United States Government Accountability Office

GAO Report to Congressional Committees

IRAQ CONTRACT 

COSTS 

DOD Consideration of 

Defense Contract 

Audit Agency’s 

Findings 

September 2006 

 

GAO-06-1132 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

IRAQ CONTRACT COSTS 

DOD Consideration of Defense Contract 

Highlights of GAO-06-1132, a report to Audit Agency's Findings 

Congressional Committees 

The government has hired private

contractors to provide billions of 

dollars worth of goods and services 

to support U.S. efforts in Iraq. 

Faced with the uncertainty as to 

the full extent of rebuilding Iraq, 

the government authorized

contractors to begin work before

key terms and conditions were

defined. This approach allows the 

government to initiate needed work 

quickly, but can result in additional 

costs and risks being imposed on 

the government. Helping to oversee 

their work is the Defense Contract 

Audit Agency (DCAA), which 

examined many Iraq contracts and 

identified costs they consider to be 

questioned or unsupported. 

The Conference Report on the 

National Defense Authorization Act 

for Fiscal Year 2006 directed GAO

to report on audit findings 

regarding contracts in Iraq and

Afghanistan. As agreed with the

congressional defense committees, 

GAO focused on Iraq contract audit 

findings and determined (1) the 

costs identified by DCAA as 

questioned or unsupported; and 

(2) what actions DOD has taken to

address DCAA audit findings, 

including the extent funds were

withheld from contractors. To

identify DOD actions in response to 

the audit findings, GAO selected 

18 audit reports representing about 

50 percent of DCAA’s questioned

and unsupported costs on Iraq 

contracts. 

GAO requested comments from 

DOD on a draft of this report, but 

none were provided. 

Defense Contract Audit Agency audit reports issued between February 2003 

and February 2006 identified $2.1 billion in questioned costs and $1.4 billion 

in unsupported costs on Iraq contracts. DCAA defines questioned costs as 

costs that are unacceptable for negotiating reasonable contract prices, and 

unsupported costs as costs for which the contractor has not provided 

sufficient documentation. This information is provided to DOD for its 

negotiations with contractors. Based on information provided by DCAA, 

DOD contracting officials have taken actions to address $1.4 billion in 

questioned costs. As a result, DOD contracting officials negotiated contract 

cost reductions of $386 million according to DCAA. Based on the 

information provided by DCAA, as of July 2006, the remaining $700 million in

questioned costs is still in process. Because unsupported costs indicate a 

lack of contractor information that is needed to assess costs, DCAA cannot 

and does not render an opinion on those costs. Therefore, DCAA does not 

track the resolution of unsupported costs. 

For the 18 audit reports selected for this review, GAO found that DOD 

contracting officials took a variety of actions to address DCAA’s audit 

findings, including not allowing some contractor costs. In the contract 

documentation GAO reviewed, DOD contracting officials generally 

considered DCAA’s questioned and unsupported cost findings when 

negotiating with the contractor. GAO found DOD contracting officials were 

more likely to use DCAA’s advice when negotiations were timely and 

occurred before contractors had incurred substantial costs. For example, in 

three audit reports related to a logistics support task order negotiated prior 

to the onset of work, DCAA questioned $204 million. According to DCAA’s 

calculations, $120 million of these questioned costs was removed from the 

contractor’s proposal as a result of its audit findings. In contrast, DOD 

officials were less likely to remove questioned costs from a contract 

proposal when the contractor had already incurred these costs. For 

example, in five audit reports comprising about $600 million of questioned 

costs reviewed, GAO found that the DOD contracting officials determined 

that the contractor should be paid for all but $38 million of the questioned 

costs, but reduced the base used to calculate the contractor’s fee by $205

million. By reducing the base, the DOD contracting official reduced the 

contractor’s fee by approximately $6 million. In addition to identifying 

questioned and unsupported costs, DCAA has the option of withholding 

funds from the contractor and chose to withhold a total of $236 million for 

eight cases included in this review. 

www.gao.gov/cgi-bin/getrpt?GAO-06-1132.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact John Hutton at 

(202) 512-4841 or huttonj@gao.gov. 
Contents 

Letter 1

Results In Brief 2 

Background 4

DCAA Audit Reports Identified Billions of Dollars of Questioned 

and Unsupported Costs on Iraq Contracts 5 

DOD Contracting Officials Have Taken a Range of Actions to 

Address Audit Findings 6 

Appendix I Scope and Methodology 15 

Figures 

Figure 1: Timeline of Key Contracting Events for Restore Iraqi Oil 

Contract, Task Order 5 9 

Figure 2: Timeline of Key Contracting Events for Logistics Civil 

Augmentation Program III Contract, Task Order 89 10 

Abbreviations: 

DCAA Defense Contract Audit Agency 

DESC Defense Energy Support Center 

DOD Department of Defense 

FAR Federal Acquisition Regulation 

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Page i GAO-06-1132 Iraq Contract Costs
United States Government Accountability Office

Washington, DC 20548 

September 25, 2006 

Congressional Committees 

The United States is spending billions of dollars to achieve U.S. political, 

security, and economic goals in Iraq. Between fiscal years 2003 and 2006,

the U.S. government has allocated about $311 billion to support U.S. 

stabilization and reconstruction efforts in Iraq. The United States has 

relied heavily on private-sector contractors to provide the goods and 

services needed to support both the military and reconstruction efforts in 

Iraq. Faced with the uncertainty as to the full extent of rebuilding Iraq, the 

government authorized contractors to begin work before key terms and 

conditions were defined. This approach allows the government to initiate

needed work quickly, but can result in additional costs and risks being 

imposed on the government. Given the dollar amounts involved, it is 

essential that these acquisitions be handled in an efficient, effective, and 

accountable manner to mitigate the government’s risk. 

The United States is spending billions of dollars to achieve U.S. political, 

security, and economic goals in Iraq. Between fiscal years 2003 and 2006,

the U.S. government has allocated about $311 billion to support U.S. 

stabilization and reconstruction efforts in Iraq. The United States has 

relied heavily on private-sector contractors to provide the goods and 

services needed to support both the military and reconstruction efforts in 

Iraq. Faced with the uncertainty as to the full extent of rebuilding Iraq, the 

government authorized contractors to begin work before key terms and 

conditions were defined. This approach allows the government to initiate

needed work quickly, but can result in additional costs and risks being 

imposed on the government. Given the dollar amounts involved, it is 

essential that these acquisitions be handled in an efficient, effective, and 

accountable manner to mitigate the government’s risk. 

The Defense Contract Audit Agency (DCAA) provides services that can

help DOD ensure accountability for its acquisitions. DCAA performs audits 

and provides financial advisory services in connection with negotiation,

administration, and settlement of contracts and subcontracts. For 

example, DCAA has audited many Iraq contract proposals and contracts

and has identified costs it considers to be questioned or unsupported. 

DCAA defines questioned costs as those costs considered to be not 

acceptable for negotiating a reasonable contract price, and unsupported 

costs as costs for which the contractor has not furnished sufficient 

documentation to support the cost proposed or claimed. 

The Defense Contract Audit Agency (DCAA) provides services that can

help DOD ensure accountability for its acquisitions. DCAA performs audits 

and provides financial advisory services in connection with negotiation,

administration, and settlement of contracts and subcontracts. For 

example, DCAA has audited many Iraq contract proposals and contracts

and has identified costs it considers to be questioned or unsupported. 

DCAA defines questioned costs as those costs considered to be not 

acceptable for negotiating a reasonable contract price, and unsupported 

costs as costs for which the contractor has not furnished sufficient 

documentation to support the cost proposed or claimed. 

The Conference Report on the National Defense Authorization Act for 

Fiscal Year 20061

 directed GAO to report on audit findings regarding 

contracts in Iraq and Afghanistan. As agreed with the congressional 

defense committees, we focused on Iraq contract audit findings and 

determined (1) the costs identified by DCAA as questioned or 

unsupported; and (2) what actions DOD has taken to address DCAA audit 

The Conference Report on the National Defense Authorization Act for 

Fiscal Year 20061

 directed GAO to report on audit findings regarding 

contracts in Iraq and Afghanistan. As agreed with the congressional 

defense committees, we focused on Iraq contract audit findings and 

determined (1) the costs identified by DCAA as questioned or 

unsupported; and (2) what actions DOD has taken to address DCAA audit 

 1

 National Defense Authorization Act of 2006, H.R. Conf. Rep. No. 109-360, p. 767(Dec. 18, 

2005). 

Page 1 GAO-06-1132 Iraq Contract Costs
findings, including the extent to which funds were withheld from 

contractors. 

To determine the costs DCAA questioned or identified as unsupported, we 

analyzed information provided to us by DCAA on Iraq-related audit reports 

issued between February 2003 and February 2006. To identify actions 

taken by DOD to address audit findings and funds withheld, we selected 

18 audit reports comprised of (1) the 10 reports with the highest dollar 

amounts of questioned and unsupported costs, and (2) 8 other audit 

reports with questioned and unsupported costs above $5 million. The 

questioned and unsupported costs for the 18 selected reports totaled 

$1.8 billion, or approximately 50 percent of all questioned and 

unsupported costs identified through DCAA’s data on Iraq contracts. The 

selected audit reports represent work performed by four contractors. For 

each audit report, we obtained key documentation from DCAA and DOD, 

and interviewed DCAA auditors and DOD contracting officials. Appendix I 

provides details on our scope and methodology. We conducted our work 

from March 2006 through September 2006 in accordance with generally

accepted government auditing standards. 

Between February 2003 and February 2006, DCAA issued hundreds of 

audit reports that collectively identified $2.1 billion in questioned costs 

and $1.4 billion in unsupported costs on Iraq contracts, primarily through 

audits of contractor proposals. Based on information provided to us by 

DCAA, contracting officials had addressed $1.4 billion of DCAA’s 

questioned costs. Of that amount, contracting officials reduced contract 

costs by about $386 million, according to information provided by DCAA.2

Based on the information provided by DCAA, as of July 2006, the 

remaining $700 million in questioned costs is still in process. Because 

unsupported costs indicate a lack of contractor information that is needed

to assess costs, DCAA cannot and does not render an opinion on those 

costs. Therefore, DCAA does not track the resolution of unsupported 

costs. 

Results In Brief 

 2

 DCAA provided information that identified $453 million in reduced contract costs. Based 

on our review of 18 audit reports, we found DCAA’s information on reduced contract costs 

included $67 million that was paid to the contractor but removed from the base used to

calculate the contractor’s fees. DCAA officials acknowledged these costs should not be

included and that the $453 million does not represent a total reduction in contract costs. 

Page 2 GAO-06-1132 Iraq Contract Costs
For the 18 audit reports selected for this review, we found that DOD 

contracting officials took a variety of actions in response to DCAA’s audit 

findings, including not allowing some contractor costs. Based on contract 

documentation we reviewed, the DOD contracting officials generally 

considered DCAA’s questioned and unsupported cost findings when 

negotiating with the contractor. We found that DOD contracting officials 

were more likely to use DCAA’s advice when negotiations were timely and 

occurred before contractors had incurred substantial costs. For example, 

in 3 audit reports related to a logistics support task order negotiated prior 

to the onset of work, DCAA questioned $204 million. According to DCAA’s 

calculations, $120 million of these questioned costs was removed from the 

contractor’s proposal as a result of its audit findings. In contrast, DOD 

officials were less likely to remove questioned costs from a contract 

proposal when the contractor had already incurred these costs. Of the 

18 audits covered in our review, 11 audit reports corresponded to contract 

actions where more than 180 days had elapsed from the beginning of the 

period of performance to final negotiations. For example, in 5 audit 

reports comprising about $600 million of questioned costs reviewed, we 

found that the DOD contracting officials determined that the contractor 

should be paid for all but $38 million of the questioned costs, but reduced 

the base used to calculate the contractor’s fee by $205 million. By reducing 

the base, the DOD contracting official reduced the contractor’s fee by 

approximately $6 million. In addition to identifying questioned and 

unsupported costs, DCAA can withhold funds from contractor payments,3

and chose to withhold a total of $236 million for 8 cases included in our 

review. Of the $236 million, the government decided to pay the contractors 

$148 million, not to pay $36 million, and $51 million has not been settled 

yet.4

We requested comments from DOD on a draft of this report, but none were 

provided. 

 3

 Pursuant to the authority of DOD Directive 5105.36, DCAA can issue a Form 1. A Form 1 

constitutes notice of costs suspended and/or disapproved incident to the audit of 

contractor costs incurred under a contract. Suspended costs are costs that have been

determined to be inadequately supported or otherwise questionable, and not appropriate 

for reimbursement under contract terms at this time. Such costs may be determined 

reimbursable after the contractor provides the auditor additional documentation or

explanation. Disapproved costs have been determined to be unallowable, that is, not 

reimbursable under the contract terms.

4

 Monies withheld do not add to $236 million due to rounding.

Page 3 GAO-06-1132 Iraq Contract Costs
The United States, along with its coalition partners and various 

international organizations and donors, has embarked on a significant 

effort to rebuild Iraq. The United States is spending billions of dollars to 

reconstruct Iraq while combating an insurgency that has targeted military 

and contractor personnel and the Iraqi people. The United States has 

relied heavily on private-sector contractors to provide the goods and 

services needed to support both the military and reconstruction efforts in 

Iraq. 

Background 

DCAA is responsible for providing contract audits for DOD, along with 

general accounting and financial advice to DOD acquisition officials 

negotiating government contracts. DCAA performs many types of audits 

for DOD, including audits of contractor proposals, audits of estimating and 

accounting systems, and incurred cost audits. Generally, the results of a 

DCAA audit are intended to assist contracting officials in negotiating 

reasonable contract prices. Normally, DCAA audits contractors’ proposals 

and provides contracting officials advice on the reasonableness of 

contractor costs prior to negotiations. DCAA also conducts audits of costtype contracts after they are negotiated to ensure costs incurred on these 

contracts are acceptable. Relying on cost information provided by the 

contractor and assessing whether the costs comply with government 

regulations, DCAA may identify certain costs as questioned or 

unsupported. DCAA defines questioned costs as costs considered to be not 

acceptable for negotiating a reasonable contract price, and unsupported 

costs as costs that lack sufficient supporting documentation. DCAA 

reports its findings to contracting officers for consideration in negotiating 

reasonable contract prices. 

DCAA audit reports represent one way DCAA can assist contracting 

officials as they negotiate government contracts. Also, contracting officials 

may invite DCAA to participate in contract negotiations to explain audit 

findings and recommendations, and may factor DCAA audit findings into 

evaluations of contract proposals. The Federal Acquisition Regulation 

(FAR) acknowledges that DCAA’s role is advisory, and assigns the 

contracting officer responsibility for ensuring that the contractor’s 

proposed price is fair and reasonable.5

 While DCAA audit 

recommendations are nonbinding, DCAA’s Contract Audit Manual states 

 5

 Federal Acquisition Regulation (FAR) 1.602-2(c), Responsibilities, 15.402(a) Pricing Policy 

(January 2006). 

Page 4 GAO-06-1132 Iraq Contract Costs
that contracting officials deviating from DCAA advice during negotiations

should explain the reasons why they disagreed with DCAA. 

DOD Directive 5105.36 also enables DCAA to withhold payments by 

(1) suspending payment for specific incurred costs lacking documentation

or (2) disapproving costs that do not conform with applicable regulations. 

DCAA can issue a Form 1 to a contractor notifying it that funds will be 

withheld, which initiates review of the challenged costs by the contracting 

officer. 

Between February 2003 and February 2006, DCAA issued hundreds of 

audit reports that collectively identified $3.5 billion in questioned and 

unsupported costs on Iraq-related contracts, primarily through audits of 

contractor proposals. In some cases, DCAA was asked to audit multiple 

iterations of contractor proposals as these proposals were revised over a 

period of time. Based on information provided by DCAA, contracting 

officials have responded to audit findings that questioned $1.4 billion. 

As a result, contracting officials negotiated contract cost reductions of 

$386 million according to DCAA. DCAA does not render an opinion about 

costs it determines to be unsupported; therefore they do not track the 

resolution of unsupported costs. 

DCAA Audit Reports 

Identified Billions of 

Dollars of Questioned 

and Unsupported 

Costs on Iraq 

Contracts 

DCAA Identified Billions of 

Dollars in Questioned and 

Unsupported Costs 

Between February 2003 and February 2006, DCAA tracked 349 audit 

reports that identified about $3.5 billion in questioned and unsupported 

costs on Iraq contracts. Of this total, DCAA classified $2.1 billion as 

questioned, and $1.4 billion as unsupported. DCAA identified these 

questioned and unsupported costs in audits related to 99 different 

contractors. Most of the questioned and unsupported costs were identified 

through audits of contractor proposals. Specifically, in DCAA’s database, 

more than three-quarters of the audits with questioned and unsupported 

costs were classified as “forward pricing activity,” which primarily 

involves auditing contractor proposals or parts of proposals. 

In some cases, DCAA reviewed multiple contractor proposals for the same 

work. DOD officials told us that contractors submitted multiple proposals 

because requirements changed or the proposal was considered inadequate 

for negotiations. For example, over a 6-month period, DCAA issued four 

audit reports on three different proposals for a task order related to an oil

mission. Each audit superseded the prior one, and DCAA updates its 

information to reflect the most recent report. 

Page 5 GAO-06-1132 Iraq Contract Costs
While DCAA tracks and records how questioned costs are addressed by 

the contracting official in negotiation, it does not track similar information 

about unsupported costs. Based on the data provided to us by DCAA, as of 

July 3, 2006, contracting officials had responded to 169 of DCAA’s 

349 Iraq audit reports. DCAA considered the findings to be addressed 

because the contracting official had documented the result of negotiations

with the contractor. 

Based on information provided by DCAA, for the $1.4 billion in questioned 

costs addressed by contracting officials, contracting officials sustained 

$386 million of the total questioned costs. DCAA defines sustained costs as 

the costs reduced through negotiations directly attributable to findings 

reported by the DCAA auditor for proposal audits. Based on the 

information provided by DCAA, as of July 2006, the remaining $700 million 

in questioned costs is still in process. DCAA’s information does not reflect 

what actions, if any, the contracting officials have taken to respond to 

these audit report findings. 

According to a DCAA official, DCAA does not track how unsupported 

costs are addressed. DCAA guidance implementing the FAR requires the 

contracting official to report on the disposition of questioned amounts, but 

not specifically on whether contractors provided sufficient documentation 

to eliminate unsupported costs.6

 Because unsupported costs indicate a 

lack of contractor information that is needed to assess costs, DCAA 

cannot and does not render an opinion on those costs. Therefore, DCAA 

does not track the resolution of unsupported costs. 

For the 18 audit reports selected for this review, we found that DOD took 

a variety of actions in response to audit findings, including not allowing 

some contractor costs. Based on contract documentation we reviewed, the 

DOD contracting officials generally considered DCAA’s questioned and 

unsupported cost findings when negotiating with the contractor. We found 

that DOD contracting officials were more likely to use DCAA’s advice 

when negotiations were timely and occurred before contractors had 

incurred substantial costs. In contrast, DOD officials were less likely to 

remove questioned costs from a contract proposal when the contractor 

DCAA Tracks How 

Questioned Costs Are 

Addressed but Does Not 

Track Similar Information 

for Unsupported Costs 

DOD Contracting 

Officials Have Taken a 

Range of Actions to 

Address Audit 

Findings 

 6

 The FAR states when the contracting officer elects not to adopt significant audit or other 

specialist recommendations, the contracting officer should provide a rationale which 

supports the negotiation result in the price negotiation documentation. Federal Acquisition 

Regulation (FAR) 15.405(a), Price Negotiation (January 2006). 

Page 6 GAO-06-1132 Iraq Contract Costs
had already incurred these costs. In addition to identifying questioned and 

unsupported costs, DCAA can also withhold funds from the contractor, 

which it chose to do in eight of the cases included in our review. Other 

actions taken by the DOD contracting officials included inviting DCAA to 

attend meetings or negotiations with the contractor and conducting 

additional analyses to respond to audit findings.

Our review of the government’s documentation of contract negotiations

for the selected audit reports showed that DOD generally considered 

DCAA audit findings.7

 The majority, or 13 of the 15 memorandums, 

identified how the contracting officials addressed DCAA audit findings.8

Most memorandums discussed questioned and unsupported costs 

identified by DCAA in areas such as labor, equipment, material, and 

subcontracts, but some lacked specific detail on how DCAA audit findings 

were addressed. However, in two cases we were unable to determine from 

the negotiation documentation how DCAA audit findings were used. 

DOD Generally Considered 

DCAA Audit Findings 

When Negotiating with the 

Contractor 

DOD Contracting Officials 

Less Likely to Remove 

Questioned Costs Already 

Incurred by the Contractor 

To address the more than $1 billion in questioned costs related to the 

audits selected, we found that the DOD contracting officials were less 

likely to remove questioned costs from a contractor proposal when the 

contractor had already incurred these costs. For example, in 5 audit 

reports comprising about $600 million of questioned costs reviewed, we 

found that the DOD contracting officials determined that the contractor 

should be paid for nearly all of the questioned costs (all but $38 million), 

but reduced the base used to calculate the contractor’s fee (by 

$205 million). By reducing the base, the DOD contracting official reduced 

the contractor’s fee by approximately $6 million. 

Generally, when entering into a contract, the government and contractor 

reach agreement on the key aspects of the contract, including the scope

and price of the work, before the work is authorized to start. However, the 

FAR enables the government to authorize the contractor to begin work 

before doing so in certain cases, such as when the government demands 

 7

 Documentation of contract negotiations includes price negotiation memorandums, 

business clearance memorandums, and definitization memorandums. For purposes of this

report, we will refer to these documents collectively as “memorandums.” 

8

 There were 15 memorandums related to the selected audit reports included in our review. 

Two of the memorandums addressed multiple audit reports. 

Page 7 GAO-06-1132 Iraq Contract Costs
the work start immediately and it is not possible to negotiate a fully 

defined contract in sufficient time to meet the requirement.9

 Our past work

has shown that the use of undefinitized contract actions can pose risks to

the government, such as potentially significant additional costs.10

Acquisition regulations generally require that the contracting official 

define the scope and costs of such contracts within 180 days of the 

contract’s start date. According to contract officials, urgent conditions in 

Iraq led the government to initiate such contract actions without first 

specifying their scope of work and agreeing to the contract price. 

In many cases we reviewed, contractors completed some work and 

incurred substantial costs well before the government negotiated the 

contract price. Of the 18 audits covered in our review, 11 audit reports 

corresponded to contract actions where more than 180 days had elapsed

from the beginning of the period of performance to final negotiations. For 

nine of these audits, the period of performance DOD initially authorized 

for each contract action concluded before final negotiations took place. 

For example, DCAA questioned $84 million in its 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 work (see fig. 1). The DOD 

contracting officer paid the contractor for all questioned costs but reduced 

the base used to calculate contractor profit by $45 million. As a result, the 

contractor was paid about $3 million less in fees. In the final negotiation 

documentation, the DOD contracting official stated that payment of 

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

circumstances.11 This same rationale was used in negotiations on several 

other task orders. 

 9

 FAR 16.603 Letter Contracts (January 2006). 

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

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

11 The DOD contracting official indicates that because DCAA chose not to suspend or 

disallow the funds, DCAA and DOD agree that these unusual circumstances did not exist. 

However, DCAA officials do not agree with this characterization. 

Page 8 GAO-06-1132 Iraq Contract Costs
Figure 1: Timeline of Key Contracting Events for Restore Iraqi Oil Contract, Task Order 5 

Source: GAO analysis of DOD data.

J

2003 2004

F MAM J J AS O ND J F MAM J

2005

J AS O ND J FM MJJ A A OND J S

Contract 

proposal

May 5

DCAA

Audit report

Oct 8

Revised

contract 

proposal

Nov. 23

Revised 

contract 

proposal 

Jan. 21

DCAA

Audit report

Jan. 11

Negotiations

Jul. 29

Price 

negotiation

memo

Sept. 9

DCAA

Audit report

Feb. 25

DCAA

Audit report 

Apr. 16

Period of performance:

May 4, 2003–December 24, 2003

Notice to proceed

May 4

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. For example, in 3 audit 

reports related to a logistics support task order, DCAA questioned 

$204 million. Since the government and the contractor negotiated the 

terms of this task order prior to the onset of work, the contractor had not 

incurred any costs at the time of negotiation (see fig. 2 for timeline). 

According to DCAA’s calculations, $120 million of these questioned costs 

was removed from the contractor’s proposal as a result of its audit 

findings. 

Page 9 GAO-06-1132 Iraq Contract Costs
Figure 2: Timeline of Key Contracting Events for Logistics Civil Augmentation Program III Contract, Task Order 89 

Source: GAO analysis of DOD data.

2005

J FMAMJ

2006

J AS O N D J FM MJJ A

Contract 

proposal

Mar. 29

Period of performance: May 1, 2005–April 30, 2006

Negotiations concluded/ 

price negotiation memo

Apr. 17

DCAA

Audit report

Apr. 12

DCAA Withheld Funds 

Related to Some Audit 

Reports We Reviewed 

In addition to identifying questioned and unsupported costs, DCAA can 

withhold funds from contractors in certain situations.12 The cognizant 

administrative contracting officer may subsequently determine that the

withheld costs should be approved for payment to the contractor. We 

found DCAA withheld $236 million from contractors related to 8 of the 

audits included in our review. Subsequently, as a result of either additional 

documentation provided by the contractor or the DOD administrative 

contracting officer determination, $148 million of the withheld funds was 

released to the contractor and the government did not pay $36 million to 

the contractor. The remaining $51 million has not been settled yet—a DOD 

contracting official is reviewing the available information to make a 

decision about whether or not these costs will be reimbursed.13

In the audit reports reviewed, the vast majority of funds withheld by DCAA 

($171 million of the $236 million) related to dining facilities services 

provided at U.S. troop camps in Iraq.14 The contractor was directed by the

 12 DCAA withholds funds from the contractor by issuing a Form 1. In general, DCAA has 

two options for withholding funds. DCAA can suspend reimbursement for costs that lack 

adequate support until the required data are received and a determination can be made

about whether the cost is allowable. Or DCAA can disapprove costs that are not considered

allowable.

13 Monies withheld do not add to $236 million due to rounding.

14 DCAA withheld a total of $212 million related to the dining facilities issue. However, only 

$171 million of this total relates to the audit reports included in our selection. 

Page 10 GAO-06-1132 Iraq Contract Costs
Army to build, equip, and operate the dining facilities located at U.S. troop 

base camps in Iraq and to provide four meals a day to the camp 

populations. The population at each camp was specified in the Army’s 

description of the work to be performed by the contractor. In addition, 

contractor and government representatives counted the number of troops 

served at each mealtime. However, the Army’s description of the work did 

not specify whether the contractor should bill the government for the 

camp population identified in the work description or the actual head

count for each meal. Generally, the government was billed based on the 

estimated base camp population, but DCAA stated that the billings should 

be based on the actual head count, which was lower than the estimated 

base camp population included in the work description. As a result, DCAA 

withheld funds by reducing payment for dining facilities costs on 

contractor billings by 19.35 percent. Ultimately, the DOD and the 

contractor negotiated a settlement where it was agreed that $36 million 

would not be paid to the contractor.15

In another example, DCAA withheld a payment to the contractor for its 

subcontractor’s costs of $12 million related to electrical repair services. 

DCAA determined the cost to be unreasonable based on a comparison of 

price quotes from other subcontractors for similar electrical repair 

services. As a result of the action taken by DCAA to withhold payment, an 

Army Corps of Engineers contracting official reviewed contractor data. 

The contracting official determined the subcontractor’s price was 

reasonable given the short contract time frames. A memo outlining the 

Army Corps of Engineers’ rationale for paying the contractor for the 

subcontractor costs states, “Corps of Engineers representatives in 

Baghdad directed all of the contractors there to do whatever was 

necessary, regardless of cost, to meet schedule commitments.” The 

$12 million withheld was released to the contractor. DCAA officials 

expressed concerns that the DOD contracting official had not sought their

assistance when settling this issue with the contractor. 

DOD Took a Variety of 

Other Actions to Address 

DCAA Audit Findings 

We found that DOD contracting officials took a variety of other actions to 

address DCAA audit findings. In many of the cases we reviewed, DCAA 

was invited to participate in meetings or negotiations with the contractor. 

For example, 

 15 The total settlement amount was for $55 million, but only $36 million relates to the audit 

reports we reviewed. 

Page 11 GAO-06-1132 Iraq Contract Costs
• To address the questioned costs identified in the task orders for the oil 

mission, the DOD contracting official convened a meeting to include 

the contractor representatives, DCAA officials, and Army Corps of 

Engineers officials. As a result of discussions in this meeting, a DCAA 

official told us that DCAA stopped questioning some costs such as the 

percentage paid to contractor employees for working in a dangerous 

area and price adjustments the contractor paid to its subcontractors for 

fuel from Turkey. In addition, the DOD contracting official asked DCAA 

to provide alternative negotiation positions, and in response DCAA 

developed memorandums outlining several options for each task order. 

Ultimately the DOD contracting official used a negotiation position 

presented in each memorandum to establish the government’s 

negotiation position with the contractor. When asked if he was 

satisfied with the resolution of the questioned costs, a DCAA official 

involved in the process told us he thought the DOD contracting official

did the best job he could.

• In another example, DCAA attended negotiations between the 

contractor and the government for an electricity contract. DCAA’s role 

at this meeting was to answer questions and to reiterate its opinion. 

Subsequent to negotiations, DCAA participated in additional meetings 

with the contractor and the Army Corps of Engineers to ensure that its 

concerns with the contractor purchasing system were addressed. 

DCAA officials told us that problems with the contractor purchasing 

system were related to the unsupported costs identified in the audit. 

DCAA officials involved in this process told us that they were generally

satisfied with the actions taken by DOD and the contractor to resolve 

their audit findings. 

In some cases, DOD officials conducted additional analyses in response to 

DCAA’s audit findings. For example, for the audit reports we reviewed 

related to the oil mission, DCAA questioned the cost of fuel and 

transportation based on a comparison between the price paid by the 

contractor and the price paid by the Defense Energy Support Center 

(DESC) when it took over the mission from the contractor in April 2004. 

In response, DOD collected additional information to update the fuel and 

transportation cost comparison. For example, although DESC negotiated

prices based on trucks shipping fuel to Iraq three times per month, in 

practice the trucks were only able to make two trips per month, a fact that

increased the cost of the mission to DESC. Overall, the additional analyses 

provided a rationale for the DOD contracting official to pay the contractor 

for some of DCAA’s questioned costs. 

Page 12 GAO-06-1132 Iraq Contract Costs
We requested comments from DOD on a draft of this report, but none were 

provided. 

We are sending copies of this report to the Secretary of Defense, 

appropriate congressional committees, and other interested parties. We 

will make copies of this report available on request. In addition, this report 

will be available at no charge on GAO’s Web site at http://www.gao.gov. 

If you have any questions concerning this report, please contact me at 

(202) 512-4841 or by e-mail at huttonj@gao.gov. Contact points for our 

Office of Congressional Relations and Public Affairs may be found on the 

last page of this report. Other major contributors to this report were 

Penny Berrier Augustine, Tim Bazzle, Greg Campbell, David E. Cooper, 

Tim DiNapoli, Julia Kennon, John Krump, Eric Lesonsky, Janet McKelvey, 

Guisseli Reyes-Turnell, Raffaele Roffo, and Jeffrey Rose. 

John P. Hutton 

Acting Director 

Acquisition and Sourcing Management 

Page 13 GAO-06-1132 Iraq Contract Costs
List of Congressional Committees: 

The Honorable John Warner 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member 

Committee on Armed Services 

United States Senate 

The Honorable Ted Stevens 

Chairman 

The Honorable Daniel K. Inouye 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

United States Senate 

The Honorable Duncan L. Hunter 

Chairman 

The Honorable Ike Skelton 

Ranking Minority Member 

Committee on Armed Services 

House of Representatives 

The Honorable C. W. Bill Young 

Chairman 

The Honorable John P. Murtha 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

House of Representatives 

Page 14 GAO-06-1132 Iraq Contract Costs
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To determine the costs identified by the Defense Contract Audit Agency

(DCAA) as questioned or unsupported, we analyzed data from DCAA’s 

management information system on all DCAA Iraq-related audit reports 

with questioned or unsupported costs issued between February 2003 and

February 2006. To develop an understanding and assess the reliability of 

the information included in the database, we held discussions with and 

obtained documentation from DCAA officials located in Fort Belvoir and 

we conducted electronic testing for obvious inconsistencies and 

completeness. During our review of the database we identified records for 

20 audits, 1 percent of the database, which listed 2 different totals for 

questioned and/or unsupported costs. For these 20 audits, based on our 

conversation with a DCAA official, we selected the amount that reflected 

the most current total for questioned and/or unsupported costs. We 

determined the data used in our review to be sufficiently reliable for our 

purposes. 

To determine the actions taken by the Department of Defense (DOD) in 

response to DCAA audit findings, including the extent to which funds were 

withheld from contractors, we selected 18 audit reports comprised of 

(1) the 10 reports with the highest dollar amounts of questioned and 

unsupported costs and (2) a selection of 8 of the remaining audit reports 

with questioned and unsupported cost dollars above $5 million.1

 We 

excluded audit reports issued after November 1, 2005 from the selection to

ensure that DOD contracting officials had adequate time to resolve the 

audit findings. The questioned and unsupported costs for the 18 audits 

total approximately $1.8 billion, or about 50 percent of all questioned and 

unsupported costs identified through DCAA’s database on Iraq contracts. 

These reports include (1) 11 audits of 8 task order proposals to provide 

logistics support for U.S. troops, (2) 3 audits of task order proposals to 

provide fuel and fuel transportation, (3) 3 audits of task order proposals 

for electricity services, and (4) 1 audit of a proposal for contract 

management and administrative support functions. The 18 selected audit 

reports represent work performed by 4 contractors. For the selected 

audits, we held discussions with DCAA officials located in Fort Belvoir; 

Arlington, Texas; Lexington, Massachusetts; Seattle, Washington; Kent, 

Washington; and Iraq. We collected key documentation related to each 

audit report, such as DCAA’s calculation of the resolution of questioned 

 1

We initially selected 10 audit reports using our second criterion. During the course of our

review, we learned that two of these audit reports were superseded by subsequent audits, 

and therefore actions taken were not documented. As a result, we removed these two audit 

reports from our review. 

Page 15 GAO-06-1132 Iraq Contract Costs
Appendix I: Scope and Methodology 

costs and dollars withheld (Form 1). For each audit, we also held 

discussions with DOD contracting officials located in Rock Island, Illinois; 

Dallas, Texas; Winchester, Virginia; and Iraq. We interviewed these 

officials to determine the actions taken by DOD to address DCAA’s audit 

findings and obtained key documentation such as price negotiation 

memorandums. 

We conducted our review from March 2006 through September 2006 in 

accordance with generally accepted government auditing standards. 

Page 16 GAO-06-1132 Iraq Contract Costs

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