Defense Contracting
Progress Made in Implementing Defense Base Act Requirements, but Complete Information on Costs Is Lacking Gao ID: GAO-08-772T May 15, 2008The Defense Base Act (DBA) requires U.S. government contractors and subcontractors to buy workers' compensation insurance for employees working overseas, and the cost of this insurance is then passed on to the government. The Department of Labor oversees the claims process and ensures contractors are aware of DBA insurance requirements. Given the large number of contractor personnel working in Iraq, concerns have been raised over the cost of workers' compensation insurance provided under DBA. Since the Iraq conflict began in March 2003, federal agencies have issued contracts for Iraq reconstruction and to support deployed forces. The Department of Defense (DOD) recently reported it alone has 163,591 contractor personnel working in Iraq. Based on GAO's 2005 report on DBA insurance, Congress directed DOD to address challenges identified. This testimony is based on the 2005 report and GAO's analysis of recent agency efforts. As requested, it provides an update on (1) DOD's efforts to reduce DBA insurance rates; (2) DOD's ability to calculate its total DBA insurance costs; and (3) the progress toward addressing prior DBA implementation challenges. In preparation for this testimony, GAO reviewed related reports to identify agency efforts to address prior findings and interviewed officials from DOD, State, Labor, and USAID. GAO discussed this testimony with agency officials.
While DOD has taken steps to reduce DBA insurance rates through the U.S. Army Corps of Engineers' (Army Corps) single-insurer pilot program, it has not yet implemented similar efforts departmentwide. GAO previously reported that eight DOD prime contractors paid from $10 to $21 per $100 of salary cost, a rate that was significantly higher than the rates paid by State and USAID contractors--$2 to $5 per $100 of salary cost--through the agencies' respective single-insurer programs. Since the Army Corps implemented its single-insurer program in December 2005, its insurance rates have decreased from what DOD was previously paying. For example, the Army Corps is now paying from $3.50 to $7.25 per $100 of salary cost for service and construction contracts. DOD continues to lack reliable aggregate data on the total cost of DBA insurance. Based on GAO's 2005 report, Congress directed DOD to identify methods to collect data on DBA insurance costs. While State, USAID, and Army Corps can obtain aggregate DBA cost data for their respective single-insurer programs, DOD reported that it has not collected this data departmentwide. As GAO has previously reported, agencies can analyze financial data to leverage their buying power, reduce costs, and better manage suppliers of goods and services. Labor officials told GAO they have taken steps to address several of the DBA insurance implementation challenges GAO identified in its 2005 report. For example, GAO found there was uncertainty among agency officials regarding when DBA insurance was required as well as problems in processing claims and monitoring compliance. Labor officials told GAO they have been receiving fewer questions after holding seven seminars through 2006 on DBA insurance for contractors, insurance companies, agency officials, and attorneys in order to clarify DBA insurance requirements. While Labor officials also noted improvements in processing insurance claims, they still face challenges in verifying that subcontractors in Iraq have obtained DBA insurance.
GAO-08-772T, Defense Contracting: Progress Made in Implementing Defense Base Act Requirements, but Complete Information on Costs Is Lacking
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Testimony:
Before the Committee on Oversight and Government Reform, House of
Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, May 15, 2008:
Defense Contracting:
Progress Made in Implementing Defense Base Act Requirements, but
Complete Information on Costs Is Lacking:
Statement of John K. Needham, Director Acquisition and Sourcing
Management Issues:
GAO-08-772T:
GAO Highlights:
Highlights of GAO-08-772T, a testimony before the Committee on
Oversight and Government Reform, House of Representatives.
Why GAO Did This Study:
The Defense Base Act (DBA) requires U.S. government contractors and
subcontractors to buy workers‘ compensation insurance for employees
working overseas, and the cost of this insurance is then passed on to
the government. The Department of Labor oversees the claims process and
ensures contractors are aware of DBA insurance requirements. Given the
large number of contractor personnel working in Iraq, concerns have
been raised over the cost of workers‘ compensation insurance provided
under DBA. Since the Iraq conflict began in March 2003, federal
agencies have issued contracts for Iraq reconstruction and to support
deployed forces. The Department of Defense (DOD) recently reported it
alone has 163,591 contractor personnel working in Iraq.
Based on GAO‘s 2005 report on DBA insurance, Congress directed DOD to
address challenges identified. This testimony is based on the 2005
report and GAO‘s analysis of recent agency efforts. As requested, it
provides an update on (1) DOD‘s efforts to reduce DBA insurance rates;
(2) DOD‘s ability to calculate its total DBA insurance costs; and (3)
the progress toward addressing prior DBA implementation challenges.
In preparation for this testimony, GAO reviewed related reports to
identify agency efforts to address prior findings and interviewed
officials from DOD, State, Labor, and USAID. GAO discussed this
testimony with agency officials.
What GAO Found:
While DOD has taken steps to reduce DBA insurance rates through the
U.S. Army Corps of Engineers‘ (Army Corps) single-insurer pilot
program, it has not yet implemented similar efforts departmentwide. GAO
previously reported that eight DOD prime contractors paid from $10 to
$21 per $100 of salary cost, a rate that was significantly higher than
the rates paid by State and USAID contractors”$2 to $5 per $100 of
salary cost”through the agencies‘ respective single-insurer programs.
Since the Army Corps implemented its single-insurer program in December
2005, its insurance rates have decreased from what DOD was previously
paying. For example, the Army Corps is now paying from $3.50 to $7.25
per $100 of salary cost for service and construction contracts.
DOD continues to lack reliable aggregate data on the total cost of DBA
insurance. Based on GAO‘s 2005 report, Congress directed DOD to
identify methods to collect data on DBA insurance costs. While State,
USAID, and Army Corps can obtain aggregate DBA cost data for their
respective single-insurer programs, DOD reported that it has not
collected this data departmentwide. As GAO has previously reported,
agencies can analyze financial data to leverage their buying power,
reduce costs, and better manage suppliers of goods and services.
Labor officials told GAO they have taken steps to address several of
the DBA insurance implementation challenges GAO identified in its 2005
report. For example, GAO found there was uncertainty among agency
officials regarding when DBA insurance was required as well as problems
in processing claims and monitoring compliance. Labor officials told
GAO they have been receiving fewer questions after holding seven
seminars through 2006 on DBA insurance for contractors, insurance
companies, agency officials, and attorneys in order to clarify DBA
insurance requirements. While Labor officials also noted improvements
in processing insurance claims, they still face challenges in verifying
that subcontractors in Iraq have obtained DBA insurance.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-772T]. For more
information, contact John Needham at (202) 512-4841 or
needhamjk1@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
Thank you for inviting me here today to discuss the Defense Base Act
(DBA)[Footnote 1] and its implementation in Iraq. DBA requires U.S.
government contractors and subcontractors to buy workers' compensation
insurance for employees working overseas. The cost of this insurance is
then passed on to the government. Given the large number of contractor
personnel working in Iraq, concerns have been raised over the cost of
workers' compensation insurance provided under DBA. Since the Iraq
conflict began in March 2003, the departments of Defense (DOD) and
State, the U.S. Agency for International Development (USAID), and other
federal agencies have issued contracts for Iraq reconstruction and to
support deployed forces. DOD recently reported it alone has 163,591
contractor personnel working in Iraq. These personnel would be subject
to DBA requirements unless covered by an exception.[Footnote 2]
In April 2005, we reported on cost and implementation issues associated
with DBA.[Footnote 3] Based on a review of DBA insurance rates for
contracts representing 69 percent of U.S.-appropriated contracting
dollars awarded for ongoing work as of May 2004, and interviews with
officials from selected contractors, DOD, State, Department of Labor,
Department of Justice, and USAID, we found:
* the total cost of DBA insurance to the government or the extent to
which Iraq reconstruction funds were being spent on DBA insurance could
not be calculated due in part to the difficulty in gathering data on
the large number of contractors and the multiple levels of
subcontractors performing work in Iraq;
* wide variations in the amounts federal agencies were paying for DBA
insurance, ranging from $2 to $21 per $100 of salary;
* several challenges in implementing DBA insurance requirements for
Iraq, such as the lack of clarity in DBA insurance requirements, delays
in processing claims, and difficulty in monitoring contractor
compliance.
As a result of our work, Congress directed DOD to work with other
agencies to address these challenges.
My statement today is based on our 2005 report and our analysis of
recent agency efforts. I will provide an update on (1) DOD's efforts to
reduce DBA insurance rates; (2) DOD's ability to calculate its total
DBA insurance costs; and (3) the progress toward addressing prior DBA
implementation challenges. In preparation for this testimony, we
reviewed reports related to DBA insurance to identify agency efforts to
address our prior findings and interviewed officials from DOD, State,
Labor, and USAID. We conducted our work from April to May 2008, in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives. We discussed our analysis of
recent agency efforts with agency officials and made technical
corrections where appropriate.
Summary:
DOD and Labor have made progress in addressing challenges we identified
in our April 2005 report, but several still remain. While DOD has taken
steps to reduce DBA insurance rates through the U.S. Army Corps of
Engineers' (Army Corps) single-insurer pilot program, it has not yet
implemented similar efforts departmentwide. Through its pilot program,
the Army Corps has lowered its DBA insurance rates from what DOD had
previously paid. While State, USAID, and Army Corps can obtain
aggregate DBA cost data for their respective single-insurer programs,
DOD reported that it has not collected this data across the department.
We previously reported that the lack of such data prevents DOD from
calculating the total cost of DBA insurance or the extent to which Iraq
reconstruction funds were being spent on DBA insurance. In addition,
while we previously reported several challenges in implementing DBA
insurance requirements in Iraq, Labor officials told us that several of
these challenges have since been addressed--requirements are clearer
and claims processing has improved. However, Labor still faces
challenges in verifying that subcontractors in Iraq have obtained DBA
insurance.
Background:
Congress enacted DBA in 1941 to provide workers' compensation
protection to employees of government contractors working at U.S.
defense bases overseas. Subsequent amendments to DBA extended coverage
to other classes of government contractor employees. The insurance
required under DBA provides employees with uniform levels of disability
and medical benefits or--in the event of death--provides death benefits
to eligible dependents. Under DBA, contractors working in Iraq,
including all levels of subcontractors, are required to obtain DBA
insurance for all employees, including foreign nationals. The cost of
DBA insurance premiums is then passed on to the government. State,
USAID, and the Army Corps have single insurer programs that require all
contractors performing work overseas to purchase DBA insurance from a
specified insurance carrier at a set rate. Labor oversees the claims
process, provides dispute resolution services, and is responsible for
ensuring that contractors are aware of the requirement to purchase DBA
insurance for covered employees.
DOD Has Taken Steps to Reduce Insurance Costs, but Has Not Yet
Implemented Similar Efforts Departmentwide:
While DOD has taken steps to reduce DBA rates since 2005 through the
Army Corps' single-insurer pilot program, it has not yet implemented
similar efforts departmentwide. We previously reported that eight DOD
prime contractors paid from $10 to $21 per $100 of salary cost, which
was significantly higher than the rates paid by State and USAID
contractors--$2 to $5 per $100 of salary cost--through the agencies'
respective single-insurer programs. The following example illustrates
the impact of these rates on cost. We reported in July 2005 that
security employees providing protection to civilians in vehicle convoys
could earn from $12,000 to $13,000 per month.[Footnote 4] Assuming a
DBA insurance rate of $10.30 per $100 of salary cost[Footnote 5] and
that security employee salaries cited in our July 2005 report have
remained the same, the contractor could bill the government between
$1,236 and $1,339 per security employee per month. In addition, DOD
reported in April 2008 that it had 12,258 security contractors in Iraq
as of December 31, 2007. After receiving complaints from companies
doing business in Iraq that the rates for this mandatory insurance had
increased precipitously, DOD officials asked the Army Corps to initiate
a single insurer pilot program for DBA insurance covering all Army
Corps contractors and subcontractors performing work overseas. The
pilot program was in place from December 2005 until March 2008 and was
subsequently extended through September 2008. Army Corps and DOD
officials told us a contract will be awarded in September 2008 for a
permanent single-insurer program. While USAID's current rate for DBA
insurance is still the lowest at $1.58 per $100 of salary cost, the
Army Corps DBA insurance rates have decreased from those paid by DOD
prior to the Army Corps' single-insurer program. For example, the Army
Corps is now paying from $3.50 to $7.25 per $100 of salary cost for
service and construction contracts.
DOD Lacks Reliable Aggregate Data on Total DBA Insurance Costs:
DOD continues to lack reliable aggregate data on the total cost of DBA
insurance. While State, USAID, and Army Corps can obtain aggregate DBA
cost data for their respective single-insurer programs, DOD reported
that it has not collected this data departmentwide. We previously
reported the lack of reliable aggregate data to calculate the total
cost of DBA insurance to the government or the extent to which Iraq
reconstruction funds were being spent on DBA insurance was due, in
part, to the difficulty in gathering data on the large number of
contractors and multiple levels of subcontractors in Iraq. In response
to our report, Congress directed DOD to identify methods to collect
data on DBA insurance costs. We have previously reported that agencies
can analyze financial data to leverage their buying power, reduce
costs, and better manage suppliers of goods and services.[Footnote 6]
As recently as last year, DOD still was not collecting aggregate data
on its DBA insurance costs and reported that such data collection
efforts would be expensive and would divert already limited contracting
resources without any clear benefit to the procurement process.
However, a recent Army Audit Agency report[Footnote 7] indicates that
the Army was at risk of paying more than necessary for DBA insurance
under its LOGCAP contract,[Footnote 8] showing DOD still has challenges
managing these costs.
Labor Reports Improvements to Prior DBA Implementation Challenges:
Labor officials told us they have taken steps to address several of the
DBA insurance implementation challenges we identified in our April 2005
report. These included the lack of clarity in DBA insurance
requirements, delays in processing claims, and difficulty in monitoring
contractor compliance. For example, we found there was uncertainty
among agency officials regarding whether (1) previously granted waivers
by Labor for DBA insurance were still valid, (2) the grants process is
required to follow DBA insurance requirements, and (3) DBA applied in
cases where non-U.S.-appropriated-funds were mixed with U.S.
appropriations. In addition, we found that the processing of claims had
been delayed due to language barriers and the difficulty in obtaining
medical and other personal information. Further, Labor could not verify
that every contractor and subcontractor working in Iraq had purchased
DBA insurance.
According to Labor officials, they have held seven seminars through
2006 on DBA insurance for contractors, insurance companies, agency
officials, and attorneys in order to clarify DBA insurance
requirements. Labor officials noted that these efforts to clarify DBA
insurance requirements have led to a significant reduction in phone
calls, e-mails, and other DBA inquiries. Furthermore, Labor officials
told us that State and DOD's recent revisions to their regulations or
policy memos should help to clarify when DBA insurance requirements
apply. These officials also reported that the claims process has
improved as claims forms and other insurance information have been
translated into Arabic and that two out of the three insurance
companies have hired Arabic speaking employees and stationed them in
the Middle East. Lastly, Labor officials told us that while prime
contractors have generally been compliant in purchasing DBA insurance,
they still face challenges in verifying that subcontractors in Iraq
have obtained DBA insurance.
Concluding Observations:
Considering the unprecedented number of contractors and subcontractors
involved in Iraq reconstruction efforts and supporting deployed forces,
the U.S. government is likely spending considerable sums on DBA
insurance. While DOD has taken steps through the Army Corps' single-
insurer program to reduce its DBA rates, it does not know what it is
spending departmentwide on such insurance. Without this information,
DOD is limited in its ability to make fully informed decisions
regarding its options for minimizing departmentwide DBA insurance
costs. Furthermore, the lack of detailed information on these costs
makes it difficult for Congress to conduct full oversight of
reconstruction funds.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions that you or other Members of the Committee
may have at this time.
Contacts and Acknowledgments:
For further information regarding this testimony, please contact John
Needham at (202) 512-4841 or (needhamjk1@gao.gov). Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this product. Staff making key contributions to
this statement were John Neumann, Assistant Director; Jeffrey Hartnett;
Greg Campbell; Sarah Jones; Tara Copp; and John Krump.
[End of section]
Footnotes:
[1] 42 U.S.C. 1651-1654.
[2] These exceptions include contracts approved or financed by the
Development Loan Fund, contracts exclusively for materials or supplies,
or waivers issued by the Secretary of Labor with respect to any
contract, work location, or class of employees.
[3] GAO, Defense Base Act Insurance: Review Needed of Cost and
Implementation Issues, GAO-05-280R (Washington, D.C.: April 29, 2005).
[4] GAO, Rebuilding Iraq: Actions Needed to Improve Use of Private
Security Providers, GAO-05-737(Washington, D.C.: July 28, 2005).
[5] This rate is based on what State and the Army Corps currently pay
under their single insurer programs to insure security personnel.
[6] GAO, Defense Acquisitions: Tailored Approach Needed to Improve
Service Acquisition Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9,
2006).
[7] U.S. Army Audit Agency, Audit of Defense Base Act Insurance for the
Logistics Civil Augmentation Program, Audit of Logistics Civil
Augmentation Program Operations in Support of Operation Iraqi Freedom
(Project A-2005-ALS-0340.000), Audit Report: A-2007-0204-ALL, Sept. 28,
2007.
[8] The Army's Logistics Civil Augmentation Program (LOGCAP) provides
logistics and engineering services, such as food preparation, laundry,
housing, and construction in support of contingency operations.
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