With approximately 90% of its work contracted to the private sector, we could say the U.S. Department of Energy (DOE) is already a highly privatized organization. Despite the large contractor presence, DOE's track record in Major Systems Acquisitions (MSAs) has come under criticism. According to the U.S. General Accounting Office (GAO), management problems and/or ineffective oversight by DOE have led to cost overruns, schedule slippage, and/or termination. From 1980 through 1996, for example, 31 of the 80 MSAs were terminated prior to completion, after expenditures of over $10 billion (GAO 1996). Although some of the projects were terminated due to changing circumstances, the GAO's analysis of these projects indicated that cost overruns and schedule delays were common in MSAs. GAO analyzed 35 projects and found that 8 were expected to be completed at or below their original budgeted cost. The remaining 27 projects were expected to have cost overruns averaging over 70%. The analysis also indicated that schedule slippages were prevalent with a few projects being over 10 years behind schedule (GAO 1996).
When reviewing the results of DOE's MSAs, it is important to recognize that these are often first-of-a-kind projects, involving significant risks and high costs. As such, they are very challenging projects and often are subjected to significant scrutiny and, in some cases, interference. Nonetheless, few will argue that the process DOE has used to procure major systems has worked well, particularly when considering the significant undertakings that have been successfully achieved in the private sector. Although DOE uses private contractors to execute a majority of functions, the cost-reimbursement contract mechanism provides few risks and rewards to the contractors, effectively insulating them from the program mission and objectives.
In recognition of the problems associated with DOE's traditional approach and the benefits of harnessing market forces, DOE initiated reforms in 1994. Through these reforms, DOE sought to transfer greater risk to its private contractors and to develop incentives to align contractor performance with its objectives.