FERMCO spending exceeds industry norm, report says


BY MIKE GALLAGHER
The Cincinnati Enquirer

The company managing Fernald has too many managers and has spent millions more than the industry average on some administrative and maintenance costs, according to a study commissioned by the U.S. Department of Energy.

The report on the spending practices of the Fernald Environmental Restoration Management Co. (FERMCO) was prepared by the Logistics Management Institute (LMI), in December and recently obtained by The Enquirer.

LMI is a McLean, Va. company with expertise in accounting, private and public sector project management, nuclear remediation projects and government financing practices.

According to the LMI report, the Energy Department commissioned the study after becoming ''increasingly concerned that the contractor is spending a disproportionate amount of Fernald's total annual budget for project management and landlord services, thus reducing the amount available for remediation (cleanup) work.''

What sparked the Energy Department's concern, the report said, was the discovery that FERMCO in fiscal year 1995 (Oct. 1, 1994 - Sept. 30, 1995) spent about half its annual Fernald budget on project management and landlord services.

FERMCO officials promised in June 1995 to reduce the number of management and supervisory positions, then about 400, representing about 18 percent of the workforce, the report said. ''Reducing the number of management positions could result in substantial savings,'' according to the report. Yet, according to FERMCO personnel records, that number remains virtually unchanged today.

LMI researchers also found that FERMCO's overtime pay to workers for some site functions, such as utilities, was excessive.

The Energy Department in 1992 awarded the Fluor Daniel Corp., an Irvine, Calif.-based company, a five-year, $2.2 billion, contract to manage the cleanup of Fernald, a former uranium-processing plant. FERMCO's contract expires in December 1997.

The Energy Department holds two, one-year options to extend FERMCO's contract at that time, if it so chooses.

When The Enquirer asked the Energy Department for comment about the LMI report, Gary Stegner, the department's Fernald spokesman, issued a written statement that said:

''The Department of Energy's Fernald Area Office commissioned the study by Logistics Management Institute to look for ways to reduce administrative and landlord overhead expenses. (The Energy Department) is currently acting on recommendations which will result in an increased share of Fernald's budget going to physical remediation activities.''

Jack Craig, the Energy Department's Fernald area manager, declined repeated requests for interviews to answer questions about how and why FERMCO had been allowed to spend millions for excessive project management and landlord services for years before and during 1995.

However, a Jan. 30 letter from Mr. Craig to then-FERMCO president Don Ofte, obtained by The Enquirer, revealed that the Energy Department has ordered FERMCO to take an additional $5.8 million of its fiscal year 1996 budget and put it toward increasing shipments of waste off-site.

FERMCO officials, in a March 22 press release that was issued after The Enquirer asked for their response to the LMI report, said:

''Viewed over the entire project cycle, the expected ratio of support costs to remediation (cleanup) costs is very favorable.

''To ensure achievement of these projections, there has been an ongoing effort by FERMCO and cost avoidances, productivity improvements and other cost savings . . .

''Over time, FERMCO will increase available funding for remediation activities while minimizing support costs,'' the statement said.

FERMCO overspends


LMI researchers compared FERMCO's spending practices at Fernald with other nuclear remediation sites around the nation and found FERMCO was overspending in several areas and slow in completing its cleanup work.

The LMI team determined that FERMCO had 28 support functions, or operations, that were being run under the categories of Project Management (administrative) and Landlord Services (maintenance). FERMCO's costs in 12 of those 28 functions were ''substantially higher than the industry norm,'' the report said.

If costs in those areas were reduced to industry norms, it could save taxpayers about $7 million annually, according to the report. Additionally, halting FERMCO's overspending on seven more of the support functions had the potential for ''modest savings'' of about $3 million.

Other findings in the study included:

FERMCO managers, salaried professionals and administrative support personnel accounted for more than $120 million in labor charges.

FERMCO's hourly employees accounted for only about $28 million in labor charges.

Project Management and Landlord Services labor costs totaled about $80 million, while only about $69 million in those categories went toward labor costs to actually clean up the site.

And 81.2 percent of all labor costs for Project Management - Landlord Services and environmental remediation went to administrators, salaried professionals and administrative support personnel, while only 18.8 percent of those costs went to the hourly employees actually doing the cleanup work.

FERMCO was found to be the industry norm'' for the remaining administrative and maintenance functions reviewed, the LMI report revealed.

Those functions include electricity expenses, security, telecommunications, public affairs and running the boiler plant operation.

Those functions that FERMCO has been excessively charging the government for included engineering design services; environment-safety-health; external dosimetry (radiation testing and monitoring); facility maintenance; inventory control; laundry services; legal; medical services; quality assurance; vehicle maintenance; and waste treatment.

In vehicle maintenance for example, the industry average is $294-$1,221 per vehicle, but FERMCO's average cost was $4,989 per vehicle, according to the report. In facility maintenance, the study said the industry average ranges from 72 cents to $2.60 per square foot, while FERMCO's averaged $9.09 per square foot. For waste - sewage treatment, the industry average ranged from 79 cents to $3.76 per 1,000 gallons treated, while FERMCO's is $9.21 per 1,000 gallons treated.

Functions in which FERMCO has been overcharging the government ''moderately'' above the industry norm and could represent savings in the millions of dollars include finance and accounting; information services; instrument calibration and testing; porters; procurement; and training.

For example, the industry average for information services ranged from 1.3 percent to 2 percent of project cost, while at FERMCO the average is 2.3 percent of the project cost, the study found.

After reviewing the costs associated with each function, LMI researchers found that FERMCO's management labor costs ''appears to offer the greatest potential for savings.''

FERMCO blames workers


FERMCO managers, when questioned by LMI researchers, blamed ''inefficient'' hourly workers at Fernald for the fact that so little money was being paid to the workers doing the actual cleanup.

LMI, in its report, however, found that a significant problem was that FERMCO was paying an ''excessive'' number of managers and supervisors (more than 400, or about 18 percent of the workforce).

LMI researchers discovered that FERMCO paid only about 15 percent of its administrative and maintenance budgets to hourly workers.

''Given the function of the organization, the ratio of one supervisor to five non-supervisory workers appears excessive,'' the report said. ''Reducing the number of management positions could result in substantial savings.''

''The (hourly) wage worker share of total payroll indicates that these workers could not be responsible for all the variation between Fernald expenses and the (nationwide comparison with other nuclear cleanup sites),'' the report said.

In its press release, FERMCO officials said the company ''believes that at this point in time, the workforce level is necessary and appropriate to ensure that we accomplish these objectives.''

Cleanup progress too slow


LMI researchers also found FERMCO was taking much too long to complete various cleanup projects at Fernald, wasting millions of taxpayers' dollars.

''We believe that one factor contributing to excessive labor (costs), but which cannot be quantified, is the view that Fernald is still an operating facility with a cold war mission requirement and that it will remain open indefinitely.

''This 'business-as-usual' perception is strengthened by what appears to be a slow rate of closing buildings and shipping of contaminated material. As a result, there is little urgency to complete the job expeditiously,'' the report said.

So far, FERMCO has dismantled only one major building at the site, but has built about 50 new structures since 1992 to aid in the cleanup.

''Taking steps such as shifting resources to the cleanup effort or shifting offices from on-site to off-site space will be a signal to the work force that the shutdown time frame is real and could further the notion that cleanup activities will terminate,'' the LMI report said.

In its press release, FERMCO said it ''is well aware that the ultimate goal of this project is a final remediation of the site in a timely manner and an end to clean up activities. We are all working hard toward achieving that goal.''

The release also said that certain ''benchmarks'' established by LMI to compare Fernald with other nuclear cleanup sites nationwide ''are not consistent with the operation of this complex radioactive and hazardous waste removal project within a highly regulated environment.''

Comparison of FERMCO costs


LMI's study found FERMCO's spending at Fernald exceeded the industry norms in several categories. Below is a list of categories that were sdubstantially* above the target range.

Function FY95 FERMCO Industry benchmarks

($M) cost per unit Engineering design 9.65 21% 7%-11% services of project costs of construction cost

Environment, safety 23.10 8.1% 1.93%-5.05%
and health of project costs of project costs

External dosimetry 1.26 $650 per person $20-$107 per person monitored monitored

Facility maintenance 8.49 $9.09 per $0.72-$2.60 square foot per square foot

Inventory mgt. 6.50 45% of average 2.46%-10.95% of and control inventory value year-end inventory value

Laundry services 1.40 $0.83 per pound $0.51 per pound

Legal 1.41 0.47% 0.13%-0.30% of project costs of project costs

Medical services 1.09 $469 per $184-$230 employee per employee

Quality assurance 4.62 3.3% 0.09%-0.75% of project costs of project costs

Vehicle maintenance 1.26 $4,989 per $294-$1,221 per vehicle vehicle

Waste - sewage 0.30 $9.21 per 1,000 $0.79-$3.76 per treatment gallons treated 1000 gallons treated

*Substantially means 50 percent or more above the highest value in the target range.

NOTE: Fiscal year 1995 is Oct. 1, 1994 - Sept. 30, 1995

Source Logistics Management Institute report, commissioned by U.S. Dept. of Energy

Published March 26, 1996.