Review of the Rework on Watts Bar Nuclear Unit 2

TVA entered into contract No. 65419 with Bechtel Power Corporation on October 19, 2007, to provide engineering, construction, and procurement work related to the restart of Unit 2 at Watts Bar Nuclear Plant (WBN U2). Section II-13 - Correction of the Work Prior to Commencement of Warranty Period of the contract stipulates the guidelines related to what does and does not constitute rework as it relates to determining Bechtel's performance fee. In addition, Bechtel receives an annual performance fee that is calculated as a percentage of the total amount billed during the fiscal year (FY). However, any amount of direct labor that has been associated with rework during the FY will be deducted from the total costs billed during the FY prior to the final calculation of Bechtel's performance fee for the FY.Since inception of the contract, there have been three projects classified as rework projects-two in FY 2008 and one in FY 2009-that have resulted in a reduction of the total costs prior to calculation of the final performance fee. The rework projects in FY 2008 totaled $40,000, and the FY 2009 rework project totaled $124,000. As of September 30, 2010, there were 13 issues classified by TVA as rework that were still outstanding or being reviewed by TVA and six rework issues that had been closed with Bechtel agreeing to two of the issuesAs part of our annual audit plan, we reviewed the rework projects identified at WBN U2 to determine if WBN U2 rework has been correctly identified, tracked, and billed in accordance with the contract terms. As a result of our review, we identified one area for improvement. Specifically, we determined some rework project costs are being settled based upon an estimated amount. However, the actual costs are not being tracked by the contractor in accordance with the contract terms.We recommended the Vice President, WBN U2, if they continue to accept the cost of rework based upon an estimated amount and not the actual amount as stipulated in the contract, amend the terms of the contract to allow for an estimated amount for rework and determine what documentation should be maintained by the contractor supporting the estimated rework amount and the amount used in the calculation of the performance fee. In TVA management's response, they stated that the contract language is adequate to address the issue. TVA management stated that it is more of an issue of TVA notification to Bechtel that soft costs should be tracked for recovery. In addition, Article II-24 of the contract, even though not formally documented as a dispute, allows both parties the latitude to interpret and resolve such issues. We agree with their response. Summary Only