The scope of the Functional Management Assessment of the cost model included a review of the plan and progress of the Cost Model Review Team. The review focused on processes in place to ensure simplicity, compliance with cost accounting standards and indirect cost allocation methodology, and the change management plan. This was intended to be a high-level initial review in order to provide recommendations for a subsequent more comprehensive review. The single document reviewed by the team during the assessment was the Indirect Cost Recovery Model Review, which describes how the indirect rate restructure and new organizational structure have resulted in streamlined charging practices to better understand and strategically manage costs. ISSUE 1: The cost model focuses heavily on rate structure but not on cost management. Significant progress has been made to simplify the rate structure. The number of indirect rates has been reduced from 67 different indirect rates used under the prior contract to 32 rates in the first year of the LLNS contract, with a goal of further reduction to 16 for FY09. The reductions are being recommended by a broad-based Working Group driven by Lab leadership desiring a simplified rate structure that would make it easier to analyze the true cost of overhead, be viewed as equitable, and ensure appropriate use of Service, i.e., operations, Centers. This has been a real challenge due to the significant change in approach from one that previously involved a very complex rate structure. Under this prior approach, the goal was to manage the rates, and rates were established at very detailed levels that would 'shine the light' on pools of overhead costs. As long as rates stayed constant or declined, not as much attention tended to be given to them, particularly with so many pools to review (184 indirect rate pools in FY05). However, as difficult and important as simplifying the rate structure has been, the fundamental reason for the simplification is to make it easier to analyze the true cost of overhead so the costs can be effectively managed. For the current year, the overall the goal of keeping the total cost of an FTE to FY07 levels. This approach reflects the past practice of managing to rates rather than focusing on costs, although streamlined with the more simplified rate structure. Given all the challenges being faced with the contract transition, this was a reasonable interim tactic for dealing with the known cost increases such as fees and taxes. Nonetheless, in order to take full advantage of the opportunities that exist for making sound decisions for further reducing the rates themselves, the Laboratory needs to implement an ongoing and disciplined approach to understanding and managing overhead cost. ISSUE 2: The NIF has a significantly different rate structure than other Laboratory work. Because of its significant size and unique organizational structure as a major construction project, the National Ignition Facility (NIF) has indirect charges that vary from the norm. These variations were reviewed and approved by and disclosed to the NNSA in the Laboratory's past annual Disclosure Statements. In mid-FY 09, NIF will begin transition from a construction line item to an operational center. The reallocation of costs when this occurs could significantly impact the Laboratory's rates and rate structure planning for that transition from a cost- and rate- impact standpoint should begin soon. ISSUE 3: The new rate model must be finalized shortly in order to implement the model beginning in FY 09. As noted in Issue No.1, a Working Group has developed a simplified rate structure for the Lab to use for FY09. The Working Group has evaluated the cost impacts of the simplified rate structure at the major program level and identified a disparate impact in the Safeguards and Security area where a substantial increase in overhead cost allocation may need to be mitigated. The simplified rate structure will need to be approved by the Laboratory Director and issued within the Laboratory to formulate detailed budgets so that operations using the new rates can proceed beginning October 1, 2008. A number of activities should occur over the coming weeks and months to ensure a smooth implementation.
