The U.S. Dept. of Energy (DOE) has updated its guidance for the administration of management and operating (M&O) contracts.

M&O contracts are unique to DOE and central to the department’s business model.  The term was first adopted in 1983 by the Secretary of Energy.  In actuality, M&O contracts predate the formal adoption of the term by more than thirty-five years, dating to contracts awarded by the Army Corps of Engineers during World War II as well as other contracts awarded by the Atomic Energy Commission (AEC).

M&O contracts are often referred to as on-site contracts, operating contracts, major cost-type contracts, or other comparable terms.

Over the years, the Government Accountability Office (GAO) has criticized DOE for its management of M&O contracts, in particular for not holding the M&O contractors accountable for their performance. As a result, DOE previously published an accountability rule intended to hold contractors liable for negligent acts under the contract.  DOE undertook a “contract reform” initiative in 1994 (entitled “Making Contracting Work Better and Cost Less”) to improve its management of M&O contracts.  That initiative included nearly 50 reforms including: 1) using performance-based contracts, 2) increasing competition for contracts, 3) improving management and cost controls, and 4) making performance-based criteria and other incentives part of DOE contracts.

FAR 17.601 defines an M&O contract as “an agreement under which the Government contracts for the operation, maintenance, or support, on its behalf, of a Government-owned or -controlled research, development, special production, or testing establishment wholly or principally devoted to one or more major programs of the contracting Federal agency.”

FAR 17.604 provides a list of basic criteria to be used in identifying a requirement that is appropriate for use of the M&O form of contract. Among the criteria are the use of Government-owned or -controlled facilities and the necessity of a special, close relationship with the contractor and the contractor’s personnel in important functions.  Examples of this includes factors such as safety, security, cost control, site conditions, the performance of the contract is substantially separate from the contractor’s other business, the work is closely related to the agency’s mission and is of a long-term or continuing nature, and for special protection covering the orderly transition of personnel and work in the event of a change in contractors.

FAR 17.603 places certain limitations on the types of functions M&O contractor personnel may perform, e.g., the employees may not supervise or control Government personnel or determine basic Government policies.

Subsequent to 1994 acquisition reforms, DOE undertook a detailed review of the then existing M&O contracts to determine if the requirements remained appropriate for use of the M&O form of contract. The result of that review was that the M&O list was reduced from approximately 52 contracts to 29.  Among those contracts dropped from the M&O list were many tracing their histories to early in the AEC’s operations.

In the guidance issued February 2017, an evaluation of the history of DOE’s M&O contracts resulted in the identification of the following  indicators for their use:

• Generally, the contractor assumes multi-program scientific and technical responsibilities and work under a broad statement of work.
• The requirement is continuing with no foreseeable end.
• The contractor is responsible for integration of scientific and technical and infrastructure functions.
• The contractor performs the substantial portion of scientific and technical responsibilities with its own workforce.
• The contractor’s workforce is large, remaining at the site despite change of contractors. This results in the need for DOE to assume stewardship of employee relations and workplace labor conditions.
• DOE oversees security, health, and safety at the site.
• Work takes place at very large, Government-owned reservations and facilities.
• DOE requires the successful offeror to form a corporate entity specifically for and dedicated to the performance of the DOE M&O contract. The contractor may accept work only directly from DOE or as allowed specifically under the M&O contract.
• The contractor must link its accounting system with the Department’s, and integrate its budget process with the Department’s; usually the budgets for M&O contracts are line items in the Department’s budget.

DOE’s updated guidance includes this historically-fascinating description of the origin of M&O contracting:

What today are known as DOE’s Management and Operating contracts began during World War II. The Manhattan Engineer District was the governmental entity responsible for the design, development, and production of the first atomic bombs, an undertaking, to that time, without precedent. This massive effort achieved its challenging objective on a schedule that was almost unimaginable. Over a two year period the theoretical science was advanced, the technology necessary to produce the necessary components was developed and applied, and some of the most complex and largest manufacturing facilities the world had known were designed, constructed, and brought into full operation in remote, and previously undeveloped, locales within the United States. The successful completion of the Manhattan Project resulted from the Government’s substantial reliance upon private industry and educational and other nonprofit institutions for the critical scientific and business expertise.

In 1946, following on the success of the Manhattan Project, Congress created the Atomic Energy Commission to design and produce nuclear weapons, to develop nuclear energy as a source of electricity, and to research the use of nuclear energy in medicine. The legislative history of the Atomic Energy Act of 1946 indicates the basic principle that underlies M&O contracts was that the AEC, a predecessor of DOE, was to employ highly capable companies and educational institutions to carry out the actual performance of the agency’s mission; that is, these contractors were to perform the agency’s mission as opposed to the agency’s using civil servants. “Wherever possible, the committee endeavors to reconcile Government monopoly of the production of fissionable material with our traditional free-enterprise system. Thus, the bill permits management contracts for the operation of Government-owned plants so as to gain the full advantage of the skill and experience of American industry.”

Thus — based on the Corps of Engineers role as project manager, reliance on scientists from academia, and the engineering and construction skills of industry — the Manhattan Engineer District successfully concluded the production of atomic bombs, and Congress decided to carry that scientific, technical, and business model forward into the AEC and today’s DOE.

View the DOE’s updated guidance on M&O contract administration at: https://energy.gov/sites/prod/files/2017/02/f34/Acq%20Guide%2017-602%20Origin%20Characteristics%20and%20Significance%20of%20DOE%20Management%20and%20Operating%20Contracts%20Feb%202017.pdf