GAO Finds Problems with KBR Defense Department Contract in Iraq

August 09, 2007 -- House Committee on Oversight and Government Reform Chairman Waxman releases a GAO report analyzing the Defense Department’s decision to pay KBR nearly all of the $221 million in costs that the Defense Contract Audit Agency questioned during its audits of the Restore Iraqi Oil contract for reconstruction work on Iraq’s oil infrastructure. The report finds multiple violations of federal acquisition regulations and procedures, placing millions of taxpayer dollars at risk and leaving questions unanswered.

Report Introduction:

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DEFENSE CONTRACT MANAGEMENT

DOD's Lack of Adherence to Key Contracting Principles on Iraq Oil Contract Put Government Interests at Risk

Why GAO Did This Study

The Department of Defense’s (DOD) U.S. Army Corps of Engineers (Corps) awarded the $2.5 billion Restore Iraqi Oil (RIO I) contract to Kellogg Brown & Root in March 2003 in an effort to reestablish Iraq’s oil infrastructure. The contract was also used to ensure adequate fuel supplies inside Iraq. RIO I was a cost-plus-award-fee type contract that provided for payment of the contractor’s costs, a fixed fee determined at inception of the contract, and a potential award fee. The Defense Contract Audit Agency (DCAA) reviewed the 10 RIO I task orders and questioned $221 million in contractor costs. We were asked to determine (1) how DOD addressed DCAA’s RIO I audit findings and what factors contributed to DOD’s decision and (2) the extent to which DOD paid award fees for RIO I and followed the planned process for making that decision. To accomplish this, we reviewed DOD and DCAA documents related to RIO I and interviewed Corps, DCAA, and other officials.

What GAO Recommends

GAO recommends the Secretary of the Army, in contingency situations, ensure that an analysis of the feasibility of following a rigorous award fee process is conducted when using cost-plus-award-fee contracts. In written comments, DOD agreed with the recommendation.

What GAO Found

DOD considered DCAA’s audit findings on the RIO I contract and performed additional analysis before deciding to pay the contractor nearly all of the $221 million in costs that DCAA questioned. DOD did, however, remove about $112 million of the questioned costs from the amount used to establish the contractor’s fee pool, which resulted in an effective lowering of the fee received by the contractor by approximately $5.8 million. Lack of timely negotiations contributed significantly to DOD’s decision on how to address the questioned costs—all 10 task orders were negotiated more than 180 days after the work commenced. As a result, the contractor had incurred almost all its costs at the time of negotiations, which influenced DOD’s decision to pay nearly all of the questioned costs. The negotiation delays were in part caused by changing requirements, funding challenges, and inadequate contractor proposals. In our previous work, we have found that negotiation delays can increase risk to the government. Overall, DCAA considers $26 million of the costs questioned on the RIO I contract to be sustained, which DCAA defines as cost reductions attributable to its audit findings. We compared the sustention rates on DCAA’s 11 RIO I contract audits to the sustention rates for 100 DCAA audits of other Iraq contract actions, and found that the sustention rates varied widely for both groups.

DOD’s Army Corps of Engineers paid $57 million in award fees on the RIO I contract, or 52 percent of the maximum possible, and on individual task orders the fee awarded ranged from 4 to 72 percent of the fee available. While the award fee plan required regular award fee boards during the life of the contract, DOD did not conduct a formal board until nearly all work on the contract was complete. As a result, DOD was not able to provide the contractor with formal award fee feedback while work was ongoing, which federal regulations state should be done in order to motivate a contractor to either improve poor performance or continue good performance. DOD officials told us the workload of RIO staff members and logistical difficulties stemming from the challenging conditions in Iraq hindered efforts to hold evaluation boards during the period of performance. DOD also was unable to give us enough documentation for a full assessment of its compliance with other parts of its plan—it did not, for example, provide the scores the award fee board assigned to the contractor on the individual award fee criteria, so we could not see if the award fee board had followed contract criteria and weighting in evaluating performance. We compared the percentage of award fees earned on the RIO I contract to the fees earned on a group of other selected Iraq reconstruction contracts and found that the percentage of award fees earned on RIO I fell within the lower range of fees earned on the other contracts.

Read the full GAO report (pdf file)

Fact Sheet:

GAO REPORT ON IRAQ OIL RECONSTRUCTION FINDS MULTIPLE CONTRACT VIOLATIONS

Rep. Henry A. Waxman,
Chairman, Committee on Oversight and Government Reform

On July 31, 2007, the Government Accountability Office issued a report entitled “DOD’s Lack of Adherence to Key Contracting Principles on Iraq Oil Contract Put Government Interests at Risk.” This report analyzes the Defense Department’s decision to pay Kellogg, Brown & Root (KBR) nearly all of the $221 million in costs that the Defense Contract Audit Agency (DCAA) questioned during its audits of the Restore Iraqi Oil (RIO I) contract for reconstruction work on Iraq’s oil infrastructure.

In its report, GAO states that it did not determine “whether the DOD contracting officer should have approved payment for the questioned costs” (p. 2) or “whether DOD reached the appropriate award fee decision for the RIO I contract” (p. 3). GAO did find multiple violations of federal acquisition regulations and procedures, however, placing millions of taxpayer dollars at risk and leaving critical questions unanswered.

Destroyed and Missing Contract Documents

According to GAO, “DOD was unable to provide sufficient documentation to enable [GAO] to fully evaluate its adherence to its award fee plan.” In particular:

• DOD could not provide “consensus scores on the individual [award fee] criteria because records of those scores were destroyed after the final award fee decision was reached.” As a result, GAO “could not determine whether the award fee board adhered to the weighting of the criteria outlined in the contract in reaching its recommendation” (p. 27).

• DOD could not provide any documentation of the reasons for the award fee determining official’s “upward adjustments to the award fee board’s recommendation.” This lack of documentation “was not in accordance with the award fee plan,” according to GAO (p. 27).

• DOD could not provide “complete information regarding the monitoring of the contractor’s performance,” including “the number of boards held, the dates of those boards, or the results from the boards.” As a result, GAO “could not determine how results from interim evaluations were figured into the award fee board’s recommendation, as the award fee plan indicates they should be” (p. 28).

Lack of Performance Monitor Reports

According to GAO, DOD’s performance monitors failed to prepare and submit hundreds of reports that would have provided the award fee board with information to determine its award fee to KBR. As GAO concluded:

• “Performance monitors were supposed to complete reports monthly and at the end of the evaluation period in order to provide the award fee board with information about the contractor’s performance” (p. 26);

• “Written reports were not prepared on a regular basis, as required by the fee award plan” (p. 26);

• “Reports that were prepared were not submitted to the award fee board” (p. 26); and

• Out of “hundreds” of reports that should have been prepared, “fewer than 10 performance monitor reports were ever provided to the award fee board” (p. 26).

Lack of Advanced Negotiation of Terms and Conditions

GAO found that DOD’s decision to pay KBR nearly all of the $221 million in questioned costs was influenced by the fact that negotiations on terms and conditions “did not begin until most of the work was complete.” Specifically, GAO concluded:

• Contrary to the Defense Federal Acquisition Regulation Supplement, “all 10 task orders were negotiated more than 180 days after the work commenced” (p. 3);

• “Because of the delays in negotiations, virtually all of the costs had been incurred at the time of negotiations” (p. 14); and

• “Lack of timely negotiation was a major contributing factor to DOD’s decision on how to address the questioned costs” (p. 3).

GAO found that the causes of the failure to negotiate terms and conditions before the costs were incurred included:

• “DOD’s changing requirements” and “DOD’s funding challenges” (p. 16);

• “[I]nadequacies in several of [KBR’s] business systems,” particularly its estimating system, which DCAA concluded was “inadequate for providing verifiable, supportable and documented cost estimates that are acceptable for negotiating a fair and reasonable price” (pp. 16, 18); and

• KBR’s failure on many of the task orders to “submit qualifying proposals until late in the period of performance or after the work had been complete” (p. 16).

DOD’s failure to properly negotiate terms and conditions prior to performance affected the contracting officer’s decision not to allow the majority of questioned costs. As GAO concluded, the contracting officer believed that “payment of incurred costs was required, absent unusual circumstances” (p. 15).

Lack of Timely Award Fee Evaluations

GAO also found that DOD granted the $57 million award fee without providing KBR with contemporaneous evaluations that could have served to induce better performance. Specifically, GAO stated that DOD:
• “Did not convene an award fee board for the RIO I contract until contract performance was almost entirely complete” (p. 25);

• Did not notify KBR of its award fee scores until January 2005, “after completion of all work on the contract” (p. 25); and

• “Did not meet the rigor called for in the award fee plan when providing interim performance feedback to the contractor” (p. 25).

Read the full GAO report (pdf file)

Source: House Committee on Oversight and Government Reform