of the pan­el, whose fi­nal re­port is ex­pec­ted this year.

So far, the lead­ers of the so-called “Con­gres­sion­al Ad­vis­ory Pan­el on the Gov­ernance of the Nuc­le­ar Se­cur­ity En­ter­prise” have said it is clear that the “‘NNSA ex­per­i­ment,’ in­volving cre­ation of the semi­autonom­ous or­gan­iz­a­tion, has failed,” in a gen­er­al sense, but they have yet to of­fer any spe­cif­ic fixes.

Pan­el Co-Chair­man Richard Mies, a re­tired Navy ad­mir­al, said, however, that the group has ob­served in­con­sist­ences in how con­tracts are struc­tured across En­ergy De­part­ment labor­at­or­ies, in­clud­ing those that work un­der its Of­fice of Sci­ence and the NNSA sites.

“When you com­pare all the labor­at­or­ies across the En­ergy De­part­ment there isn’t a kind of stand­ard tem­plate for how they’re awar­ded — what per­cent­age is fixed fee, what per­cent­age is award fee, how much of the fee is a per­cent­age of their budget — those kind of is­sues,” Mies told GSN. “I think there needs to be some stand­ard­iz­a­tion.”

Mies said that, in his view, the fee NNSA lab man­age­ment con­tract­ors re­ceive cur­rently “is not ex­or­bit­ant,” however.

“The fee is three per­cent of the total budget,” Mies said. “A stand­ard util­ity makes a 10 per­cent profit “¦

“But there is this in­equity where some labs are get­ting one per­cent of the budget — oth­er labs are get­ting a three per­cent fee,” Mies ad­ded. “So, why the dif­fer­ence? Shouldn’t there be more con­sist­ency and bal­ance? Clearly the dif­fer­ence between fixed fee and award fee makes a dif­fer­ence, as well. We’re look­ing at all of those is­sues to try to find some reas­on­able bal­ance.”

Pan­el Co-Chair­man Nor­man Au­gustine said there are pros and cons to hav­ing for-profit com­pan­ies in­volved in the man­age­ment of the NNSA labs.

“With [a DOE Of­fice of Sci­ence] lab, they can get a uni­versity, which is ba­sic­ally a not-for-profit in­sti­tu­tion,” Au­gustine told GSN. “But when you’re do­ing man­u­fac­tur­ing and man­aging huge pro­grams — [those are] not things that uni­versit­ies are very good at.

“So that means you have to get the cor­por­ate world in­volved, and when you bring the cor­por­ate world in, they have share­hold­ers they have to ac­com­mod­ate,” Au­gustine ad­ded. “They also care about the na­tion­al in­terest “¦ but there has to be some reas­on­able bal­ance and we hope we can strike that.”

Cla­ri­fic­a­tion: This story was mod­i­fied after pub­lic­a­tion to re­flect that Los Alam­os Na­tion­al Se­cur­ity LLC also in­cludes URS Corp.

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