EMERGENCY TRANSPORTATION

SERVICES CONTRACT: 

LESSONS LEARNED FROM THE 

2005 GULF COAST HURRICANES 

Office of the Secretary

Report Number: FI-2007-030 

Date Issued: February 5, 2007 
U.S. Department of 

Memorandum

Transportation 

Office of the Secretary 

of Transportation 

Office of Inspector General 

Subject: ACTION: Report on Emergency Transportation 

Services Contract: Lessons Learned From the 

2005 Gulf Coast Hurricanes, OST 

Report No. FI-2007-030 

Date: February 5, 2007 

From: Rebecca C. Leng 

Assistant Inspector General for 

 Financial and Information Technology Audits 

Reply to 

Attn. of: JA-20 

To: Acting Director, Office of Intelligence, Security, 

 and Emergency Response 

This report presents the results of our review of Federal Aviation Administration 

(FAA) actions in modifying the Department of Transportation’s (DOT) emergency 

transportation services contract for Hurricane Katrina, and, more broadly, 

contracting issues dealing also with Hurricanes Rita and Wilma. Designing and 

administering contracts for emergency transportation services is particularly 

difficult because it compels acquisition officials to anticipate requirements based 

upon the consequences of natural and man-made disasters. Even with the best of 

planning, disasters can cause unprecedented challenges and unforeseen events to 

which officials must respond. 

In the immediate aftermath of disasters, it is often impossible—in the midst of the 

devastation—to determine the full extent and intensity of the damage in order to 

initiate remedial action. Although it is critical that officials act immediately in 

response to a disaster, they must still do all they can to ensure that contracts are 

properly administered and that prices for emergency services are reasonable. 

Reasonable prices are vital to stimulating efficient contractor performance while 

providing appropriate rewards for the risks that they assume. 

Under the Federal Government’s National Response Plan, DOT is responsible for 

coordinating and providing Federal and civil transportation support during 

national emergencies, as directed by the Federal Emergency Management Agency 

and other Federal agencies. Within DOT, the Office of Intelligence, Security, and 

Emergency Response coordinates these efforts. To support the Department’s 

responsibilities, FAA’s Southern Region awarded a competitive contract on an 
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indefinite delivery, indefinite quantity basis to Landstar Express America, Inc. in 

2002 to provide air, sea, and land transportation and associated services during 

national emergencies. Upon contract activation, personnel at FAA’s Southern 

Region performed the contract administration duties. 

In the aftermath of Hurricane Katrina, the immediate transportation of people and 

vital supplies to and from hurricane-affected areas was critical to saving lives. 

The circumstances surrounding the disaster were extraordinary, and FAA Southern 

Region management and its contractor provided an unprecedented response to the 

crisis as it unfolded. In 2003, during Hurricane Isabel, DOT transported about 

700 truckloads of commodities to support areas affected by that storm. In 

contrast, in 2005, DOT transported about 23,000 truckloads of commodities in 

response to Hurricanes Katrina, Rita, and Wilma—over 30 times the volume of 

2003. To respond to the requirement for an increased volume of services, the 

contract was modified, increasing the cap from $100 million to $400 million for 

calendar year 2005, with up to an additional $100 million added for calendar year 

2006. 

Our objective was to determine what lessons relating to contract design and 

administration could be learned from this disaster and FAA’s response to it. We 

performed this audit in accordance with Generally Accepted Government Auditing 

Standards as prescribed by the Comptroller General of the United States and 

conducted such tests as we considered appropriate to detect fraud, abuse, or illegal 

acts. See Exhibit A for a full explanation of our scope and methodology. 

RESULTS IN BRIEF 

FAA Southern Region’s emergency transportation services contract successfully 

allowed FAA and its contractor to carry out a strong, rapid response during the 

2005 Gulf Coast hurricanes. Having an existing competitive contract in place 

limited cost risks while at the same time ensuring that transportation services that 

were essential in such catastrophic conditions were made available. 

However, this disaster also provided lessons about how contracting practices can 

be improved. FAA Southern Region personnel told us that contract administration 

resources were stretched quite thin and, understandably, that the top priority was 

to provide transportation to deliver goods, equipment, and services as quickly as 

possible to those in need of assistance. 
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Nevertheless, these experiences demonstrate that, when possible, it is important to 

ensure that: 

Administrative costs are properly structured and adaptable to unforeseen and 

changing requirements, 

•

•

•

•

The profit rate paid to contractors does not exceed 10 percent, 

Contracts are effectively administered, and 

Price reasonableness determinations are periodically performed. 

DOT has already taken steps to begin dealing with these issues. For example, the 

contracting officer began requesting updated subcontractor quotes for task orders 

on February 28, 2006. This practice resulted in better pricing. 

To strengthen future emergency contracts, we recommended that the Office of 

Intelligence, Security, and Emergency Response ensure that administrative fees 

are structured appropriately and that profit rates are appropriate for the types of 

contracts awarded and in accordance with sound business practices. 

We provided the Office of the Secretary of Transportation (OST) with a copy of 

our draft report on December 22, 2006. On January 19, 2007, OST provided its 

formal response. OST agreed with our findings and recommendations. OST’s 

planned corrective actions are responsive, subject to follow-up provisions in DOT 

Order 8000.1C. Our recommendations and a summary of OST’s response can be 

found on pages 6 and 7 of this report. 

Additionally, in its response, OST stated that FAA’s Southern Region has secured 

Landstar’s promise to negotiate, in good faith, changes to profit and administrative 

fee rates in the present contract. We request that OST provide us with the revised 

profit and administrative fee rates and associated cost savings, if any. OST’s 

response is contained in its entirety in the Appendix. 

FINDINGS 

Improving the Structure of Administrative Costs 

Improving the structure of the administrative fee established for the contract and 

the modification to the contract would better protect the Government’s interests. 

FAA established the administrative fee as a fixed rate, which inappropriately 

included both fixed and variable expenses. Unlike variable expenses, fixed 

expenses by nature do not fluctuate with changes in work requirements. Using a 
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single fixed rate to reimburse the contractor—comprising both types of 

expenses—increases the Government’s vulnerability to overpaying. 

Under this scenario, the Government pays more in administrative costs if the costs 

incurred by the contractor increase. For future contracts, the fixed administrative 

rate structure should be revised to either (1) exclude fixed expenses from the fixed 

rate and pay for them separately or (2) pay for the contractor’s actual 

administrative costs incurred. Structuring a fee in this manner helps ensure that 

the Government is paying fair and reasonable prices. 

Limiting Contractor Profit 

Since profit is the contractor’s reward for assuming the risks and burdens 

associated with a contract, a contract’s profit rate, in general, should be 

commensurate with the risk of not recovering the costs that the contractor bears. 

For cost–plus–fixed–fee contracts, the contractor assumes minimal risk of not 

recovering costs. Therefore, the profit rate determination—both for the base 

contract and the modification—should reflect that minimal risk. 

The profit rates for FAA’s contract (including the modification) were as high as 

15 percent. This exceeds the maximum rate allowed by the Federal Acquisition 

Regulation (FAR). While the FAR limits profit on cost-plus-fixed-fee type 

contracts to 10 percent, FAA’s acquisition policy sets no limit on profit. We 

recognize that FAA is not subject to FAR requirements, as are other DOT 

Operating Administrations and other Federal agencies. However, paying more 

profit than what is allowed by other DOT Operating Administrations and Federal 

agencies without good reason is not a sound business practice. To illustrate the 

extent to which FAA paid its contractor over the 10 percent generally accepted 

rate, of the 571 task orders issued under this contract in response to Hurricane 

Katrina, we reviewed 11 randomly selected orders that had a total value of about 

$27 million. About $3 million of that amount was profit. Had the profit rate been 

limited to 10 percent for these 11 task orders, the Government could have avoided 

paying over $565,000 (see Exhibit B). 

Effective Contract Administration 

FAA awarded task orders on this contract on a cost-plus-fixed-fee basis. This 

method is designed to reimburse the contractor for profit at fixed amounts. 

However, the contract was not administered in this way. Instead of establishing 

profit amounts for each task order before the work started, FAA allowed the 

amounts to remain uncertain until work was substantially completed. 

Administering a contract in this manner results in the application of a cost-pluspercentage-of-cost contract, which is prohibited by FAA acquisition policy. These 
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contracts offer no incentive for contractors to control costs because their profits 

increase in direct proportion to the costs of services performed. 

For example, while FAA authorized the use of 100 water tankers on 

September 6, 2005, it did not concurrently issue a task order establishing a fixedfee amount that the contractor would be paid. It was not until November 14th that 

FAA issued the task order. The delay essentially changed the character of the 

contract from cost-plus-fixed-fee to cost-plus-percentage-of-cost because, rather 

than setting the amount before work commenced, the fixed-fee amount was set 

after the work had been substantially completed. This type of arrangement 

provides an incentive for the contractor to overspend because as the total cost 

increases, so does the fee. 

FAA procurement officials discontinued the practice in October 2005 and 

formalized the procedures in March 2006. We verified that task orders issued 

since then were administered properly. An FAA contracting official stated that 

administering the contract as a cost-plus-percentage-of-cost contract was a 

consequence of FAA Southern Region’s being overtasked by the unprecedented 

level of response needed as a result of Hurricane Katrina’s devastation. 

Determining Price Reasonableness 

FAA’s acquisition policy requires that current quotes and pricing information be 

obtained for each task order modification. However, contracting officials did not 

regularly require that the contractor provide revised subcontractor quotes when 

task orders were modified for services not included in the original task order or 

when the performance period was extended. FAA officials eventually took 

corrective action by requesting updated subcontractor quotes, and considerably 

lower prices were negotiated. 

For example, on September 2, 2005, the contractor provided FAA with 

subcontractor quotes for four refrigerated trucks with power supplies. FAA 

awarded a task order for the trucks at a value of $120,481. Over time, FAA 

modified the task order by more than a factor of 10—to a value of $1,372,370—to 

increase service and extend the period of performance by an additional 10 months. 

FAA awarded these task order modifications without requiring that the contractor 

again provide FAA with subcontractor quotes, in direct contravention of FAA’s 

own acquisition policy and contract terms. 

To illustrate the extent of this problem, we reviewed nine judgmentally selected 

task orders to identify instances in which the initial scope of work was modified. 

We found that significant modifications occurred for three of the nine task orders 

and that the contractor did not provide updated subcontractor quotes. Beginning 

in February 2006, FAA obtained new subcontractor quotes for modifications 
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awarded for the three orders. Based on the three orders we reviewed, FAA could 

have avoided paying over $273,000 had contracting officials obtained the updated 

quotes sooner.1

 Exhibit C provides details on how we calculated the cost 

avoidance. 

Again, the stretching of FAA Southern Region’s resources to provide the 

unprecedented level of response was the cause of the Agency’s not obtaining 

current pricing sooner for the modifications. 

FAA Has Initiated Corrective Action 

During the audit, FAA officials ensured that fixed fees were awarded before 

beginning work on task orders. Further, on its own initiative, FAA began 

obtaining updated subcontractor quotes for task orders modified on or after 

February 1, 2006, resulting in better pricing. For example, for one task order, the 

updated contractor proposal showed a reduction in subcontractor quotes by 

$350 per day per truck—a 25-percent reduction from previous daily rates. This 

resulted in savings of $76,160. Accordingly, we are not making any 

recommendations in these areas. DOT officials are coordinating with FAA on 

how to better structure DOT’s future emergency transportation contract, including 

using more flexible contract terms, such as providing that indirect rates be costreimbursable and subject to annual audits. 

RECOMMENDATIONS 

In order to strengthen future emergency transportation contracts, we recommend 

that the DOT Acting Director, Office of Intelligence, Security, and Emergency 

Response: 

1. Ensure that administrative fees are structured appropriately for future 

emergency contracts. 

2. Negotiate profit rates for future emergency contracts that are appropriate 

for the types of contracts awarded and in accordance with sound business 

practices. 

 

1

 In assessing task order modifications, we limited our analysis to modifications made more than 120 days after award 

of the task order. The original task orders were awarded shortly after August 29, 2005—the date that Hurricane 

Katrina struck. In our opinion, such a significant lapse from the time between the orders and later modifications 

should have triggered a concern that conditions—such as initial demand—might have changed, which should have 

resulted in lower unit prices. 
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AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

A draft of this report was provided to OST on December 22, 2006. On 

January 19, 2007, OST provided its formal response, which is contained in its 

entirety in the Appendix. OST agreed with our findings and concurred with our 

recommendations. OST indicated that while the Landstar contract provided a 

useful mechanism to expedite transportation services in response to the 

unprecedented devastation of that year’s Gulf Coast hurricanes, post event 

analyses, including those by the Office of the Inspector General, have identified 

areas where improvements can be achieved. OST intends to address those areas 

both during the ongoing recompetition for the next emergency transportation 

services contracts and in further administration of the present contract. 

Management responses to our recommendations are summarized below. 

Recommendation 1: OST concurred. The Department has ongoing efforts 

directed towards completing the next emergency transportation services contract. 

During this contracting effort, the Department will assess the administrative fee 

structures with the intention of providing a fee structure in the new contract that 

helps to ensure that the Federal government is paying fair and reasonable prices. 

The Department intends to complete the contracting effort before the end of fiscal 

year (FY) 2007. Also, OST indicated that the FAA Southern Region has secured 

Landstar's promise to negotiate in good faith changes to profit and administrative 

fee rates in the present contract. 

Recommendation 2: OST concurred. During the ongoing contracting process for 

the next emergency transportation services contract, DOT will ensure that any 

negotiated profit rates are appropriate for the risk inherent in the type of contract 

proposed and consistent with applicable regulations. The Department intends to 

complete the contracting effort before the end of FY 2007. 

ACTIONS REQUIRED 

The actions planned satisfy the intent of our recommendations, subject to 

follow-up provisions in DOT Order 8000.1C. We request that OST provide us 

with the revised profit and administrative fee rates and associated cost savings, if 

any, resulting from negotiations with Landstar in the present contract. 
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We appreciate the courtesies and cooperation of Department of Transportation 

representatives during this audit. If you have any questions concerning this report, 

please call me or Mark H. Zabarsky, Deputy Assistant Inspector General for 

Financial Management Audits, at (202) 366-1496. 

# 

cc: Assistant Secretary for Budget 

 and Programs/Chief Financial Officer 

 Acting Assistant Secretary for Administration 

 Senior Procurement Executive 

 Southern Regional Administrator, FAA 

 Martin Gertel, M–1 

 Anthony Williams, ABU-100 
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EXHIBIT A. SCOPE AND METHODOLOGY 

We performed this audit from March through November 2006, at DOT 

Headquarters in Washington, D.C., and at the FAA Southern Region in Atlanta, 

Georgia. The audit was conducted in accordance with Generally Accepted 

Government Auditing Standards as prescribed by the Comptroller General of the 

United States and included such tests as we considered necessary to provide 

reasonable assurance of detecting abuse, fraud, or illegal acts. 

To determine lessons learned as they relate to contract design and administration, 

we visited FAA’s Southern Region and reviewed contract and selected task order 

files. We also discussed with the contracting officer the methods used for 

administering task orders. 

In assessing the price analysis performed for the contract modification, we 

reviewed the contract and modification files and selected task order files for 

evidence of price analyses. In assessing whether task orders were fairly priced, we 

reviewed initial, updated, and final quotes; purchase requisitions; and associated 

files and support for nine orders for which FAA officials told us they had obtained 

revised quotes. We assessed FAA’s contract administration procedures for the 

nine task orders. 

We researched various sources of guidance, including FAA’s Acquisition 

Management System; the United States Code; and private contracts databases and 

texts, such as Wifcon Forum and Cinibic and Nash’s “Administration of 

Government Contracts.” Further, we consulted with knowledgeable experts, such 

as professors at the Defense Acquisition University and reviewed Government 

Accountability Office decisions to assess administration of the contract. We 

reviewed FAA’s revised March 2006 procedures for administering and awarding 

task orders, including determining when profit and administrative management 

rates were applied. 

In reviewing the application of profit and profit rate, we reviewed a random 

sample of 11 task orders awarded through March 2006. We compared the 

effective rates awarded in the task orders with the profit limit in the Federal 

Acquisition Regulation and computed potential savings for the 11 orders. 

We did not rely on automated databases as part of our audit. All contract actions 

and task orders reviewed were verified to the contract and task order files.

Exhibit A. Scope and Methodology 
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EXHIBIT B. COST AVOIDANCE USING 10-PERCENT PROFIT 

RATE 

To calculate the potential cost avoidance based on a profit rate of 10 percent, we: 

• Determined the actual amount of profit for each of the 11 task orders sampled 

(column A). 

• Determined the profit for each of the 11 task orders using the 10-percent profit 

rate cap (column B). 

• Took the difference between the actual profit amount in column A and the 10- 

percent profit amount in column B. This represents the potential cost 

avoidance had the profit rate been limited to 10 percent (column C). 

Table 1. Estimated Cost Avoidance Based on 

10-Percent Profit Rate 

Sample (A) Actual 

Profit Paid 

(B) Profit if 10% 

Rate Applied 

(C) Potential Cost 

Avoidance if 10% 

Profit Rate Applied 

(A-B=C) 

1 $2,023,236 $1,633,669 $389,567

2 $466,730 $376,516 $90,214

3 $16,200 $13,068 $3,132

4 $149,836 $120,868 $28,968

5 $29,609 $24,082 $5,527

6 $30,090 $24,273 $5,817

7 $13,624 $11,947 $1,677

8 $13,445 $11,801 $1,644

9 $6,750 $5,445 $1,305

10 $609 $491 $118

11 $193,596 $156,168 $37,428

 Total $2,943,725 $2,378,328 $565,397

Source: FAA data and OIG analysis 

Exhibit B. Cost Avoidance Using 10-Percent Profit Rate 
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EXHIBIT C. ESTIMATED COST AVOIDANCE FROM UPDATED 

QUOTES 

To calculate the potential cost avoidance based on the three task orders with 

quotes that should have been revised, we: 

• Determined the total cost of the task order using the original quotes as stated in 

the task orders (column A). 

• Determined the total cost of the task order using the updated quotes and 

obtained the quotes from the task orders revised after FAA took corrective 

action requesting the quotes (column B). 

• Took the difference between the total cost from the original quotes in column 

A and the total cost from the updated quotes in column B. This represents the 

potential cost avoidance had the contractor requested updated quotes sooner 

(column C). 

Table 2. Estimated Cost Avoidance From Updated Quotes 

Sample (A) Original Quote:

Total Costs 

(B) Updated 

Quote: Total 

Costs 

(C) Total Potential 

Cost Avoidance 

(A-B=C) 

1 $481,440 $312,936 $168,504 

2 $337,008 $252,756 $84,252 

3 $295,800 $275,400 $20,400 

 Total $1,114,248 $841,092 $273,156 

Source: FAA data and OIG analysis 

Exhibit C. Estimated Cost Avoidance From Updated Quotes 
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EXHIBIT D. MAJOR CONTRIBUTORS TO THIS REPORT 

Mark Zabarsky Deputy Assistant Inspector 

 General for Financial 

 Management Audits 

Terrence Letko Program Director 

Leonard Meade Project Manager 

Jill Cottonaro Management and Program 

 Analyst 

Leslie Mitchell Auditor 

Narja Hylton Auditor 

Michael P. Fruitman Communications Adviser 

Seth Kaufman Associate Counsel 

Andrea Nossaman Writer-Editor

Exhibit D. Major Contributors to This Report 
13

APPENDIX. MANAGEMENT COMMENTS 

U.S. Department of 

Memorandum

Transportation 

Office of the Secretary 

of Transportation

 Subject: 

ACTION: Comments on Office of Inspector General (OIG) 

Draft Report – Emergency Transportation Services Contract: 

Lessons Learned From the 2005 Gulf Coast Hurricanes

Date: Janury 19, 2007 

From: 

Roger Bohnert 

Acting Director, Office of Intelligence, Security, 

 and Emergency Response

Reply to 

Attn. of: 

To: Rebecca C. Leng 

Assistant Inspector General for 

 Financial and Information Technology Audits

Under the National Response Plan and Emergency Support Function (ESF) #1, the 

Department of Transportation is responsible for providing transportation support in 

response to domestic Incidents of National Significance. The Department’s role is 

focused exclusively on providing transportation support for the Federal Emergency 

Management Agency (FEMA) and other Federal agencies. The Department’s top priority 

at the time of an emergency is placed on providing the transportation services necessary 

to deliver goods, equipment, and services as quickly as possible to those in need of 

assistance. 

The Department appreciates the OIG’s recognition of the complexities involved in 

designing and administering the contracts for emergency transportation services. 

Balancing the need for expeditious and effective response to a wide range of emergencies 

in diverse locales within a contract structure that offers reasonable prices and protects 

taxpayer interests is indeed a complex endeavor. During the 2005 Hurricane season, 

DOT was fortunate to have in place the Landstar contract administered by the Federal 

Aviation Administration’s Southern Region. While the contract provided a useful 

mechanism to expedite transportation services in response to the unprecedented 

devastation of that year’s Gulf Coast hurricanes, post event analyses, including those by 

the OIG, have identified areas where improvements can be achieved. We intend to 

address those areas both during the ongoing recompetition for the next emergency 

transportation services contracts and in further administration of the present contract.

Recommendations and Response: 

OIG recommends that the Office of Intelligence, Security, and Emergency Response: 

Appendix. Management Comments 
14

Recommendation 1: Ensure that administrative fees are structured appropriately for 

future emergency contracts. 

Response: Concur. The Department has ongoing efforts directed towards completing 

the next emergency transportation services contract. During this contracting effort, the 

Department will assess the administrative fee structures with the intention of providing a 

fee structure in the new contract that helps to ensure that the Federal government is 

paying fair and reasonable prices. The Department intends to complete the contracting 

effort before the end of fiscal year (FY) 2007. In the meantime, in consideration of OIG 

recommendations in respect to future contracts, the FAA Southern Region has secured 

Landstar's promise to negotiate in good faith changes to profit and administrative fee 

rates in the present contract. 

Recommendation 2: Negotiate profit rates for future emergency contracts that are 

appropriate for the types of contracts awarded and in accordance with sound business 

practices. 

Response: Concur. During the ongoing contracting process for the next emergency 

transportation services contract, DOT will ensure that any negotiated profit rates are 

appropriate for the risk inherent in the type of contract proposed and consistent with 

applicable regulations. The Department intends to complete the contracting effort before 

the end of FY 2007. 

cc: Ms. Stefani, B-2 

 Mr. Gertel, M-1 

 Mr. Litman, M-60 

 Ms. Briatico, ABU 

 

Appendix. Management Comments