A Hanford contractor improperly awarded $63.5 million to a subcontractor with which it shared ownership ties, among other improper actions, according to the Department of Energy.

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Hanford contractor Mission Support Alliance improperly awarded $63.5 million in taxpayer money as profit to a subcontractor with which it shared ownership ties, according to the Department of Energy.

Lockheed Martin is a principal owner of Mission Support Alliance, and Mission Support Alliance subcontracted some work to Lockheed Martin Services.

DOE claims that paying profit for subcontracted work performed by Lockheed Martin Services amounted to both of the Lockheed Martin-controlled organizations receiving profit for the same work.

The issue came to light in a report on a DOE Office of Inspector General audit released Wednesday. It not only looked at details of the profit payment that DOE is retracting but also found other issues related to payment for information technology services at Hanford.

Mission Support Alliance holds the DOE contract to provide IT and other services sitewide at Hanford. In turn, it awarded a subcontract valued at an estimated $232 million over five years starting in 2010 to Lockheed Martin Services to provide IT services at Hanford.

The audit found that the $63.5 million — the difference between reported costs incurred by Lockheed Martin Services and what it was paid — appeared to be potentially unallowable profit.

Lockheed Martin Services was created in 1996 as part of a DOE Hanford plan to create “outside the fence” companies to do both Hanford and non-Hanford work.

DOE and Mission Support Alliance remain in dispute about the profit payment to Lockheed Martin Services. Mission Support Alliance has brought the matter to the Civilian Board of Contract Appeals, which resolves federal contracting disputes. The board has yet to rule.

DOE told auditors that it had made clear from the start of the Lockheed Martin Services subcontract that the subcontract was classified in a way that would prevent separate profit payments to the subcontractor. DOE officials said Mission Support Alliance ignored the directive.

The audit report found DOE partially to blame, saying it had not ensured costs incurred were appropriate and transparent to the federal government.

DOE said it did not have contracting authority over Mission Support Alliance’s subcontractors and had not been provided records that would be needed for effective monitoring. In turn, Mission Support Alliance said Lockheed Martin Services, as a separate commercial entity, had refused to provide access to its records.

Lockheed Martin Services was created in 1996 as part of a largely failed initiative to create non-Hanford companies to boost the Tri-City economy by doing both Hanford and non-Hanford work.

The audit found weaknesses related to contract awards and work scope, time and material task orders and affiliate profit.

In other matters, the audit questioned why so much of the work done by Lockheed Martin Services was reimbursed according to time spent and materials used, an arrangement discouraged by federal regulations because it provides little incentive to control costs compared to other methods, such as fixed-priced contracts.

Mission Support Alliance had said that time and material task orders would only be used for services that were not performed regularly. The company also said they would be used for less than 12 percent of work.

In fact, time and material task order costs were more than $120 million and accounted for almost half the work.

The audit also questioned why Lockheed Martin Services had additional side agreements to perform work that was part of the Mission Support Alliance contract. The support services contract was intended to consolidate all infrastructure contracts.

At least three additional Lockheed Martin Services subcontracts to provide IT services to individual Hanford contractors were negotiated without the consent of DOE, the audit report said. DOE’s ability to oversee services costing more than $114 million was reduced.

One of the subcontracts was arranged by Mission Support Alliance, but the cost was not deducted from its contract to make sure it did not exceed the $232 million estimate, the audit found.

The markup for the subcontracted work ranged from 1 to 7,000 percent above costs, DOE officials told auditors.

Auditors said they were concerned that Lockheed Martin Services was awarded significant profit payments for work required to be performed through Mission Support Alliance, even though documents showed that was not allowed.

Several executives within Mission Support Alliance also held senior executive positions within Lockheed Martin. They were specifically excluded from making strategic decisions on the management of its contract with DOE.

However, the audit found they improperly were directly involved in negotiations with DOE officials on a proposed settlement agreement for $2.2 million related to profits paid on the Lockheed Martin Services agreement. DOE refused the settlement, which would have required that the Lockheed Martin subcontract be extended.

The work in the subcontract has been divided up, with Mission Support Alliance pulling some of the work in house. It asked for bids for other work, again selecting Lockheed Martin Services for much of the work.

Lockheed Martin Services is now in transition to the new subcontract, which will take full effect in late May.