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Naval Facilities Engineering Command Administration of Selected Energy Savings Performance Contracts

DODIG-2018-050

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Background

Energy Savings Performance Contracts (ESPCs) provide a way for the private sector to finance Federal Government energy‑saving projects. The ESPC is a contract type through which an energy services contractor designs, finances, acquires, installs, and maintains energy‑saving equipment and systems for a Federal agency. ESPCs allow Federal agencies to procure energy savings and facility improvements with no upfront capital costs or special appropriations from Congress.

An ESPC consists of two phases—the construction phase and the performance phase. During the construction phase, the energy savings contractor constructs the energy conservation measures. At the conclusion of the construction phase, the contractor submits a post-installation report to summarize construction phase issues and outcomes, and identify any energy savings achieved during the phase. The performance phase begins once the energy conservation measures are installed and accepted by the Government.

During the performance phase, the contractor will operate and maintain energy improvements, measure the energy savings, and submit measurement and verification reports in accordance with the ESPC. The reports outline the calculation of energy savings and any other evaluation of costs and savings needed to determine the guarantee of savings. The agency is responsible for ESPC administration for the entire term of the ESPC.

The Naval Facilities Engineering Command-Expeditionary Warfare Center (NAVFAC-EXWC), Port Hueneme, California, manages the Navy ESPC program and performs the contract management functions. The base‑level Public Works Office officials manage installation facilities. As it relates to ESPCs, the base-level public works office performs oversight of the contractor during both the construction and performance phases of the ESPC. Actions performed at the Navy installation public works or contracting office are referred to as “base level” in this report.

We non-statistically selected seven ongoing ESPCs valued at $822.7 million from a universe of 50 ongoing ESPCs valued at $ 2.6 billion. The seven ESPCs were located at Naval Air Station Oceana, Virginia, (Main Base and Dam Neck Annex); Marine Corps Logistics Base, Georgia; and Commander Fleet Activities Yokosuka, Japan, to determine whether NAVFAC performed on-site oversight of the ESPCs and tailored quality assurance surveillance plans to the needs of the individual ESPCs.

We non-statistically selected three of the seven ESPC projects to review at Naval Air Station Oceana, Virginia, (Main Base and Dam Neck Annex) and Marine Corps Logistics Base Albany, Georgia. We determined whether NAVFAC officials verified the energy savings reported in the contractor’s post‑installation and measurement and verification reports were accurate, and that Government payments to the contractor did not exceed the verified savings. The post-installation report is a contractor-submitted report summarizing the project’s construction phase results and identifying any energy savings achieved.

For the ESPC detailed review at Commander Fleet Activities Yokosuka, Japan, we determined whether NAVFAC officials justified and validated contractor‑proposed foreign currency adjustments and whether NAVFAC properly tracked and recorded the adjustments in NAVFAC ESPC value and funding systems.

 

Findings

NAVFAC officials did not properly administer seven ESPCs, valued at $ 822.7 million. Specifically, for two ongoing performance-phase ESPC projects, NAVFAC officials did not validate the contractor-claimed energy savings in a contractor post-installation report and 13 of 21 contractor measurement and verification reports, and they did not perform higher-level reviews for 4 of 8 base-level validation reports. This occurred because NAVFAC officials and base-level public works office officials did not prioritize validating the contractor’s post-installation and measurement and verification reports. As a result, the two ESPC projects include $22 million in questionable ESPC payments and did not fully comply with section 8287, title 42, United States Code.

NAVFAC contracting officials did not tailor quality assurance surveillance plans to the specifics of each implemented energy conservation measure, describe how to validate contractor-submitted energy-savings reports, and oversee contractor maintenance, repair, and replacement of energy conservation measures. This occurred because NAVFAC officials and base-level PWO officials did not emphasize the need to tailor quality assurance surveillance plans. By not tailoring quality assurance surveillance plans, contracting officials may cause inconsistent validation of contractor-claimed energy savings reporting and inadequate oversight of ESPC contractor performance.

Contracting and base public works office officials did not properly validate 9 of 11 contractor-proposed currency escalation modifications for the ESPC at Commander Fleet Activities Yokosuka. Specifically, NAVFAC officials did not justify or validate nine contractor proposals for annual yen currency adjustment valued at $6.7 million. This occurred because contracting officials did not apply the contractual escalation clauses, which consider and account for changes to the contract price resulting from annual changes to the yen and U.S. dollar exchange rates.

In addition, contracting officials did not properly track and record the resulting adjustments to the ESPC resulting from yen currency changes. This occurred because contracting officials did not make required manual adjustments in the electronic accounting system to explain the currency rate adjustments on future payments. As a result, NAVFAC overpaid the contractor $250,000 in annual currency adjustment payments. Additionally, NAVFAC contracting officials issued contract modifications that overstated the ESPC value by $760,000.

In addition to this report’s findings on the lack of oversight of the NAVFAC ESPC, we previously reported similar weaknesses related to Navy and Air Force oversight of ESPC contracting and project management in three prior reports. Specifically, the Navy and Air Force officials did not validate the contractor‑claimed energy savings in a contractor post-installation report and contractor measurement and verification reports. Furthermore, Navy and Air Force contracting officials did not develop a quality assurance surveillance plan that provided specifics on how to oversee each implemented energy conservation measure or determine how to validate the contractor post-installation reports and contractor measurement and verification reports. As a result, neither the Navy nor Air Force contracting officials knew whether multiple ESPC projects achieved the contractor-claimed energy savings.

 

Recommendations

Defense (Energy, Installations, and Environment) develop and implement DoD-wide guidance to monitor energy savings performance contracts. We also recommend that the Assistant Secretary coordinate with the Director, Defense Procurement and Acquisition Policy to require oversight of ESPCs through development of quality assurance surveillance plans and monitor ESPC programs to ensure consistent award and administration throughout the Department.

Furthermore, we recommend that the Commander, NAVFAC, direct program and contracting officials to validate and perform required higher-level reviews of $22 million in contractor-guaranteed energy‑savings payments over 14 performance periods for two ESPCs. In addition, the Commander should direct NAVFAC officials to:

  • take action to recover payments for unrealized energy savings;

  • develop tailored quality assurance surveillance plans, for seven ESPCs reviewed;

  • validate contractor-proposed currency adjustments for nine Commander Fleet Activities Yokosuka ESPC performance years;

  • follow the contractually required process to calculate and approve currency adjustments for future years or modify contract to establish a revised process;

  • recover the unsupported currency fluctuation payments calculated by the audit at $250,000 modify the ESPC to reduce contract price by $760,000; and

  • train contracting officials to make manual adjustments to NAVFAC electronic accounting systems to record and account for future year payment revisions.

 

Management Actions Taken

On March 14, 2017, we notified the NAVFAC‐EXWC officials of the Commander Fleet Activities Yokosuka ESPC value and funding tracking errors. On March 21, 2017, the NAVFAC‐EXWC contracting officer issued a contract modification to decrease the Commander Fleet Activities Yokosuka ESPC value and funding by $760,000 to $363.3 million. By issuing the contract modification, the NAVFAC‐EXWC contracting officer eliminated the value and funding tracking error. Therefore, the recommendation to reduce the contract price by $760,000 is closed.

 

Management Comments and Our Response

The Assistant Secretary of Defense (Energy, Installations, and Environment) agreed with our recommendations to develop and implement DoD‐wide guidance to monitor ESPCs and anticipated implementing the guidance by November 27, 2018. In addition, the Assistant Secretary agreed to coordinate with the Director, Defense Procurement and Acquisition Policy, to ensure appropriate guidance or policy is in place to require measurement and verification plans and quality assurance surveillance plans for ESPCs. Therefore, the recommendations are resolved but will remain open. We will close the recommendations once we verify Assistant Secretary develop and implement DoD‐wide guidance to monitor ESPCs.

 

The Assistant Secretary of the Navy (Energy, Installations, and Environment), responding for the Commander, NAVFAC, agreed with our recommendations to:

•validate and perform required higher‐level reviews of contractor‐guaranteed energy‐savings payments;

•recover payments for unrealized energy savings; surveillance plans;

•validate contractor‐proposed currency adjustments;

•follow a contractually required process to calculate and approve future year currency adjustments;

•develop written guidance to manually adjust the electronic accounting system record and account for future contract revisions; and

•train contracting officials to adjust electronic accounting systems for the currency adjustments.

 

The Navy will implement these recommendations between February 28, 2018, and May 31, 2018. Therefore, these recommendations are resolved but will remain open. We will close these recommendations once we verify the Navy has completed the above stated actions.