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Overbilling and billing without the knowledge or approval of Los Alamos National Laboratory officials by its largest subcontractor are key findings in an Office of Inspector General report released Monday.
Without alleging fraud, the IG's inspection identified accounting procedures that allowed KSL Services to bill some $41 million in charges above initial estimates in 2006. Inspectors found a regular pattern of projects coming in substantially over budget, according to the report.
Inspectors reviewed 94,561 estimates of work-order tasks from January 2005 through April 2007 and revealed what they considered a systemic problem where actual costs frequently exceeded estimates, often by significant amounts.
"This can negatively impact the ability of KSL and LANL facility personnel to effectively manage the cost of work performed and the allocation of labor and material charges," they wrote.
Inspectors found internal control weaknesses associated with the accounting program called PassPort, which may have contributed to problems with work order charges and costs. PassPort has the capacity to accept monetary ranges on all work orders to limit work order charges and to alert LANL when potential problems arise. But according to the report, these capabilities had not been utilized.
A LANL official told inspectors that PassPort is a "wide open system without controls." Since PassPort interfaces with LANL financial systems and results in the debiting of numerous LANL accounts, inspectors said they believe stricter internal controls are essential to ensure the integrity of the work order process.
Kevin Roark, a laboratory spokesperson, said the laboratory has been aware of the problem for some time.
"We recognized more than a year ago that substantial changes to the way KSL contract was admininistered were necessary and set about making those changes," he said this morning.
In a prepared response, KBR, the principal partner in KSL, said it disagreed with the findings and said it was not asked to provide direct data or related information for the report.
KSL General Manager David Whitaker reiterated the responses made by KBR.
"The company and its subsidiary, KSL Services, utilize industry recognized practices and are strongly committed to fiduciary responsibility," Whitaker said adding that "Integrity and best-in-class risk awareness are among KBR'S core values."
KSL Services had worked with LANL, Whitaker said, prior to the publishing of the IG's report, to implement new processes and procedures designed to address many of the issues raised in the report.
"It is also important to note that our most recent award fee score of 88 is an accurate reflection of our efforts," he said. "While we were not asked to provide direct data or related information for the 'audit,' we remain committed to cooperating with all parties involved to resolve the issues that have been raised."
According to the report, on Dec. 1, 2006, LANL issued a new administrative procedure for KSL work performance that identifies new controls to address estimates and cost overruns.
The procedure states that for all work valued at greater than $10,000, when tasks reach 85 percent of the cost estimate, KSL is to calculate the projected "final cost." If the projected cost is less than 120 percent of the estimate, then work continues, but if the projected final cost exceeds 120 percent of the estimate, then KSL is to cease work and develop a formal revised cost estimate.
This revised estimate is to be approved by the LANL maintenance manager, and the originator is to be notified of the new costs. Inspectors noted that they were told that as of May 1, of this year, the new procedure had not been widely implemented.
Since February 2003, site support services at LANL, including maintenance and repairs, have been provided by KSL Services, a joint venture formed by Kellogg Brown and Root Inc., Shaw Infrastructure Inc. and Los Alamos Technical Associates Inc.
The total estimated contract value over five years is $785,457,000. This is a cost-plus-award-fee contract that provides an incentive, in the form of an available award fee, to encourage and reward improved performance and increased efficiency in the achievement of the contract objectives. KSL's performance is evaluated semi-annually against performance objectives, expectations, and associated weighting factors.
The contract states that KSL is to "provide cost estimating accuracy that is consistent with acceptable, recognized industry standards."
Details of the IG's audit findings indicate a "red" rating if the actual cost came within plus or minus 20 percent of the estimate less than 30 percent of the time. Higher percentages were established for "small jobs," and "projects." When LANL officials were asked why the standard for passing was set so low, the report states that LANL said KSL estimates had been such a problem that "we needed to start somewhere." The evaluation comments under both "small jobs" and "projects" stated that LANL "May re-evaluate scoring criteria to 'raise the bar' once systemic improvements have been made to improve process and estimating."
KSL scored "red" 90 percent of time for the 11-month period from November 2004 to September 2005 for "preventative maintenance," "small jobs" and "projects, according to the report."
KSL also scored "red" 74 percent of the time when its performance was measured at each of the nine Facility Management Units in effect at that time.
Roark said, "Like any consumer, when the lab is presented with a bill that appears to be out of line, you work with the company to determine whether those charges are wrong or whether there needs to be an adjustment of some kind. We do that with KSL."
He said such situations have been found and charges have been reversed.
"But we have never found any evidence of wide-scale overcharging," he said.
Problems with labor and material charges by KSL include cases where KSL had charged their work orders with labor and materials that were "questionable, inappropriate, excessive or unsupported based on their knowledge of the work performed."
Examples cited include inappropriate charges that were the result of timekeeping errors, work orders being charged by people who did not work on them, unapproved overtime charges, and charges to closed work orders.
One LANL facility official, according to the report, indicated that when KSL workers have no work to do, they are being subsidized, and work order "padding" is common.
Specific examples to support these claims include at one facility, a 2006 electrical upgrade work order with a final PassPort cost of $140,151 had multiple problems. The total estimate for this project was $133,574; however, there was no cost entered for materials and supplies, and only $9,282 was entered for labor. The other $124,292 was shown as "miscellaneous."
Actual labor totaled $129,579 and actual materials totaled $10,157. At a point in time when the LANL project coordinator had only authorized KSL to spend up to $123,812, KSL's actual charges rose to $154,170.
The LANL project coordinator found the financial condition of the project to be "very disturbing" and performed an analysis of the $30,358 cost overrun.
The project coordinator found that the amount of wire charged to the project was more than twice what was required to perform the work, with an original wire estimate of $4,529 and an actual wire charge of $10,191.
The project coordinator also questioned labor costs, stating that "We had a report from the customer that the crafts were witnessed sleeping in trucks.
In a response to the IG's report, the National Nuclear Security Administration (NNSA) said they generally agreed. "It is important to note that many of the issues noted by the IG for this report were, in fact, corrected prior to the IG's field work. Equally, actions being taken by the laboratory because of its own internal audit are the genesis of corrective actions along with validation of issues raised by the IG."
NNSA also stated in their response that LANL's own internal audit this year did not reveal any systemic mischarging by KSL relative to documented FY '07 time-charging policies.
LANL's business practices have been under fire and under review for a number of years.
"It never stops," Roark said. "We're never going to be in that place where everything is perfect."
He added, "There's also the law of unintended negative outcomes. Every time you put a solution in place, it's like whack-a-mole, another problem pops up and you have to smack it."
Monitor Assistant Editor Roger Snodgrass contributed to this report.