This August 1997, file photo, shows the exterior of the Center for National Security and Arms Control at Sandia National Laboratory in Albuquerque, N.M. Eric Draper/AP
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Top officials at the Lockheed Martin Corporation in 2009 sought to extend their lucrative contract work managing Sandia National Laboratories for the Energy Department, and expected that their political connections would help them gain an inside track for a noncompetitive contract renewal. This is, after all, how Washington usually functions.

But the Energy Department’s top auditor has asserted in a riveting new report that the firm, and top officials that helped it operate the Sandia nuclear weapons labs in Albuquerque, appear to have violated federal laws when they used some of their contract funds to pay for lobbying and other forms of pressure on DOE to obtain the contract renewal.

The firm argued during the department’s review of its actions that spending federal funds to obtain more federal funds was “allowable” and only was meant to help the department’s leaders make an informed decision, according to the Nov. 12 report by DOE Inspector General Gregory H. Friedman.

But Friedman called that decision “highly problematic.” He said it was not only a violation of government-wide contracting regulations, but also “impermissible” under the precise wording of Sandia’s longstanding, multi-billion dollar contract with DOE.

Friedman’s slender six-page summary of his extensive investigation — many details of his work were declared “For Official Use Only” — is noteworthy because it’s an unusual broadside against what many in the Capitol say is a common way of doing business: Get one federal grant, and then use the profits to hire lobbyists — including former members of Congress — to meet with federal officials, lawmakers and others who can help orchestrate a new, even richer federal grant.

It’s Washington’s own version of a perpetual motion machine — one that has created and enshrined countless fortunes in the Capitol region. “Not only is it explicitly against the law for contractors to use taxpayer dollars to lobby federal officials, it’s galling that in this particular case, the contractor is using taxpayer dollars to try and do an end-around competition,” said Lydia Dennett, an investigator at the Project on Government Oversight, a nonprofit group in Washington. “This instance is hardly the first time appropriated funds have been abused this way.”

Lockheed Martin wound up getting a two-year contract extension worth $7.7 billion in March of this year to manage Sandia, rather than the 12-year extension it had sought. But a Sandia official, whose name was not given in the report, acknowledged in a 2010 email obtained by Friedman that its federally-funded campaign for a Lockheed Martin extension was not new.

Sandia used “operating costs” — a budget account funded by DOE — “in the same way in securing” contract extensions in 1998 and 2003, and also coordinated its effort closely with Lockheed Martin, Friedman’s report quotes the Sandia official as writing.

Sandia’s top counsel had specifically warned in 2004 that neither Sandia nor its direct overseers in the Energy Department “could tolerate even the suspicion” that Sandia was using its contract revenues to help Lockheed win a new contract, Friedman wrote. After all, the contract stated that Sandia “shall not have any interface with any present or potential Federal, state, municipal” officials or legislators for the purpose of obtaining or retaining business, his report said. It is, in fact, a standard federal contract rule that recipients of federal funds cannot use those funds “to pay any person for influencing or attempting to influence an officer of any agency or a member of Congress” about an extension.

Sandia’s officials planned nonetheless to use their political connections to get such an extension, beginning in 2009, Friedman wrote. In an internal document prepared that year, officials candidly vowed to try to persuade DOE that no other firms should be allowed to bid on the work, but said if that effort failed, they would attempt “to influence the evaluation criteria” — in effect, to jigger the competition.

Sandia also hired three consultants, who urged an extensive lobbying campaign involving the state’s congressional delegation, a former U.S. Senator, a former governor, and a former head of the National Nuclear Security Administration. None are named in Friedman’s summary, but it says that DOE overseers at Sandia concluded the labs engaged a former Republican congresswoman, Heather Wilson, to participate in the taxpayer-funded campaign for a contract extension.

According to news reports, Sandia’s contract with a firm Wilson created called for payments of $10,000 a month for her strategic advice, but barred her from lobbying. After DOE officials protested the arrangement, Sandia repaid the DOE a total of $226,000 that it paid Wilson.

Wilson, who worked at the White House under President George H.W. Bush and now directs the South Dakota School of Mines and Technology, said in a prepared statement that she had done nothing wrong. “I was not a lobbyist for Sandia and I did not contact any federal official — Congressional or Executive — for Sandia to try to extend the Sandia contract,” she said. Wilson is presently on a DOE-organized panel meant to advise the department about how the nuclear weapons laboratories should be organized and paid for by DOE.

According to Sandia documents cited by Friedman, the labs’ message in its lobbying was that allowing competition for a new contract was unnecessary and not in the government’s interest. These points were emphasized in a letter sent by a senior Lockheed executive to then-Secretary of Energy David Chu.

A Lockheed spokesman, Matthew Kramer, said in a prepared statement that “Sandia Corporation, a wholly-owned subsidiary of Lockheed Martin that operates Sandia National Labs, has cooperated with the Inspector General’s review and will continue to do so. Lockheed Martin will cooperate fully with Sandia and the Department of Energy as needed.” Sandia spokeswoman Heather Clark said that while the labs are still reviewing the report, “Sandia takes these allegations seriously and has cooperated fully in the Inspector General’s review of the issue … Sandia is confident that the company and the DOE will be able to resolve these issues.”

Frank Klotz, who became director of the National Nuclear Security Administration this year, affirmed in a written response to the audit that Sandia’s payments to Wilson were “unallowable,” and that officials are now assessing whether other salaries and fees paid to Sandia employees and consultants from DOE revenues should be recovered. He also said that NNSA might adjust its overall payment to Sandia once its probe is complete. “We take this issue seriously, and are committed to … taking preventive measures to ensure this does not recur,” Klotz said.

Data reporter Alex Cohen contributed to this article.

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R. Jeffrey Smith worked for 25 years in a series of key reporting and editorial roles at The Washington...