The US Government Accountability Office (GAO) reported that contractors managing construction at National Nuclear Security Administration (NNSA) sites routinely underestimated costs and failed to follow best practices for estimating fixed-price subcontracts. In fiscal year 2023 alone, final costs exceeded initial estimates by over $37 million — an average increase of 14% across 252 subcontracts.
The report, entitled “Additional Steps Needed to Improve Cost Estimates for Fixed Price Subcontracts,” is mandated by the Senate’s FY 2024 National Defense Authorization Act. It evaluated how well management and operating (M&O) contractors adhered to GAO’s 12-step cost estimating guide. None of the seven contractors reviewed met or substantially met all 12 steps. Four contractors met most steps, while three met only a few.
GAO emphasized that “federal agencies require reliable cost information to conduct oversight of their programs and ensure the proper stewardship of public funds.” Yet NNSA’s oversight was limited, and its contractors’ policies often lacked key elements of sound cost estimation.
The GAO found that 64% of the reviewed subcontracts had final costs that exceeded initial estimates. In 43% of cases, costs were at least 20% higher than projected. Nineteen subcontracts more than doubled their original estimates. Most overruns occurred after contracts were awarded, undermining the premise of fixed-price agreements.
“Federal agencies require reliable cost information to conduct oversight of their programs and ensure the proper stewardship of public funds.”
The largest cost increases were concentrated in subcontracts exceeding $1 million. One example cited a utility expansion project that ballooned from $3.2 million to $5.5 million — a 70% increase — after scope changes were made to avoid delays and additional procurement. GAO noted that “the proposed hours, equipment, and materials were justified by the additional scope and that the pricing was fair and reasonable.”
Another project, intended to install a secondary electrical feed in an older building, faced unanticipated expenses due to outdated schematics and the inability to shut off power during design. The team had to replace a transformer and reroute a water line, pushing costs from $5.5 million to over $7 million. “These additional costs were paid for by both NNSA and the subcontractor,” the report stated.
GAO’s 12-step guide includes defining the project, identifying ground rules and assumptions, and conducting sensitivity analysis. While most contractors met Step 3 — defining the project — few met Step 5 or Step 8.
Step 5 requires identifying “ground rules and assumptions,” which GAO described as “judgments about past, present, or future conditions postulated as true in the absence of positive proof.” Without these, estimates lack a clear foundation and are vulnerable to invalidation.
Step 8 calls for “sensitivity analysis,” or what-if scenarios that test how changes in inputs affect costs. GAO warned that “an agency or contractor that fails to conduct sensitivity analysis … increases the chance that decisions will be made without a clear understanding of these impacts on costs.”
The report concluded that “not meeting these two steps can lead to poor cost estimates,” and that overly optimistic assumptions may skew budgets and planning.
Although Department of Energy (DOE) regulations require contractors to apply commercial best practices, NNSA had not ensured that its contractors’ policies aligned with GAO’s cost guide. DOE guidance mandates reviews of contractor purchasing systems every six years, but GAO found these reviews insufficient.
“NNSA has approved all its M&O contractors’ purchasing systems but has not ensured that its M&O contractors’ policies are substantially meeting all 12 steps for developing a reliable cost estimate,” the report stated.
Contracting officers are also supposed to conduct risk assessments every one to two years, but GAO found no evidence that these assessments evaluated adherence to cost estimating best practices.
GAO recommended that NNSA “ensure that M&O contractor policies incorporate commercial best practices related to cost estimating.” The agency reviewed a draft of the report but did not provide comments.
The findings come as the US plans to spend tens of billions of dollars over the next two decades to modernize its nuclear weapons stockpile and infrastructure. Many of these projects fall below the “minor construction threshold,” meaning they do not require individual congressional approval. Collectively, however, they represent hundreds of millions in annual spending.