Report on audit of Department of Energy`s contractor salary increase fund

The Department of Energy (Department) uses contractors to operate its facilities and compensates contractor employees based on their skills, complexity of jobs, and work performance. Thirty-one of the Department`s major contractors reported a total payroll of $4.3 billion and $4.4 billion during 1994 and 1995, respectively. The 31 contractors also reported awarding salary increases of $18 million for 1994 and $200 million for 1995. The purpose of the audit was to review the process used to determine and approve the amount of salary increases for contractor employees. The specific audit objective was to determine whether salary increases received by contractor employees were in accordance with Departmental policies and procedures. The Department of Energy Acquisition Regulation (DEAR) requires that contractor salary actions be within specific limitations, supportable, and approved prior to incurrence of costs. In addition, the Secretary of Energy imposed a 1 year salary freeze on the merit portion of management and operating contractor employee salaries for each contractor`s Fiscal Year 1994 compensation year. However, a fund for promotions and adjustments was approved but limited to 0.5 percent of payroll for the year. A review of eight major contractors showed that six complied with the Department`s policies on salary increases. The other two gave salary increases that were not always in accordance with Departmental policies. This resulted in both contractors not fully complying with the pay freeze in 1994 and exceeding their salary increase fund budgets in 1995. If these two contractors had implemented Department and contract requirements and contracting officers had properly performed their contract administrative responsibilities concerning salary increase funds, both contractors would have frozen salary increases and would not have exceeded their annual budgets