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Defense Logistics Agency Award and Administration of Energy Savings Performance Contracts DODIG-2018-135

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Objective:

We determined whether the Defense Logistics Agency (DLA) officials:

  • maintained competition in soliciting and awarding energy savings performance contracts (ESPCs),
  • appointed contracting officer’s representatives (CORs) and conducted base-level oversight of ESPC maintenance and repair, and
  • validated contractor-claimed energy savings on elect ESPCs.

Background:

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, such as lighting improvements, and heating and air conditioning replacements. At the conclusion of the construction phase, the contractor submits a post-installation report to summarize construction phase actions and outcomes, and identify any energy savings achieved during the phase. The performance phase begins once the contractor installs and the Government accepts the energy conservation measures. During the performance phase, the contractor operates and maintains energy improvements, measures the energy savings, and submits 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.

DLA-Energy, Fort Belvoir, Virginia, performs the contract management functions for 11 ESPCs, valued at $992.8 million, at selected Army, Air Force, and Defense agency bases. We reviewed 10 of the 11 ESPCs, valued at $343.5 million, to determine whether DLA-Energy properly solicited and awarded the ESPCs.1

Seven of the 10 projects, valued at $240.7 million, were in the performance phase. With the assistance of base-level Department of Public Works (DPW) officials, DLA-Energy oversees the contractor during both the construction and performance phases of the ESPC.

We reviewed the seven DLA-Energy performance‑phase ESPCs to determine whether DLA-Energy and the base-level DPW officials verified that 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.

We nonstatistically selected five performance-phase ESPCs, valued at $117.8 million, to determine whether DLA-Energy and the base-level DPW officials performed onsite oversight of the ESPCs. The five ESPCs were located at Fort Hood, Texas, and Fort Hamilton, New York.

Finding:

DLA-Energy contracting officials maintained competition in soliciting and awarding the 10 ongoing ESPCs. In addition, DLA-Energy contracting and base‑level DPW officials properly administered four of seven ESPCs we reviewed by appointing contracting officer’s representatives and validating contractor‑claimed energy savings.

However, DLA-Energy contracting and base-level DPW officials did not:

  • document the validation of the contractor claimed energy savings in 2 of 52 measurement and verification reports that supported a total of $0.9 million in contract payments, and
  • resolve a disagreement between DLA-Energy contracting and base-level DPW officials regarding whether the contractor sufficiently supported $1.8 million in contractor-claimed energy savings in the Fort Hamilton Delivery Order No.2 post-installation report.

This occurred because DLA-Energy contracting officials had not established written standard operating procedures on the Federal Energy Management Program requirements for awarding and administering ESPCs. As a result, three performance-phase ESPC projects included $2.7 million in questionable contract payments that do not fully comply with Federal ESPC statutory requirements. Furthermore, if DLA-Energy does not maintain standard operating procedures to implement Federal Energy Management Program guidance for ESPCs, DLA-Energy contracting officials may implement inconsistent oversight of ESPCs when validating contractor-claimed savings and overseeing the maintenance, repair, and replacement of energy conservation measures.

Recommendations:

We recommend that the DLA-Energy Commander direct DLA-Energy contracting officials to validate ESPC contractor-claimed energy savings achieved for one ESPC (SPO600-03-F-8274) at Fort Hood, Texas, and two ESPCs (SPO600-02-F-8257 and SPO600-15-F-8001) at Fort Hamilton, New York. We also recommend that the Commander direct the contracting officials, based on the result of the validations, as mandated by law, to take appropriate contractual action (if necessary), such as recovering unrealized guaranteed energy savings or buying out the remaining portion of the applicable contracts.

In addition, we recommend that the DLA-Energy Commander consider developing standard operating procedures regarding implementing Federal Energy Management Program guidance regarding solicitation, competition, award, and monitoring of ESPCs. We also recommend that DLA-Energy implement a standard operating procedure to resolve internal Government disagreements over contractor-claimed energy savings.

Management Comments and Our Response:

The DLA Acquisition Deputy Director, responding for the DLA-Energy Commander, agreed or partially agreed with six recommendations and disagreed with one recommendation. Specifically, the DLA Acquisition Deputy Director:

  • agreed with recommendations to validate contractor-claimed energy savings achieved for one ESPC each at Fort Hood and Fort Hamilton and provided documentation showing recently completed validations. Therefore, we have closed these two recommendations.
  • partially agreed with the recommendation to validate a second Fort Hamilton ESPC (SPO600-15-F-8001), noting that the DLA contracting officer, the contractor, and Fort Hamilton base-level DPW officials were in continuing discussion to modify the ESPC to improve contractor-claimed energy savings methodology, if necessary. We will close this recommendation once DLA-Energy officials have provided the results of the discussions and issued a contract modification, if required.
  • partially agreed with the two recommendations to consider developing standard operating procedures regarding the award and administration of ESPCs and the validation of contractor claimed energy savings. The DLA Acquisition Deputy Director stated that the DLA considered developing standard operating procedures to Federal energy Management Program ESPC guidance for solicitation, competition, award, and monitoring of ESPCs, but concluded that supplemental DLA procedures were unnecessary. DLA-Energy remains the exception among DoD Components in operating an ESPC program without standard operating procedures. We request additional comments from the DLA-Energy Commander as to why further DLA-Energy Commander as to why further DLA-Energy policy for award and administration of DLA ESPCs are unnecessary. Therefore, we consider these recommendations to be unresolved.
  • disagreed with the recommendation to implement a standard operating procedure to resolve internal Government disagreements. However, the Deputy Director noted, as of October 2017, DLA-Energy issued an Interagency Agreement with requiring activities that included language to have Government parties resolve any dispute through consultation and escalation, as needed, within their respective organizations. We verified that the agreements included language to resolve Government disagreements; therefore, we have closed the recommendation.