Contingency Contracting
Improved Planning and Management Oversight Needed to Address Challenges with Closing Contracts Gao ID: GAO-11-891 September 27, 2011Since 2002, DOD obligated at least $166.6 billion on contracts supporting reconstruction and stabilization efforts in Iraq and Afghanistan. Many of these contingency contracts, in particular those awarded in Iraq, need to be closed. Contract closeout is a key step to ensure the government receives the goods and services it purchased at the agreed upon price and, if done timely, provides opportunities to use unspent funds for other needs and reduces exposure to other financial risks. To assess DOD's efforts to close its Iraq contracts, GAO examined the (1) number of contracts that are eligible for closeout and the extent to which they will be closed within required time frames, (2) factors contributing to contracts not being closed within required time frames, (3) steps DOD took to manage the financial risks associated with not closing contracts within required time frames, and (4) extent to which DOD captured and implemented lessons learned from closing its Iraq contracts. GAO reviewed contingency contracting guidance, analyzed contract and closeout data for contracts awarded between fiscal years 2003 and 2010, and interviewed DOD officials from six organizations responsible for awarding or closing out these contracts.
DOD does not have visibility into the number of its Iraq contracts eligible for closeout, but available data indicate that DOD must still review and potentially close at least 58,000 contracts awarded between fiscal years 2003 and 2010. GAO's analysis indicates that relatively few of its contracts will be closed within required time frames. For example, about 90 percent of the limited number of contracts for which DOD could provide closeout data are already over age for closeout. The U.S. Central Command's Contracting Command (C3) and its predecessors, which awarded many of DOD's Iraq contracts, did not have sufficient internal controls to ensure that contracting data were accurate and complete. C3's management visibility was further affected by limitations of its information systems, staff turnover, and poor contract administration. DOD's ability to close its contracts has been hindered by the lack of advance planning, workforce shortfalls, and contractor accounting challenges. For example, DOD's contingency contracting doctrine and guidance do not specifically require advanced planning for contract closeouts. DOD took steps in 2008 to address its backlog of contracts needing to be closed but such actions came too late to make significant difference in closing contracts within required time frames. DOD is now transitioning responsibility for closing out C3's contracts to the Army Contracting Command. Staffing challenges, however, during this transition have hindered efforts to close these contracts. Efforts to close large, cost-type contracts have been further hindered by Defense Contract Audit Agency staffing shortages and unresolved issues with contractors' accounting practices, which have delayed audits of the contractors' incurred costs. DOD's efforts to identify unspent contract funds and improper payments--two examples of financial risks that timely closeout of contracts may help identify--are hindered by limited visibility into its Iraq contracts. DOD identified at least $135 million in unspent funds that could potentially not be available to meet other DOD needs. If not used, these funds will be returned to the U.S. Treasury at the end of fiscal year 2011. Should DOD identify a need to pay for an unanticipated cost on these contracts, it will need to use other funds that are currently available. Additionally, instances of improper payments and potential fraud were sometimes found years after final contract deliveries were made, making it harder for DOD to recover funds owed to it and increasing the risk that it may need to pay contractors interest fees on late payments. DOD has identified and addressed some of the problems related to the closeout of Iraq contracts, but the growing backlog of over 42,000 Afghanistan contracts that need to be closed suggests the underlying causes have not been resolved. DOD officials noted that the lessons learned in Iraq highlight the need to improve contract data, increase the emphasis on contract administration and closeout, and improve contingency contracting doctrine and guidance. DOD officials reported that actions are underway to correct these deficiencies in future contingencies, but fully implementing these initiatives may take several years. GAO is making three recommendations to ensure DOD has sufficient resources to close its Iraq and Afghanistan contracts and to better plan for and improve visibility of closeout efforts in future contingencies. DOD concurred with each of the recommendations.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: John P. Hutton Team: Government Accountability Office: Acquisition and Sourcing Management Phone: (202) 512-7773GAO-11-891, Contingency Contracting: Improved Planning and Management Oversight Needed to Address Challenges with Closing Contracts
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United States Government Accountability Office:
GAO:
Report to Congressional Addressees:
September 2011:
Contingency Contracting:
Improved Planning and Management Oversight Needed to Address
Challenges with Closing Contracts:
GAO-11-891:
GAO Highlights:
Highlights of GAO-11-891, a report to congressional addressees.
Why GAO Did This Study:
Since 2002, DOD obligated at least $166.6 billion on contracts
supporting reconstruction and stabilization efforts in Iraq and
Afghanistan. Many of these contingency contracts, in particular those
awarded in Iraq, need to be closed. Contract closeout is a key step to
ensure the government receives the goods and services it purchased at
the agreed upon price and, if done timely, provides opportunities to
use unspent funds for other needs and reduces exposure to other
financial risks.
To assess DOD‘s efforts to close its Iraq contracts, GAO examined the
(1) number of contracts that are eligible for closeout and the extent
to which they will be closed within required time frames, (2) factors
contributing to contracts not being closed within required time
frames, (3) steps DOD took to manage the financial risks associated
with not closing contracts within required time frames, and (4) extent
to which DOD captured and implemented lessons learned from closing its
Iraq contracts. GAO reviewed contingency contracting guidance,
analyzed contract and closeout data for contracts awarded between
fiscal years 2003 and 2010, and interviewed DOD officials from six
organizations responsible for awarding or closing out these contracts.
What GAO Found:
DOD does not have visibility into the number of its Iraq contracts
eligible for closeout, but available data indicate that DOD must still
review and potentially close at least 58,000 contracts awarded between
fiscal years 2003 and 2010. GAO‘s analysis indicates that relatively
few of its contracts will be closed within required time frames. For
example, about 90 percent of the limited number of contracts for which
DOD could provide closeout data are already over age for closeout. The
U.S. Central Command‘s Contracting Command (C3) and its predecessors,
which awarded many of DOD‘s Iraq contracts, did not have sufficient
internal controls to ensure that contracting data were accurate and
complete. C3‘s management visibility was further affected by
limitations of its information systems, staff turnover, and poor
contract administration.
DOD‘s ability to close its contracts has been hindered by the lack of
advance planning, workforce shortfalls, and contractor accounting
challenges. For example, DOD‘s contingency contracting doctrine and
guidance do not specifically require advanced planning for contract
closeouts. DOD took steps in 2008 to address its backlog of contracts
needing to be closed but such actions came too late to make
significant difference in closing contracts within required time
frames. DOD is now transitioning responsibility for closing out C3‘s
contracts to the Army Contracting Command. Staffing challenges,
however, during this transition have hindered efforts to close these
contracts. Efforts to close large, cost-type contracts have been
further hindered by Defense Contract Audit Agency staffing shortages
and unresolved issues with contractors‘ accounting practices, which
have delayed audits of the contractors‘ incurred costs.
DOD‘s efforts to identify unspent contract funds and improper
payments”-two examples of financial risks that timely closeout of
contracts may help identify”-are hindered by limited visibility into
its Iraq contracts. DOD identified at least $135 million in unspent
funds that could potentially not be available to meet other DOD needs.
If not used, these funds will be returned to the U.S. Treasury at the
end of fiscal year 2011. Should DOD identify a need to pay for an
unanticipated cost on these contracts, it will need to use other funds
that are currently available. Additionally, instances of improper
payments and potential fraud were sometimes found years after final
contract deliveries were made, making it harder for DOD to recover
funds owed to it and increasing the risk that it may need to pay
contractors interest fees on late payments.
DOD has identified and addressed some of the problems related to the
closeout of Iraq contracts, but the growing backlog of over 42,000
Afghanistan contracts that need to be closed suggests the underlying
causes have not been resolved. DOD officials noted that the lessons
learned in Iraq highlight the need to improve contract data, increase
the emphasis on contract administration and closeout, and improve
contingency contracting doctrine and guidance. DOD officials reported
that actions are underway to correct these deficiencies in future
contingencies, but fully implementing these initiatives may take
several years.
What GAO Recommends:
GAO is making three recommendations to ensure DOD has sufficient
resources to close its Iraq and Afghanistan contracts and to better
plan for and improve visibility of closeout efforts in future
contingencies. DOD concurred with each of the recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-11-891] for key
components. For more information, contact John P. Hutton at (202) 512-
4841 or huttonj@gao.gov.
[End of section]
Contents:
Letter:
Background:
DOD's Visibility into the Number of Contracts Eligible for Closeout Is
Hindered by Inadequate Data:
Planning, Workforce, and Contractor Accounting Issues Hinder Efforts
to Close Contracts:
DOD Has Taken Steps to Mitigate Potential Loss or Misuse of Funds but
Limited Visibility into Its Contracts Hinders Such Efforts:
Growing Backlog of Afghanistan Contracts Suggests Problems Related to
Closing Contracts Will Continue:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Status of C3 Contracts Inventoried and Reviewed by the Task
Force as of April 2011:
Table 2: Closeout Status for Selected C3 Contracts as of May 2011:
Table 3: DOD Iraq Contracts Reported Eligible and Over Age for
Closeout:
Table 4: Number of DOD Cost-Type Contracts Related to Iraq Eligible
for Closeout:
Table 5: Estimated Iraq Contract Funding that Potentially Could Return
to Treasury at the End of Fiscal Year 2011:
Table 6: Examples of Contracts with Overpayments that Were Not
Recovered:
Figures:
Figure 1: Overview of Contract Closeout Process:
Figure 2: Incurred Cost Audit for One Major Iraq Contractor's 2003
Costs Was Delayed Until 2008 Due in Part to Repeated Inadequate
Proposal Submissions:
Abbreviations:
ACC-RI: Army Contract Command-Rock Island:
AFCEE: Air Force Center for Engineering and the Environment:
C3: U.S. Central Command Contracting Command:
DCAA: Defense Contract Audit Agency:
DCMA: Defense Contract Management Agency:
DFAS: Defense Finance and Accounting Service:
DOD: Department of Defense:
FAR: Federal Acquisition Regulation:
LOGCAP: Logistics Civil Augmentation Program:
USACE: U.S. Army Corps of Engineers:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
[End of section]
September 27, 2011:
Congressional Addressees:
Since 2002, the Department of Defense (DOD) has reported obligations
of at least $166.6 billion to acquire goods and services needed to
support its reconstruction and stabilization efforts in Iraq and
Afghanistan, according to the Commission on Wartime Contracting. Our
work, as well as that of others, has documented shortcomings in DOD's
strategic planning for operational contract support, contract
administration and oversight, and its acquisition workforce in these
contingency operations. Many of the contracts that were awarded to
support these efforts have been completed and must be closed as the
final step in the acquisition process. Contract closeout includes a
number of administrative actions, including DOD confirming that all
goods and services were received and issuing final payment to the
contractor, the contractor acknowledging that the U.S. government does
not owe it additional payment, and finally, the government
deobligating any unspent funds. For contracts awarded on a cost-
reimbursable basis, the Defense Contract Audit Agency (DCAA) conducts
audits to assist the contracting officer in determining that
contractor costs are allowable, allocable, and reasonable.
The Federal Acquisition Regulation (FAR) states that firm-fixed price
contracts should be closed within 6 months after the contract is
physically completed, which generally occurs when the government
accepts final delivery of goods and services.[Footnote 1] Cost-type
contracts should be closed within 36 months and can be more difficult
to close than firm-fixed price contracts as they require the
settlement of indirect cost rates.[Footnote 2] Closing contracts
within these time frames can help to limit the government's exposure
to certain financial risks by identifying and recovering improper
payments and avoiding paying interest fees when the government does
not pay contractors on time. Timely closeout also ensures that DOD
deobligates and uses unspent funds from completed contracts before the
funds are canceled and return to the U.S. Department of the Treasury
(Treasury).[Footnote 3] The timing for when funds are canceled is set
by statute.
Many DOD organizations awarded contracts to support military
operations in Iraq, but the majority in our review were awarded in
theater by U.S. Central Command's Contracting Command (C3) and its
predecessor organizations.[Footnote 4] In 2007, the Gansler Commission
on Army Acquisition and Program Management in Expeditionary Operations
found that only 5 percent of Iraq contracts were being closed. In
response to these findings, the Army established a Contract Closeout
Task Force Office (Task Force) to close C3's Iraq and Afghanistan firm-
fixed price contracts and estimated its mission would be completed in
January 2011. C3, however, significantly underestimated the total
number of contracts it needed to close and is now transferring the
Task Force's mission to Army Contract Command-Rock Island (ACC-RI).
ACC-RI is also responsible for managing the Army's Logistics Civil
Augmentation Program (LOGCAP) contracts. C3 has also delegated
closeout responsibilities of its cost-type contracts to the Defense
Contract Management Agency (DCMA) Southern Europe. Additionally, U.S.
Army Corps of Engineers (USACE) and Air Force's Center for Engineering
and the Environment (AFCEE) also awarded many Iraq contracts but
generally retained responsibility for closing those contracts.
To assess DOD's efforts to close its Iraq contracts, under the
authority of the Comptroller General to conduct evaluations on his own
initiative to assist Congress with its oversight responsibilities, we
examined the (1) total number of its contracts with performance in
Iraq that are eligible for closeout and the extent to which DOD closed
these contracts within required time frames, (2) factors that
contributed to contracts not being closed within required time frames,
(3) steps DOD took to manage the financial risks associated with not
closing contracts within required time frames, and (4) extent to which
DOD captured and implemented lessons learned from closing its Iraq
contracts.
To determine the number of DOD's Iraq contracts eligible for closeout
and the extent to which DOD closed these contracts within required
time frames, we reviewed the FAR and the Defense Federal Acquisition
Regulation Supplement to determine when a contract is eligible for
closeout and the time frames and the procedures for closing contracts.
For the purpose of our review the term contracts refers to all base
contracts, task orders, and blanket purchase agreement call orders. We
obtained contract data from four DOD organizations that our prior work
indicated had been responsible for awarding many of the contracts with
performance in Iraq: C3, Army's ACC-RI, USACE, and AFCEE. These
organizations may retain responsibility for administering and closing
the contracts they awarded, or they may delegate such responsibilities
to another organization. In those instances, we obtained contract data
from that organization. From each organization, we requested the
contract number, period of performance, contract type, contract
status, total obligations, total unliquidated obligations, and
physical completion dates for each contract for which they were
responsible to close. The data we obtained from the Task Force also
included contracts with performance in Afghanistan, which we
identified separately in our analysis. In instances in which DOD did
not have complete data, we used available data to determine the number
of contracts eligible for closeout. We assessed the reliability of
these data reported by the contracting organizations through
interviews with knowledgeable officials and electronic data testing
for missing data, outliers, and obvious errors within each database.
While we found that C3's contract data from fiscal years 2003 through
2008 were generally unreliable for determining the closeout status of
contracts, they were sufficiently reliable for determining the minimum
number of contracts awarded during this time period. We did not assess
the reliability of the financial management systems used by DOD to
provide financial data for our review.
To identify the factors that contributed to contracts not being closed
within required time frames, we reviewed DOD's closeout planning
documents and interviewed officials at each of the contracting
organizations, DCAA, and the Defense Finance and Accounting Service
(DFAS), which is responsible for making payments on many Iraq
contracts, and U.S. Army Central. We reviewed DOD's policy and
guidance to determine how contract closeout should be incorporated
into contingency contracting planning. To understand any challenges
faced by DOD contracting personnel in closing individual contracts, we
reviewed contract documents for 25 firm-fixed price contracts
purposefully selected to obtain a variety of closeout organizations
and a range of closeout difficulty and interviewed contracting
personnel on their experiences with closing them. We also reviewed the
Task Force's and ACC-RI's monthly closeout data to assess the Army's
progress in closing C3's contracts. In addition, to identify the
factors that affected the completion of audits of cost-type contracts,
we purposefully selected eight contractors based on the number of over-
age task orders, the amount obligated on the contract, and the amount
of unliquidated obligations. We reviewed completed audit reports and
interviewed DCAA officials at headquarters and eight field offices to
determine what factors affected their ability to complete planned
audits associated with those contractors.
To determine the steps DOD has taken to manage the financial risks
associated with closing contracts, we reviewed the DOD Financial
Management Regulation and closeout guidance and interviewed
contracting and financial management personnel at the Office of the
Under Secretary of Defense, Comptroller; Office of the Assistant
Secretary of the Army, Financial Management & Comptroller; Joint
Chiefs of Staff Force Structure, Resources, and Assessment Directorate
(J-8); and USACE Resource Management. In addition, we analyzed
unliquidated obligation data and interviewed contracting and financial
management personnel at each contracting organization we met with to
determine how these funds were managed and if any funds would be
returned to Treasury. We also reviewed contracts with known improper
payments and interviewed DFAS personnel to assess DOD's ability to
recover such payments.
To assess the extent to which DOD captured and implemented lessons
learned from closing contracts in contingency operations, we
interviewed contracting officials at each of the organizations we
visited and reviewed C3 documents on contracting-related problems
encountered in Iraq. We also interviewed senior contracting officials
in Iraq and Afghanistan to identify any changes made in response to
the lessons learned from closing the C3 contracts. We obtained and
reviewed C3 data on the total number of contracts in Afghanistan that
are eligible and over age for closeout to assess its progress in
closing these contracts. We also interviewed Army, Joint Chiefs of
Staff, and Acquisition, Technology, and Logistics' Office of Defense
Procurement and Acquisition Policy officials responsible for setting
policy and issuing guidance to identify changes made to respond to the
problems encountered in Iraq. See appendix I for additional details on
our scope and methodology.
We conducted this performance audit from July 2010 through September
2011 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:
Background:
DOD faces a number of long-standing and systemic challenges that have
hindered its ability to achieve more successful acquisition outcomes,
such as ensuring that DOD personnel use sound contracting approaches
and maintaining a workforce with the skills and capabilities needed to
properly manage the acquisitions and oversee contractors. While the
issues encountered in Iraq and Afghanistan are emblematic of these
systemic challenges, their significance and effect are heightened in a
contingency environment.[Footnote 5] For example, in 2004, we raised
concerns about DOD's ability to effectively administer and oversee
contracts in Iraq, in part because of the continued expansion of
reconstruction efforts, staffing constraints, and the need to operate
in an unsecure and threatening environment.[Footnote 6] Similarly, we
reported in July 2007 that DOD had not completed negotiations on
certain task orders in Iraq until more than 6 months after the work
began and after most of the costs had been incurred, contributing to
its decision to pay the contractor nearly all of the $221 million
questioned by auditors.[Footnote 7] In 2008, we reported that not
having qualified personnel hindered oversight of contracts to maintain
military equipment in Kuwait and provide linguistic services in Iraq
and questioned whether DOD could sustain increased oversight of its
private security contractors.[Footnote 8]
The contract closeout process includes verifying that the goods or
services were provided and that all final administrative steps are
completed, including an audit of the costs billed to the government
and adjusting for any over-or underpayments on the final invoice. To
close a contract, DOD must complete a number of tasks, including
making final payment to the contractor, receiving a release of claims
from the contractor, and deobligating excess funds, among other tasks
(see figure 1). A contract is eligible to be closed once the contract
is physically complete, which is generally when all option provisions
have expired and the contractor has completed performance and the
government has accepted the final delivery of goods or services in the
form of a receiving report or the government has provided the
contractor a notice of complete contract termination.[Footnote 9] From
this point, contracts should be closed within time frames set by the
FAR--6 months for firm-fixed price contracts and 36 months for cost-
type contracts and time and materials contracts. Additional time is
allowed for the closeout of these latter contract types as the
contracting officer and DCAA may need to ensure any incurred costs are
allowable, allocable, and reasonable. Additional time is also needed
to set the final indirect overhead rates, which determine, in part the
contractor's final payment on cost-type contracts.[Footnote 10] When
the contract completion statement, also known as the DD 1594, is
signed by the contracting officer, the contract is considered closed
and contract documents can be stored and retained.
Figure 1: Overview of Contract Closeout Process:
[Refer to PDF for image: illustration]
Contract awarded:
Period of performance.
Contract is physically complete and eligible for closeout:
Receiving report;
Confirm final receipt of goods/services;
For cost-type contracts: Audit indirect cost rates and settle
disallowed costs;
Confirm all invoices, including final, have been paid;
Obtain release of claims;
Deobligate excess funds;
Contract closed.
Signed DD 1594.
Source: GAO analysis of the Federal Acquisition Regulation and DOD
guidance on contract closeouts.
[End of figure]
A contract not closed within the FAR time frames is considered to be
over age for closeout and increases an organization's exposure to a
number of financial issues. If contract closeout does not take place
in a timely manner and funds are not deobligated when currently
available, the agency loses the use of those funds for new
obligations. Even if funds are expired when they are deobligated, the
agency can still use them for up to 5 years after they expire to pay
for authorized increases to existing obligations made from the same
appropriation. Any funds remaining after the 5-year period are
considered canceled and must be returned to Treasury. If closeout does
not take place until after they are canceled, and the agency
identifies a need for the government to pay the contractor for an
unanticipated cost, the government must use other funds that are
currently available. Additionally, the risk of late payments to
contractors increases when contracts are not closed within required
time frames and in turn may result in the government paying interest.
Further, the longer an organization waits to close a contract the more
difficult it becomes to identify and recover improper payments to
contractors. In addition, closing a contract years after the
performance is complete can be more time consuming because key
documentation, such as invoices and receiving reports, and contracting
personnel with first-hand knowledge of the contract may no longer be
available.
DOD's Visibility into the Number of Contracts Eligible for Closeout Is
Hindered by Inadequate Data:
DOD does not have visibility into the total number of its Iraq
contracts eligible for closeout, but our analysis of available data
indicates that relatively few of these contracts will be closed within
the time frames prescribed by the FAR. C3, which awarded the majority
of the Iraq contracts, did not have sufficient internal controls to
ensure its contracting data were accurate and complete, and was
further affected by limitations of its contracting systems, turnover
in contracting personnel, and other competing demands. In 2009, to
help reduce the backlog of contracts to be closed, C3 transferred
66,760 Iraq contracts and 14,336 contracts in which a place of
performance was not specified to the Task Force.[Footnote 11] As it
was unclear how many of these contracts were closed before being
shipped, Task Force personnel are in the process of reviewing each
contract and, as appropriate, closing any open contracts. As of April
2011, however, over 54,000 of these contracts still needed to be
reviewed. DOD officials noted that record keeping generally improved
for C3's firm-fixed price contracts awarded after fiscal year 2008. C3
also improved visibility of its large, cost-type contracts awarded
between fiscal year 2003 and 2010 after delegating contract
administration, including closeout responsibilities, to DCMA Southern
Europe in 2008. Based on available data provided by C3 and the other
DOD contracting organizations we reviewed, there are at least an
additional 4,298 Iraq contracts--90 percent of which are already over
age--that need to be closed.
C3's Visibility into Its Contracting Activity Improved in Fiscal Year
2009 but Reliability of Prior Years' Data Is Questionable:
C3 and its predecessor organizations awarded the majority of DOD's
contracts to support reconstruction and stabilization efforts, yet
weak internal controls, turnover in contracting personnel, and
competing demands contributed to incomplete or inaccurate information
that hindered management oversight of its contracting activities,
including whether it was meeting FAR closeout requirements.[Footnote
12] DOD officials noted C3 did not have a contract writing and
management information system in Iraq between 2003 and 2008, which
contributed to the use of multiple manual databases. Each regional
contracting center awarded manually written contracts and documented
contract actions on independent spreadsheets. C3 and Army officials
noted some of the challenges with manually written contracts included
duplicate or inaccurate contract numbers and inaccurate period of
performance dates. They also noted that each regional contracting
center maintained and managed its contract data on spreadsheets
differently as there was not an Iraq-wide standard for how to maintain
contract data and that data input was often unverified. These contract
documentation challenges were exacerbated by the constant turnover of
contracting personnel and the command's emphasis on awarding contracts
to support the warfighter. Additionally, C3 and Army officials said
that an unknown number of contracts were never input into C3's
database and could not be accounted for because contract files were
lost, damaged, or destroyed.
Our analysis of C3's data on its Iraq contracts found at least 55,000
contracts were recorded as being awarded between fiscal years 2003 and
2008, but we determined that the data had numerous discrepancies.
These discrepancies, which included missing or invalid period of
performance and physical completion dates as well as invalid or
duplicative contract numbers, affect the data needed to maintain
visibility on the contracts eligible to be closed. Army officials
acknowledged that the contract information reflected in C3's database
through fiscal year 2008 was unreliable for determining the actual
number of contracts it awarded or which contracts were eligible to be
closed. Consequently, the Army underestimated the total number of
contracts that the Task Force needed to close. In 2008, the Army
estimated that the Task Force would need to close approximately 24,000
contracts awarded by C3 in Iraq and Afghanistan from 2003 to 2008, but
the Task Force recorded that C3 sent it 103,693 contracts (see table
1). Our analysis of the Task Force's data indicates that C3
transferred at least 66,760 Iraq contracts, including approximately
8,500 more contracts awarded between fiscal years 2003 and 2008 than
what was reflected in C3's database. Additionally, the Task Force
inventoried another 14,336 contracts for which the place of
performance was not specified.[Footnote 13] Army officials stated that
C3 had closed some of these contracts before sending the files to the
Task Force, but acknowledged that the C3 data did not accurately
reflect which contracts were closed. Therefore, the Army required Task
Force personnel to review each contract and close those that remain
open. Army officials stated, however, that there have been no attempts
to reconcile the C3 contracting data with the Task Force's findings.
Table 1: Status of C3 Contracts Inventoried and Reviewed by the Task
Force as of April 2011:
Place of contract performance: Iraq;
Reviewed: 26,735;
Not reviewed: 40,025;
Total contracts inventoried: 66,760.
Place of contract performance: Not specified[A];
Reviewed: 0;
Not reviewed: 14,336;
Total contracts inventoried: 14,336.
Place of contract performance: Afghanistan;
Reviewed: 3,510;
Not reviewed: 19,087;
Total contracts inventoried: 22,597.
Place of contract performance: Total;
Reviewed: 30,245[B];
Not reviewed: 73,448;
Total contracts inventoried: 103,693[C].
Source: GAO analysis of DOD data.
[A] DOD generally uses a DOD Activity Address Code within the contract
identification number to identify the office awarding the contract.
According to C3's Acquisition Instruction, these contracts reflected
Activity Address Codes that were not among those C3 personnel were
authorized to use in Iraq and Afghanistan. We were unable to identify
the place of performance for these contracts because there was no such
data available in the Task Force's database as these contracts have
not yet been reviewed for closeout.
[B] GAO analysis indicates that 30,048 contracts were reviewed and
closed, as appropriate, by Task Force personnel. There were an
additional 129 contracts under review, but not closed, and another 68
contracts under review with a place of performance other than Iraq or
Afghanistan.
[C] Nearly all of the contracts sent to the Task Force were awarded
from fiscal year 2002 to 2008. Task Force data, however, also indicate
that 3,165 Iraq contracts, 2,964 Afghanistan contracts, and 2
unspecified contracts awarded between fiscal years 2009 and 2010 were
sent to the Task Force. We could not determine the award year for
another 287 contracts.
[End of table]
The extent to which the contracts that have not yet been reviewed by
Task Force personnel and will need to be closed is uncertain, in part,
because some that were reportedly closed by C3 still required contract
administration. For example, Task Force personnel stated that
contracts sometimes included a signed DD 1594 even though the
contracts still required administrative actions.
To improve the management of its contracts, C3 began using the
Standard Procurement System in fiscal year 2009. Both Army and C3
officials stated that the Standard Procurement System had better
quality control checks to generate valid contract numbers with
automated prompts requiring contracting personnel to insert required
data fields, such as period of performance, at the time of award.
These officials also said that the quality control checks improved the
completeness and quality of C3's data and provided better insight
needed to manage the contract closeout process. Army officials said
that once the Standard Procurement System was deployed in Iraq, the
regional contracting centers were able to transmit data back to Army
locations in the United States which could be used to run automated
reports on contracts closed, eligible for closeout, and over age for
closeout. Army and C3 officials acknowledged that while the data
improved, C3 continued to identify problems with the data input by
contracting personnel. In a July 2010 memorandum, C3 directed its
personnel to take actions to improve the overall quality, accuracy,
and timelines of C3's contracting actions. For example, it identified
specific data fields, including those that help to determine a
contract's eligibility for closeout, that personnel are required to
capture in C3's data systems.
C3 obtained better visibility of its firm-fixed price contracts
awarded in fiscal years 2009 and later as well as their large, cost-
type contracts. C3's data on these firm-fixed price contracts
indicates that C3 closed over 9,600 of its Iraq contracts awarded
between fiscal years 2009 and 2010. Similarly, DOD officials indicated
that C3 had better visibility of its large, cost-type contracts
awarded between fiscal years 2003 and 2010, in part because it
generally delegated contract administration for these contracts,
including closeout responsibilities, to DCMA Southern Europe in 2008.
DCMA officials reported that when it accepted C3's cost-type
contracts, the files were in generally poor condition and missing
documents. DCMA officials reported, however, that they devoted the
resources necessary to collect missing information for these contracts
and developed their own data to manage the closeout of these contracts
and task orders. Our analysis of these firm-fixed price and cost-type
contracts indicates that 97 percent were over age as of May 2011 (see
table 2).
Table 2: Closeout Status for Selected C3 Contracts as of May 2011:
Fiscal year awarded: 2009-2010;
Contract type: Firm-fixed price;
Eligible to close: 3,282;
Over age: 3,192;
Percent over age: 97%.
Fiscal year awarded: 2003-2010;
Contract type: Cost-type;
Eligible to close: 109;
Over age: 106;
Percent over age: 97%.
Fiscal year awarded: Total;
Eligible to close: 3,391;
Over age: 3,298;
Percent over age: 97%.
Source: GAO analysis of DOD data.
[End of table]
Other DOD Organizations Had Better Visibility of Contracts, but
Challenges Remain for Closeout:
ACC-RI, AFCEE, and USACE officials indicated that the use of existing
contracting systems at the onset of military operations in Iraq
provided them better visibility into the number of contracts they had
awarded to support efforts in Iraq. Agency officials acknowledged,
however, that they sometimes encountered challenges with using their
existing systems. For example, USACE officials noted that the standard
reports used to determine which Iraq contracts needed to be closed
were initially inaccurate because period of performance or physical
completion dates were not correctly entered into their contracting
systems. As a result, USACE officials found in March 2011 that USACE's
closeout reports underestimated the number of contracts eligible and
over age for closeout due to inaccurate period of performance dates.
USACE revised its reports using period of performance dates from other
data sources, which identified that 639 contracts were eligible to be
closed, more than 300 contracts than its initial report reflected.
Similarly, AFCEE's data indicate that the period of performance ended
for 154 of its Iraq contracts but the data did not reflect whether
final goods and services had been delivered and whether the contract
was physically complete. Our analysis indicates that the period of
performance ended at least 3 years ago for 37 of these contracts, but
AFCEE personnel stated that they cannot close these contracts until
they receive final documentation that the goods and services have been
delivered. Overall, we estimate that about 66 percent of these
organizations' 907 eligible contracts are over age (see table 3).
Table 3: DOD Iraq Contracts Reported Eligible and Over Age for
Closeout:
Contracting organization: ACC-RI LOGCAP;
Contract type: Cost-type;
Eligible to close: 18;
Over age: 17;
Percent over age: 94%.
Contracting organization: AFCEE;
Contract type: Firm-fixed price;
Eligible to close: 5;
Over age: 4;
Percent over age: 80%.
Contracting organization: AFCEE;
Contract type: Cost-type;
Eligible to close: 222;
Over age: 83;
Percent over age: 37%.
Contracting organization: AFCEE;
Contract type: Time and materials;
Eligible to close: 23;
Over age: 9;
Percent over age: 39%.
Contracting organization: USACE;
Contract type: Firm-fixed price;
Eligible to close: 572;
Over age: 463;
Percent over age: 81%.
Contracting organization: USACE;
Contract type: Cost-type;
Eligible to close: 63;
Over age: 20;
Percent over age: 32%.
Contracting organization: USACE;
Contract type: Time and materials;
Eligible to close: 4;
Over age: 0;
Percent over age: 0.
Contracting organization: Total;
Eligible to close: 907;
Over age: 596;
Percent over age: 66%.
Source: GAO analysis of data reported by contracting organizations
between January and June 2011.
[End of table]
Our analysis of data provided by these contracting organizations
reflects a higher percent of eligible firm-fixed price contracts that
are over age compared to eligible cost-type contracts, in part due to
the longer period of time allowed by the FAR to close out cost-type
contracts.[Footnote 14] For example, our analysis indicates that about
81 percent of the firm-fixed price contracts eligible to be closed
were over age compared to approximately 40 percent of eligible cost-
type contracts. Nevertheless, these organizations have closed few of
their cost-type Iraq contracts. For example, USACE data indicate that
it had closed 7 of its 77 Iraq cost-type contracts and AFCEE had
closed just 10 of its 239 Iraq cost-type contracts awarded since 2003.
Planning, Workforce, and Contractor Accounting Issues Hinder Efforts
to Close Contracts:
DOD's ability to close the contracts it awarded to support efforts in
Iraq is hindered by several factors, including the failure to plan for
or emphasize the need to close these contracts until reconstruction
efforts were well underway, staffing shortfalls, and contractor
accounting issues. DOD did not plan for or focus on closing its Iraq
contracts until 2008, in part because DOD's contingency contracting
policy and guidance do not emphasize the need to plan for contract
closeouts during the early stages of a contingency operation. DOD has
taken steps to reduce the number of firm-fixed price contracts it
needs to close, but ACC-RI has not been able to hire enough personnel
to replace Task Force personnel during the transition of closeout
responsibilities, which has slowed these efforts. Similarly, efforts
to close its large, cost-type contracts is hindered by staffing
shortages at DCAA and unresolved issues with contractors' cost
accounting practices that preclude completing the necessary audits of
the contractors' incurred costs. As a result, DOD is unlikely to close
226 cost-type contracts with over $19.1 billion in obligations in the
near future.
DOD Doctrine and Policy Do Not Emphasize Advanced Planning for
Closeout:
DOD contingency contracting doctrine and policy do not specifically
include closeout as part of the advanced planning for a contingency
operation. Since 2006, a contract support integration plan annex
termed Annex W--which provide details on the contractor support
required during a contingency, including the military's organizational
requirements needed to acquire and oversee such support--has been
required to be in DOD's most detailed operation plans.[Footnote 15] In
October 2008, DOD established its first doctrine to standardize
guidance for planning, conducting, and assessing operational contract
support integration, contractor management functions, and contracting
command and control in support of joint operations in its Joint
Publication 4-10, Operational Contract Support.[Footnote 16] In part,
this doctrine provides guidance for contingency contracting
requirements that should be planned for within the Annex W. While it
states that an Annex W should outline all activities necessary to
execute contract support integration requirements in an operational
area, it does not specifically direct DOD commands to determine an
approach for closing contracts in advance or even during the initial
stages of a contingency operation. Joint Publication 4-10 advises that
contracts be closed as performance is completed, consistent with the
requirements established in the FAR, but makes no reference for the
need to plan for the resources needed to close contracts within
required time frames. Instead, contract closeout is described as part
of the redeployment and contract termination phase, the fourth and
final operational phase of a contingency. In 2009, DOD issued a
template for planners to use when developing Annex Ws and plans to
incorporate the template into planning policy. The template does not,
however, specifically call attention to the need to plan for the
closeout of contracts. Furthermore, in March 2010, we reported that
few of the operation plans approved by the Secretary of Defense or his
designee even included an Annex W and when they did, those annexes
restated broad language from DOD's high-level guidance on operational
contract support.[Footnote 17]
The contracting organizations included in our review generally did not
conduct any planning to close the contracts they awarded to support
operations in Iraq until several years after the contracts were
initially awarded. DOD officials noted that the department initially
assumed that post-conflict stability and reconstruction efforts would
not last for an extended period and as such, any organization that
awarded contracts to support these efforts would close contracts under
the organization's standard processes. Officials acknowledged that as
these efforts continued and the level of contracting activity
increased, C3's predecessors attempted to close contracts as time and
resources permitted, but did not develop a plan needed to do so. For
example,
* The Army did not develop a plan to close its Iraq contracts until
2008, long after reconstruction efforts were underway in Iraq.
According to the Army, the 2007 Gansler Commission report's finding
that only 5 percent of eligible Iraq contracts were closed prompted
the Army to begin planning for and taking steps to address the backlog
of over-age Iraq contracts. To do so, in October 2008, the Army
established the Task Force and delegated responsibility to DCMA
Southern Europe to close a number of C3's cost-type contracts.
* According to USACE personnel, they began focusing on contract
closeouts after the Army identified that the Army had more than
660,000 over-age contracts as of January 2009 and established a goal
to close all of its over-age contracts by the end of fiscal year 2011.
In January 2011, USACE established a contract closeout cell in
Winchester, Virginia.
* AFCEE personnel, with 96 over-age Iraq contracts, stated they have
not developed an Iraq contract closeout plan and continue to close
these contracts as part of their routine contracting activities. AFCEE
personnel stated, however, only two contracting personnel are assigned
to closing the Iraq contracts and do so only when time and other
responsibilities permit.
Commands Focused Limited Staff Resources on Awarding Contracts:
DOD officials also noted that the need to focus limited staff
resources on fulfilling urgent requirements in support of the war
effort, and other contingency-related challenges, contributed to the
backlog of contracts to be closed. One senior Army official noted that
as there were not enough contracting officers in theater to handle
both awards and closeouts, the command focused its attention on
awarding contracts. Similarly, C3 and USACE contracting personnel we
spoke with stated that they were responsible for awarding,
administering, and closing contracts, but to meet urgent requirements,
they prioritized contract awards over other activities. In addition,
an Army official noted that contracting personnel have little
incentive to close contracts, as their success is often measured by
contracts awarded. Contracting personnel who are responsible for
closing contracts stated, however, that emphasis on timely contract
closeout is especially important in a contingency environment because
the longer the time from when the contractor completes its work and
when the contract is closed, the more difficult it becomes to
determine the status of contracts, resolve documentation and
administration issues, obtain a release of claims, and negotiate final
payments. For example,
* To close a $16.8 million guard services contract, contracting
personnel in Iraq described the process of determining how payments
were made as "putting together pieces of a puzzle." Personnel stated
that they spent several weeks identifying what the contractor billed
and was paid by reviewing invoices, contract modifications, and e-
mails.
* Similarly, contracting personnel in Iraq stated that resolving an
overpayment of over $500,000 has delayed the closeout of another $17
million guard services contract. The contracting officer who awarded
and administered the contract was no longer in Iraq when the
contracting personnel began closing the contract. These personnel
stated that they relied on e-mails in the contract file and obtained
payment information from DFAS to determine the extent to which the
contractor was overpaid and are awaiting further guidance from DFAS on
what steps are needed to recover funds from the contractor.
* Task Force personnel noted that while closing a $1.3 million
contract for life support services, they found that there was no
documentation in the contract file to explain why services were not
performed at three camp sites listed in the contract. The contractor
told Task Force personnel that he was instructed not to perform the
services but was never provided anything in writing. Task Force
personnel noted that the contractor then refused to sign the release
of claims, so personnel unilaterally deobligated the remaining funds
on the contract to close the contract.
* According to one senior C3 official, contracting officers sometimes
relied on documents provided by the contractor to resolve claims
because they were not maintained in the contract files. In one
instance, while closing a vehicle lease contract, C3 personnel stated
that they found 149 damage claims for vehicles, but oversight
personnel often did not keep records or pictures of the condition of
the vehicles when they were picked up and dropped off by the
contractor. The contracting personnel stated that they are
coordinating with the payment office and resource managers but said
that it may not be possible to locate someone who can verify or
dispute the claims.
Task Force personnel stated that they often needed to perform routine
contract administration tasks on contracts, including reconciling
payments and obligations, acquiring receiving reports, contacting
contractors in theater to obtain invoices and release of claims, and
piecing together incomplete contract files to provide reasonable
assurance that the government received what it paid for and the
contract could be closed. Task Force personnel illustrated some of the
challenges they often encounter in the following two examples:
* In one case involving the closeout of a $55 million contract for
shotguns, goggles, and radios, Task Force personnel stated that they
had to reconcile payments against nine different task orders because
payments were not made to the correct task orders, including one lump-
sum payment for $8 million that did not correspond to any task order,
and the contract was missing receiving reports and payment documents.
Task Force personnel contacted DFAS to determine how much should have
been paid on the task order and verified payments through a data
system. Task Force personnel eventually closed all of the task orders
between March and December 2010.
* During the closeout of another contract for $101,000 to lease buses
from an Iraqi contractor, Task Force personnel found that the
contractor was not paid for 1 month of service and not compensated for
damages to two of the buses. After contacting DFAS and determining
that there were enough funds on the contract to cover the missing
payment and repair costs, Task Force personnel notified the payment
office to make a final payment to the contractor. Task Force personnel
were able to close the contract after the contractor was paid and a
release of claims was received.
Workforce Challenges Associated with Transitioning Closeout
Responsibilities Have Reduced Capacity to Close Firm-Fixed Price
Contracts:
C3 has taken steps to reduce the number of firm-fixed price contracts
it needs to close, but difficulties with hiring ACC-RI personnel have
slowed these efforts. The Army and C3 initially established the Task
Force to address the backlog of C3's firm-fixed price contracts
awarded before fiscal year 2009 and planned at that time to close any
contracts awarded in fiscal year 2009 and later in theater. To ensure
the contracts remaining in theater were closed, a senior C3 official
established closeout goals in October 2010 and required each regional
contracting center to appoint personnel responsible for completing
contract closeout. While Army data indicate that progress was made in
closing contracts in Iraq, C3 officials told us that closeout goals
were tracked informally and acknowledged that some regional
contracting centers were unable to meet these goals. By February 2011,
the Army changed its strategy and decided that when the Task Force is
shut down in September 2011, all C3 contracts, including those awarded
after fiscal year 2009, would eventually be transferred to ACC-RI for
closeout. According to C3's commanding general, this decision was made
because ACC-RI has a workforce that can handle complex contract
actions and has expertise in southwest Asia contracting.
By June 2011, the Army had transferred about 15,000 Iraq and
Afghanistan contracts awarded between fiscal years 2008 and 2010 from
the Task Force to ACC-RI. According to the Army, ACC-RI personnel are
in the process of inventorying these contracts and identifying which
are closed or require additional administration. Army officials stated
that they are reviewing ACC-RI closeout procedures and data collection
efforts to ensure Army data are accurate and complete.
During this transition period, ACC-RI has not been able to hire the
number of individuals it estimated it needed to manage the anticipated
workload and the number of contracts reviewed and closed by the Task
Force has fallen considerably. According to Army officials, ACC-RI
will need to hire 25 individuals by the time it fully assumes the Task
Force's responsibilities. Army officials stated that ACC-RI has
experienced challenges hiring contracting personnel in part due to
potential applicants' hesitation to accept these positions, which are
term positions that expire by October 2012. Army officials stated as
of June 2011, ACC-RI had only hired 4 staff but efforts are underway
to hire additional personnel. Until these positions can be filled,
other ACC-RI personnel are temporarily supporting the closeout
efforts. In addition, in July 2011, the ACC-RI issued a task order for
contract closeout support to AbilityOne, which provides job
opportunities on federal contracts for individuals who are blind or
have other disabilities. According to one ACC-RI official, ACC-RI
plans to hire nine AbilityOne employees under this contract. It
remains uncertain, however, when the Army will be able to review and,
as necessary, close the contracts that remain at the Task Force.
Similarly, Army officials stated that the Task Force's capacity to
close contracts has decreased, as 10 of its 25 staff have resigned in
advance of the Task Force's planned closure. During the week of
September 3, 2010, the Task Force closed 439 contracts but by the week
of June 9, 2011, the Task Force only closed 267 contracts.
Limited DCAA Staffing and Unresolved Contractor Accounting Challenges
Hinder Closeout of Cost-Type Contracts:
DOD's efforts to close its large, cost-type contracts are hindered by
staffing shortages at DCAA and unresolved issues with contractors'
cost accounting practices. DOD reported that it had 226 over-age, cost-
type Iraq contracts with approximately $19.1 billion in obligations
(see table 4). A critical step to closing these contracts is to
determine how to allocate a contractor's general administrative and
overhead costs to each of its contracts. To do so, DCAA performs
annual incurred cost audits on a contractor-by-contractor basis--
versus a contract-by-contract basis--by reviewing incurred cost
proposals from the contractor for each year of performance. DCAA
auditors test direct and indirect costs to determine whether they are
allowable, allocable, and reasonable. The direct and indirect costs
form the basis for DCAA's recommended indirect cost rate, which is
usually used by the contracting officer to negotiate a final rate with
the contractor. When the indirect cost rate for the final year of
contract performance is settled and the final price of the contract is
determined, contract closeout may proceed.
Table 4: Number of DOD Cost-Type Contracts Related to Iraq Eligible
for Closeout:
Contracting organization: ACC-RI LOGCAP;
Number of eligible contracts: 18;
Number of over-age contracts: 17;
Obligations on over-age contracts: $14.8 billion.
Contracting organization: C3;
Number of eligible contracts: 109;
Number of over-age contracts: 106;
Obligations on over-age contracts: $2.6 billion.
Contracting organization: AFCEE;
Number of eligible contracts: 222;
Number of over-age contracts: 83;
Obligations on over-age contracts: $1.4 billion.
Contracting organization: USACE;
Number of eligible contracts: 63;
Number of over-age contracts: 20;
Obligations on over-age contracts: $0.3 billion.
Contracting organization: Total;
Number of eligible contracts: 412;
Number of over-age contracts: 226;
Obligations on over-age contracts: $19.1 billion.
Source: GAO analysis of data reported by contracting organizations
between January and July of 2011.
[End of table]
DOD's cost-type contracts related to Iraq often spanned multiple years
and as such DCAA must complete incurred cost audits for each year of
performance. For example, on one contract with performance from 2004
through 2008 and 5 divisions of the contractor claiming costs, DCAA is
required to complete 25 audits of costs incurred, one for each year of
performance per division. DCAA, however, is still completing audits
for this contractor for costs incurred in 2004 and 2005, with audits
of the remaining years scheduled for 2011 and after. DCAA officials
told us that this condition is due in part to a DCAA-wide shortage of
auditors. DCAA data indicates that from fiscal years 2000 to 2011, its
workforce grew by 16 percent while DOD research and procurement
spending, an indicator of DCAA's workload, increased by 87 percent. In
addition, DCAA officials stated that in response to GAO's finding in
2009 on problems with DCAA's audit quality, including insufficient
testing of contractors' support for claimed costs, DCAA now requires
more testing and stricter compliance with government auditing
standards, which adds to the amount of staff time required to complete
each audit.[Footnote 18] DCAA officials stated that as their workload
increased and resources remained relatively constant, auditors
prioritized time-sensitive activities, such as audits to support new
awards, and incurred cost audits were not completed, creating a
backlog.
In planning for its fiscal year 2011 workload requirements, DCAA
determined that it had the resources to complete only about half of
its entire portfolio of required audits and activities, including both
Iraq and non-Iraq work. As a result, DCAA prioritized its high-risk
audits, which included the backlog of incurred audits for C3's 106
over-age, cost-type contracts. As of July 2011, DCAA reported that of
the 116 incurred cost audits needed to close these C3 contracts, it
had completed 27 audits and estimated another 19 audits will be
completed by the end of fiscal year 2011. The remaining 70 audits are
planned to be completed after fiscal year 2011. DCMA contracting
officials responsible for closing C3's cost-type contracts stated that
regardless of whether DCAA completes the 19 audits as planned, none of
the C3 contracts can be closed by the end of fiscal year 2011 because
most of the contractors claimed costs through 2008 or 2009, and the
audits will only be completed for costs incurred mostly through 2004
and 2005. Further, there are an additional 31 AFCEE over-age cost-type
contracts that will not have final incurred cost audits completed
before the end of fiscal year 2011.
To address its resource challenges, DCAA officials reported that it
hired over 500 new employees in the past 2 years. DCAA has also
requested authority to hire 200 auditors per year over each of the
next 5 years. DCAA officials noted, however, that it often takes
several years before auditors are properly trained to conduct an
incurred cost audit. In addition, in January 2011, DOD issued a
memorandum that shifted some audit responsibilities, such as lower
dollar price proposal audits and purchasing system reviews, to DCMA to
allow DCAA to devote more resources to high-risk work, like the
incurred cost audits needed to support the closeout of Iraq contracts.
DCAA officials also stated that they plan to dedicate additional
auditors to solely focus on conducting incurred cost audits in fiscal
year 2012.
DCAA has identified a number of deficiencies at major defense
contractors, which provided support in Iraq, that need to be resolved
before the incurred cost audits can be completed. These deficiencies
include:
* inadequate incurred cost proposals and cost documentation;
* inadequate contractor business systems;
* accounting practices that are not compliant with cost accounting
standards,[Footnote 19] leading to misallocation of costs;
* delays in providing DCAA access to needed records;
* disputes with contractors over unallowable costs; and:
* other challenges, such as those due to ongoing litigation.
The following examples illustrate the challenges that DCAA reported
for several contractors.
* Due to inadequate incurred cost proposals, DCAA has completed
incurred costs audits only through 2003 for one major Iraq contractor
that incurred costs through 2010. In total, DOD has $15.3 billion in
obligations on over-age, cost-type Iraq contracts awarded to this
contractor. DCAA reported that it issued the 2003 incurred cost audit
5 years after the costs were incurred, in part because the contractor
repeatedly submitted inadequate incurred cost proposals and did not
provide adequate support for costs (see figure 2). Further, DCAA
officials stated that the incurred cost proposals submitted by the
contractor for 2004 through 2009 are inadequate but will continue its
audits of the 2004 and 2005 proposals.
Figure 2: Incurred Cost Audit for One Major Iraq Contractor's 2003
Costs Was Delayed Until 2008 Due in Part to Repeated Inadequate
Proposal Submissions:
[Refer to PDF for image: timeline]
December 2003:
Contractor year ends.
October 2004:
Contractor submits incurred cost proposal.
April 2005:
DCAA deems proposal inadequate.
March 2006:
Contractor resubmits incurred cost proposal.
July 2006:
DCAA deems revised proposal inadequate.
September 2007:
DCAA provides list of inadequately supported transactions to
contractor.
April 2008:
DCAA issues 2003 incurred cost audit report.
Source: GAO analysis of DCAA's incurred cost audit report.
[End of figure]
* Additionally, DCAA reported that this contractor had deficient
accounting systems, unresolved issues associated with unallowable
costs, noncompliant accounting practices, and legal investigations
that further delayed incurred cost audits. In 2006, DCAA reported that
the contractor had significant deficiencies in its accounting system
that resulted in the contractor charging over $370 million to
incorrect task orders from 2002 to 2004, requiring reclassification of
costs to the proper task orders. The reclassifications were completed
in January 2005. Then, in 2009 and 2010, DCAA found over $185 million
in unallowable costs that are pending negotiations with DCMA and
settlement of contractor claims. In 2010, DCAA auditors found the
contractor did not comply with the cost accounting standard associated
with insurance costs, which resulted in an estimated $1.6 million in
costs that were misallocated. DCAA reported that the contractor did
not respond to DCAA's finding because it had not completed its
management review of the allocated costs. Further, according to the
auditors, DCAA's incurred cost audit reports could be delayed as the
auditors coordinate the issuance of audit reports with various
investigative agencies. DCAA auditors do not expect to complete the
2004 and 2005 incurred cost audits for this contractor before the end
of fiscal year 2011. In May 2011, the contractor withdrew its 2006
through 2009 incurred cost proposals and stated that it plans to delay
its submission of the 2010 incurred cost proposal until November 2011.
* For another major contractor, DCAA identified that the contractor's
accounting practices were not compliant with cost accounting
standards. DOD has $316 million in obligations on over-age, cost-type
Iraq contracts awarded to this contractor with performance between
2004 and 2009. DCAA reported in 2006 that the contractor's accounting
practices did not sufficiently remove unallowable costs from a cost
proposal, which DCAA auditors stated put additional onus on them to
test whether the costs were allowable. In one case, DCAA auditors
found the contractor had included over $500,000 in bonuses to senior
executives in the incurred cost proposal, even though these costs are
expressly unallowable under law. The contractor disagreed with DCAA's
findings but agreed to remove these costs from its proposal. As of
July 2011, DCAA has completed 5 of the 18 incurred cost audits
required to close the contracts.
* DCAA identified deficient subcontract management systems, disputes
over unallowable costs, and challenges with access to records as
contributing to delays in completing incurred cost audits for another
contractor. DOD has $212 million in obligations on over-age, cost-type
Iraq contracts awarded to this contractor. In 2005, 2006, and 2009,
DCAA auditors reported significant deficiencies in the contractor's
subcontract management system that resulted in potential unreasonable
and unallowable costs being billed to the government, subcontracts
being awarded noncompetitively, and inadequate price analysis. As a
result, DCAA auditors had to audit the subcontractors' costs, even
though doing so is generally the prime contractor's responsibility.
The contractor generally disagreed with DCAA's findings but stated it
would evaluate and revise its procedures where necessary to comply
with DCAA's recommendations. In addition, in 2010 and 2011, DCAA
auditors reported the contractor had over $22.5 million in unallowable
subcontract costs, some of which have been appealed by the contractor
and some of which are being settled by DCMA. Finally, in 2010, DCAA
auditors repeatedly requested but were denied access to support for
the 2006 incurred cost proposal, including a $2.3 million procurement
file. DCAA reported that its auditors requested the data over a period
of 5 months and stated that when the contractor provided the data,
they were still inadequate in supporting the claimed costs. DCAA
auditors stated as a result, it deemed those costs as unallowable for
reimbursement.
DOD has taken steps to address the challenges with auditing
contractors' incurred costs. For example, effective June 2011, the FAR
was revised to list the minimum information that contractors must
include for proposals to be adequate to address the delays resulting
from inadequate incurred cost proposals. Also, to improve its
oversight of contractor business systems, DOD revised the Defense
Federal Acquisition Regulation Supplement in May 2011 to more clearly
define contractor business systems, including accounting, estimating,
and purchasing, and to allow payments to be withheld from contractors
if their business systems contain significant deficiencies.
DOD Has Taken Steps to Mitigate Potential Loss or Misuse of Funds but
Limited Visibility into Its Contracts Hinders Such Efforts:
DOD has taken steps to identify unspent contract funds and recover
improper payments, but limited visibility into its contracts has
hindered such efforts. For example, DOD has deobligated some funds to
make them available to meet other DOD needs, but there remains at
least $135 million that will potentially not be available for use by
DOD at the end of fiscal year 2011. DOD generally cannot identify to
which contracts these funds are associated. Additionally, instances of
improper payments and potential fraud were sometimes found years after
final deliveries were made, but contracting personnel may not be able
to recover funds owed to the government.
DOD's Efforts to Prioritize the Deobligation of Funds that Will Return
to Treasury at the End of the Fiscal Year Are Affected by Poor
Visibility into Its Contracts:
DOD prioritizes deobligating funds that may potentially be returned to
Treasury at the end of each fiscal year so these funds would be
available for other DOD uses. DOD contracting organizations, however,
have varying degrees of visibility into the amount of funds remaining
on their Iraq contracts. Contracting organizations we met with
generally could not identify the total and unliquidated obligations
associated with their Iraq contracts, in part because the systems used
to track contracting information were not linked with systems used to
track financial and payment data. Similarly, DOD resource managers,
who are responsible for maintaining information on the availability of
funding, tracked unspent funds at the appropriation level but did not
always have such information on a contract-by-contract basis. DOD
estimates that at least $135 million in contract funding could return
to Treasury by the end of fiscal year 2011 if not deobligated but
there may be additional funds not yet identified (see table 5).
Table 5: Estimated Iraq Contract Funding that Potentially Could Return
to Treasury at the End of Fiscal Year 2011:
Contracting organization: C3[A];
Estimated amount of funds: $18.6 million.
Contracting organization: AFCEE[B];
Estimated amount of funds: unknown.
Contracting organization: USACE[C];
Estimated amount of funds: $104.9 million.
Contracting organization: ACC-RI LOGCAP[D];
Estimated amount of funds: $12.3 million.
Contracting organization: Total;
Estimated amount of funds: $135.8 million.
Source: GAO analysis of DOD data.
[A] Estimates for C3 include both cost-type and firm-fixed price
contracts and are as of May and June 2011, respectively.
[B] AFCEE did not track these data for their contracts in theater.
[C] Estimates for USACE are as of March 2011.
[D] Estimates for LOGCAP are as of June 2011.
[End of table]
C3, AFCEE, and USACE contracting organizations generally do not track
unspent funds that could be returned to Treasury on a contract-by-
contract basis. As a result, resource management personnel stated they
are responsible for notifying contracting personnel of these funds.
Resource management personnel, however, reported that identifying the
appropriate contracting personnel can be time-consuming and labor-
intensive, in part because of the rapid turnover of contracting
personnel, which often caused the contact information listed in the
data systems to be invalid. Contracting personnel stated that once
they were aware that funds may be potentially returned to Treasury,
they took steps to prioritize deobligating these funds, including
checking whether there were pending invoices or claims requiring
payments. For example:
C3 did not maintain visibility of unspent funds at the contract level,
in part due to limitations in its contracting and financial management
systems, but available data indicate that DOD may lose $18.6 million
for its use and which will be returned to Treasury at the end of
fiscal year 2011. While C3 officials noted that some contracting
officers may have tracked unspent funds for contracts for which they
were responsible, we found that C3's contracting data systems did not
maintain such financial data. After being delegated closeout
responsibility for C3's large, cost-type contracts, DCMA Southern
Europe undertook efforts to manually track unspent funds on a contract-
by-contract basis. DCMA personnel reported that $15.0 million of funds
that could be returned to Treasury remained on C3's cost-type
contracts as of May 2011, but anticipated having most of these funds
deobligated by the end of July 2011. Similarly, without visibility
into which firm-fixed price contracts had unspent funds, Task Force
personnel focused their efforts on reviewing C3 contracts awarded in
fiscal year 2006 to deobligate funds but told us they do not believe
they will be able to close all of these contracts before these funds
are returned to Treasury. Resource managers at U.S. Army Central--
which manages the funds associated with C3's contracts--stated they
believe that, as of June 2011, $3.6 million on these contracts will
potentially be returned to Treasury.
AFCEE contracting personnel stated that they generally do not maintain
visibility into AFCEE's unspent funds at the contract level. For
AFCEE's own contracts, contracting personnel generally deobligate
funds down to 10 percent of the total obligated amount, or $100,000,
whichever is less, to pay for any additional costs that may be
identified during DCAA's incurred cost audits. AFCEE contracting
personnel reported that for these contracts, they do not believe any
funds will be returned to Treasury at the end of fiscal year 2011.
AFCEE contracting personnel stated that for the contracts awarded on
behalf of other organizations, they are notified by the customers of
unspent funds on an ad-hoc basis. AFCEE contracting personnel stated
that they prioritize the deobligation of these funds when they are
made aware of them, but do not track the total amount of funds that
may be returned to Treasury.
USACE contracting personnel stated that they do not maintain
information on unspent funds on a contract level, but rather USACE
resource managers tracked funds at the account level. For these
accounts, USACE resource managers notify contracting personnel, who
attempt to identify which contracts are associated with these funds
and, as appropriate, take steps to deobligate these funds. USACE
reported, however, that $104.9 million have not been deobligated as of
March 2011. USACE personnel stated that a majority of these funds are
on contracts awaiting DCAA audits.[Footnote 20]
Conversely, ACC-RI's LOGCAP office tracked funds that could be
returned to Treasury on a contract-by-contract basis. ACC-RI
contracting personnel stated that they hold weekly meetings with the
contractor and resource managers to reconcile financial records and
identify funds that could be deobligated. ACC-RI personnel told us
that $12.3 million of funds that could be returned to Treasury have
not been deobligated as of June 2011, but anticipated having most of
these funds deobligated by the end of July 2011.
DOD Incurred Unnecessary Costs because Improper Payments Were
Discovered Late:
In some instances, DOD discovered improper payments during the
contract closeout process years after the contractors delivered the
final good or service, but some attempts to recover overpayments were
unsuccessful and, at times, late payments to contractors resulted in
interest fees.[Footnote 21] According to DFAS personnel responsible
for recovering overpayments made on some Iraq contracts, if contracts
were closed immediately after final payments are made, overpayments
could be discovered earlier, which increases the likelihood of
recovering payments. For example, when the contractor is still
conducting business with the government, DFAS can reduce payments on
one contract to offset overpayments made on another contract. Task
Force personnel noted that for a 2005 vehicle lease contract,
contracting personnel in theater found the contractor was overpaid by
over $41,000 on several invoices and subsequently DFAS withheld
payments on several of the contractor's other contracts to completely
offset the overpayment. DFAS personnel, however, stated that the more
time that has passed from when the contractor was mistakenly paid, the
more difficult it becomes to recover those payments because the
contractor may no longer be in business with the U.S. government or
may have changed address or name. In several instances, overpayments
on contracts for goods or services delivered in 2007 or earlier were
not referred to DFAS until 2010 (see table 6). DFAS personnel stated
that in these cases, despite numerous attempts to contact the
contractor, they have yet to recover the overpayments. As of June
2011, two of the contracts have been referred to Treasury and one
contract has been referred to another DFAS office for further debt
collection efforts.
Table 6: Examples of Contracts with Overpayments that Were Not
Recovered:
Description of contract good or service: Gymnasium;
Delivery date: 10/8/2004;
Date referred to DFAS: 8/18/2010;
Amount of unrecovered overpayment: $104,696.
Description of contract good or service: Linguist building
construction;
Delivery date: 3/11/2007;
Date referred to DFAS: 9/27/2010;
Amount of unrecovered overpayment: $170,000.
Description of contract good or service: Latrines with servicing;
Delivery date: 10/31/2007;
Date referred to DFAS: 10/5/2010;
Amount of unrecovered overpayment: $27,200.
Source: GAO analysis of Task Force and DFAS data.
[End of table]
In a few instances, Task Force personnel did not refer overpayments to
DFAS because they determined the excess payments were relatively small
in value or unlikely to be recovered. For example, Task Force
personnel found that the U.S. government overpaid a contractor by
$8,100 for trash services provided in 2006 and 2007. After
unsuccessful attempts to contact the contractor, Task Force personnel
closed the contract in 2009, noting that so much time had passed since
the final payment that it was unreasonable to expect that the
overpayment could be recovered.
C3 is unable to mitigate the amount of interest payments that may be
associated with late payments because the contracting and financial
management systems cannot identify which contracts still require
payment, especially for contracts awarded between 2003 and 2007. Task
Force personnel stated that given the limitations of these systems,
they must review the contract file to determine whether a contract
requires additional payment. For example, while closing a $94,500
contract for vehicle lease services in Iraq, Task Force personnel
discovered the contractor may not have been paid for 2 months' worth
of vehicle lease services, so the Task Force is attempting to contact
personnel in theater to confirm whether services were rendered.
Additionally, some contracts requiring final payments were not paid
until years after the final delivery, which resulted in interest
payments. DFAS personnel reported that DFAS has paid $2.8 million in
interest payments on Iraq contracts as of June 2011, though it is not
possible to determine the amount of interest payments associated with
over-age contracts.
DOD took steps to improve its payment processes in Iraq, but some
challenges with timely payments remain. According to DFAS officials,
in 2008, DFAS became responsible for making payments for contracts
awarded in theater with obligations of $25,000 or more and in 2010
DFAS and C3 agreed to lower this threshold to $3,000. DFAS officials
stated this decision was made to improve internal controls by ensuring
that adequate documentation was available before payments are made in
theater. DFAS officials noted, however, there were some payment delays
because payment documentation requirements were not always met. One C3
official noted that these payment processing delays led to some Iraqi
vendors being unwilling to do business with the U.S. government and
walking off job sites. C3's commanding general stated that when
contracts are not closed out and vendors have not been paid for goods
and services that they provided to the U.S. government, this
contributes to negative perceptions about Americans.
Finally, late contract closeouts may hinder efforts to identify and
address potential fraud found on the C3 contracts because they were
reported to investigators years after the potential fraudulent
activities took place and the contract files were poorly maintained.
As Task Force personnel reviewed and closed C3 contracts, they
identified 151 contracts with potential fraudulent activities and
referred these contracts to the Army's Criminal Investigations
Division. For example, in one contract for a cable fiber network, Task
Force personnel stated that they found evidence that the contracting
officer had made a payment of $84,000 in cash, but the contractor's
invoice was only for $64,000. There was no documentation in the file
to account for the $20,000 difference between the disbursement and
invoice, so Task Force personnel referred this case to the Army's
criminal investigators. According to an Army investigator, it was
difficult to determine whether this case and other cases were due to
fraudulent activity or contracting errors, in part because the
contracts did not have enough documentation to build a case.
Furthermore, the Army investigator stated that many of the referred
contracts had been awarded many years ago so following up on these
cases has been challenging, as many of the contracting personnel and
contractors involved are no longer available.
Growing Backlog of Afghanistan Contracts Suggests Problems Related to
Closing Contracts Will Continue:
DOD reported that actions are underway to address the lessons learned
in Iraq, including developing deployable contract management systems
and explicitly requiring that contract closeout requirements be
incorporated into contingency contracting planning documents. DOD
officials acknowledge, however, they are likely to face similar
problems with closing contracts awarded to support efforts in
Afghanistan. For example, the backlog of C3's Afghanistan contracts
that need to be closed is growing steadily, but the Army's capacity to
close these contracts in the United States remains in question due to
challenges with transitioning closeout responsibilities from the Task
Force to ACC-RI.
DOD Has Identified and Addressed Some of the Problems Associated with
Closing Iraq Contracts:
In October 2010, as part of the Army's Operational Contract Support
Lessons Learned Program, C3 identified lessons learned from
contracting in Iraq between 2005 and 2010. As part of this effort, C3
identified the need to improve and consolidate data management,
improve contract oversight, and increase emphasis on contract
administration and closeout. DOD officials told us they had already
implemented or planned new practices, as the following examples
illustrate.
* C3 officials noted that they had implemented the Standard
Procurement System in both Iraq and Afghanistan to better document
information on contracts awarded during and after fiscal year 2009 and
have worked to improve the data input into the system. Defense
Procurement and Acquisition Policy officials and a representative from
the Joint Chiefs of Staff told us they are also identifying and
developing deployable contract writing and management systems with the
intent that one day contingency contracting personnel will use the
same contract management tools in theater that are used in the United
States.
* C3 also identified that contract oversight was a historic problem
and noted the need to ensure contracting officer's representatives
fulfilled their oversight responsibilities. In March 2010, the Under
Secretary of Defense for Acquisition, Technology and Logistics issued
new certification requirements for contracting officer's
representatives to ensure they are experienced and trained before they
are appointed to oversee contractor performance. In June 2011, we
reported, however, that DOD personnel in Afghanistan were not always
fully prepared for their roles and responsibilities to provide
adequate oversight there.[Footnote 22]
* Defense Procurement and Acquisition Policy has also issued and since
updated the Defense Contingency Contracting Handbook, which includes
reference material to ensure contingency contracting officers maintain
proper contract documentation and complete closeout duties. For
example, the handbook includes guidance on the essential documents
that should be in a contract file, identifies steps to ensure
contracts are properly enumerated to avoid duplicate contract numbers,
and recognizes the need to close contracts as soon as possible.
Finally, DOD is in the process of determining how it will address the
problems C3 attributed to a lack of planning for the contracting
requirements in Iraq. A senior C3 official recommended that
operational campaign plans include a contracting annex, such as an
Annex W. In such cases when an Annex W would be required, we found
that Joint Publication 4-10 and DOD's Annex W guidance do not fully
address the need to plan for contract closeout requirements--including
identifying responsibilities, either in or outside of theater, for
closing contracts. United States Forces-Iraq issued an Annex W in
2011, which included directions for personnel to take steps to close
contracts in Iraq, well after C3's backlog of contracts was
identified. Representatives from the Joint Chiefs of Staff responsible
for revising Joint Publication 4-10 and the Annex W guidance recognize
the need to incorporate more specific language on the need to plan for
contract closeout during the contingency contracting planning process.
These officials stated that they plan to issue new Annex W guidance by
the end of 2011 and intend to add more specific language regarding
contract closeout.
Steadily Increasing Backlog of C3's Afghanistan Contracts Suggests
Closeout Problems May Persist:
As was the case in Iraq, C3 officials stated that prior to the build-
up of forces in Afghanistan, contract closeout was a challenge because
there were not enough contracting personnel in theater to meet
competing contracting demands. To address its backlog of contracts
awarded before fiscal year 2009, C3 delegated responsibility for
closing at least 22,597 Afghanistan inactive contracts to the Task
Force.[Footnote 23] Task Force data indicate that 3,510, or about 16
percent, of these contracts have been reviewed as of April 2011. Task
Force personnel stated that they faced the same challenges with
closing the Afghanistan contracts as those associated with the Iraq
contracts, such as poor contract documentation and improper payments.
According to C3's commanding general and senior contracting officials,
these challenges were exacerbated during the build-up of U.S. military
personnel in Afghanistan, and the focus remains on meeting the
warfighter's needs. C3 officials told us the number of contracting
officers in Afghanistan increased from about 60 in 2008 to about 200
in April 2011. In part, this increase in personnel enabled C3 to close
over 18,600 contracts awarded between fiscal years 2009 and 2011.
Despite these efforts, however, the number of contracts eligible to be
closed continues to grow. For example, as of April 2008, C3 data
indicated that 1,471 Afghanistan contracts remained in theater that
were eligible but over age for closeout. As of May 2011, the number of
contracts eligible but over age for closeout has increased to over
16,900 contracts. Additionally, C3 will have to close over 7,000 other
contracts awarded during this period that are eligible but not yet
over age for closeout. C3 officials told us they expect that more
Afghanistan contracts will be transferred out of theater to be closed
by ACC-RI, likely after much of the remaining Iraq contracts are
closed. As previously noted, however, the Army's ability to close
contracts remains in question due to challenges with transitioning
closeout responsibilities to ACC-RI.
Conclusions:
Contract closeout is a key step to ensure the government receives the
goods and services it purchases at the agreed upon price and, if done
in a timely manner, provides opportunities to utilize unspent funds
for other DOD needs. In Iraq, however, contract closeout was often an
afterthought or was done as time permitted. The complications DOD has
faced with closing its Iraq contracts underscore the importance of
advanced planning to close contracts awarded in a contingency
environment, encouraging a greater command emphasis on completing and
overseeing administrative requirements, establishing a process to
provide better management visibility and insight into contracting
efforts, and ensuring that DOD's contracting workforce has the
capacity to provide appropriate contract administration and contractor
oversight. Meeting warfighter needs is paramount, but doing so does
not lessen the need to ensure that contracts are properly administered
and executed.
DOD's recognition in 2008 that it needed to address the backlog of
contracts that are over age for closeout and its establishment of the
Task Force came too late in the operation to make a significant
difference in closing contracts within the required time frames. By
not fully understanding the scope of the backlog and waiting to
address it, DOD underestimated the efforts required to close these
contracts. Further, the limited visibility provided by the contracting
and financial management systems hindered DOD's ability to identify
and address improper payments. Challenges with transitioning closeout
responsibilities to ACC-RI appear to have hindered the progress the
Army had made in closing its Iraq contracts. With over 100,000 C3 Iraq
and Afghanistan contracts that need to be reviewed and closed, as
appropriate, further delays in closing these contracts can be
expected. Finally, closing the large cost-type contracts is further
hindered by DCAA's shortage of auditors and problems with contractor
accounting practices. DOD has recognized the need to increase DCAA's
staffing and address contractor business systems, but fully
implementing these initiatives will take several years.
Recommendations for Executive Action:
To help address the current backlog of contracts supporting the
efforts in Iraq and Afghanistan that need to be closed out, we
recommend that the Secretary of Defense direct the Secretary of the
Army to take steps to ensure ACC-RI's planned resources are adequate
to meet forecasted closeout demands.
To help improve DOD's ability to manage the closeout of contracts
awarded in support of future contingencies, we recommend that the
Secretary of Defense, in coordination with the Chairman of the Joint
Chiefs of Staff, take the following two actions:
* revise DOD's contingency contracting doctrine and guidance to
reflect the need for advanced planning for contract closeout; and:
* require senior contracting officials to monitor and assess the
progress of contract closeout activities throughout the contingency
operation so steps may be taken if a backlog emerges.
Agency Comments and Our Evaluation:
DOD provided written comments on a draft of this report. DOD concurred
with the three recommendations and identified a number of ongoing and
planned actions to address them. For example, DOD noted that Army
Contracting Command-Rock Island will utilize contractors and explore
additional options, such as the Wounded Warrior program, to assist in
closing contracts. DOD also noted that it recently amended the Defense
Federal Acquisition Regulation Supplement and provided additional
guidance to DOD personnel to underscore the need to understand the
unique requirements and considerations associated with planning and
executing contingency contract administration services in contingency
operations. DOD also plans to further revise its guidance to address
the need for contracting officers to do advance planning for closeout
of contracts performed in contingency areas. DOD also indicated it
intends to issue a revised Joint Publication 4-10, its contingency
contracting planning doctrine, in June 2012 to reflect the need for
such planning. DOD also provided technical comments, which were
incorporated as appropriate. DOD's comments are reprinted in appendix
II.
We are sending copies of this report to the Secretary of Defense, the
Secretaries of the Army and Air Force; the Under Secretary of Defense
(Acquisition, Technology, and Logistics); the Director, Defense
Procurement and Acquisition Policy; the Under Secretary of Defense
(Comptroller) and Chief Financial Officer; the Chairman, Joint Chiefs
of Staff; the Commander, U.S. Central Command; the Director, Defense
Contract Audit Agency; the Director, Defense Finance and Accounting
Service; and interested congressional committees. In addition, the
report will be made available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-4841. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this
report are listed in appendix III.
Signed by:
John P. Hutton:
Director:
Acquisition and Sourcing Management:
List of Addressees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Joseph I. Lieberman:
Chairman:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Claire McCaskill:
Chairman:
Ad Hoc Subcommittee on Contracting Oversight:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Howard P. McKeon:
Chairman:
The Honorable Adam Smith:
Ranking Member:
Committee on Armed Services:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To assess the Department of Defense's (DOD) efforts to close its Iraq
contracts, under the authority of the Comptroller General to conduct
evaluations on his own initiative, we examined the (1) total number of
its contracts with performance in Iraq that are eligible for closeout
and the extent to which DOD closed these contracts within required
time frames, (2) factors that contributed to contracts not being
closed within required time frames, (3) steps DOD took to manage the
financial risks associated with not closing contracts within required
time frames, and (4) how DOD captured and implemented lessons learned
from closing its Iraq contracts.
To determine the number and value of DOD's Iraq contracts eligible for
closeout and the extent to which DOD will close these contracts within
required time frames, we reviewed the Federal Acquisition Regulation
(FAR) and the Defense Federal Acquisition Regulation Supplement which
provide the time frames and the procedures for closing contracts. For
the purpose of our review the term contracts refers to all base
contracts, task orders, and blanket purchase agreement call orders. We
obtained contract data from four DOD organizations which our prior
work indicated had been responsible for awarding the majority of
contracts with performance in Iraq: CENTCOM Contracting Command (C3),
Army Contracting Command-Rock Island (ACC-RI), US Army Corps of
Engineers (USACE), and Air Force Center for Engineering and the
Environment. These organizations may retain responsibility for
administering and closing the contracts they awarded, or may they may
delegate such responsibilities to another organization. In those
instances, we obtained contract data from that organization, which
includes Defense Contract Management Agency, ACC-RI, and C3's Contract
Closeout Task Force Office (Task Force). From each organization, we
requested the following data for contracts for which they are
responsible: contract and order numbers, period of performance,
contract type, contract status, total obligations, total unliquidated
obligations, and physical completion dates. We identified contracts
that were eligible for closeout and over age for closeout based on the
time frames established in the FAR. We also identified contracts that
did not have complete data to determine eligibility for closeout, but
we determined these contracts to be eligible and over age according to
data available. We assessed the reliability of these data reported by
the contracting organizations through interviews with knowledgeable
officials and electronic data testing for missing data, outliers, and
obvious errors within each database. While we found that C3's contract
data from fiscal years 2003 through 2008 were generally unreliable for
determining the closeout status of contracts, they were sufficiently
reliable for determining the minimum number of contracts awarded
during this time period. We did not evaluate or assess the reliability
of the financial management systems used to provide financial data for
the purpose of our review. We also did not independently evaluate
whether DOD closed individual contracts in accordance with the
procedures outlined in the FAR or other DOD guidance.
To identify the factors that contributed to contracts not being closed
within FAR-required time frames, we analyzed data provided by and
interviewed officials at each of the contracting organizations and the
Defense Finance and Accounting Service (DFAS), which is responsible
for making payments on some of the Iraq contracts. To understand any
challenges faced by DOD contracting personnel in closing individual
contracts, we reviewed contract documents for 25 firm-fixed price
contracts purposefully selected to obtain a variety of closeout
organizations and a range of closeout difficulty and interviewed
contracting personnel on their experiences with closing them. We also
reviewed Task Force and ACC-RI closeout data to assess the Army's
ability to close C3's contracts. In addition, to identify the factors
that affected the closeout of cost-type contracts, we interviewed
personnel at each of the contracting organizations. In addition, we
purposefully selected eight contractors with varying amounts of over-
age cost-type contracts, obligations on contracts, and remaining
unliquidated obligations and reviewed DCAA's incurred cost and other
audit reports for these contracts, and interviewed DCAA officials at
headquarters and eight field offices to determine the factors affected
their ability to complete the audits. We also reviewed Joint
Publication 4-10; the Defense Contingency Contracting Handbook; and
the Defense Contract Management Agency's contract closeout guidance
and handbook to assess the guidance provided to DOD contracting
personnel regarding the need to plan the contract closeout process.
To determine the steps DOD has taken to manage the financial risks
associated with not closing contracts within FAR time frames, we
reviewed the DOD Financial Management Regulation and each contracting
office's closeout guidance. We also interviewed contracting and
financial management personnel at the Office of the Under Secretary of
Defense, Comptroller; Office of the Assistant Secretary of the Army,
Financial Management & Comptroller; U.S. Forces - Iraq, Force
Structure Resources and Assessment (J-8); U.S. Army Central Command;
and USACE. In addition, we analyzed unliquidated obligation data
provided by both the contracting personnel and financial management
personnel to determine how these funds were managed. To determine the
steps DOD has taken to manage other risks of not closing contracts
timely, we reviewed data and interviewed officials from C3; the Task
Force; DFAS, which is responsible for collecting overpayments and
tracking interest payments; and the Army's Criminal Investigations
Division, which is responsible for investigating instances of
fraudulent activity found in contracts.
To assess the extent to which DOD captured and implemented lessons
learned from closing contracts in contingency operations, we
interviewed contracting officials at each of the organizations we
visited to identify any lessons learned and reviewed documentation
when available. We also interviewed senior contracting officials in
Iraq and Afghanistan to identify any changes made in response to the
lessons learned from closing the C3 contracts. We reviewed DOD's
current contingency contracting doctrine and guidance, and interviewed
officials from the Joint Chiefs of Staff who are responsible for
revising the doctrine and guidance. We also interviewed officials from
the Office of Under Secretary of Defense for Acquisition, Technology,
and Logistics' Office of Defense Procurement and Acquisition Policy
and the Office of the Deputy Assistant Secretary for the Army
(Procurement) to identify any policy changes that may result from the
lessons learned in Iraq. We obtained and reviewed C3 data on the total
number of its Afghanistan contracts eligible and over age for closeout
to assess its ability to close these contracts.
We conducted this performance audit from July 2010 through September
2011 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.
[End of section]
Appendix II: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
Acquisition, Technology And Logistics:
3000 Defense Pentagon:
Washington, DC 2030 1-3000:
September 26, 2011:
Mr. John T. Hutton:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Hutton:
This is the Department of Defense (DoD) response to the GAO draft
report 11-891, "Contingency Contracting: Improved Planning and
Management Oversight Needed to Address Challenges in Closing
Contracts," dated August 23, 2011 (GAO Code 120931). Detailed comments
on the report recommendations are enclosed. Technical comments were
provided separately for your consideration.
The Department appreciates the opportunity to comment on the draft
report. My point of contact for this effort is Mr. Bill Reich,
william.reich@osd.mil, 571-256-7009.
Sincerely,
Signed by:
Richard Ginman:
Director, Defense Procurement and Acquisition Policy:
Enclosure: As stated.
[End of letter]
GAO Draft Report Dated August 23, 2011:
GAO-11-891 (GAO Code 120931):
"GAO Draft Report, GAO-II-891, "Contingency Contracting: Improved
Planning and Management Oversight Needed to Address Challenges with
Closing Contracts," dated August 23, 2011 (GAO Code 120931):
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
direct the Secretary of the Army to take steps to ensure Army
Contracting Command-Rock Island's (ACC-RI) planned resources are
adequate to meet forecasted closeout demands.
DOD Response: Concur with comment. C-JTSCC, in coordination with ACC-
RI, will provide contract closeout data on a quarterly basis in order
for the Deputy Assistant Secretary of the Army (DASA(P)) to meet the
recommendation to ensure resources are adequate to meet forecasted
closeout demands. The availability of ACC-RI rotational personnel was
effectively leveraged to start work despite delays with hiring term
personnel. Due to the availability of ACC-RI rotational personnel, ACC-
RI was able to make progress in closing contracts while striving
towards hiring dedicated ACC-RI closeout personnel. Additionally. ACC-
RI issued a Task Order under an existing contract for six closeout
specialists, a supervisor and two warehouse personnel. Funding was
provided by DASA(P). The ACC-RI also identified the Wounded Warrior
program as a potential source of personnel. The ACC-R1 will begin to
utilize hiring flexibilities available under their authority. To
assist ACC-RI, DASA(P) began recruitment actions for ACC-RI in the
beginning of FY11. To date, three people from the Contract Closeout
Task Force Office (CCTFO) have accepted offers and will relocate to
ACC-RI after CCTFO drawdown 30 September 2011. Five additional
personnel were hired from a list of qualified applicants provided to
ACC-RI by the DASA(P). They reported in late June 2011.
Recommendation 2: The GAO recommends that the Secretary of Defense
revise DOD's contingency contracting doctrine and guidance to reflect
the need for advanced planning for contract closeout.
DOD Response: Concur. Joint Publication (JP) 4-10 is in the process of
being updated by the Joint Staff J-4, Logistics Directorate. The Joint
Staff Doctrine Sponsor and lead agent for this update have agreed to
add this planning consideration to the revised publication, which is
expected to be released by June 2012. The need to understand the
unique requirements and considerations associated with planning and
executing contingency contract administration services (CCAS) in
contingency operations was recently added to Defense Federal Acquisition
Regulation Supplement and Procedures, Guidance, and Information (DFARS
PGI) at 207.105(b)(20)(C)(8) and 225.7404. Draft DFARS PGI language is
also being developed that addresses the need for contracting officers
to do advance planning for closeout of contracts performed in
contingency areas.
Recommendation 3: The GAO recommends that the Secretary of Defense
require senior contracting officials to monitor and assess the
progress of contract closeout activities throughout the contingency
operation so steps may be taken if a backlog emerges.
DOD Response: Concur. C-JTSCC is monitoring and assessing the progress
of contract closeout activities in Iraq and Afghanistan by identifying
candidate contract closeouts through the Army Contracting Business
Intelligence System (ACBIS) database and weekly updates from ACC-RI.
Draft DFARS and PGI language is being developed that addresses this
contract closeout requirements and contract administration in support
of contingency operations, For future contingency operations, this
recommendation will be addressed in the JP 4-10 update.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
John P. Hutton, (202) 512-4841 or huttonj@gao.gov:
Acknowledgments:
In addition to the individual named above key contributors to this
report were Timothy DiNapoli, Assistant Director; Johana Ayers; Noah
Bleicher; Seth Carlson; Morgan Delaney-Ramaker; Justin Jaynes; Julia
Kennon; John Krump; Claire Li; Anne McDonough-Hughes; and Roxanna Sun.
[End of section]
Footnotes:
[1] FAR § 4.804-1(a)(2).
[2] FAR § 4.804-1(a)(3).
[3] For appropriated funds, Congress specifies the period of time each
appropriation can be used. Any funds not obligated within their period
of availability are considered expired. Expired funds cannot be used
for new obligations but can be used up to 5 years after they expire to
pay for authorized increases to existing obligations made from the
same appropriation. Any funds remaining after the 5-year period are
considered canceled and must be returned to the Treasury.
[4] C3 became the Joint Theater Support Contracting Command for Iraq
and Afghanistan on June 11, 2010. C3 was preceded by the Joint
Contracting Command - Iraq/Afghanistan, the Project and Contracting
Office, and the Coalition Provisional Authority.
[5] GAO, Contingency Contracting: Observations on Actions Needed to
Address Systemic Challenges, [hyperlink,
http://www.gao.gov/products/GAO-11-580] (Washington, D.C.: Apr. 25,
2011).
[6] GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures
and Management Challenges, [hyperlink,
http://www.gao.gov/products/GAO-04-605] (Washington, D.C.: June 1,
2004).
[7] GAO, Defense Contract Management: DOD's Lack of Adherence to Key
Contracting Principles on Iraq Oil Contract Put Government Interests
at Risk, [hyperlink, http://www.gao.gov/products/GAO-07-839]
(Washington, D.C.: July 31, 2007).
[8] GAO, Military Operations: DOD Needs to Address Contract Oversight
and Quality Assurance Issues for Contracts Used to Support Contingency
Operations, [hyperlink, http://www.gao.gov/products/GAO-08-1087]
(Washington, D.C.: Sept. 26, 2008).
[9] Files for contracts using simplified acquisition procedures should
be considered closed when the contracting officer receives evidence of
receipt of property and final payment, unless otherwise specified by
agency regulations. FAR § 4.804-1(a)(1).
[10] The FAR also prohibits the closing of contract files if the
contract is in litigation, under appeal, or where the contract is
being terminated and all termination actions have not been completed.
FAR § § 4.804-1(c)(1) and (2).
[11] C3 data reported a total of seven fiscal year 2002 contracts
awarded before operations began in Iraq that we found to be coded
incorrectly.
[12] Internal controls should provide reasonable assurance that the
objectives of the agency are being achieved in the following
categories: effectiveness and efficiency of operations including the
use of the entity's resources; reliability of financial reporting,
including reports on budget execution, financial statements, and other
reports for internal and external use; and compliance with applicable
laws and regulations. GAO/AIMD-00-21.3.1
[13] C3 also transferred 22,597 of its Afghanistan contracts that were
awarded between 2002 and 2008 to the Task Force to be reviewed and
closed.
[14] FAR § § 4.804-1(a)(2) and (3).
[15] An operation plan describes how DOD will respond to a potential
event that might require the use of military force. It is composed of
a base plan, which describes the concept of operations, major forces,
sustainment concept, and anticipated time lines for completing the
mission; and annexes, which provide further details on areas such as
intelligence, logistics, personnel, communications, and operational
contract support. Chairman of the Joint Chiefs of Staff Manual
3122.03B, Joint Operation Planning and Execution System (JOPES) Volume
II Planning Formats (Feb. 28, 2006). Superseded by Joint Chiefs of
Staff Manual 3122.03C, Joint Operation Planning and Execution System
(JOPES) Volume II Planning Formats (Aug. 17, 2007).
[16] Joint Chiefs of Staff, Joint Publication 4-10, Operational
Contract Support (Oct. 17, 2008).
[17] GAO, Warfighter Support: DOD Needs to Improve Its Planning for
Using Contractors to Support Future Military Operations, [hyperlink,
http://www.gao.gov/products/GAO-10-472] (Washington, D.C.: Mar. 30,
2010).
[18] GAO, DCAA Audits: Widespread Problems with Audit Quality Require
Significant Reform, [hyperlink,
http://www.gao.gov/products/GAO-09-468] (Washington, D.C.: Sept. 23,
2009).
[19] The Cost Accounting Standards are accounting requirements for the
measurement, assignment, and allocation of costs to government
contracts.
[20] USACE personnel stated that USACE also served as the payment
office for a number of contracts awarded by C3 and AFCEE. USACE
identified an additional $83.0 million that may potentially return to
Treasury at the end of fiscal year 2011 for these contracts as of
March 2011. USACE personnel could not identify which contracting
offices were responsible for these contracts and is currently
coordinating with the Task Force, AFCEE, and DCMA contracting
personnel to identify which contracts they have to deobligate these
funds.
[21] Improper payments are defined as any payment that should not have
been made or that was made in an incorrect amount (including
overpayments and underpayments) under statutory, contractual,
administrative, or other legally applicable requirements. It also
includes any payment to an ineligible recipient or ineligible service,
duplicate payments, payments for services not received, and any
payment for an incorrect amount. In 2009, GAO reported that DOD's
processes to conduct risk assessments, estimate improper payments, and
develop corrective actions to reduce improper payments had significant
weaknesses. See GAO, Improper Payments: Significant Improvements
Needed in DOD's Efforts to Address Improper Payment and Recovery
Auditing Requirements, [hyperlink,
http://www.gao.gov/products/GAO-09-442] (Washington, D.C.: July 29,
2009).
[22] GAO, Operational Contract Support: Actions Needed to Address
Contract Oversight and Vetting of Non-U.S. Vendors in Afghanistan,
[hyperlink, http://www.gao.gov/products/GAO-11-771T] (Washington,
D.C.: June 30, 2011).
[23] We could not identify the place of performance for over 14,000
other contracts that were sent to the Task Force to be closed.
[End of section]
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