OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION

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SPECIAL INSPECTOR GENERAL FOR IRAQ RECONSTRUCTION 

400 Army Navy Drive • Arlington, Virginia 22202 

July 31, 2006 

MEMORANDUM FOR U.S. AMBASSADOR TO IRAQ 

 MISSION DIRECTOR-IRAQ, U.S. AGENCY FOR 

INTERNATIONAL DEVELOPMENT 

 DIRECTOR, IRAQ RECONSTRUCTION MANAGEMENT 

 OFFICE 

SUBJECT: Review of the U.S. Agency for International Development’s Management of 

the Basrah Children’s Hospital Project (SIGIR-06-026) 

We are providing this audit report for your information and use. We performed the audit in 

accordance with our statutory duties contained in Public Law 108-106, as amended, which 

requires that we provide for the independent and objective conduct of audits, as well as 

leadership and coordination of and recommendations on policies designed to promote 

economy, efficiency, and effectiveness in the administration of Iraq relief and reconstruction 

programs and operations and to prevent and detect waste, fraud, and abuse. 

We considered management comments from the U.S. Mission-Iraq on a draft of this report 

when preparing the final report. We also received separate comments on the draft of this 

report from the U.S. Agency for International Development, which were considered and 

incorporated as appropriate. Copies of all comments received are included in the 

Management Comments section of this final report. 

We appreciate the courtesies extended to the staff. For additional information on this report, 

please contact Mr. Joseph T. McDermott at (703) 343-7926, or by email at 

joseph.mcdermott@iraq.centcom.mil; or Mr. Clifton Spruill by email at 

clifton.spruill@iraq.centcom.mil or at (703) 343-9275. For the report distribution, see 

Appendix C. 

 

Stuart W. Bowen, Jr. 

Inspector General 

cc: Distribution 
i

Special Inspector General for Iraq Reconstruction 

SIGIR-06-026 July 31, 2006 

Review of the U.S. Agency for International Development’s 

Management of the Basrah Children’s Hospital Project 

Executive Summary 

Introduction. As part of the Iraq Relief and Reconstruction Program, the U.S. Agency 

for International Development (USAID) was tasked with the construction of a modern, 

50-bed pediatric facility in Basrah to improve the quality of care and life expectancy for 

both the women and children of Iraq. In November 2003, Congress authorized $50 

million for this project from the Iraq Relief and Reconstruction Fund (IRRF). USAID, in 

turn, established a Memorandum of Understanding with Project HOPE, under which 

Project HOPE would take the lead in providing a significant portion of the hospital 

equipment and have responsibility for training medical and administrative staff. The 

scope of work was modified in July 2005 at the request of the Iraqi Ministry of Health to 

increase the number of beds to 94 and to upgrade the facility to be an oncology center. 

No additional IRRF funding was requested, nor was the schedule extended as a result of 

this modification. 

USAID issued a job order for construction of the hospital in August 2004 to Bechtel 

National, Inc. (Bechtel). Bechtel began initial activities to include site preparation and, in 

mid-October 2004, awarded a design-build subcontract for $37 million. The job order 

with Bechtel required that the hospital be completed by December 31, 2005. Completion 

of the project slipped several times over the next year. The purpose of this review was to 

determine the effectiveness of the U.S. government project management team and the 

contracting team in the performance of this project. 

Objectives. This review was announced on April 12, 2006, with the objective of 

assessing the Iraq Reconstruction Management Office’s (IRMO) and USAID’s 

management of the Basrah Children’s Hospital project. The objectives of the audit were 

to determine whether: 

• USAID has effective policies, procedures, and management controls in place to 

achieve expected project outcomes 

• USAID has adequate financial controls in place to effectively monitor the project 

and to collect and report on cost to complete 

• USAID and IRMO have effective management reporting processes in place to 

ensure effective transparency of project cost, schedule, and performance 
ii 

On March 26, 2006, Bechtel reported to USAID that the estimated completion date had 

slipped to July 31, 2007, and that the estimated cost-at-completion had grown to 

approximately $98 million because of project delays and a revision in the allocation of 

indirect costs. We learned of this project status after our review began, and consequently 

modified our objectives to determine the reasons for the project slippage and increased 

costs. Therefore, our review was adjusted to answer the following questions: 

• Does USAID have effective processes in place for tracking and reporting the 

schedules of its Basrah Children’s Hospital project? 

• Does USAID have effective processes in place for tracking and reporting the cost 

of the Basrah Children’s Hospital project to the Congress and to the Chief of 

Mission? 

• Do USAID and IRMO have effective policies, procedures, and management 

controls in place to achieve expected project outcomes? 

Results. The project status reports received by USAID from its dedicated U.S. Army 

Corps of Engineers on-site engineer and Bechtel, its prime contractor, regularly identified 

slippages in the Basrah Children’s Hospital project. However, this information was not 

effectively analyzed or included in Section 2207 Reports or Project Assessment Reports.1

 Specifically, 

• Because of subcontractor performance concerns, Bechtel announced in October 

2005 that it was conducting a special assessment of the project schedule. 

• In late December 2005, the Corps on-site engineer reported the project as 111 

days behind schedule and the prime contractor was reporting a delay of 45 days. 

However, USAID reported no delays with the project in either their January 2006 

Section 2207 Report or Project Assessment Report. 

• Between January 2 and March 22, 2006, Bechtel reported schedule impacts 

ranging from 25 days to 77 days. The number of delay days fluctuated as Bechtel 

worked with the subcontractor to establish recovery plans. 

• In March 2006, the Gulf Region Division, U.S. Army Corps of Engineers 

conducted a “no-notice assessment” of the Basrah Children’s Hospital. On 

approximately March 14, 2006, they estimated a completion date of June 2007. 

• On March 26, 2006, Bechtel released its special assessment describing the project 

as 273 days behind schedule, a slip of 197 days from the delay noted in its report 

of March 22, 2006. 

• In March 2006, the USAID on-site manager reported schedule concerns. 

Nonetheless, in the April 2006 Section 2207 Report, USAID reported no 

problems with the project schedule. 

• Two weeks later in its April 2006 Project Assessment Report, USAID finally 

reported the project as delayed by 273 days, with an estimated completion date of 

July 31, 2007. 

 

1

 Section 2207 of Public Law 108-106 requires a quarterly report to the House and Senate Committees on 

Appropriations on the use of all IRRF funds on a project-by-project basis. The required information is 

included in a Section 2207 Report and an accompanying Project Assessment Report. 
iii 

According to a USAID contracting official, the delays, which included subcontractor 

design flaws, lack of subcontractor focus on critical path activities, and security concerns, 

were not reported because the contractor had produced several recovery plans; 

consequently USAID believed the estimated completion date could still be met. 

However, according to USAID documents, by December 2005 the contractor had issued 

three recovery plans, none of which succeeded in recovering the lost time. Yet USAID 

did not report any concerns as the project continued to fall behind schedule. 

Although USAID is responsible for construction of the hospital, it has not included the 

installation of medical equipment in its estimated project completion schedule or costs. 

According to a Project HOPE official, the final installation of some medical equipment 

will not start until construction is completed and will further delay the commissioning of 

the hospital. According to the USAID Mission Director-Iraq, she did not believe USAID 

was required to track or report on the medical equipment. Project HOPE is to provide 

approximately $30 million in equipment and training, and as of June 25, 2006, reported 

that it was prepared to meet all commitments for equipment, on time and with the quality 

and quantity required to support a state-of-the-art tertiary care pediatric center. USAID is 

responsible for keeping the Congress and the Chief of Mission accurately apprised of the 

hospital’s status. According to the Deputy Chief of Mission, he was unaware that the 

USAID reported completion date did not reflect delivery of a turnkey operation that 

would include medical equipment. 

USAID’s accounting systems and processes are inadequate and failed to accurately 

identify and report hospital project costs to the Chief of Mission and to the Congress. As 

of the April 2006 Section 2207 Report to the Congress, USAID reported the hospital 

project cost-at-completion as $50 million, even though Bechtel had determined the 

estimated cost would be at least $98 million. USAID reported the lower number because 

it believed that it did not have to include an estimated $48 million in contractor indirect 

costs in its reports. While we did not audit USAID’s financial records, we believe that it 

is possible that other cost elements have not been reported which could drive the costs 

higher. These elements include an appropriate share of the cost of the Participating 

Agency Service Agreement, established in May 2003 between USAID and the U.S. 

Army Corps of Engineers. 

Based on cost data we obtained from USAID, we believe that, under the current 

management/contracting structure, the actual turnkey cost for the project will be about 

$149.5 million to $169.5 million including costs for medical equipment, integrating the 

equipment into the hospital, training of hospital staff and administration, initial 

sustainment funding, and initial acquisition of consumable medical supplies. A June 

2006 USAID contracted study explored other future management/contracting options that 

have the potential to reduce costs. We also believe that exploring alternative contracting 

methods could reduce costs. 

We also believe that the project will require between $69.5 million to $89.5 million of 

additional funds to complete. This estimate is based on our estimated cost-to-complete of 

between $149.5 million to $169.5 million, minus the $50 million IRRF allocation and 

$30 million from Project HOPE. However, we also caution there is still an unclear 

picture of schedule control, security, construction quality, and the use of alternative 

contract/management options that will impact the true cost to complete. 

Oversight and management of the Basrah Children’s Hospital project schedule and cost 

has been hampered by the lack of effective program management and oversight by the 

Department of State and USAID. The Chief of Mission is responsible for the supervision 

and direction of all U.S. assistance programs, but did not establish a management 
iv 

structure for carrying out that responsibility. USAID similarly did not establish an 

appropriate program management structure. Specifically, to oversee its entire $1.4 billion 

IRRF construction program which consists of approximately 20 projects across 8 

sectors,2 USAID relied upon one administrative contracting officer and one cognizant 

technical officer, and never appointed a program manager with sole responsibility for the 

hospital project or established a hospital program management office. 

Management Actions. In May and June 2006, the Deputy Chief of Mission and the 

IRMO Director took a number of actions to get control of the contract. On May 19, 

2006, the Acting IRMO Director instructed USAID to issue a “stop work” order to its 

contractor. On June 6, 2006, the Deputy Chief of Mission directed USAID and IRMO to 

provide specific information on (1) the true cost and schedule to complete the project (the 

Deputy Chief of Mission defined completion as a fully functioning hospital); (2) what 

would be accomplished with the $50 million that was allocated when the costs against 

this $50 million would be fully incurred; and (3) what options are available to complete 

the project to include options for funding, contracting, project management, and 

oversight. On June 14, 2006, the IRMO Director again instructed USAID to “issue an 

order to Bechtel National, Inc. to immediately cease construction work other than that 

necessary to place the site in caretaker status, and to begin demobilization from the job 

site.” 

Recommendations

We recommend that the U.S. Ambassador to Iraq take the following actions: 

1. Direct USAID Mission Director-Iraq to: 

a. Issue a “stop work” order to Bechtel and its subcontractors until there 

are sufficient plans, resources, and processes in place to ensure a 

successful project. 

b. Report on the total project, including Project HOPE’s activities in its 

Section 2207 Report. 

c. Provide the IRMO Director with timely, accurate, and complete 

information as deemed necessary to ensure the project has independent 

oversight. 

2. Direct the IRMO Director and the USAID Mission Director-Iraq to: 

a. Promptly report on the answers to the Deputy Chief of Mission’s 

questions provided on June 6, 2006. 

b. Consider alternative forms of contracting and project management to 

complete the project. 

c. Develop a management structure to ensure the success of this project. 

SIGIR plans to conduct a review of USAID’s overall Bechtel contract and all USAIDmanaged IRRF projects to determine if similar reporting has occurred. 

 

2

 USAID Cost-to-Complete report, May 15, 2006. 
v 

Management Comments and Audit Response. We received a consolidated response 

from the U.S. Mission-Iraq on a draft of this report. The Mission concurred with all of 

our recommendations and reported that the Ambassador has created and chairs a 

Reconstruction Core Group which includes all U.S. Mission agencies involved in 

reconstruction. The Reconstruction Core Group has devised a plan to complete the 

project in which program and project management for the Basrah Children’s Hospital is 

transferred from USAID to the U.S. Army Corps of Engineers, Gulf Region DivisionProject and Contracting Office. The Gulf Region Division plans to establish a Gulf 

Region Division-led special project office in Basrah with USAID and Project HOPE 

representatives; a Gulf Region Division-provided hospital and equipment integrator to 

ensure synchronization of effort; and program management additions at Gulf Region 

Division Headquarters to ensure adequate controls during execution. We consider this 

action and other planned actions to be fully responsive to our report. 

We also received separate written comments from USAID on a draft of this report which 

were incorporated in the final report as appropriate. Our detailed response to USAID’s 

comments is included in the Management Comments section at the end of this report. 

Based upon our review of management comments, except for recommendation 1(b), we 

consider all recommendations to be closed. 
Table of Contents 

Executive Summary i 

Introduction 

Background 1 

Objective 3 

Findings 

USAID’s Processes for Tracking, Analyzing and Reporting Project Schedule 4 

USAID’s Accounting Systems and Processes for Identifying Project Costs 9 

USAID and Department of State Management Controls 14 

Conclusion and Recommendations 17 

Appendices 

A. Scope and Methodology 19 

B. Acronyms 21 

C. Report Distribution 22 

D. Audit Team Members 24 

Management Comments 

U.S. Mission-Iraq 25 

U.S. Agency for International Development 28 

SIGIR Audit Response to Comments by 

 the U.S. Agency for International Development 35 

 
1

Introduction 

As part of the Iraq Relief and Reconstruction Program, the U.S. Agency for International 

Development (USAID) was tasked with the construction of a modern, 50-bed pediatric 

facility in Basrah to improve the quality of care and life expectancy for both the women 

and children of Iraq. Congress authorized $50 million for this project. USAID, in turn, 

established a Memorandum of Understanding with Project HOPE,3

 under which Project 

HOPE would take the lead in providing a significant portion of the hospital equipment 

and have responsibility for training medical and administrative staff. As originally 

scoped, the hospital included inpatient and outpatient specialized pediatric care facilities. 

The Iraqi Ministry of Health initially requested a 50 bed hospital that would provide 

referral level pediatric care, with an emphasis on pediatric oncology. The initial design 

presented to the Ministry of Health included over 25,000 square meters of space with 

over 100 beds. Subsequent design modifications resulted in the current design, which 

includes a 94 bed facility and oncology services and radio therapy facilities. No 

additional funding was requested, nor was the schedule extended as a result of this 

modification. 

USAID issued a job order for construction of the hospital in August 2004 to Bechtel 

National, Inc. (Bechtel). Bechtel began design-build activities to include site preparation 

and, in March 2005, awarded a construction subcontract for $37 million. The hospital 

was to be completed by December 31, 2005. Completion of the project slipped several 

times over the next year. The purpose of this review was to determine the effectiveness 

of the U.S. government project management team and the contracting team in the 

performance of this project. 

Background 

In November, 2003, Congress appropriated $18.4 billion for relief and reconstruction 

activities in Iraq and allocated the funds to specific sectors of Iraqi infrastructure and 

governance based on lists of project plans developed over the summer of 2003.4 The 

appropriated money is known as the Iraq Relief and Reconstruction Fund II (IRRF II).5 One of the specific projects was the construction of a new, modern, 50-bed pediatric 

facility in Basrah. This was later changed to a 94 bed facility by a job order amendment. 

Congress authorized $50 million for this project. The Coalition Provisional Authority, 

the U.N. recognized coalition authority led by the United States and the United Kingdom 

that was responsible for the temporary governance of Iraq and for overseeing, directing, 

and coordinating the reconstruction effort, assigned responsibility for the project to the 

United States Agency for International Development (USAID). USAID, in turn, 

established a Memorandum of Understanding with Project HOPE, a charitable 

 

3

 Project HOPE (Health Opportunities for People Everywhere) was founded in the U.S. in 1958. Their 

mission is to achieve sustainable advances in health care around the world by implementing health 

education programs and providing humanitarian assistance in areas of need. www.projecthope.org 

4

 House of Representatives Conference Report 108-337, October 30, 2003, “Making Emergency 

Supplemental Appropriations for Defense and for the Reconstruction of Iraq and Afghanistan for the Fiscal 

Year Ending September 30, 2004, and For Other Purposes,” identifies the programs and the amount 

authorized for each program. 

5

 Initially Congress appropriated $2.1 billion to a fund that came to be known as Iraq Relief and 

Reconstruction Fund I (IRRF I); in November 2003 a second appropriation of $18.4 billion was made, 

hence IRRF II. 
2

organization, under which Project HOPE would take the lead in providing hospital 

equipment and training. 

In total, USAID was responsible for $1.4 billion in IRRF II-funded projects for water and 

sewer improvement, electrical generation and distribution, and similar construction 

activities. USAID selected Bechtel National, Inc. (Bechtel) as its prime contractor for all 

of its projects, and awarded it a cost-plus-fixed-fee design-build contract on January 5, 

2004. 

On August 3, 2004, Job Order 04-511 for $50 million for the Basrah Children’s Hospital 

project was issued. In mid-October 2004, Bechtel subcontracted with Midcon/Universal 

Hospital Services/Hospital Designers and Planners, a Jordanian company, for the hospital 

development. The original contracted completion date for the hospital was December 31, 

2005. However, the hospital project’s estimated completion date slipped at least six times 

between the start of construction in October 2004 and April 2006. The latest estimate for 

completion is July 31, 2007. Table 1 identifies key events in the chronology of the 

Basrah Children’s Hospital project. 

Table 1: Chronology of Basrah Children’s Hospital Project 

Date Project Event 

August 3, 2004 Job Order 04-511 issued to Bechtel for construction of the Basrah 

Children’s Hospital. Site preparation and design-build drawings 

commenced. 

mid-October 2004 Bechtel subcontracts for the hospital development. 

March 1, 2005 Bechtel mobilizes the subcontractor. Estimated completion date of the 

hospital construction is December 31, 2005. 

March 25, 2005 Bechtel reports a $6 million increase in direct costs. Project funding 

remains at $50 million, with $7 million to cover indirect costs. 

April 2005 USAID reports the estimated completion date has slipped to May 31, 

2006. 

July 2005 USAID reports the estimated completion date has slipped to September 

2006. 

July 7, 2005 Job Order Amendment 1 changes completion date to October 31, 2006. 

October 2005 USAID reports the estimated completion date has slipped to October 31, 

2006. 

December 28, 2005 First disbursements reported on hospital construction project 

March 29, 2006 Bechtel reports 273-day schedule slip to USAID. Completion date 

identified as July 31, 2007, with an estimated cost of $98 million. 

April 6, 2006 USAID issues memo to Ambassador Khalilzad citing schedule and cost 

issues with Bechtel; provides Estimate-at-Complete of $75 million to $80 

million. 

May 19, 2006 IRMO Director issues letter to USAID to “stop work.” 

May 29, 2006 USAID issues letter to Bechtel to develop a plan to preserve and protect 

construction work; provide for site security; and demobilize. 

June 14, 2006 IRMO Director issues second letter to USAID to “stop work.” 

Source: SIGIR analysis of USAID data. 
3

Objectives 

This review was announced on April 12, 2006, with the objective of assessing USAID’s 

management of the Basrah Children’s Hospital, one of its Iraq reconstruction projects. 

The objectives of the audit were to determine whether (1) USAID has effective policies, 

procedures, and management controls in place to achieve expected project outcomes; (2) 

USAID has adequate financial controls in place to effectively monitor the project and to 

collect and report on cost to complete; and (3) USAID and the Iraq Reconstruction 

Management Office (IRMO) have effective management reporting processes in place to 

ensure effective transparency of project cost, schedule and performance. Upon initiation 

of the review, we found that on March 26, 2006, Bechtel had informed USAID that the 

estimated completion date had slipped to July 31, 2007, and the estimated cost-atcompletion would be approximately $98 million. Consequently, we modified our 

objectives to determine the reasons for the project slippage and why USAID’S reports to 

the Congress and to the Chief of Mission failed to disclose the problems. This review 

looked specifically at the following: 

• Does USAID have effective processes in place for tracking and reporting the 

schedules of the Basrah Children’s Hospital project? 

• Does USAID have effective processes in place for tracking and reporting the cost 

of the Basrah Children’s Hospital project to the Congress and to the Chief of 

Mission? 

• Do USAID and IRMO have effective policies, procedures, and management 

controls in place to achieve expected project outcomes? 

In March 2006, the Gulf Region Division, U.S. Army Corps of Engineers conducted a 

“no-notice assessment” of the Basrah Children’s Hospital. This report also presents 

information from that assessment that may have an additional impact on the project. 

For a discussion of the scope, methodology, and a summary of prior coverage, see 

Appendix A. For definitions of the acronyms used in this report, see Appendix B. For a 

list of the report distribution, see Appendix C. For a list of the audit team members, see 

Appendix D. 
4

USAID’s Processes for Tracking, Analyzing and 

Reporting Project Schedule 

USAID had good processes in place for tracking the Basrah Children’s Hospital project 

schedule. However, the information it received was not adequately analyzed and passed 

on to either the Chief of Mission or the Congress in required reports. We recognize that 

estimating project schedules can be imprecise, particularly in a difficult environment such 

as Iraq. However, we believe the information available gave USAID ample notice that 

this project was in trouble. 

USAID was responsible for construction of the hospital building, but had not included the 

installation of medical equipment in its project completion estimate. According to a 

Project HOPE official, the final installation of some medical equipment will not start 

until construction is completed and will further delay the commissioning of the hospital. 

According to the Deputy Chief of Mission, he was unaware that the USAID reported 

completion date did not reflect delivery of a turnkey operation that would include 

medical equipment. 

Requirement to Report Schedule. The requirement to report project schedule 

information is found in Public Law 108-106. The Law established the Iraq Relief and 

Reconstruction Fund and directed the Office of Management and Budget, in consultation 

with the Department of State, to submit a quarterly report to the House and Senate 

Committees on Appropriations on the proposed use of all funds including estimates of the 

costs required to complete each project.6

 The baseline for reporting (and the 

identification of the specific projects that the implementing agencies are to report against) 

is found in the Conference Report that accompanies the Act.7 While reporting schedule 

data is not specified in the law, construction costs are driven in large part by schedule. 

Consequently, any significant delay in schedule would increase cost and be a reportable 

event. Additionally, to comply with the law’s requirement to provide cost-to-complete 

data, a combined Office of Management and Budget, Department of Defense, and 

Department of State team came to Iraq in the spring of 2005 to develop a reporting 

format. The team developed a format, known as the Project Assessment Report, in which 

specific financial data on each project are to be reported. One of the reporting elements 

is the estimated completion date. The Project Assessment Report is submitted to the 

Congress each quarter on the same schedule as the Section 2207 Report. 

Reports to USAID on the Status of the Basrah Children’s Hospital. We identified 

two sets of reports that USAID received weekly on the status of its projects: the reports 

from the on-site engineer from the U.S. Army Corps of Engineers, and reports from 

USAID’s prime contractor, Bechtel. On May 25, 2003, USAID and the U.S. Army Corps 

of Engineers signed a Participating Agency Service Agreement to have the Corps of 

Engineers provide construction oversight of USAID’s construction projects. The Corps 

of Engineers agreed to provide technical assistance to USAID and to be responsible for 

 

6

 The law assigns the responsibility to the Office of Management and Budget, in consultation with the 

Coalition Provisional Authority. However, on May 11, 2004, National Security Presidential Directive 36 

terminated the Coalition Provisional Authority and assigned all of its responsibilities to the U.S. Mission in 

Baghdad. IRMO gathers the necessary data from the IRRF-implementing agencies and forwards it to 

Department of State headquarters, where the report is finalized. 7

 House of Representatives Conference Report 108-337; Making Emergency Supplemental Appropriations 

for Defense and for the Reconstruction of Iraq and Afghanistan for the Fiscal Year Ending September 30, 

2004, and For Other Purposes, Oct. 30, 2003. 
5

monitoring the quality control, quality assurance, schedule, performance monitoring, 

safety, environmental issues, de-mining, unexploded ordinance, and safety programs of 

Bechtel, and report to the USAID contracting officer and cognizant technical officer 

when exceptions or problems were uncovered. Pursuant to this agreement, the Corps of 

Engineers had an engineer on-site at the hospital project starting in December 2004, and 

the engineer submitted weekly status reports to USAID on the Basrah Hospital project. 

On about December 20, 2005, the Corps’ engineer departed and was replaced by a 

USAID representative who continued with the weekly Project Review Reports. 

The second set of reports was provided by the contractor. Under the terms of the 

contract, Bechtel reported and met weekly with USAID on the status of projects. USAID 

received a number of recurring reports from Bechtel including Weekly Project Review 

reports, Trend reports, and Critical Action Item reports. 

Information Available to USAID on the Status of the Hospital Project. The 

following shows the information reported to USAID by its on-site engineer and its 

contractor. As discussed, the original contracted completion date for the hospital was 

December 31, 2005. 

January to March 2005 

During this quarter, the project completion date slipped from December 31, 2005, to May 

31, 2006. Between January and April 2005, the Corps’ on-site engineer reported a steady 

slippage in the estimated completion date of the contract because of delays by the Iraqi 

Ministry of Health in making facility design requirement decisions. According to the 

reports, this added about 90 days to the schedule. Site security was also cited as a 

concern, and the engineer alerted USAID that the schedule for laying pilings could add 

up to 50 days to the schedule. 8

 By the end of the quarter, the Corps’ on-site engineer 

was estimating the completion date as May 31, 2006. The schedule slippage was also 

reported by the contractor, along with concerns about overall project cost. 

In the April 2005 Section 2207 Report to the Congress USAID identified the estimated 

completion date as March 30, 2006. At this time, USAID was not preparing Project 

Assessment Reports and was not reporting an estimated cost at completion. 

April to June 2005 

Between April and June 2005, the estimated completion date slipped from May 31, 2006, 

to September 15, 2006. The Corps’ on-site engineer reported the slippages created by 

facility design decision delays and site security throughout the quarter and also reported 

that the design-build estimate received exceeded the job order budget, and that the budget 

and site security were concerns. 

The contractor, Bechtel, was also reporting that forecasted costs would exceed budget 

and that the forecast completion would be September 15, 2006. An amendment to the job 

order was initiated to address the cost issue. 

In the July 2005 Section 2207 Report to the Congress, USAID identified the estimated 

completion date as September 2006. USAID was still not preparing Project Assessment 

Reports at this time and was not reporting an estimated cost at completion. 

 

8

 Pilings are concrete rods driven into the earth upon which the hospital foundation rests. 
6

July to September 2005 

On July 7, 2005, amendment 1 to the job order was signed by USAID and Bechtel, 

extending the estimated completion date to October 31, 2006, and increasing the direct 

costs of the subcontractor for constructing the hospital from $37 million to $41 million. 

This addressed the cost issues identified in the previous quarter. Starting in the July 22, 

2006 report, the Corps’ on-site engineer reported the same estimated project completion 

date of October 31, 2006; which corresponded with amendment 1 for the end of the 

Bechtel contract, so it would not have been possible to go past that point without a 

contract extension. Instead of changing the estimated completion date, however, the 

engineer started identifying construction delays in the narrative section of the report. By 

August, the on-site engineer was reporting that the October 31, 2006, completion date 

was at risk because of problems with the pilings. The amount of delay gradually 

increased, until by late-September he was identifying the project as 51 days behind 

schedule. He also reported that Bechtel and the sub-contractor had implemented a work 

plan to put the project back on schedule. 

Neither USAID nor Bechtel reported any problems with the contract throughout this 

period. The October 2005 Section 2207 Report did not identify the on-site engineer’s 

concerns with the project and no mention was made of the 51-day potential delay. The 

first Project Assessment Report was issued in October 2005, for the period ending 

September 30, 2005, and reported the estimated completion date as October 31, 2006, 

and the estimated cost at completion as $50 million, despite the 10 month slip in the 

schedule from the original December 31, 2005 completion date. 

October to December 2005 

From October to December 2005, the Corps’ on-site engineer continued to identify the 

completion date as October 31, 2006, but in his narrative identified a steady slip in the 

project schedule. Bechtel was operating from a revised schedule based on the previous 

quarter’s 51-day slip. Beginning from the first report of the quarter the on-site engineer 

reported a growing deviation from the revised schedule. By December 12, 2005, the onsite engineer was reporting the contractor as 8 weeks behind its revised schedule. On 

December 18, 2005, the Corps’ on-site engineer submitted a special baseline schedule 

assessment, which stated that the project was 111 days behind schedule due to errors in 

construction documents, lack of subcontractor focus on critical path activities, and 

slowdown in construction in order to ensure quality output. The on-site engineer also 

reported pessimism about recovery. According to the assessment, “(t)he project is on its 

third recovery plan to reduce the project schedule deficit. The third recovery plan 

indicates that it will eliminate approximately 80 days of the project schedule deficit. 

None of the previous recovery plans have worked to date as the project continues to fall 

further behind.” 

In the December 20, 2005, Project Review Report, a USAID on-site representative 

replaced the departed Corps’ engineer and began using a new methodology for reporting 

the project’s status. In reports filed in late-December and early January he continued to 

identify the specific number of days the project was behind schedule. However, he also 

started using a color code system to report project status in which he reported the project 

as “Green, Amber, or Red.” For example, in the December 20 report he stated that the 

project was six weeks behind schedule and that the status of the project was changed 

from “Green to Amber” because it was falling behind schedule. 

Bechtel was also reporting delays but was less pessimistic than the on-site engineer. 

However, the contractor announced that it was going to do a special assessment of the 
7

project schedule. On October 21, 2005, Bechtel was reporting the estimated completion 

as 22 days behind schedule and gradually increased that estimate through the quarter 

until, by December 26, 2005, Bechtel was reporting the project as 44 days late. 

The January 2006 Section 2207 Report and Project Assessment Report did not identify 

any delays on the project. The Project Assessment Report identified the estimated 

completion date as October 31, 2006, and the estimated cost at completion as $50 

million. 

January to March 2006 

By mid-January 2006, the USAID representative stopped reporting days behind schedule 

altogether, and reported project status using the color code only. From January 17 

through March 19, 2006, the USAID representative assessed the project as “Amber” in 

eight consecutive weekly reports, citing schedule concerns. Finally, on April 4, 2006, the 

USAID representative reported the project as “RED – Behind schedule.” 

Bechtel submitted similarly pessimistic reports, identifying the project in its January 2, 

2006, report as 25 days behind schedule and increasing that estimate in every weekly 

report through March 22, 2006, at which time it announced the project as 77 days behind 

schedule. Finally, on March 26, 2006, Bechtel released its project assessment and briefed 

USAID that the project was 273 days behind schedule with a new estimated completion 

date of July 31, 2007. Nonetheless, in the April 2006 Section 2207 Report, USAID 

reported no problems with the project schedule. 

Table 2 shows the information available to USAID and what it reported from January 

2005 through April 2006. 

Table 2: USAID Reports to the Congress on Status of Basrah Children’s Hospital 

Section 2207 

Report Dates 

to Congress 

Corps of 

Engineers’/USAID 

On-Site Reports on 

Project Status 

Completion Date 

Reported to 

Congress in 

Section 2207 

Report 

Completion Date 

Reported in 

Project Assessment 

Reports 

Estimated 

Cost atCompletion in 

Project 

Assessment 

Report 

January 20051 Estimated completion 

of February 28, 2006 

December 2005 Report not prepared Not provided 

April 2005 Estimated completion 

of May 31, 2006 

March 2006 Report not prepared Not provided 

July 2005 Estimated completion 

of September 15, 2006 

September 2006 Report not prepared Not provided 

October 2005 51 days behind 

schedule 

A project 

completion date was 

not identified 

October 31, 2006 $50,000,000 

January 2006 111 days behind 

schedule 

A project 

completion date was 

not identified 

October 31, 2006 $50,000,000 

April 2006 Status: Red 

“Behind Schedule”

A project 

completion date was 

not identified 

July 31, 2007 $61,752,474 

1

Construction of the hospital began in mid-October 2004. 
8

According to USAID officials, they were aware of the 77 day slip in the January to 

March 2006 period (due to concrete pouring falling behind schedule, local holidays, and 

security concerns), but were taken by surprise by the (cumulative) 273 day slip 

announced by the contractor. Bechtel explained that problems continued between the 

subcontractor and its sub-tier contractors that resulted in work slowdowns/stoppages. 

USAID also said that they did not report the delays because with each slip the contractor 

provided a new schedule identifying how it intended to make up the lost time. 

We recognize that estimating project schedules is an imprecise art, particularly in an 

environment as difficult and challenging as Iraq. Projects can fall behind schedule and a 

recovery can sometimes occur. However, as stated earlier, by July 2005 the project was 

already 10 months behind its original schedule and the delays were increasing on a 

monthly basis. Further, the contractor had submitted numerous recovery plans for the 

hospital to reduce the project’s schedule deficit, none had worked, and the project 

continued to fall further behind. Given the 15-month long pattern of delays coupled with 

the contractor’s inability to recover from those delays, we believe that USAID had ample 

information to conclude that the hospital project was in trouble. 

Integrating Medical Equipment Will Add To the Delay. USAID was responsible for 

construction of the hospital building and has not included the installation of medical 

equipment in its project completion estimate. According to a Project HOPE official, the 

final installation of some medical equipment will not start until construction is completed 

and will further delay the commissioning of the hospital. Project HOPE is to provide 

approximately $30 million in equipment and training, and as of June 25, 2006, reports 

that it is prepared to meet all commitments for equipment, on time and with the quality 

and quantity required to support a state-of-the-art tertiary care pediatric center. 

According to the USAID Director, USAID was not required to report on the medical 

equipment and is not required to include Project HOPE’s contribution in its Section 2207 

Report. While we agree that USAID is not responsible for the equipment, it is 

responsible for integrating Project HOPE’s contribution into its plans. Further, 

“completion” of a hospital that lacks its operating equipment is not an accurate appraisal 

of the project’s status. For example, the Deputy Chief of Mission was unaware that the 

completion date did not reflect delivery of a turnkey operation that would include 

medical equipment. 
9

USAID’s Accounting Systems and Processes for 

Identifying Project Costs 

USAID’s accounting systems and processes are inadequate and failed to accurately 

identify and report hospital project costs to the Chief of Mission and to the Congress. As 

of the April 2006 Section 2207 Report to the Congress, USAID was reporting the 

hospital project cost as $50 million, even though the contractor estimated the cost at $98 

million. USAID reported the lower number because it believed that it did not have to 

include an estimated $48 million in contractor indirect costs in its reports. According to a 

USAID contracting officer, USAID did not report these costs so it could stay within the 

$50 million authorization. While we did not conduct an audit of USAID’s financial 

records, we observed that other cost elements, such as the costs of the Corps of 

Engineers’ Participating Agency Service Agreement, have not been reported, which 

could drive the costs higher. USAID also mis-reported its disbursements against the 

hospital project (and all other projects), further obscuring the status of the project. SIGIR 

plans to conduct an audit of USAID’s overall Bechtel contract and all USAID-managed 

Iraq Relief and Reconstruction Fund projects to determine if similar reporting has 

occurred. 

USAID’s Categorization of Costs for the Hospital Project. Public Law 108-106 

established the Iraq Relief and Reconstruction Fund, and allocated $18.439 billion to 

specific sectors of Iraq society and governance. The funds were further allocated down 

to projects within each sector, one of which was the Basrah Children’s Hospital project.9

 

In total, $50 million was authorized for this project. These funds were to finance all 

expenses of the project, to include the hospital’s direct and indirect costs. 

USAID contracting documents show that it was aware that the $50 million authorized for 

the hospital was to fund all construction costs of the hospital including both the direct and 

indirect costs. The contract job order defines the scope of work as “the design and 

construction of a pediatric teaching hospital in the city of Basrah,” with an initial rough 

order of magnitude cost estimate of $37 million. Bechtel, in turn, awarded a firm-fixedprice subcontract for the $37 million, and set aside $13 million to cover indirect costs. 

USAID reviewed Bechtel’s subcontract and agreed with it and the $13 million indirect 

cost set aside. 

USAID identifies two types of what it refers to as “distributable” indirect costs: indirect 

costs at the job order level and indirect costs at the contract level. Indirect costs at the job 

order level consist of items such as the salary of the acquisition team and subcontract 

management, camps, security, and office equipment. Indirect costs at the contract level 

consist of such items as the prime contractor’s mobilization expenses, the contractor’s 

fixed fee for mobilization, and the contractor’s fixed fee for the job orders. During the 

early implementation of the contract, these “distributable costs” were estimated using a 

fixed percentage of the job order direct costs; estimated to be 35 percent of the direct 

costs based on historical information and experience. This methodology was used to 

estimate “distributable” indirect costs for all USAID job orders until early 2005. 

 

9

 House of Representatives Conference Report 108-337, October 30, 2003, “Making Emergency 

Supplemental Appropriations for Defense and for the Reconstruction of Iraq and Afghanistan for the Fiscal 

Year Ending September 30, 2004, and For Other Purposes,” identifies the programs and the amount 

authorized for each program. 
10

USAID Funding and Indirect Cost Allocation Issues. In November 2004, USAID 

reduced the estimated cost of its Bechtel contract from $1.8 billion to $1.4 billion in 

response to a reallocation of IRRF funding between sectors directed by the Chief of 

Mission. However, because USAID had allowed Bechtel to mobilize the staff and 

resources needed to implement a $1.8 billion contract, it was now faced with greatly 

increased mobilization costs and fewer job orders to allocate the costs against. 

In March 2005, USAID took its problem to the Iraq Reconstruction Management Office 

(IRMO) and asked permission to reduce the scope of a number of its projects to resolve 

its funding problems. Altogether, USAID asked for $74 million in project cancellations 

and scope changes. USAID also asked for permission to make $25.5 million worth of 

within-scope changes to a number of its projects, including a $6 million within-scope 

change to the Basrah Children’s Hospital “to absorb greatly increased construction 

costs.” According to the USAID memorandum, “(The costs) (w)ill be offset by reducing 

contractor overhead allocated to this project.” On March 23, 2005, the former IRMO 

Director gave USAID permission to carry out its plan. This scenario was reflected in a 

reallocation spreadsheet prepared by USAID on March 23, 2005, which showed a new 

direct cost threshold of $43 million and an indirect cost threshold of $7 million for the 

Basrah Children’s Hospital project. 

We were unable to locate any documentation that expands upon the agreement reached 

between USAID and IRMO. According to the former IRMO Deputy Director for 

Operations, the memorandum was not intended to give USAID blanket permission to 

change the reporting of all indirect costs. Rather, it was seen as a one-time solution to 

resolve USAID’s funding problem. An attachment to the agreement indicates that it was 

reviewed by the IRMO Budget Officer, the IRMO Director of Operations, and a 

Department of State legal officer. Regardless of the decision made by IRMO, we find the 

entire agreement unclear. The document states that hospital project cost increases would 

be offset by reducing contractor overhead allocated to the project, but project reports for 

the period show no effort to reduce overhead. If the intent was to allow USAID to stop 

reporting its overhead, as stated by USAID, we again fail to see how this would benefit 

USAID in its effort to “rebalance” its programs and free up money to alleviate a funding 

shortfall. Funds would not be freed up by reducing indirect costs. Rather, the hospital 

project’s legitimate indirect costs would have to be assigned to another project creating 

an additional funding burden for another project. 

Beginning in March 2005 through April 2006, USAID started assigning its 

“distributable” indirect costs solely on the difference between the amount obligated to a 

sub-sector and the direct costs incurred by the sub-sector. For example, a USAID 

document dated March 23, 2005, shows the estimated direct cost of the Mussayab 

Thermal Power Station as $6.6 million and the indirect cost for the project as $27.6 

million (a 418 percent indirect cost rate). Conversely, the same document shows the 

estimated cost of the Baghdad South Phase II Electric project as $164.3 million and the 

indirect cost as $1.4 million (a 0.8 percent indirect cost rate). According to a USAID 

contracting officer, USAID did this to stay within the authorization for each project. 

Also, USAID’s Iraq mission believed that when IRMO gave its permission to reduce the 

amount of indirect costs that USAID had to apply to the Basrah Children’s Hospital 

project, that USAID also received blanket permission to assign its “distributable” indirect 

costs in a similar manner for all of its projects for the remainder of the contract period. 

USAID’s failure to properly report its indirect costs to the appropriate project can also be 

seen in the cost estimates for the hospital project that it provided to the Congress. The 

job order for the Basrah Children’s Hospital was signed on August 3, 2004, and the 

completion date was identified as December 31, 2005. That date remained the official 
11

contract completion date until July 7, 2005, when USAID amended the contract and 

revised the completion date to October 31, 2006. USAID made no other changes in the 

schedule until April 2006, when it notified IRMO that Bechtel changed the completion 

date to July 31, 2007. In every Section 2207 Report submitted to the Congress from 

January 2005 through April 2006 (a total of six reports) USAID identified the hospital 

project as a $50 million project, even though the project had slipped by at least 10 

months. Bechtel’s distributable indirect costs were around $400,000 per day for all 

USAID projects, including for this hospital project. Consequently, under normal cost 

allocation procedures, the 10-month slip in the hospital schedule should have had a 

significant effect on hospital costs. 

The net effect of USAID’s accounting errors is that millions of dollars in indirect costs 

that should have been applied to the hospital project were applied to other USAID 

projects resulting in a serious misstatement of hospital project costs. While, we did not 

conduct an audit of USAID’s financial records, it is likely, in our view, that the current 

estimates identified by USAID do not contain all elements of cost that should correctly be 

assigned to the hospital. For example, we have been unable to determine if the Corps of 

Engineers’ cost for managing USAID projects has been correctly assigned to this project. 

USAID‘s Reporting of Contract Disbursements. The increase in costs that should 

have been aligned with the hospital project was further obscured by USAID’s failure to 

accurately record or report the hospital project’s disbursements. Although the hospital 

project began in October 2004, USAID did not report any disbursements for the hospital 

until December 28, 2005 (three days before the original project completion date of 

December 31, 2005). These disbursements were first identified to Congress in the 

January 2006, Section 2207 Report. With no disbursements reported, it appeared that the 

project had not begun, and consequently, project completion delays raised no red flags 

that problems were being encountered. Comparing disbursements to estimated project 

costs provides a status of funding available for a project. Instead of reporting 

disbursements against the appropriate job order, USAID instead arbitrarily assigned them 

against its oldest obligations. As a result, the actual status of all of its projects was not 

apparent. USAID is still uncertain about the amount it has disbursed for the Basrah 

Children’s Hospital project. Specifically, in a June 2006 report to the Deputy Chief of 

Mission, USAID reported disbursements as $42 million as of May 15, 2006. However, 

one week later it was reporting its disbursements as $31 million. 

USAID’s Compliance to Rules. As discussed earlier, USAID contracting and finance 

officials told us that they believed that when IRMO gave its permission in March 2005 to 

reduce the amount of indirect costs that USAID had to apply to the Basrah Children’s 

Hospital, it had also received blanket permission to assign its “distributable” indirect 

costs in a similar manner for all of its projects in all future reports. They do not perceive 

that what they did was incorrect because, according to the administrative contracting 

officer, USAID only has one contract, the umbrella Bechtel contract, and that contract is 

being managed in accordance with the Federal Acquisition Regulations. The 

administrative contracting officer said that job orders (such as the one directing the 

construction of the children’s hospital) are not legal documents; rather they are letters or 

other written communications signed by the contracting officer authorizing the contractor 

to proceed to implement an identified project. The job order is not an obligating 

document; it was used to identify the scope and rough order of magnitude for a particular 

infrastructure project. Therefore, exceeding the cost of a job order is not consequential. 

We disagree with USAID’s analysis for a number of reasons. Public Law 108-106 

directed that the implementing agencies report to Congress on a project-by-project basis. 

The definition of a project was clearly identified in Congress’ authorization of the IRRF 
12

appropriation in which the Basrah Children’s Hospital was identified as one project in the 

Health Sector. Further, the Office of Management and Budget allocated the IRRF money 

to USAID using Standard Form 132, which further identified the Basrah Children’s 

Hospital as a project. Each quarter USAID submitted its input for the Section 2207 

report in which it reported on the Basrah Children’s Hospital as a single project. In fact, 

the requirement in Public Law 108-106 to report costs at a project level is not ambiguous. 

The law requires the reporting of all funds on a project by project basis along with an 

estimate of the costs required to complete each project. The costs identified by USAID 

for the Basrah Children’s Hospital did not satisfy either of these requirements. 

Estimated Cost at Completion of the Hospital Will Be About $149.5 Million to 

$169.5 Million. Based on cost data we obtained from USAID, we believe that, under the 

current management/contracting structure, the actual “turnkey” cost for the project will 

be about $149.5 million to $169.5 million, including costs for medical equipment, 

integrating the equipment into the hospital, training of hospital staff and administration, 

initial sustainment funding, and initial acquisition of consumable medical supplies. 

Additionally, further delays in construction and construction deficiencies recently 

identified by the Gulf Region Division, U.S. Army Corps of Engineers, have the potential 

to push the costs higher. A June 2006 contracted study by the Louis Berger Group has 

explored other management/contracting options that have the potential to reduce costs. 

Our estimate is also intended only to provide a rough estimate of what we believe the 

costs would be if the status quo is maintained. 

Our estimate uses USAID data, that assumes that construction of the hospital will be 

completed by July 31, 2007, and we added a 10 percent contingency in the event the 

schedule slips further. Security of the hospital and other indirect costs that will be 

incurred while medical equipment is being installed after construction is complete will 

increase the total cost further. Our estimate of $30 to $50 million for medical equipment 

is based on USAID’s original estimate and an estimate provided by a USAID contractor. 

However, we also caution there is still an unclear picture of schedule control, security, 

construction quality, and the use of alternative contract/management options that will 

impact the true cost to complete. See Table 3 for our estimate. 

Table 3: SIGIR’s cost-to-complete estimate for the Basrah Children’s Hospital Project 

Construction Direct Cost (from estimate at completion) $ 50.0 million 

Construction Indirect Costs (USAID estimate) $ 48.0 million 

10% Contingency for schedule slips $ 10.0 million 

Sustainability-Year 1 (15% of direct and contingency) $ 9.0 million 

Equipment – estimate $ 30.0 to $50.0 million 

Medical equipment integrator $ 1.0 million 

Consumable medical supplies $ 1.5 million 

Total $149.5 to $169.5.3 million 

Source: SIGIR analysis of USAID data, as of June 26, 2006. 

Complicating the estimate is a March 2006 Gulf Region Division, U.S. Army Corps of 

Engineers assessment of the project that describes the overall quality of work at the 

project as meeting minimum acceptable limits. The Corps’ assessment cites “serious 

cracks” in the concrete. Repairing these cracks could add to the total construction cost of 

the hospital. The Corps’ report is discussed in more detail later in this report. 
13

In June 2006, USAID contracted with the Louis Berger Group to conduct a Completion 

Assessment of the Basrah Children’s Hospital. The contractor deployed an assessment 

team to Iraq and on June 27, 2006, submitted its report. The contractor identified five 

options: 

1. Withdrawing from the Basrah Children’s Hospital project altogether. 

2. Continuing the status quo until the project is finished. 

3. Discontinue Bechtel as the prime contractor and assign project responsibility 

to the Corps of Engineers, Gulf Region Division. 

4. Continue to build, but descope the level of clinical services provided to the 

people of Basrah under this program and yet retain the core focus of oncology 

services and pediatric surgery. 

5. Assign project execution to an Iraqi ministry. 

The assessment team concluded that maintaining the status quo would cost 

approximately $131 million, not including medical equipment. The recommended 

option was discontinuing Bechtel as the prime contractor and assigning responsibility 

to the Corps of Engineers, Gulf Region Division. This option has the potential to 

reduce costs to approximately $90 million plus the cost of medical equipment. The 

savings comes almost exclusively from the reduction in contractor overhead. 
14

USAID and Department of State Management 

Controls 

Oversight and management of the Basrah Children’s Hospital project has been hampered 

by the lack of effective program management and oversight by the Department of State 

and USAID. The Chief of Mission is responsible for the supervision and direction of all 

U.S. assistance programs, but did not establish a management structure for carrying out 

that responsibility. USAID similarly did not establish an appropriate program 

management structure. 

Department of State Oversight of IRRF Projects Needs Improvement. 

Responsibility for the supervision and direction of all U.S. assistance activities for Iraq 

was assigned to the Chief of the U.S. Mission in Iraq by National Presidential Security 

Directive 36, dated May 11, 2003. The Directive also established a temporary office 

within the Department of State called the Iraq Reconstruction Management Office, to 

“facilitate the transition in Iraq.” According to an operating structure schematic, the 

Director of IRMO reports to the U.S. Ambassador, as does the Director of the USAID 

Mission. The exact authorities and responsibilities of IRMO, however, are not clearly 

defined. As a result, what has emerged is an unclear and sometimes contentious 

relationship between IRMO and USAID. During our review, IRMO officials have 

complained to us about the difficulty in obtaining basic information from USAID on the 

Basrah hospital project status and funding. This lack of authority makes it exceedingly 

difficult for IRMO to carry out its mission. We believe that providing IRMO with the 

authority to request and receive timely, accurate, complete information on IRRF projects 

would greatly improve the Department of State’s oversight, and preclude surprises such 

as occurred on the Basrah Hospital project. 

USAID’s Staff Resources to Manage Contracts. USAID is responsible and 

accountable for the overall implementation of all of its reconstruction activities and for 

providing technical and management oversight of the work to be performed by Bechtel. 

To accomplish these responsibilities, USAID and the U.S. Army Corps of Engineers 

signed a Participating Agency Service Agreement to have the Corps of Engineers provide 

construction oversight of Bechtel. The Participating Agency Service Agreement has a 

total estimated cost of $34.886 million, and when last modified on June 23, 2005, had an 

obligation level of $29.244 million. Under the agreement, the Corps of Engineers was to 

provide technical assistance to USAID and to be responsible for monitoring the quality 

control, quality assurance, schedule, performance monitoring, safety, environmental 

issues, de-mining/unexploded ordinance, and safety programs of Bechtel, and report to 

the USAID contracting officer and cognizant technical officer when exceptions or 

problems were uncovered. Correspondence amongst USAID officials makes it clear that 

the Corps of Engineers’ charter was technical oversight (not management) of the 

contract. The Corps provided these functions for USAID through December 2005, at 

which time the Corp’s on-site engineer departed country and was not replaced. Instead, 

USAID directed that a USAID agent who was also on-site take over some of the 

responsibilities of the Corps engineer. 

While USAID had the agreement with the Corps to provide on-site monitoring, its project 

management team and contracting team was largely understaffed. The contracting officer 

appointed one administrative contracting officer in Baghdad to oversee the contract. The 

administrative contracting officer, in turn, was assisted in Baghdad by one cognizant 

technical officer. These three individuals were responsible for the contract oversight of 

the entire $1.4 billion contract comprised of 20 IRRF-funded construction projects 
15

covering facilities and subprojects located throughout Iraq. They were assisted, since 

December 2005, by a USAID representative based in Basrah. This individual was not, 

however, a hospital construction specialist. The team was also assisted by a Senior 

Contract Specialist, a trainee Contract Specialist, USAID’s Sector Managers, and 

USAID-Iraq Financial Management Office. However, based on the job responsibilities 

described below, we do not believe that this constitutes sufficient staff to oversee and 

monitor a construction program of this magnitude. 

Some of the responsibilities identified in the umbrella contract with Bechtel that the 

administrative contracting officer and the cognizant technical officer were expected to 

accomplish for a $1.4 billion construction program include the following: 

Administrative contracting officer 

• Determine the allowability of costs suspended or disapproved, direct the 

suspension or disapproval of costs when there is reason to believe they should be 

suspended or disapproved, and approve final vouchers. 

• Review and approve or disapprove the contractor’s request for payments. 

• Ensure timely notification by the contractor of any anticipated overrun or under 

run of the estimated cost under cost reimbursement contracts. 

• Negotiate prices and execute supplemental agreements for spare parts and other 

items. 

• Perform property administration. 

• Perform necessary screening, redistribution, and disposal of contractor inventory. 

• Ensure contractor compliance with quality assurance requirements. 

• Ensure contractor compliance with contractual safety requirements. 

• Perform engineering surveillance to assess compliance with contractual terms for 

schedule, cost, and technical performance in the areas of design, development, 

and production. 

Cognizant technical officer 

• Assure that the contractor performs the technical requirements of the contract in 

accordance with the contract terms, conditions, and specifications. 

• Perform, or cause to be performed, inspections necessary (in ensuring the 

contractor performs the technical requirements of the contract). 

• Issue written interpretation of technical requirements of government drawings, 

designs, and specifications. 

• Monitor the contractor’s production or performance progress and notify the 

contractor in writing of deficiencies observed during surveillance, and direct 

appropriate action to effect correction. 
16

Management Actions

In May and June 2006, the Deputy Chief of Mission and the IRMO Director took a 

number of actions to get control of the Basrah Children’s Hospital project. 

 

• On May 19, 2006, the Acting IRMO Director instructed USAID to issue a “stop 

work” order to its contractor. According to the Action Memorandum issued to 

USAID, this action was intended to preserve remaining funds within the $50 

million allocation while the schedule and cost-to-complete were reviewed and 

appropriate decisions made and implemented. The Acting IRMO Director’s 

instruction was not followed. 

• On June 6, 2006, the Deputy Chief of Mission chaired a meeting of senior IRMO 

staff and the USAID Director. At that meeting, USAID presented a briefing on 

the status of the Basrah Children’s Hospital. At the conclusion of the meeting the 

Deputy Chief of Mission directed USAID and IRMO to provide specific 

information on (1) the true cost and schedule to complete the project (the Deputy 

Chief of Mission defined completion as a fully functioning hospital); (2) what 

would be accomplished with the $50 million that was allocated and when the 

costs against this $50 million would be fully incurred; and (3) what options are 

available to complete the project to include options for funding, contracting, 

project management, and oversight. 

• On June 14, 2006, the IRMO Director again instructed USAID to “issue an order 

to Bechtel National, Inc. to immediately cease construction work other than that 

necessary to place the site in caretaker status, and to begin demobilization from 

the job site.” The letter also stated, “(A)dditionally, USAID is instructed that 

remaining funds shall be used to (sic) for physical security of the job site and to 

secure the work to date for a period of no less than 120-days.” 
17

Conclusion and Recommendations 

Conclusion 

Construction of the Basrah Children’s Hospital project began in October 2004 with an 

estimated completion date of December 2005 and by July 2005 the schedule had slipped 

10 months to October 2006. Despite schedule revisions and other efforts to catch up, the 

project remained behind schedule. Starting in October 2005 the schedule slippage began 

to accelerate and by December the Corps’ on-site engineer was reporting the project as 

111 days past the October 2006 completion date. Finally, on March 26, 2006, Bechtel 

revised the estimated completion date to July 31, 2007. Despite regular alerts from 

several sources, little of this information was reported by USAID in the Section 2207 

Reports to the Congress or into USAID’S Project Assessment Reports. 

A similar situation exists with costs. From at least March 2005 USAID has known that 

the hospital would not be built within the $50 million congressional authorization. 

However, in all reports submitted to Congress between March 2005 and March 2006, 

USAID continued to describe the hospital as a $50-million project. To stay within that 

cost limit, USAID stopped reporting the indirect costs that should have correctly been 

assigned. These costs estimates were significant, conceivably totaling $48 million at 

completion. According to USAID officials, they believed they had the permission of 

IRMO to report in this manner. Regardless of any permission that may or may not have 

been given by IRMO, however, arbitrarily assigning costs does not meet the requirement 

in Public Law 108-106 to report costs on a project-by-project basis along with a cost-tocomplete estimate for each project. 

The lack of effective program management and oversight by the Department of State and 

USAID contributed significantly to the Basrah Children’s Hospital project problems. 

The Iraq Chief of Mission is responsible for the supervision and direction of Iraq 

assistance programs but has never established an oversight process that meets either 

requirement. Project management has been left primarily in the hands of the 

implementing agencies, with little oversight or direction from the Department of State. 

USAID also has not established an effective project management structure. Currently 

one contracting officer, one administrative contracting officer, and one cognizant 

technical officer; along with a handful of program staff, are responsible for the 

management and oversight of approximately $1.4 billion in construction activities, and 

no hospital project management office has been established. 

We also believe that the project will require between $69.5 million to $89.5 million of 

additional funds to complete. This estimate is based on our estimated cost-to-complete of 

between $149.5 million to $169.5 million, minus the $50 million IRRF allocation and 

$30 million from Project HOPE. However, we also caution there is still an unclear 

picture of schedule control, security, construction quality, and the use of alternative 

contract/management options that will impact the true cost to complete. 
18

Recommendations 

We recommend that the U.S. Ambassador to Iraq take the following actions: 

1. Direct USAID Mission Director-Iraq to: 

a. Issue a “stop work” order to Bechtel and its subcontractors until there 

are sufficient plans, resources, and processes in place to ensure a 

successful project. 

b. Report on the total project, including Project HOPE’s activities in its 

Section 2207 Report. 

c. Provide the IRMO Director with timely, accurate, and complete 

information as deemed necessary to ensure the project has independent 

oversight. 

2. Direct the IRMO Director and the USAID Mission Director-Iraq to: 

a. Promptly report on the answers to the Deputy Chief of Mission’s 

questions provided on June 6, 2006. 

b. Consider alternative forms of contracting and project management to 

complete the project. 

c. Develop a management structure to ensure the success of this project. 

SIGIR plans to conduct a review of USAID’s overall Bechtel contract and all USAIDmanaged IRRF projects to determine if similar reporting has occurred. 

Management Comments and Audit Response 

We received a consolidated response from the U.S. Mission-Iraq on a draft of this report. 

The Mission concurred with all of our recommendations and identified a number of 

actions underway. Foremost, the Ambassador has created and chairs a Reconstruction 

Core Group which includes all U.S. Mission agencies involved in reconstruction. The 

Reconstruction Core Group has devised a plan to complete the project in which program 

and project management for the Basrah Children’s Hospital is transferred from USAID to 

the U.S. Army Corps of Engineers, Gulf Region Division- Project and Contracting 

Office. The Gulf Region Division plans to establish a Gulf Region Division-led special 

project office in Basrah with USAID and Project HOPE representatives, a Gulf Region 

Division provided hospital and equipment integrator to ensure synchronization of effort, 

and program management additions at Gulf Region Division Headquarters to ensure 

adequate controls during execution. The Ambassador has also: 

• issued an instruction to all agencies that implement U.S. assistance under his 

authority to provide the Iraq Reconstruction Management Office with accurate 

and complete information on projects

• directed the USAID Director to work with the IRMO Director to establish 

reporting systems that assure that information is made available that reflects 

the most accurate possible direct and indirect cost allocations by projects and 

programs

We consider these actions and other planned U.S. Mission actions to be fully responsive 

to our report. We also received separate written comments from USAID on a draft of this 

report which were incorporated in the final report as appropriate. Our detailed response 

to USAID’s comments is included in the Management Comments section at the end of 

this report. Based upon our review of management comments, except for 

recommendation 1(b), we consider all recommendations to be closed. 
19

Appendix A. Scope and Methodology 

This review was announced on April 12, 2006 (Project No. 6016), with the objective of 

assessing the Iraq Reconstruction Management Office’s (IRMO) and USAID’s 

management of the Basrah Children’s Hospital project. The announced objectives of the 

audit were to determine (1) whether USAID has effective policies, procedures, and 

management controls in place to achieve expected project outcomes; (2) whether USAID 

has adequate financial controls in place to effectively monitor the project and to collect 

and report on cost to complete; and (3) whether USAID and IRMO have effective 

management reporting processes in place to ensure effective transparency of project cost, 

schedule, and performance. 

On March 26, 2006, Bechtel reported to USAID that the estimated completion date for 

the project had slipped to July 31, 2007, and that estimated costs for the project had 

grown from $50 million to $98 million. We learned of this project status after our audit 

began, and consequently, we modified our objectives to determine the reasons for the 

project slippage and increased costs. Therefore, our review was adjusted to answer the 

following questions: 

• Does USAID have effective processes in place for tracking and reporting the 

schedules of its Basrah Children’s Hospital project? 

• Does USAID have effective processes in place for tracking and reporting the cost 

of the Basrah Children’s Hospital project to the Congress and to the Chief of 

Mission? 

• Do USAID and IRMO have effective policies, procedures, and management 

controls in place to achieve expected project outcomes? 

To determine the effectiveness of USAID’s processes for tracking and reporting its 

projects we interviewed the Deputy Chief of Mission and personnel from IRMO, USAID, 

U.S. Army Corps of Engineers, and Bechtel National, Inc. to understand the roles and 

responsibilities of each party involved in the Basrah Children’s Hospital project. We also 

obtained and reviewed all pertinent contract documents, and the Memorandum of 

Understanding between USAID and Project HOPE. Based on information obtained 

during our interviews and our document review we requested copies of all hospital 

project status reports prepared by the Corps of Engineers and Bechtel. We also requested 

and received all emails written by USAID personnel that pertained to the hospital project. 

Among the documents we obtained were weekly trend, activity, and schedule updates. 

These documents were analyzed and chronologically arranged to determine what 

information was available to USAID on the project and when it was available. 

To determine USAID’s processes for tracking and reporting costs, we met with the 

USAID-Iraq Mission Comptroller to obtain a description of USAID’s accounting 

processes and information on how USAID calculates its’ costs-to-complete and 

estimates-at-completion to meet the requirements of the Section 2207 and Project 

Assessment Reports. We also met with Bechtel officials to gain an understanding of the 

cost data provided to USAID by Bechtel. Finally, we discussed USAID’s cost reporting 

with the IRMO budget officer to determine what IRMO received from USAID. We did 

not audit USAID’s financial management or accounting systems. 
20

To determine USAID’s policies, procedures, and management controls we interviewed 

USAID contracting personnel including the administrative contracting officer, the 

cognizant technical officer, the Mission comptroller, and the Sector Manager. We also 

spoke IRMO officials about their oversight of the contract. 

We performed this audit from April 12, 2006, through June 30, 2006, in accordance with 

generally accepted government auditing standards. 

Use of Computer-processed Data. We performed no tests to determine the accuracy 

and reliability of the data we obtained from USAID. 

Prior Coverage. Special Inspector General for Iraq Reconstruction Audit Report 

Number SIGIR-05-027, dated January 27, 2006, “Methodologies for Reporting Cost-toComplete Estimates”, concluded that (of among agencies examined in this report) 

USAID failed to estimate and report reliable and transparent cost-to-complete 

information for the IRRF projects we reviewed. USAID submitted quarterly Section 

2207 Reports to Congress with errors that were significant enough to undermine users’ 

confidence in the reporting. 

Special Inspector General for Iraq Reconstruction Audit Report Number SIGIR-05-021, 

dated October 24, 2005, “Management of Iraq Relief and Reconstruction Fund Programs: 

Cost-to-Complete Estimate Reporting”, concluded that USAID and IRMO have been 

required, since January 2004, to report cost-to-complete information for their IRRF 

projects in quarterly reports to Congress. However these (and other) agencies did not 

begin providing reasonably comprehensive cost-to-complete data to IRMO until recently. 
21

Appendix B. Acronyms 

Project HOPE Health Opportunities for People Everywhere 

IRMO Iraq Reconstruction Management Office 

IRRF Iraq Relief and Reconstruction Fund 

SIGIR Special Inspector General for Iraq Reconstruction 

USAID U.S. Agency for International Development 
22

Appendix C. Report Distribution 

Department of State 

Secretary of State 

Senior Advisor to the Secretary and Coordinator for Iraq 

U.S. Ambassador to Iraq 

Director, Iraq Reconstruction Management Office 

Mission Director-Iraq, U.S. Agency for International Development 

Inspector General, Department of State 

Department of Defense 

Secretary of Defense 

Deputy Secretary of Defense 

Director, Defense Reconstruction Support Office 

Under Secretary of Defense (Comptroller)/Chief Financial Officer 

 Deputy Chief Financial Officer 

 Deputy Comptroller (Program/Budget) 

Inspector General, Department of Defense 

Director, Defense Contract Audit Agency 

Director, Defense Finance and Accounting Service 

Director, Defense Contract Management Agency 

Department of the Army 

Assistant Secretary of the Army for Acquisition, Logistics, and Technology 

Principal Deputy to the Assistant Secretary of the Army for Acquisition, 

Logistics, and Technology 

Deputy Assistant Secretary of the Army (Policy and Procurement) 

Director, Project and Contracting Office 

Commanding General, Joint Contracting Command-Iraq/Afghanistan 

Assistant Secretary of the Army for Financial Management and Comptroller 

Chief of Engineers and Commander, U.S. Army Corps of Engineers 

 Commanding General, Gulf Region Division 

Auditor General of the Army 

U.S. Central Command

Commanding General, Multi-National Force-Iraq 

Commanding General, Multi-National Security Transition Command-Iraq 

Commander, Joint Area Support Group-Central 

Other Federal Government Organizations 

Director, Office of Management and Budget 

Comptroller General of the United States 

Inspector General, Department of the Treasury 

Inspector General, Department of Commerce 

Inspector General, Department of Health and Human Services 

Inspector General, U.S. Agency for International Development 

President, Overseas Private Investment Corporation 

President, U.S. Institute for Peace 
23

Congressional Committees and Subcommittees, Chairman and 

Ranking Minority Member 

U.S. Senate 

Senate Committee on Appropriations 

Subcommittee on Defense 

Subcommittee on State, Foreign Operations and Related Programs 

Senate Committee on Armed Services 

Senate Committee on Foreign Relations 

Subcommittee on International Operations and Terrorism 

Subcommittee on Near Eastern and South Asian Affairs 

Senate Committee on Homeland Security and Governmental Affairs 

Subcommittee on Federal Financial Management, Government Information and 

International Security 

Subcommittee on Oversight of Government Management, the Federal 

Workforce, and the District of Columbia 

U.S. House of Representatives 

House Committee on Appropriations 

Subcommittee on Defense 

Subcommittee on Foreign Operations, Export Financing and Related Programs 

Subcommittee on Science, State, Justice and Commerce and Related Agencies 

House Committee on Armed Services 

House Committee on Government Reform 

Subcommittee on Management, Finance and Accountability 

Subcommittee on National Security, Emerging Threats and International 

Relations 

House Committee on International Relations 

Subcommittee on Middle East and Central Asia 

 
24

Appendix D. Audit Team Members 

This report was prepared and the audit work was conducted under the direction of 

Joseph T. McDermott, the Assistant Inspector General for Audit, Office of the 

Special Inspector General for Iraq Reconstruction. The staff members who 

contributed to the report include: 

Mark L. Comfort 

Glenn D. Furbish 

John Morrell 

James B. Pollard 
25

Management Comments 

U.S. Mission Iraq 
26
27
28

Management Comments 

U.S. Agency for International Development 
29
30
31
32
33
34
35

SIGIR Audit Response to Comments by the 

U.S. Agency for International Development 
36
37