United States Government Accountability Office

GAO Testimony before the Committee on 

Oversight and Government Reform, 

House of Representatives 

REBUILDING IRAQ 

Reconstruction Progress 

Hindered by Contracting, 

Security, and Capacity 

Challenges 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 10:00 a.m. EST 

Thursday, February 15, 2007

 

GAO-07-426T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 15, 2007

REBUILDING IRAQ

Reconstruction Progress Hindered by 

Contracting, Security, and Capacity 

Challenges 

Highlights of GAO-07-426T, a testimony 

before the Committee on Oversight and 

Government Reform, House of 

Representatives 

The Department of Defense (DOD)

has relied extensively on 

contractors to undertake major 

reconstruction projects and 

provide support to its deployed

forces, but these efforts have not 

always achieved desired outcomes. 

Further, the Iraqi government must

be able to reduce violence, sustain 

reconstruction progress, improve 

basic services, and make a positive 

difference in the daily lives of the

Iraqi people.

This statement discusses 

(1) factors affecting DOD’s ability 

to promote successful acquisition 

outcomes on its contracts for 

reconstruction and for support to 

deployed forces in Iraq, (2) the 

deteriorating security situation and 

the capabilities of the Iraqi security

forces, and (3) issues affecting the 

Iraqi government’s ability to 

support and sustain future 

reconstruction progress. 

The testimony is based upon our 

work on Iraq reconstruction and 

stabilization efforts, DOD

contracting activities, and DOD’s 

use of support contractors

spanning several years. This work 

was conducted in accordance with

generally accepted government

auditing standards. 

What GAO Recommends

GAO is making no new 

recommendations in this 

testimony. GAO has previously 

made numerous recommendations 

to improve DOD’s management and 

use of contracts. DOD has

generally agreed with these 

recommendations and has taken 

some actions to implement them. 

The challenges faced by DOD on its reconstruction and support contracts 

often reflect systemic and long-standing shortcomings in DOD’s capacity to 

manage contractor efforts. Such shortcomings result from poorly defined or 

changing requirements, the use of poor business arrangements, the absence 

of senior leadership and guidance, and an insufficient number of trained 

contracting, acquisition and other personnel to manage, assess and oversee 

contractor performance. In turn, these shortcomings manifest themselves in 

higher costs to taxpayers, schedule delays, unmet objectives, and other 

undesirable outcomes. For example, because DOD authorized contractors to 

begin work before reaching agreement on the scope and price of that work, 

DOD paid millions of dollars in costs that were questioned by the Defense 

Contract Audit Agency. Similarly, DOD lacks visibility on the extent to which 

they rely on contractors to support their operations. When senior military 

leaders began to develop a base consolidation plan, officials were unable to 

determine how many contractors were deployed and therefore ran the risk 

of over- or under-building the capacity of the consolidated bases. 

U.S. reconstruction efforts also continue to be hampered by a security 

situation that continues to deteriorate. Although the number of trained and 

equipped Iraqi security forces increased to about 323,000 in December 2006 

and more Iraqi Army units have taken the lead for counterinsurgency 

operations, attacks on coalition and Iraqi security forces and civilians have

all increased. Aggregate numbers of trained and equipped Iraqi forces, 

however, do not provide information on the capabilities and needs of 

individual units. GAO has made repeated attempts to obtain unit-level 

Transition Readiness Assessments (TRAs) without success. This information 

is essential for the Congress to make fully informed decisions in connection 

with its authorization, appropriations, and oversight responsibilities. 

As the U.S. attempts to turn over its reconstruction efforts, the capacity of 

the Iraqi government to continue overall reconstruction progress is 

undermined by shortfalls in the capacity of the Iraqi ministries, widespread 

corruption and the inability to fund and execute projects for which funds 

were previously budgeted. Iraqi government institutions are undeveloped 

and confront significant challenges in staffing a competent, nonaligned civil 

service; using modern technology; and managing resources and personnel 

effectively. For example, according to U.S. officials 20 to 30 percent of the 

Ministry of Interior staff are “ghost employees” whose salaries are collected

by other officials. Further, corruption in Iraq poses a major challenge to 

building an effective Iraqi government and could jeopardize future flows of 

needed international assistance. Unclear budgeting and procurement rules 

have affected Iraq’s efforts to spend capital budgets effectively and 

efficiently, according to U.S. officials. At the Ministry of Oil, for example, 

less than 1 percent of the $3.5 billion budgeted in 2006 for key enhancements 

to the country’s oil production, distribution, and export facilities, had been 

spent as of August 2006. 

www.gao.gov/cgi-bin/getrpt?GAO-07-426T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Katherine V. 

Schinasi at (202) 512-4841 or 

schinasik@gao.gov. 
Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss (1) factors affecting the 

Department of Defense’s (DOD) ability to promote successful acquisition 

outcomes on its contracts for reconstruction and for support to deployed 

forces in Iraq, (2) the deteriorating security situation and the capabilities 

of the Iraqi security forces, and (3) issues affecting the Iraqi government’s 

ability to support and sustain future reconstruction progress. Prudence 

with taxpayer funds and growing long-range fiscal challenges demand that

DOD maximize its return on the billions of dollars it has invested in 

reconstruction projects and support contracts. Further, strengthening 

Iraq’s fragile government institutions, which have thus far failed to 

adequately deter corruption, stimulate employment, or deliver essential 

services is critical to establishing a peaceful, stable, and secure Iraq. 

DOD has relied extensively on contractors to undertake major 

reconstruction projects and provide support to its troops, but these efforts 

have not always achieved desired outcomes or achieved such outcomes in 

an economic and efficient manner. The challenges encountered in Iraq are 

emblematic of a range of systemic and long-standing challenges faced by

DOD. In this regard, we identified DOD contract management to be high

risk because of its vulnerability to fraud, waste, abuse, and 

mismanagement 15 years ago and have reported on DOD’s long-standing 

problems with management and oversight of support contractors since 

1997. In a report issued in July 2006, we concluded that with awards to 

contractors large and growing, DOD will continue to be vulnerable to 

contracting fraud, waste or misuse of taxpayer dollars, and abuse.1

 While 

DOD has acknowledged its vulnerabilities and taken some actions to 

address them, many of the initiatives are still in their early stages and it is

too soon to tell what impact they may have. 

The Iraqi situation is more complicated as the United States must rely on 

the Iraqi government to play a larger role, which will require capacity not

yet present. As we previously reported, amid signs of progress, the 

coalition faces numerous political, economic, and security challenges in 

rebuilding Iraq. In addition, the continued violence increases the risk that

the United States will not be able to complete remaining reconstruction 

 1

GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud, Waste, and 

Abuse, GAO-06-838R (Washington, D.C.: July 7, 2006). 

Page 1 GAO-07-426T
projects as planned and threatens the Iraqi government’s ability to provide 

essential services to the Iraqi people.

This testimony is based upon GAO’s extensive work on Iraq reconstruction

and stabilization efforts, DOD contracting activities, and DOD’s use of 

support contractors spanning several years. This work was conducted in 

accordance with generally accepted government auditing standards. 

The challenges faced by DOD on its reconstruction and support contracts 

often reflect systemic and long-standing shortcomings in DOD’s capacity

to manage contractor efforts. Such shortcomings result from various 

factors, including poorly defined or changing requirements; the use of 

poor business arrangements; the absence of senior leadership and 

guidance; and an insufficient number of trained contracting, acquisition, 

and other personnel to manage, assess, and oversee contractor

performance. In turn, these shortcomings manifest themselves in higher 

costs to taxpayers, schedule delays, unmet objectives, and other 

undesirable outcomes. For example, because DOD authorized contractors 

to begin work before reaching agreement on the scope and price of that 

work, DOD paid millions of dollars in incurred costs that were questioned 

by the Defense Contract Audit Agency. A DOD contracting official noted 

that the payment of incurred costs is required for cost-type contracts, 

absent unusual circumstances. Similarly, DOD lacks visibility on the 

extent to which it relies on contractors to support its operations. In turn, 

when senior military leaders began to develop a base consolidation plan,

officials were unable to determine how many contractors were deployed 

and therefore ran the risk of over- or under-building the capacity of the 

consolidated bases. With about 29 percent of DOD’s planned construction 

work remaining and the need for continued support for deployed forces, it 

is essential for DOD to address these shortcomings if the department is to 

increase its return on its investment in Iraq. 

Summary 

U.S. reconstruction efforts also continue to be hampered by a security 

situation that continues to deteriorate. Although the number of trained and 

equipped Iraqi security forces has increased from about 174,000 in July 

2005 to about 323,000 in December 2006, and more Iraqi Army units have

taken the lead for counterinsurgency operations, attacks on coalition and 

Iraqi security forces and civilians have all increased. Consequently, U.S. 

forces have continued to conduct combat operations in urban areas, 

especially Baghdad. Aggregate numbers of trained and equipped forces do

not provide information on the capabilities and needs of individual units. 

Rather, this information is found in unit-level Transition Readiness 

Page 2 GAO-07-426T
Assessment reports that are prepared by coalition advisors embedded in 

Iraqi units. GAO has made repeated attempts since January 2006 to obtain

these assessments without success. These data are essential for the 

Congress to make fully informed decisions in connection with its 

authorization, appropriations, and oversight responsibilities. 

As the United States attempts to turn over its reconstruction efforts, the 

capacity of the Iraqi government to continue overall reconstruction 

progress is undermined by shortfalls in the capacity of the Iraqi ministries, 

widespread corruption, and the Iraq government’s inability to fund and 

execute projects for which funds were previously budgeted. Iraqi 

government institutions are undeveloped and confront significant 

challenges in staffing a competent, non-aligned civil service; using modern 

technology; and managing resources and personnel effectively. For 

example, according to U.S. government reports and international 

assessments, ministry personnel are frequently selected on the basis of 

political affiliation rather than competence or skills, and some ministries 

are under the authority of political parties hostile to the U.S. government. 

Further, according to U.S. officials, 20 to 30 percent of the Ministry of 

Interior staff are “ghost employees” whose salaries are collected by other 

officials. Corruption in Iraq poses a major challenge to building an 

effective Iraqi government and could jeopardize future flows of needed

international assistance. According to U.S. officials, unclear budgeting and 

procurement rules have affected Iraq’s efforts to spend capital budgets 

effectively and efficiently. For example, at the Ministry of Oil, less than 

1 percent of the $3.5 billion budgeted in 2006 for key enhancements to the 

country’s oil production, distribution, and export facilities had been spent

as of August 2006. 

The broader context of U.S. efforts for Iraqi reconstruction is tied to how 

missions and projects are being conducted and managed. Over the past 

decade, DOD has increasingly relied on contractors to provide a range of

mission-critical services. Overall, DOD’s obligations on service contracts 

rose from $82.3 billion in fiscal year 1996 to $141.2 billion in fiscal year 

2005. According to DOD officials, the amount obligated on service 

contracts exceeded the amount the department spent on major weapon 

systems. 

Background 

The growth in spending for services has coincided with decreases in 

DOD’s workforce. DOD carried out this downsizing, however, without 

ensuring that it had the specific skills and competencies needed to 

accomplish DOD’s mission. For example, the amount, nature, and 

Page 3 GAO-07-426T
complexity of contracting for services have increased, which has 

challenged DOD’s ability to maintain a workforce with the requisite 

knowledge of market conditions and industry trends, the ability to prepare 

clear statements of work, the technical details about the services they 

procure, and the capacity to manage and oversee contractors. Participants 

in an October 2005 GAO forum on Managing the Supplier Base for the 

21st Century commented that the current federal acquisition workforce 

significantly lacks the new business skills needed to act as contract 

managers. 

Contractors have an important role to play in the discharge of the 

government’s responsibilities, and in some cases the use of contractors 

can result in improved economy, efficiency, and effectiveness. At the same 

time, there may be occasions when contractors are used to provide certain 

services because the government lacks another viable and timely option.

In such cases, the government may actually be paying more and incurring

higher risk than if such services were provided by federal employees. In 

this environment of increased reliance on contractors, sound planning and 

contract execution are critical for success. We have previously identified 

the need to examine the appropriate role for contractors to be among the

challenges in meeting the nation’s defense and other needs in the 21st 

century.2

The proper role of contractors in providing services to the government is 

currently the topic of some debate. In general, I believe there is a need to

focus greater attention on what type of functions and activities should be 

contracted out and which ones should not, to review and reconsider the 

current independence and conflict of interest rules relating to contractors, 

and to identify the factors that prompt the government to use contractors 

in circumstances where the proper choice might be the use of civil 

servants or military personnel. Possible factors could include inadequate 

force structure; outdated or inadequate hiring policies, classification and

compensation approaches; and inadequate numbers of full-time equivalent 

slots. 

Turning to Iraq, DOD has relied extensively on contractors to undertake 

major reconstruction projects and provide support to its troops. For 

example, DOD has responsibility for a significant portion of the more than 

 2

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

Page 4 GAO-07-426T
$30 billion in appropriated reconstruction funds and has awarded and 

managed many of the large reconstruction contracts, such as the contracts 

to rebuild Iraq’s oil, water, and electrical infrastructure, and to train and 

equip Iraqi security forces. Further, U.S. military forces in Iraq have used 

contractors to a far greater extent than in prior operations to provide 

interpreters and intelligence analysts, as well as more traditional services 

such as weapon systems maintenance and base operations support. The 

Army alone estimates that almost 60,000 contractor employees currently 

support ongoing military operations in Southwest Asia and has spent 

about $15.4 billion on its single largest support contract—the Logistics 

Civil Augmentation Program (LOGCAP)—between 2001 and 2004. 

Reconstruction and support contracts are often cost-reimbursement-type 

contracts, which allow the contractor to be reimbursed for reasonable,

allowable, and allocable costs to the extent prescribed in the contracts. 

Further, these contracts often contain award fee provisions, which are 

intended to incentivize more efficient and effective contractor

performance.3

 If contracts are not effectively managed and given sufficient

oversight, the government’s risk is likely to increase. For example, we 

have reported DOD needs to conduct periodic reviews of services 

provided under cost-reimbursement contracts to ensure that services are 

being provided and at an appropriate level and quality. Without such a 

review, the government is at risk to pay for services it no longer needs. 

DOD’s reliance on contractors for key reconstruction efforts and support 

to deployed forces requires that DOD create the conditions conducive for 

success. Our work has shown that these conditions include a match 

between requirements and resources, sound acquisition approaches, 

leadership and guidance, visibility and knowledge of the number of 

contractors and the services they provide, and the capacity to manage and 

assess contractor performance. As we have previously reported, in many 

cases these conditions were not present on DOD reconstruction and 

support contracts, increasing the potential for fraud, waste, abuse, and 

mismanagement. 

DOD Needs to 

Improve Its Capacity 

to Manage 

Contractors 

 3

In December 2005, we reported that DOD programs engage in award fee practices that 

undermine efforts to motivate contractor performance and that do not hold contractors 

accountable for achieving desired acquisition outcomes. See GAO, Defense Acquisitions:

DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition 

Outcomes, GAO-06-66 (Washington, D.C.: Dec. 19, 2005). 

Page 5 GAO-07-426T
Several of my colleagues in the accountability community and I have 

developed a definition of waste. As we see it, waste involves the taxpayers 

in the aggregate not receiving reasonable value for money in connection

with any government funded activities due to an inappropriate act or 

omission by players with control over or access to government resources 

(e.g., executive, judicial or legislative branch employees, contractors, 

grantees or other recipients). Importantly, waste involves a transgression 

that is less than fraud and abuse. Further, most waste does not involve a 

violation of law, but rather relates primarily to mismanagement, 

inappropriate actions, or inadequate oversight. Illustrative examples of 

waste could include: 

• unreasonable, unrealistic, inadequate or frequently changing 

requirements; 

• proceeding with development or production of systems without 

achieving an adequate maturity of related technologies in situations 

where there is no compelling national security interest to do so; 

• the failure to use competitive bidding in appropriate circumstances; 

• an over-reliance on cost-plus contracting arrangements where 

reasonable alternatives are available;

• the payment of incentive and award fees in circumstances where the 

contractor’s performance, in terms of costs, schedule and quality 

outcomes, does not justify such fees; 

• the failure to engage in selected pre-contracting activities for

contingent events; 

• Congressional directions (e.g. earmarks) and agency spending actions 

where the action would not otherwise be taken based on an objective 

value and risk assessment and considering available resources. 

A prerequisite to having good outcomes is a match between well-defined 

requirements and available resources. Shifts in priorities and funding, even 

those made for good reasons, invariably have a cascading effect on 

individual contracts, making it more difficult to manage individual projects 

to successful outcomes and complicate efforts to hold DOD and 

contractors accountable for acquisition outcomes. I should note such 

problems reflect some of the systemic and long-standing challenges 

Changing Requirements 

and Resources Complicate 

Efforts to Hold DOD and 

Contractors Accountable 

for Outcomes 

Page 6 GAO-07-426T
confronting DOD, whether on contracts for services or major weapon 

systems. Contracts, especially service contracts, often do not have 

definitive or realistic requirements at the outset needed to control costs 

and facilitate accountability. 

U.S. reconstruction goals were based on assumptions about the money 

and time needed, as well as a permissive security environment, all of 

which have proven unfounded. U.S. funding was not meant to rebuild 

Iraq’s entire infrastructure, but rather to lay the groundwork for a longerterm reconstruction effort that anticipated significant assistance from 

international donors. To provide that foundation, the Coalition Provisional 

Authority (CPA) allocated $18.4 billion in fiscal year 2004 reconstruction 

funds among various projects in each reconstruction sector, such as oil, 

electricity, and water and sanitation.4

 The CPA used a multitiered 

contracting approach to manage and execute the projects. In this case, the

CPA, through various military organizations, awarded 1 lead contractor, 6 

sector contractors, and 12 design-build contracts in early 2004 (see fig. 1).

 4

From May 2003 through June 2004, the CPA was responsible for overseeing, directing, and

coordinating rebuilding efforts.

Page 7 GAO-07-426T
Figure 1: DOD Construction Program Carried Out through a Multitiered Contracting Approach

After the CPA dissolved, the Department of State initiated an examination 

of the priorities and programs with the objectives of reprioritizing funding 

for projects that would not begin until mid- to late-2005 and using those 

funds to target key high-impact projects. By July 2005, the State 

Department had conducted a series of funding reallocations to address 

new priorities, including increased support for security and law 

enforcement efforts and oil infrastructure enhancements. One of the 

consequences of these reallocations was to reduce funding for the water 

and sanitation sector by about 44 percent, from $4.6 billion to $2.6 billion. 

One reallocation of $1.9 billion in September 2004 led DOD’s Project and 

Contracting Office to cancel some projects, most of which had been

planned to start in mid-2005. 

Page 8 GAO-07-426T
Additionally, higher than anticipated costs associated with using the large

design-build contracts contributed to DOD’s decision to directly contract

with Iraqi firms. For example, in the electricity sector, high cost estimates 

by one design-build contractor resulted in the termination of five task 

orders and the resolicitation of that work. After the task orders were 

canceled, the design-builder was slow to reduce overhead costs in 

accordance with the reduced workload, according to agency officials and

documents. DOD is now directly contracting with Iraqi firms to reduce the 

costs of reconstruction efforts not requiring advanced technical and

management expertise, such as erecting electrical distribution projects. 

Similarly, in the transportation sector, the design-build contractor 

demobilized and left Iraq shortly after award of the contract in March 2004 

because DOD and the contractor agreed that the overall program costs 

were too high. Subsequently, DOD has made greater use of Iraqi 

contractors who were experienced in building roads and bridges. 

Further, the lack of a permissive environment resulted in higher than 

anticipated security costs, which in turn, resulted in diverting planned 

reconstruction resources and led to canceling or reducing the scope of 

certain reconstruction projects. As we reported in July 2005, U.S. civilian

agencies and the reconstruction contractors we evaluated generally 

obtained security services from private security providers.5

 We noted that 

the use of private security providers reflected, in part, the fact that 

providing security was not part of the U.S. military’s stated mission. We 

also found, however, that despite significant role played by private 

security providers, U.S. agencies generally did not have complete data on

the costs associated with their use. In June 2006, we reported that the 

agencies had agreed to include requirements for reconstruction 

contractors to report all costs for private security supplies and services 

that the contractor or any subcontractor may have to acquire necessary 

for successful contractor performance.6

 5

GAO, Rebuilding Iraq: Actions Needed to Improve Use of Private Security Providers,

GAO-05-737 (Washington, D.C.: July 28, 2005). 

6

GAO, Rebuilding Iraq: Actions Still Needed to Improve Use of Private Security

Providers, GAO-06-865T (Washington, D.C.: June 13, 2006).

Page 9 GAO-07-426T
Agency procurement personnel generally had limited advance warning 

prior to awarding the initial reconstruction contracts and were uncertain

as to the full scope of reconstruction activities that were required. The 

need to award contracts and begin reconstruction efforts quickly 

contributed to DOD using business arrangements that potentially 

increased DOD’s risks. Such arrangements included allowing contractors 

to begin work before agreeing on what needed to be done and at what 

price and, during the initial stages of reconstruction, awarding contracts 

that were not awarded under full and open competition. 

DOD’s Business 

Arrangements Contributed 

to Increased Risks on 

Individual Contracts 

To produce desired outcomes within available funding and required time 

frames, DOD and its contractors need to clearly understand reconstruction 

objectives and how they translate into the contract’s terms and conditions: 

the goods or services needed, the level of performance or quality desired,

the schedule, and the cost. When requirements were not clear, DOD often 

entered into contract arrangements that posed additional risks, in 

particular by authorizing contractors to begin work before key terms and 

conditions, including the work to be performed and its projected costs, 

were fully defined. For example, 

• In 2004, we issued two reports that identified a considerable amount of 

work that was being undertaken in Iraq as undefinitized contract 

actions.7

 For example, we reported that as of March 2004, about 

$1.8 billion had been obligated on reconstruction contract actions 

without DOD and the contractors reaching agreement on the final 

scope and price of the work. Similarly, we found that as of June 2004, 

the Army and the contractor had definitized only 13 of the 54 task 

orders on the LOGCAP contract that required definitization. The lack of 

definitization contributed to the Army’s inability to conduct award fee 

boards to assess the contractor’s performance.8

• In September 2005, we reported that difficulties in defining the cost, 

schedule, and work to be performed associated with projects in the 

water sector contributed to project delays and reduced scopes of 

 7

GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management

Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004); and GAO, Military Operations: 

DOD’s Extensive Use of Logistics Support Contracts Requires Strengthened Oversight, 

GAO-04-854 (Washington, D.C.: July 19, 2004). 

8

The LOGCAP award fee process was also hindered because of the failure to finalize the 

award fee plan and to appoint individuals to serve on the award fee boards, as well as 

concerns that some customers had not been documenting their LOGCAP experiences. 

Page 10 GAO-07-426T
work.9

 We reported that DOD had obligated about $873 million on 

24 task orders to rebuild Iraq’s water and sanitation infrastructure, 

including municipal water supplies, sewage collection systems, dams, 

and a major irrigation project. We found, however, that agreement 

between the government and the contractors on the final cost, 

schedule, and scope of 18 of the 24 task orders we reviewed had been 

delayed. These delays occurred, in part, because Iraqi authorities, U.S. 

agencies, and contractors could not agree on scopes of work and 

construction details. For example, at one wastewater project, local 

officials wanted a certain type of sewer design that increased that 

project’s cost. 

• In September 2006, we issued a report on how DOD addressed issues 

raised by the Defense Contract Audit Agency in audits of Iraq-related 

contract costs.10 In particular, we found that DOD contracting officials 

were less likely to remove the costs questioned by auditors if the 

contractor had already incurred these costs before the contract action 

was definitized. In one case, the Defense Contract Audit Agency 

questioned $84 million in an audit of a task order proposal for an oil 

mission. In this case, the contractor did not submit a proposal until a 

year after the work was authorized, and DOD and the contractor did 

not negotiate the final terms of the task order until more than a year 

after the contractor had completed the work. In the final negotiation 

documentation, the DOD contracting official stated that the payment of 

incurred costs is required for cost-type contracts, absent unusual 

circumstances. In contrast, in the few audit reports we reviewed where 

the government negotiated prior to starting work, we found that the 

portion of questioned costs removed from the proposal was 

substantial. 

The need to award contracts and begin reconstruction efforts quickly—a 

contributing factor to DOD’s use of undefinitized contract actions—also 

contributed to DOD using other than full and open competition during the 

initial stages of reconstruction. While full and open competition can be a 

tool to mitigate acquisition risks, DOD procurement officials had only a 

relatively short time—often only weeks—to award the first major 

 9

GAO, Rebuilding Iraq: U.S. Water and Sanitation Efforts Need Improved Measures for 

Assessing Impact and Sustained Resources for Maintaining Facilities, GAO-05-872 

(Washington, D.C.: Sept. 7, 2005). 

10GAO, Iraq Contract Costs: DOD Consideration of Defense Contract Audit Agency’s

Findings, GAO-06-1132 (Washington, D.C.: Sept. 25, 2006). 

Page 11 GAO-07-426T
reconstruction contracts. As a result, these contracts were generally 

awarded using other than full and open competition. We recently reported 

that our ability to obtain complete information on DOD reconstruction 

contract actions was limited because not all DOD components 

consistently tracked or fully reported this information. Nevertheless, for 

the data we were able to obtain, consisting of $7 billion, or 82 percent, of 

DOD’s total contract obligations between October 1, 2003, through March 

31, 2006, DOD competed the vast majority of DOD’s contract obligations.11

DOD Lacked the Capacity 

to Properly Manage and 

Assess Contractor 

Performance 

An unstable contracting environment—when wants, needs, and contract 

requirements are in flux—also requires greater attention to oversight, 

which relies on a capable government workforce. Managing and assessing 

postaward performance entails various activities to ensure that the 

delivery of services meets the terms of the contract and requires adequate 

surveillance resources, proper incentives, and a capable workforce for 

overseeing contracting activities. If surveillance is not conducted, not 

sufficient, or not well documented, DOD is at risk of being unable to 

identify and correct poor contractor performance in a timely manner and 

potentially paying too much for the services it receives. 

We and others have reported on the impact of the lack of adequate 

numbers of properly trained acquisition personnel and high turnover rates 

on reconstruction efforts. For example, 

• Our June 2004 report found that early contract administration 

challenges were caused, in part, by the lack of a sufficient number of 

personnel. 

• Our September 2005 report on water and sanitation efforts found that 

frequent staff turnover affected both the definitization process and the 

overall pace and cost of reconstruction efforts. 

• The Special Inspector General for Iraq Reconstruction found that one 

of the CPA’s critical shortcomings in personnel was the inadequate link

between position requirements and necessary skills. 

• In 2004, an interagency assessment team found that the number of 

contracting personnel was insufficient to handle the increased 

 11GAO, Rebuilding Iraq: Status of Competition for Iraq Reconstruction Contracts, 

GAO-07-40 (Washington, D.C.: Oct. 6, 2006). 

Page 12 GAO-07-426T
workload expected with the influx of fiscal year 2004 funding. In part, 

the CPA’s decision to award seven contracts in early 2004 to help better 

coordinate and manage the fiscal year 2004 reconstruction efforts 

recognized this shortfall. As a result, however, DOD is relying on these 

contractors to help manage and oversee the design-build contractors. 

DOD’s lack of capacity contributed to challenges in using interagency 

contracting vehicles in Iraq. In certain instances, rather than develop and 

award its own contracts, DOD used contracts already awarded by other 

agencies. While this practice may improve efficiency and timeliness, these 

contracts need to be effectively managed, and their use requires a higher 

than usual degree of business acumen and flexibility on part of the 

workforce. 

During the initial stages of reconstruction, we and the DOD Inspector 

General found instances in which DOD improperly used interagency 

contracts. For example, the Inspector General found that a DOD 

component circumvented contracting rules when awarding contracts on 

behalf of the CPA when using the General Services Administration’s 

federal supply schedule. The Inspector General cited DOD’s failure to plan 

for the acquisition support the CPA needed to perform its mission as 

contributing to this condition. Similarly, in April 2005 we reported that a 

lack of effective management controls—in particular insufficient 

management oversight and a lack of adequate training—led to breakdowns 

in the issuance and administration of task orders for interrogation and 

other services by the Department of the Interior on behalf of DOD.12 These 

breakdowns included: 

• issuing 10 out of 11 task orders that were beyond the scope of 

underlying contracts, in violation of competition rules; 

• not complying with additional DOD competition requirements when 

issuing task orders for services on existing contracts; 

• not properly justifying the decision to use interagency contracting; 

• not complying with ordering procedures meant to ensure best value for 

the government; and 

 12GAO, Interagency Contracting: Problems with DOD’s and Interior’s Orders to Support 

Military Operations, GAO-05-201 (Washington, D.C.: Apr. 29, 2005). 

Page 13 GAO-07-426T
• not adequately monitoring contractor performance. 

Because officials at Interior and the Army responsible for the orders did 

not fully carry out their roles and responsibilities, the contractor was 

allowed to play a role in the procurement process normally performed by 

the government. Further, the Army officials responsible for overseeing the 

contractor, for the most part, lacked knowledge of contracting issues and 

were not aware of their basic duties and responsibilities. In part, problems 

such as these contributed to our decision to designate management of 

interagency contracting a high-risk area in January 2005. 

To improve its capacity to plan and award contracts and manage 

contractor performance, DOD has merged the Project and Contracting 

Office with the U.S. Army Corps of Engineers’ Gulf Region Division. 

Additionally, DOD established the Joint Contracting Command–Iraq to 

consolidate and prioritize contracting activities and resolve contracting 

issues, among other things. As noted previously, DOD has also attempted 

to directly contract with Iraqi firms, rather than rely on the large U.S. 

design-build contracts that it had awarded in early 2004. Although DOD 

expects this approach will reduce costs, it will also likely increase the 

administrative and oversight burden on DOD’s workforce. 

DOD Needs Clear and 

Comprehensive Guidance 

and Leadership to Manage 

and Oversee Support 

Contractors 

Since the mid-1990s, our reports have highlighted the need for clear and

comprehensive guidance for managing and overseeing the use of 

contractors who support deployed forces. As we reported in December 

2006, DOD has not yet fully addressed this long-standing problem.13

Such problems are not new. In assessing LOGCAP implementation during 

the Bosnian peacekeeping mission in 1997, we identified weaknesses in 

the available doctrine on how to manage contractor resources, including

how to integrate contractors with military units and what type of 

management and oversight structure to establish.14 We identified similar 

weaknesses when we began reviewing DOD’s use of contractors in Iraq. 

For example, in 2003 we reported that guidance and other oversight 

 13GAO, Military Operations: High-Level DOD Action Needed to Address Long-standing 

Problems with Management and Oversight of Contractors Supporting Deployed Forces, 

GAO-07-145 (Washington, D.C.: Dec. 18, 2006). 

14GAO, Contingency Operations: Opportunities to Improve the Logistics Civil 

Augmentation Program, GAO/NSIAD-97-63 (Washington, D.C.: Feb. 11, 1997). 

Page 14 GAO-07-426T
mechanisms varied widely at the DOD, combatant command, and service 

levels, making it difficult to manage contractors effectively.15 Similarly, in 

our 2005 report on private security contractors in Iraq, we noted that DOD 

had not issued any guidance to units deploying to Iraq on how to work 

with or coordinate efforts with private security contractors.16 Further, we 

noted that the military may not have a clear understanding of the role of 

contractors, including private security providers, in Iraq and of the 

implications of having private security providers on the battle space. 

Our prior work has shown that it is important for organizations to provide 

clear and complete guidance to those involved in program 

implementation. In our view, establishing baseline policies for managing 

and overseeing contractors would help ensure the efficient use of 

contractors in places such as Iraq. DOD took a noteworthy step to address 

some of these issues when it issued new guidance in 2005 on the use of 

contractors who support deployed forces. However, as our December 2006 

report made clear, DOD’s guidance does not address a number of 

problems we have repeatedly raised—such as the need to provide 

adequate contract oversight personnel, to collect and share lessons 

learned on the use of contractors supporting deployed forces, and to 

provide DOD commanders and contract oversight personnel with training 

on the use of contractors overseas prior to their deployment.

In addition to identifying the lack of clear and comprehensive guidance for 

managing contract personnel, we have issued several reports highlighting 

the need for DOD components to comply with departmental guidance on 

the use of contractors. For example, in our June 2003 report we noted that 

DOD components were not complying with a long-standing requirement to 

identify essential services provided by contractors and develop backup 

plans to ensure the continuation of those services during contingency 

operations should contractors become unavailable to provide those 

services. We believe that risk is inherent when relying on contractors to 

support deployed forces, and without a clear understanding of the 

potential consequences of not having the essential service available, the 

risks associated with the mission increase. 

 15GAO, Military Operations: Contractors Provide Vital Services to Deployed Forces but 

Are Not Adequately Addressed in DOD Plans, GAO-03-695 (Washington, D.C.: June 24, 

2003). 

16GAO-05-737. 

Page 15 GAO-07-426T
In other reports, we highlighted our concerns over DOD’s planning for the 

use of contractor support in Iraq—including the need to comply with 

guidance to identify operational requirements early in the planning 

process. When contractors are involved in planning efforts early, and given 

adequate time to plan and prepare to accomplish their assigned missions, 

the quality of the contractor’s services improves and contract costs may be 

lowered. DOD’s October 2005 guidance on the use of contractor support to 

deployed forces went a long way to consolidate existing policy and 

provide guidance on a wide range of contractor issues. However, as of 

December 2006, we found little evidence that DOD components were 

implementing that guidance, in part because no individual within DOD was 

responsible for reviewing DOD and service efforts to ensure the guidance 

was being consistently implemented. 

We have made a number of recommendations for DOD to take steps to 

establish clear leadership and accountability for contractor support issues. 

For example, in our 2005 report on LOGCAP we recommended DOD 

designate a LOGCAP coordinator with the authority to participate in 

deliberations and advocate for the most effective and efficient use of the 

LOGCAP contract. Similarly, in our comprehensive review of contractors 

on the battlefield in 2006, we recommended DOD appoint a focal point 

within the Office of the Under Secretary of Defense for Acquisition, 

Technology, and Logistics—at a sufficiently senior level and with the 

appropriate resources—dedicated to leading DOD’s efforts to improve its 

contract management and oversight. DOD agreed with these 

recommendations. In October 2006, DOD established the office of the 

Assistant Deputy Under Secretary of Defense for Program Support to 

serve as the office of primary responsibility for contractor support issues,

but the office’s specific roles and responsibilities have not yet been clearly

defined. 

Military Commanders and 

Senior DOD Leaders Need 

to Have Visibility over the 

Contractors Who Support 

Them 

DOD continues to lack the capability to provide senior leaders and military 

commanders with complete information on support provided by 

contractors to deployed forces. Without such visibility, senior leaders and 

military commanders cannot develop a complete picture of the extent to

which they rely on contractors to support their operations. We first 

reported the need for better visibility in 2002 during a review of the costs 

associated with U.S. operations in the Balkans.17 At that time, we reported 

 17GAO, Defense Budget: Need to Strengthen Guidance and Oversight of Contingency 

Operations Costs, GAO-02-450 (Washington, D.C.: May 21, 2002). 

Page 16 GAO-07-426T
that DOD was unaware of (1) the number of contractors operating in the 

Balkans, (2) the tasks those contractors were contracted to do, and (3) the 

government’s obligations to those contractors under the contracts. We 

noted a similar situation in 2003 in our report on DOD’s use of contractors 

to support deployed forces in Southwest Asia and Kosovo.18 At that time, 

we reported that although most contract oversight personnel had visibility 

over the individual contracts for which they were directly responsible, 

visibility of all contractor support at a specific location was practically 

nonexistent at the combatant commands, component commands, and 

deployed locations we visited. As a result, commanders at deployed 

locations had limited visibility and understanding of all contractor activity 

supporting their operations and frequently had no easy way to get answers 

to questions about contractor support. This lack of visibility inhibited the 

ability of commanders to resolve issues associated with contractor 

support such as force protection issues and the provision of support to the 

contractor personnel. 

Moreover, in our December 2006 review of DOD’s use of contractors in 

Iraq, we found that DOD’s continuing problems with limited visibility over 

contractors in Iraq unnecessarily increased contracting costs to the 

government and introduced unnecessary risk. Without visibility over 

where contractors are deployed and what government support they are 

entitled to, costs to the government may increase; for example, at a 

contractor accountability task force meeting we attended, an Army 

Materiel Command official noted that an Army official estimated that 

about $43 million is lost each year on free meals provided to contractor 

employees at deployed locations who also receive a per diem food 

allowance. Also, when senior military leaders began to develop a base 

consolidation plan, officials were unable to determine how many 

contractors were deployed and therefore ran the risk of over- or 

under-building the capacity of the consolidated bases. DOD’s October 2005 

guidance on contractor support to deployed forces included a requirement 

that the department develop or designate a joint database to maintain byname accountability of contractors deploying with the force and a 

summary of the services or capabilities they provide. The Army has taken 

the lead in this effort, and recently DOD designated a database intended to

provide improved visibility over contractors deployed to support the 

military in Iraq, Afghanistan, and elsewhere. 

 18GAO-03-695. 

Page 17 GAO-07-426T
As I previously noted, having the capacity to manage and assess contractor 

performance is a critical factor in promoting successful outcomes, yet as 

we reported in December 2006, DOD does not have sufficient numbers of 

trained contractor management and oversight personnel at deployed 

locations. Such personnel include not only the contracting officers who 

award contracts, but also those personnel who define the requirements, 

receive or benefit from the services obtained, and monitor contractor 

performance. The lack of an adequate number of trained personnel limits 

DOD’s ability to obtain a reasonable assurance that contractors are 

meeting contract requirements efficiently and effectively. 

DOD Lacks a Sufficient 

Number of Trained 

Contractor Management 

and Oversight Personnel 

Several contract oversight personnel stated that DOD does not have 

adequate personnel at deployed locations to effectively oversee and 

manage contractors. For example, an Army official acknowledged that the 

Army is struggling to find the capacity and expertise to provide the 

contracting support needed in Iraq. In addition, officials responsible for 

contracting with Multinational Forces-Iraq stated that they did not have

enough contract oversight personnel and quality assurance representatives 

to allow the organization to reduce the Army’s use of the LOGCAP 

contract by awarding more sustainment contracts for base operations 

support in Iraq. Similarly, a LOGCAP program official noted that if 

adequate staffing had been in place, the Army could have realized 

substantial savings on the LOGCAP contract through more effective 

reviews of new requirements. Finally, the contracting officer’s

representative for an intelligence support contract in Iraq stated that he 

was unable to visit all of the locations that he was responsible for 

overseeing. 

The inability of contract oversight personnel to visit all the locations they 

are responsible for can create problems for units that face difficulties 

resolving contractor performance issues at those locations. For example, 

officials from a brigade support battalion stated that they had several 

concerns with the performance of a contractor that provided maintenance 

for the brigade’s mine-clearing equipment. These concerns included delays

in obtaining spare parts and a disagreement over the contractor’s 

obligation to provide support in more austere locations in Iraq. According 

to the officials, their efforts to resolve these problems in a timely manner 

were hindered because the contracting officer’s representative was 

located in Baghdad while the unit was stationed in western Iraq. In other 

instances, some contract oversight personnel may not even reside within 

the theater of operations. For example, we found the Defense Contract 

Management Agency’s (DCMA) legal personnel responsible for LOGCAP in 

Iraq were stationed in Germany, while other LOGCAP contract oversight 

Page 18 GAO-07-426T
personnel were stationed in the United States. According to a senior 

DCMA official in Iraq, relying on support from contract oversight 

personnel outside the theater of operations makes resolving contractor 

performance issues more difficult for military commanders in Iraq, who 

are operating under the demands and higher operational tempo of a 

contingency operation in a deployed location. 

Our work has also shown the need for better predeployment training for 

military commanders and contract oversight personnel on the use of 

contractor support since the mid-1990s. Training is essential for military 

commanders because of their responsibility for identifying and validating 

requirements to be addressed by the contractor. In addition, commanders 

are responsible for evaluating the contractor’s performance and ensuring 

the contract is performed in an economic and efficient manner. Similarly, 

training is essential for DOD contract oversight personnel who monitor the 

contractor’s performance for the contracting officer. 

As we reported in 2003, military commanders and contract management 

and oversight personnel we met in the Balkans and throughout Southwest 

Asia frequently cited the need for better preparatory training.19

Additionally, in our 2004 review, we reported that many individuals using 

support contracts such as LOGCAP were unaware that they had any 

contract management or oversight roles.20 Army customers stated that they

knew nothing about LOGCAP before their deployment and that they had 

received no predeployment training regarding their roles and

responsibilities in ensuring that the contract was used economically and 

efficiently. In 2005, we reported that military units did not receive specific 

predeployment training or guidance about working with private security 

providers. In our December 2006 report, we noted also that many officials 

responsible for contract management and oversight in Iraq told us they 

received little or no training on the use of contractors prior to their 

deployment, which led to confusion over their roles and responsibilities. 

For example, in several instances, military commanders attempted to 

direct or ran the risk of directing a contractor to perform work outside the 

scope of the contract, even though commanders are not authorized to do 

so. Such cases can result in increased costs to the government.

 19GAO-03-695. 

20GAO-04-854. 

Page 19 GAO-07-426T
Over the years, we have made several recommendations to DOD intended 

to strengthen this training. Some of our recommendations were aimed at 

improving the training of military personnel on the use of contractor 

support at deployed locations, while others focused on training regarding 

specific contracts, such as LOGCAP, or the role of private security 

providers. Our recommendations have sought to ensure that military 

personnel deploying overseas have a clear understanding of the role of 

contractors and the support the military provides to them. DOD has agreed 

with most of our recommendations. However, we continue to find little 

evidence that DOD has improved training for military personnel on the use 

of contractors prior to their deployment. 

The security situation continues to deteriorate, impeding the management 

and execution of reconstruction efforts. To improve this condition, the 

United States is, among other things, (1) training and equipping Iraqi 

security forces that will be capable of leading counterinsurgency 

operations, and (2) transferring security responsibilities to Iraqi forces and 

the Iraqi government as capabilities improve. Although progress has been 

made in transferring more responsibilities to the Iraqi security forces, the 

capabilities of individual units are uncertain. 

A Deteriorating 

Security Situation 

Continues to Hamper 

Reconstruction 

Efforts

Since the fall of 2003, the U.S.-led multinational force in Iraq has 

developed and refined a series of plans to transfer security responsibilities 

to the Iraqi government and security forces, with the intent of creating 

conditions that would allow a gradual drawdown of the 140,000 U.S. 

military personnel in Iraq. This security transition was to occur first in 

conjunction with the neutralization of Iraq’s insurgency and second with 

the development of Iraqi forces and government institutions capable of 

securing their country. 

DOD and the State Department have reported progress in implementing 

the current security transition plan. For example, the State Department 

has reported that the number of trained and equipped Iraqi army and 

police forces has increased from about 174,000 in July 2005 to about 

323,000 in December 2006. DOD and the State Department also have 

reported progress in transferring security responsibilities to Iraqi army 

units and provincial governments. For example, the number of Iraqi army 

battalions in the lead for counterinsurgency operations has increased from

21 in March 2005 to 89 in October 2006. In addition, 7 Iraqi army division 

headquarters and 30 brigade headquarters had assumed the lead by 

December 2006. Moreover, by mid-December 2006, three provincial 

Page 20 GAO-07-426T
governments—Muthanna, Dhi Qar, and Najaf—had taken over security 

responsibilities for their provinces. 

The reported progress in transferring security responsibilities to Iraq, 

however, has not led to improved security conditions. Since June 2003, 

overall security conditions in Iraq have deteriorated and grown more 

complex, as evidenced by the increased numbers of attacks and more 

recent Sunni-Shi’a sectarian strife after the February 2006 bombing of the 

Golden Mosque in Samarra (see figure 2). Enemy-initiated attacks against 

the coalition and its Iraqi partners have continued to increase during 2006. 

For example, the average total attacks per day increased from about 

70 per day in January 2006 to about 180 per day in October 2006. In

December 2006, the attacks averaged about 160 per day. These attacks 

have increased around major religious and political events, such as 

Ramadan and elections. Coalition forces are still the primary target of 

attacks, but the number of attacks on Iraqi security forces and civilians 

also has increased since 2003. In October 2006, the State Department 

reported that the recent increase in violence has hindered efforts to 

engage with Iraqi partners and shows the difficulty in making political and

economic progress in the absence of adequate security conditions. 

Page 21 GAO-07-426T
Figure 2: Enemy-Initiated Attacks against the Coalition and Its Iraqi Partners 

2003 2004 2005 2006

Number of attacks

Source: Multi-National Force-Iraq and Defense Intelligence Agency.

0

1,000

2,000

3,000

4,000

5,000

6,000

Attacks on Iraqi security forces Attacks on civilians Attacks on coalition Total

No

Dec.

Jan.

Feb.

Mar.

Apr.

v.

Oct.

Sept.

Oct.

Au

Sept.

g.

Aug.

JulyJuly

J

Mar

Apr.

May

une

.

Au

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Nov.

Dec.

g.

July

Feb.

Mar.

Apr.

May

June

May

June

Oct.

Nov.

Dec.

Jan.

Au

Sept.

g.

July

May

June

Note: An unclassified breakout of attacks by category is not available for September 2006, and an 

unclassified number of attacks is not available for November 2006.

Further, because of the level of violence in Iraq, the United States has not 

been able to draw down the number of U.S. forces in Iraq as early as 

planned. For example, after the increase in violence and collapse of Iraqi 

security forces during the spring of 2004, DOD decided to maintain a force 

level of about 138,000 troops until at least the end of 2005, rather than 

reducing the number of troops to 105,000 by May 2004, as had been 

announced the prior fall. Subsequently, DOD reversed a decision to 

significantly reduce the U.S. force level during the spring of 2006 because 

Iraqi and coalition forces could not contain the rapidly escalating violence 

that occurred the following summer. Moreover, rather than moving out of 

urban areas, U.S. forces have continued to conduct combat operations in 

Baghdad and other cities in Iraq, often in conjunction with Iraqi security 

forces. As you know, DOD is in the process of providing additional forces 

to help stem violence in Iraq. 

Understanding the true capabilities of the Iraqi security forces is essential 

for the Congress to make fully informed decisions in connection with its 

authorization, appropriations, and oversight responsibilities. DOD and 

Page 22 GAO-07-426T
State provide Congress with weekly and quarterly reports on the progress 

made in developing capable Iraqi security forces and transferring security

responsibilities to the Iraqi army and the Iraqi government. This 

information is provided in two key areas: (1) the number of trained and 

equipped forces, and (2) the number of Iraqi army units and provincial 

governments that have assumed responsibility for security of specific 

geographic areas. 

The aggregate nature of these reports, however, does not provide 

comprehensive information on the capabilities and needs of individual 

units. This information is found in unit-level Transition Readiness 

Assessment (TRA) reports. The TRA is a joint assessment, prepared 

monthly by the unit’s coalition commander and Iraqi commander. 

According to Multinational Force-Iraq guidance, the purpose of the TRA 

system is to provide commanders with a method to consistently evaluate 

units; it also helps to identify factors hindering unit progress, determine 

resource shortfalls, and make resource allocation decisions. These reports 

provide the coalition commander’s professional judgment on an Iraqi 

unit’s capabilities and are based on ratings in personnel, command and 

control, equipment, sustainment and logistics, training, and leadership. 

These reports also serve as the basis for the Multinational Force-Iraq’s 

determination of when a unit is capable of leading counterinsurgency 

operations and can assume security responsibilities for a specific area. 

DOD provided GAO with classified, aggregate information on overall 

readiness levels for the Iraqi security forces—including an executive-level

brief—and information on units in the lead, but has not provided unit-level 

reports on Iraqi forces’ capabilities. GAO has made multiple requests for 

access to the unit-level TRA reports since January 2006. Nevertheless, as 

of last week, DOD still had not provided GAO unit-level TRA data, thereby 

limiting oversight over the progress achieved toward a critical objective. 

While the United States has spent billions of dollars rebuilding the 

infrastructure and developing Iraqi security forces, U.S. and World Bank 

assessments have found that the Iraqi government’s ability to sustain and 

maintain reconstruction efforts is hindered by several factors, including 

the lack of capacity in Iraq’s key ministries and widespread corruption, 

and the inability of the Iraqi government to spend its 2006 capital budget

for key infrastructure projects. 

The Iraqi Government 

Currently Lacks the 

Capacity to Sustain 

and Continue 

Reconstruction and 

Security Efforts 

Page 23 GAO-07-426T
Despite Some Progress, 

Concerns about Ministries’ 

Capacity and Widespread 

Corruption Hinder 

Reconstruction Efforts 

The United States has invested about $14 billion to restore essential 

services by repairing oil facilities, increasing electricity generating 

capacity, and restoring water treatment plants. For example, the U.S. 

Army Corps of Engineers reported that it had completed 293 of 

523 planned electrical projects, including the installation of 35 natural 

gas turbines in Iraqi power generation plants. Additionally, reconstruction 

efforts have rebuilt or renovated schools, hospitals, border forts, post 

offices, and railway stations. Despite these efforts, a considerable amount

of planned reconstruction work is not yet completed. DOD estimated that 

as of October 8, 2006, about 29 percent of the planned work remained to 

be completed, including some work that will not be completed until midto late 2008. 

The Iraqi government has had difficulty operating and sustaining the aging 

oil infrastructure and maintaining the new and rehabilitated power 

generation facilities. For example, 

• Iraq’s oil production and exports have consistently fallen below their 

respective program goals. In 2006, oil production averaged 2.1 million 

barrels per day, compared with the U.S. goal of 3.0 million barrels per 

day. The Ministry of Oil has had difficulty operating and maintaining 

the refineries. According to U.S. officials, Iraq lacks qualified staff and 

expertise at the field, plant, and ministry levels, as well as an effective 

inventory control system for spare parts. According to the State 

Department, the Ministry of Oil will have difficulty maintaining future 

production levels unless it initiates an ambitious rehabilitation 

program. In addition, oil smuggling and theft of refined oil products 

have cost Iraq substantial resources. 

• In 2006, electrical output reached 4,317 megawatts of peak generation 

per day, falling short of the U.S. goal of 6,000 megawatts. Prewar 

electrical output averaged 4,200 megawatts per day. Production also 

was outpaced by increasing demand, which has averaged about 

8,210 megawatts per day. The Iraqi government has had difficulty 

sustaining the existing facilities. Problems include the lack of training, 

inadequate spare parts, and an ineffective asset management and parts 

inventory system. Moreover, plants are sometimes operated beyond 

their recommended limits, resulting in longer downtimes for 

maintenance. In addition, major transmission lines have been 

repeatedly sabotaged, and repair workers have been intimidated by 

anti-Iraqi forces. 

In part, these shortfalls can be traced to the lack of capacity within Iraq’s 

central government ministries. Iraqi government institutions are 

Page 24 GAO-07-426T
undeveloped and confront significant challenges in staffing a competent, 

non-aligned civil service; using modern technology and managing 

resources effectively; and effectively fighting corruption. According to U.S. 

and World Bank assessments, ministry personnel are frequently selected 

on the basis of political affiliation rather than competence or skills, and 

some ministries are under the authority of political parties hostile to the 

U.S. government. The Iraqi ministries also lack adequate technology and

have difficulty managing their resources and personnel. For example, the 

World Bank reports that the Iraqi government pays salaries to nonexistent,

or ghost, employees that are collected by other officials. According to U.S. 

officials, 20 to 30 percent of the Ministry of Interior staff are ghost 

employees. 

Further, corruption in Iraq is reportedly widespread and poses a major 

challenge to building an effective Iraqi government and could jeopardize 

future flows of needed international assistance. For example, a World 

Bank report notes that corruption undermines the government’s ability to

make effective use of current reconstruction assistance. A 2006 survey by

Transparency International ranked Iraq’s government as the second most 

corrupt government in the world. Moreover, between January 2005 and 

August 2006, 56 officials in Iraq’s ministries were either convicted of 

corruption charges or subject to arrest warrants. 

According to U.S. government and World Bank reports, the reasons for 

corruption in the Iraqi ministries are several, including the following: 

• the absence of an effective Iraqi banking system leaves the government 

dependent on cash transactions; 

• the majority of key Iraqi ministries have inadequately transparent, 

obsolete, or ambiguous procurement systems; and 

• key accountability institutions, such as the inspectors general who 

were installed in each Iraqi ministry in 2004, lack the resources and 

independence to operate effectively and consistently. 

Corruption is also pervasive in the oil sector, a critical source of revenue

for the Iraqi government. In 2006, the World Bank and the Ministry of Oil’s 

Inspector General estimated that millions of dollars of government 

revenue is lost each year to oil smuggling or diversion of refined products.

According to State Department officials and reports, about 10 percent to 

30 percent of refined fuels is diverted to the black market or is smuggled 

out of Iraq and sold for a profit. According to U.S. embassy documents, the 

Page 25 GAO-07-426T
insurgency has been partly funded by corrupt activities within Iraq and 

from skimming profits from black marketers. In addition, Iraq lacks fully 

functioning meters to measure oil production and exports, precluding 

control over the distribution and sale of crude and refined products. 

Iraq Has Spent Little of Its 

Annual Capital Budget to 

Help Support 

Reconstruction Efforts 

Sound government budgeting practices can help determine the priorities 

of the new government, provide transparency on government operations, 

and help decision makers weigh competing demands for limited resources. 

However, unclear budgeting and procurement rules have affected Iraq’s 

efforts to spend capital budgets effectively and efficiently, according to 

U.S. officials. The inability to spend the funds raises serious questions for 

the government, which has to demonstrate to skeptical citizens that it can 

improve basic services and make a difference in their daily lives. The U.S. 

government has launched a series of initiatives in conjunction with other 

donors to address this issue and improve the Iraqi government’s budget 

execution. 

When the Iraqi government assumed control over its finances in 2004, it 

became responsible for determining how more than $25 billion annually in 

government revenues would be collected and spent to rebuild the country 

and operate the government. Unclear budgeting and procurement rules 

have affected Iraq’s efforts to spend capital budgets effectively and 

efficiently, according to U.S. officials. As of August 2006, the government 

of Iraq had spent, on average, 14 percent of its 2006 capital projects budget 

(Iraq’s fiscal year begins on January 1 of each year). Some of the lowest 

rate of spending occurs at the Ministry of Oil, which relies on damaged 

and outdated infrastructure to produce the oil that provides nearly all of 

the country’s revenues (see table 1).

Page 26 GAO-07-426T
Table 1: Iraq’s 2006 Budget and Actual Expenditures through August 2006 

Dollars in millions

2006 annual budget Expenditures through August 2006 

Ministry Capital goods Capital projects Total budget Capital goods Capital projects Total budget

Finance $10 $33 $16,506 $1 $74 $8,895

Planning 4 27 55 0.4 3 9

Interior 233 27 1,919 25 0.2 958

Defense 864 33 3,443 12 0.0 831

Oil 2 3,533 3,590 0.4 4 40

Electricity 4 767 840 0.3 267 279

Water 0.2 200 259 0.0 49 78

Justice 3 10 74 2 0.2 34

Others 272 1,552 7,290 77 480 3,501

Total $1,392 $6,181 $33,975 $117.0

(8.4%)

$877.0

(14.2%)

$14,623

(43.0%)

Source: GAO analysis of Iraqi budget data. 

Since most of the $34.5 billion in reconstruction funds provided between 

fiscal years 2003 and 2006 have been obligated, unexpended Iraqi funds 

represent an important source of additional financing. The capital goods 

budgets of the Interior and Defense ministries were intended for the 

purchase of weapons, ammunition, and vehicles, among other items. 

However, as of August 2006, Interior and Defense had spent only about 

11 percent and 1 percent, respectively, of these budgeted funds. 

Further, according to U.S. and foreign officials, the ability of the Iraqi 

government to fund improvements in its oil and electricity sectors remain 

uncertain. For example, the Ministry of Oil has had difficulty operating and

maintaining its aging infrastructure, including some refineries originally 

constructed in the 1950s, 1960s, and 1970s. While the Ministry of Oil’s 

$3.5 billion 2006 capital project’s budget targeted key enhancements to the 

country’s oil production, distribution, and export facilities, as of August 

2006, the ministry had spent less than 1 percent of these budgeted funds.

Similarly, Iraq’s electricity sector suffers from deteriorated, outdated, and 

inefficient infrastructure resulting from two decades of underinvestment 

in operations and maintenance, replacement, and expansion. This 

weakened infrastructure has led to unplanned outages. Despite the 

Ministry of Electricity’s recent development of a 10-year master plan, 

Iraq’s ability to fund improvements in its electricity sector remains 

uncertain. This uncertainty is due to low electricity tariffs, uncertain donor 

Page 27 GAO-07-426T
commitments, and according to a World Bank assessment, an inadequate 

legal and regulatory framework. 

As I have discussed today, there are a number of conditions that exist in 

Iraq that have led to, or will lead to, increased risk of fraud, waste, and 

abuse of U.S. funds. DOD’s extensive reliance on contractors to undertake 

reconstruction projects and provide support to deployed forces requires 

DOD to address long-standing challenges in an aggressive, effective 

manner. This reliance raises a broader question as to whether DOD has 

become too dependent on contractors to provide essential services 

without clearly identifying roles and responsibilities, and employing 

appropriate oversight and accountability mechanisms. 

Continuing reconstruction progress will require overall improvement in 

the security situation in Iraq. To do so, Iraqi security forces and provincial

governments must be in a position to take responsibility for the security of 

their nation. At this time, their capacity to do so is questionable. 

Furthermore, the U.S. and the international community will need to 

support the Iraqi government’s efforts to enhance its capacity to govern 

effectively and efficiently if it is to make a positive difference in the daily 

lives of the Iraqi people.

- - - - 

Mr. Chairman, this concludes my statement. I would be pleased to answer 

any questions that you or other members may have at this time. 

For questions regarding this testimony, please call Katherine V. Schinasi at

(202) 512-4841. Other contributors to this statement were Ridge Bowman, 

Daniel Chen, Joseph Christoff, Carole Coffey, Lynn Cothern, Timothy 

DiNapoli, Whitney Havens, John Hutton, John Krump, Steve Lord, Steve 

Marchesani, Tet Miyabara, Judy McCloskey, Mary Moutsos, Ken Patton, 

Jim Reynolds, and William Solis. 

Concluding 

Observations 

GAO Contacts and 

Acknowledgments 

(120625) Page 28 GAO-07-426T
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