United States Government Accountability Office

GAO Report to Congressional Requesters

DEFENSE 

CONTRACT 

MANAGEMENT 

DOD’s Lack of 

Adherence to Key 

Contracting Principles 

on Iraq Oil Contract 

Put Government 

Interests at Risk 

July 2007 

 

GAO-07-839 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2007

DEFENSE CONTRACT MANAGEMENT

DOD's Lack of Adherence to Key 

Contracting Principles on Iraq Oil 

Contract Put Government Interests at 

Risk 

Highlights of GAO-07-839, a report to 

congressional requesters 

The Department of Defense’s 

(DOD) U.S. Army Corps of

Engineers (Corps) awarded the 

$2.5 billion Restore Iraqi Oil (RIO I) 

contract to Kellogg Brown & Root 

in March 2003 in an effort to 

reestablish Iraq’s oil infrastructure. 

The contract was also used to

ensure adequate fuel supplies 

inside Iraq. RIO I was a cost-plusaward-fee type contract that

provided for payment of the

contractor’s costs, a fixed fee 

determined at inception of the 

contract, and a potential award fee.

The Defense Contract Audit 

Agency (DCAA) reviewed the 10

RIO I task orders and questioned 

$221 million in contractor costs. 

We were asked to determine (1)

how DOD addressed DCAA’s RIO I 

audit findings and what factors 

contributed to DOD’s decision and 

(2) the extent to which DOD paid 

award fees for RIO I and followed 

the planned process for making 

that decision. To accomplish this, 

we reviewed DOD and DCAA 

documents related to RIO I and

interviewed Corps, DCAA, and 

other officials.

What GAO Recommends

GAO recommends the Secretary of

the Army, in contingency 

situations, ensure that an analysis 

of the feasibility of following a

rigorous award fee process is 

conducted when using cost-plusaward-fee contracts. In written 

comments, DOD agreed with the 

recommendation. 

DOD considered DCAA’s audit findings on the RIO I contract and performed 

additional analysis before deciding to pay the contractor nearly all of the 

$221 million in costs that DCAA questioned. DOD did, however, remove 

about $112 million of the questioned costs from the amount used to establish 

the contractor’s fee pool, which resulted in an effective lowering of the fee 

received by the contractor by approximately $5.8 million. Lack of timely 

negotiations contributed significantly to DOD’s decision on how to address 

the questioned costs—all 10 task orders were negotiated more than 180 days

after the work commenced. As a result, the contractor had incurred almost 

all its costs at the time of negotiations, which influenced DOD’s decision to 

pay nearly all of the questioned costs. The negotiation delays were in part 

caused by changing requirements, funding challenges, and inadequate 

contractor proposals. In our previous work, we have found that negotiation 

delays can increase risk to the government. Overall, DCAA considers $26 

million of the costs questioned on the RIO I contract to be sustained, which 

DCAA defines as cost reductions attributable to its audit findings. We 

compared the sustention rates on DCAA’s 11 RIO I contract audits to the 

sustention rates for 100 DCAA audits of other Iraq contract actions, and 

found that the sustention rates varied widely for both groups. 

DOD’s Army Corps of Engineers paid $57 million in award fees on the RIO I 

contract, or 52 percent of the maximum possible, and on individual task 

orders the fee awarded ranged from 4 to 72 percent of the fee available. 

While the award fee plan required regular award fee boards during the life of 

the contract, DOD did not conduct a formal board until nearly all work on 

the contract was complete. As a result, DOD was not able to provide the 

contractor with formal award fee feedback while work was ongoing, which 

federal regulations state should be done in order to motivate a contractor to 

either improve poor performance or continue good performance. DOD 

officials told us the workload of RIO staff members and logistical difficulties 

stemming from the challenging conditions in Iraq hindered efforts to hold 

evaluation boards during the period of performance. DOD also was unable 

to give us enough documentation for a full assessment of its compliance 

with other parts of its plan—it did not, for example, provide the scores the 

award fee board assigned to the contractor on the individual award fee 

criteria, so we could not see if the award fee board had followed contract 

criteria and weighting in evaluating performance. We compared the 

percentage of award fees earned on the RIO I contract to the fees earned on 

a group of other selected Iraq reconstruction contracts and found that the 

percentage of award fees earned on RIO I fell within the lower range of fees 

earned on the other contracts. 

www.gao.gov/cgi-bin/getrpt?GAO-07-839.

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 3 

Background 5

Delayed Negotiations Shaped DOD’s Decision to Pay the 

Contractor for Nearly All of the Costs Questioned on the RIO I 

Contract 9

DOD Paid About Half of the Maximum Possible Award Fee for the 

RIO I Contract, but Did Not Fully Adhere to Key Steps in Its 

Award Fee Plan for Providing Performance Feedback to the

Contractor 23

Conclusion 29

Recommendation for Executive Action 30 

Agency Comments and Our Evaluation 30 

Appendix I Objectives, Scope, and Methodology 32 

Appendix II Comments from the Department of Defense 34 

Tables 

Table 1: GAO’s Analysis of the Resolution of DCAA’s Questioned 

Costs 12 

Table 2: DCAA’s Questioned Costs Sustained on the RIO I Contract 

Audits 21 

Table 3: Award Fee Paid for RIO I Task Orders 24 

Figures 

Figure 1: Reasons for DCAA Questioned Costs 8 

Figure 2: Elapsed Days from Notice to Proceed to Definitization 15 

Figure 3: Comparison of Sustention Rates 22 

Figure 4: Percentage of Award Fee Earned on the RIO I Contract 

and on 11 Other Selected Iraq Reconstruction Contracts 

from January 2004 to June 2006 29 

Page i GAO-07-839 Defense Contract Management
Abbreviations 

DCAA Defense Contract Audit Agency 

DESC Defense Energy Support Center 

DFARS Defense Federal Acquisition Regulation Supplement 

DOD Department of Defense 

DFI Development Fund for Iraq 

FAR Federal Acquisition Regulation 

RIO Restore Iraqi Oil 

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Page ii GAO-07-839 Defense Contract Management
United States Government Accountability Office

Washington, DC 20548 

July 31, 2007

The Honorable Henry A. Waxman 

Chairman 

The Honorable Tom Davis 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

The Honorable Daniel K. Akaka 

Chair 

Subcommittee on Oversight of Government Management, the Federal 

Workforce, and the District of Columbia 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

The United States, along with its coalition partners and various 

international organizations and donors, has embarked on a significant 

effort to rebuild Iraq. As of October 2006, the United States had obligated

about $29 billion for reconstruction and stabilization efforts in Iraq. The 

United States has relied heavily on private sector contractors to provide 

the goods and services needed to support reconstruction efforts in Iraq. 

For example, to help reestablish Iraq’s oil infrastructure, in March 2003 the 

U.S. Army Corps of Engineers (Corps) awarded the Restore Iraqi Oil (RIO 

I) contract to Kellogg Brown & Root.1

 The contract was also used to 

import fuels from neighboring countries to avoid domestic fuel shortages 

in Iraq. Under this contract, the Corps issued 10 task orders worth 

approximately $2.5 billion. The RIO I contract, like many other 

reconstruction and support contracts, was a cost-plus-award-fee type

contract. In general, these contracts provide for payment of the 

contractor’s allowable, allocable, and reasonable costs; a fixed base fee 

amount determined at inception of the contract; and a potential award fee 

sufficient to provide motivation for excellence in contract performance. A 

cost-plus-award-fee contract, like other cost reimbursement type 

contracts, increases the risk to the government of incurring higher than 

expected costs, as compared to some other contract types. To mitigate 

this risk, these types of contracts require sufficient oversight.

 1

 Kellogg Brown & Root is now known as KBR. 

Page 1 GAO-07-839 Defense Contract Management
The Defense Contract Audit Agency (DCAA) provides services that can

help the Department of Defense (DOD) ensure accountability for its 

acquisitions. DCAA performs audits and provides financial advisory 

services in connection with the 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. DCAA defines questioned costs as those costs that are not 

acceptable for negotiating a fair and reasonable contract price. Ultimately, 

the contracting officer has the final decision about whether questioned 

costs should be paid, taking into account DCAA’s advice and other 

information. On the RIO I contract, DCAA identified $221 million in 

questioned costs in its final audits of the task order proposals under the 

contract. 

Because of your interest in understanding the final agreement reached 

between DOD and the contractor on the RIO I contract, we examined (1) 

how DOD addressed DCAA’s audit findings on the contract and what 

factors contributed to DOD’s decision of how to address these findings 

and (2) the extent to which DOD paid award fees for the contract and 

followed the planned process for making that decision. 

To determine how DOD addressed DCAA’s audit findings on the RIO I 

contract and the factors that contributed to DOD’s decision of how to 

address those findings, we reviewed negotiation memorandums and DCAA 

audit reports for each of the 10 RIO I task orders and other documents 

related to the negotiation process and resolution of DCAA’s findings. We 

also interviewed Corps, DCAA, and other government officials as well as 

contractor representatives. Additionally, to put DOD’s decisions into 

context, we compared the resolution of DCAA’s questioned cost findings 

on 100 audits of Iraq-related contract actions that were resolved as of the 

end of fiscal year 2006 to the resolution of the questioned cost findings on

the RIO I task order audits. Because a contracting officer has the 

discretion to determine whether or not to pay questioned costs when 

reaching agreement with a contractor, our review does not include a

determination of whether the DOD contracting officer should have 

approved payment for the questioned costs. 

To determine the extent to which DOD paid award fees for the RIO I 

contract and followed its planned process for making that decision, we 

collected and reviewed key documents related to the award fee process, 

including the award fee determining official’s decision and the award fee 

plan. We also interviewed Corps officials to develop an understanding of 

the process and outcome for the award fees and contractor 

Page 2 GAO-07-839 Defense Contract Management
representatives to obtain their perspective on award fees. Additionally, to

put the award fee for the RIO I contract into context, we examined 

available award fee documentation for 11 large contracts that DOD 

awarded in 2004 to carry out reconstruction activities in Iraq. During the 

period we looked at, January 2004 through June 2006, a total of 37 award 

fee evaluation periods were conducted for the 11 contracts. Because an

award fee determination is a unilateral decision made solely at the 

discretion of the government based upon judgmental evaluations of 

individual contractor performance, our review does not include a 

determination of whether DOD reached the appropriate award fee 

decision for the RIO I contract. Appendix I provides details on our scope 

and methodology. We conducted our work from October 2006 through 

July 2007 in accordance with generally accepted government auditing 

standards. 

DOD considered DCAA’s audit findings on the RIO I contract and 

performed additional analysis before deciding to pay the contractor nearly

all of the $221 million in costs that DCAA questioned, a decision 

influenced by the fact that negotiations of the task orders’ terms and 

conditions did not begin until most of the work was complete. DOD also 

removed about $112 million of the questioned costs from the amount used 

to establish the contractor’s fee pool, which resulted in an effective 

lowering of the fee received by the contractor by approximately $5.8 

million. Lack of timely negotiations was a major contributing factor to 

DOD’s decision on how to address the questioned costs. Although the 

Defense Federal Acquisition Regulation Supplement (DFARS) generally 

requires that contract actions be definitized within 180 days after issuance

of the action, all 10 task orders were negotiated more than 180 days after

the work commenced. As a result, the contractor had incurred nearly all 

costs at the time of negotiations, and this fact influenced the DOD 

contracting officer’s decision to pay most of the questioned costs. 

According to various DOD officials and contractor representatives, 

changing requirements, funding challenges, and inadequate contractor 

proposals contributed to the negotiation delays. These findings are 

consistent with our previous work, where we found that factors such as 

changing requirements and difficulties with funding were linked to delays 

in definitization, and that these delays can increase risk to the government. 

Overall, DCAA considers $26 million of the costs questioned on the RIO I 

contract to be sustained, which DCAA defines as cost reductions directly 

attributable to its audit findings. We compared the sustention rates on 

DCAA’s 11 RIO I contract audits to the sustention rates for 100 DCAA 

Results in Brief 

Page 3 GAO-07-839 Defense Contract Management
audits of other Iraq contract actions, and found that the sustention rates 

varied widely for both groups. 

DOD’s Army Corps of Engineers paid about $57 million in award fees, or 

52 percent of the maximum possible award fees, on the RIO I contract, but 

it did not adhere to some key steps in its planned award fee process 

related to providing performance feedback to the contractor. The award 

fee paid varied by task order, ranging from 4 percent to 72 percent of the

possible award fee. DOD developed an award fee plan that laid out the 

steps for making its award fee decision, but it did not fully adhere to that 

plan. For example, the plan required award fee evaluations on a regular 

basis during the period of performance, but DOD did not conduct a formal 

evaluation until July 2004, subsequent to the completion of nearly all work 

on the contract. DOD officials told us the workload of RIO staff members 

and logistical difficulties stemming from the challenging conditions in Iraq

hindered efforts to hold evaluation boards during the period of

performance. By not conducting such evaluations during the period of 

performance, DOD was not able to provide the contractor with formal 

award fee feedback while work was ongoing, which federal regulations 

state should be done in order to motivate a contractor to either improve 

poor performance or continue good performance.2

 Additionally, DOD was 

not able to provide us with sufficient documentation to enable us to fully 

assess its adherence to other steps of its plan. For example, DOD did not 

have the scores the award fee board assigned to the contractor on the 

individual award fee criteria in coming to its award fee recommendation. 

Without these scores, we were unable to determine whether the award fee 

board had followed the criteria and weighting laid out in the contract in 

reaching its recommendation. We compared the percentage of award fees

earned on the RIO I contract to fees earned on a group of other selected 

Iraq reconstruction contracts and found that the percentage of award fee 

earned on the RIO I contract fell within the lower range of fees earned on 

other contracts. 

To ensure that cost-plus-award-fee contracts provide the intended 

benefits, we are recommending to the Secretary of the Army that the 

department conduct an analysis of the administrative feasibility of 

following a rigorous award fee process before awarding a cost-plus-awardfee contract in contingency situations. In written comments, DOD agreed 

with the recommendation. DOD’s comments are included in appendix II. 

 2

 Federal Acquisition Regulation (FAR) 16.405-2(b)(3). 

Page 4 GAO-07-839 Defense Contract Management
The United States, along with its coalition partners and various 

international organizations and donors, has embarked on a significant 

effort to rebuild Iraq. As of October 2006, the United States had obligated

about $29 billion for reconstruction and stabilization efforts in Iraq. The 

United States has relied heavily on private sector contractors to provide 

the goods and services needed to support the reconstruction efforts in 

Iraq. 

Background 

Congress has appropriated substantial amounts to support rebuilding 

efforts such as restoring Iraq’s oil and electric infrastructures, assisting in 

developing a market-based economy, and improving the country’s health, 

education, and medical services. With regard to Iraq’s oil sector, U.S. 

support has included efforts to (1) restore Iraq’s oil infrastructure to 

sustainable prewar crude oil production and export capacity, and (2) 

deliver and distribute refined fuels for domestic consumption. Specific 

U.S. activities and projects for the restoration of Iraq’s oil production and 

export capacity include repairing the Al-Fathah oil pipeline crossing, 

restoring several gas and/or oil separation plants near Kirkuk and Basrah,

and repairing natural gas and liquefied petroleum gas plant facilities in 

southern Iraq. U.S. activities also include the restoration of wells, pump 

stations, compressor stations, export terminals, and refineries, and 

providing electrical power to many of these oil facilities. In addition to 

infrastructure restoration activities, from late May 2003 through August 

2004, the United States facilitated and oversaw the purchase, delivery, and 

distribution of refined fuels throughout Iraq, primarily funded using the 

Development Fund for Iraq (DFI).3

 These imports—used for cooking, 

heating, personal transportation, and private power generation—were 

required to supplement domestic production due to increased demand and 

Iraq’s limited refining capacity. 

In early 2003, DOD assigned the Corps the responsibility of the oil 

restoration activities known as Restore Iraqi Oil. In March 2003 the Corps

awarded a cost-plus-award-fee contract, referred to as the RIO I contract, 

to support the oil restoration mission. Under this contract, the Corps 

awarded 10 task orders to the contractor worth a total of $2.5 billion. Two 

task orders related to oil restoration planning and extinguishing oil fires; 

 3

 On May 22, 2003, United Nations Security Council Resolution 1483 noted the 

establishment of the Development Fund for Iraq, a special account held on the books of the 

Central Bank of Iraq. The DFI includes frozen assets of the former Iraqi regime and Iraq oil 

proceeds. The DFI was to be used for the economic reconstruction and repair of Iraq’s

infrastructure, among other purposes. 

Page 5 GAO-07-839 Defense Contract Management
two task orders were for the construction and repair of the oil 

infrastructure; one was for life support activities, such as lodging and 

dining services; and five task orders were for the importation, delivery, 

and distribution of refined fuels throughout Iraq.

At the request of the Corps, DCAA audited the contractor’s proposals for 

the RIO I contract.4

 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 

DCAA audits of contractor proposals are intended to assist contracting 

officials in negotiating reasonable contract prices. Typically, DCAA audits

contractors’ proposals and provides contracting officials advice on the 

reasonableness of contractor costs prior to negotiations. DCAA also 

conducts audits of cost-type 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. DCAA defines questioned costs as costs considered to be not

acceptable for negotiating a fair and reasonable contract price. DCAA 

reports its findings to contracting officers for consideration in negotiating 

fair and 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. DCAA’s role is advisory, and the 

contracting officer is responsible for ensuring that the contractor’s 

proposed price is fair and reasonable.5

 While DCAA audit 

recommendations are nonbinding, federal regulations specify that when 

significant audit recommendations are not adopted, the contracting officer 

should provide rationale that supports the negotiation result in the price 

negotiation documentation.6

In its final 11 audits of the 10 task orders, DCAA identified $221 million in

questioned costs on the RIO I contract. In total, DCAA issued 22 proposal 

 4

 These proposals were intended to definitize the contractual actions and were generally 

submitted after the contractor had incurred some of its costs. 

5

 Federal Acquisition Regulation 1.602-2(c), 15.402(a). 

6

 Federal Acquisition Regulation 15.405(a).

Page 6 GAO-07-839 Defense Contract Management
audits of the RIO I contract because DCAA audited multiple proposals for 

some of the task orders. The final 11 audits included one audit of each task

order and an audit of a contractor claim on the life support task order. 7

Nearly 80 percent of the questioned costs related to the costs paid for fuel

and fuel delivery. For example, DCAA questioned $139 million of the costs 

the contractor paid for fuel and fuel transportation in Kuwait based on a 

comparison of the price paid by the contractor and the price paid by the 

Defense Energy Support Center (DESC) when it took over the mission for 

the contractor in April 2004. Figure 1 outlines the reasons for DCAA’s 

questioned costs on the RIO I contract. 

 7

 More than 99 percent of DCAA’s questioned costs were on task orders 3, 5-10, and the 

contractor claim for task order 4, all of which were negotiated by one DOD contracting

officer. Another DOD contracting officer negotiated the other three task orders. Report 

references to the DOD contracting officer refer to the contracting officer who decided how 

to address nearly all of the questioned costs. 

Page 7 GAO-07-839 Defense Contract Management
Figure 1: Reasons for DCAA Questioned Costs 

5%

11%

63% 14%

Source: GAO analysis of DOD data.

2%

Inadequate documentation of price

reasonableness

4%

Costs not allocable to task order

Timing of obtaining contracting officer

consent

Other questioned costs

Turkey fuel and fuel delivery charges

Kuwait fuel and fuel delivery charges

Note: Numbers do not add to 100 percent due to rounding. 

The RIO I contract provided for payment of a fixed fee of 2 percent of the

negotiated estimated contract cost plus an award fee amount of up to 5 

percent, based on the government’s evaluation of the contractor’s 

performance. Award fee contracts allow an agency to adjust the amount of 

fee paid based on contractor performance.8

 The award fee is intended to 

motivate excellence in contractor performance, and can also serve as a 

tool to control program risk and cost. However, the monitoring and 

evaluation of contractor performance necessary under an award fee 

contract requires additional administrative effort and cost, and federal 

regulations provide that the use of such a contract is suitable when the 

expected benefits of an award fee contract are sufficient to warrant this 

additional effort and cost.9

 8

 GAO recently reviewed DOD’s use of award and incentive fees. See GAO, Defense 

Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of

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

9

 Federal Acquisition Regulation 16.405-2(b)(iii).

Page 8 GAO-07-839 Defense Contract Management
In general, for award fee contracts, DOD personnel (usually members of 

an award fee evaluation board) conduct periodic evaluations of the 

contractor’s performance against specified criteria in an award fee plan 

and recommend the amount of fee to be paid. These evaluations are 

informed by input provided by government personnel who directly 

observe the contractor’s performance. Typically, award fee contracts 

emphasize multiple aspects of contractor performance, such as quality,

timeliness, technical ingenuity, and cost-effective management. Because 

award fees are intended to motivate contractor performance in areas that 

are susceptible to judgmental and qualitative measurement and evaluation, 

these criteria and evaluations tend to be subjective. After receiving the

recommendation of the award fee evaluation board, a fee-determining 

official makes the final decision on the amount of fee the contractor will 

receive. In certain cases the fee-determining official may also decide to

move unearned award fee from one evaluation period to a subsequent 

evaluation period or periods, thus providing the contractor an additional 

opportunity to earn previously unearned fee—a practice called rollover.10

DOD considered DCAA’s audit findings and conducted additional analysis 

before deciding to pay the RIO I contractor nearly all of the $221 million in

costs that DCAA questioned, and to remove $112 million from the amount 

used to establish the contractor’s fixed and award fees. The reduction in 

the amount used to establish the fee pool resulted in an effective reduction

of the contractor’s fee by about $5.8 million. DOD’s decision to pay most 

questioned costs was shaped by the fact that negotiations did not begin 

until most of the work was complete and the costs had already been 

incurred. The delay in negotiations was influenced by factors such as 

changing requirements, funding challenges, and problems with the 

contractor’s business systems. DCAA considers $26 million of the costs 

questioned on the RIO I contract to be sustained, which DCAA defines as 

cost reductions directly attributable to its questioned cost findings. We 

compared the sustention rates on DCAA’s 11 RIO I contract audits to the 

sustention rates for 100 DCAA audits of other Iraq contract actions, and 

found that the sustention rates varied widely for both groups. 

Delayed Negotiations 

Shaped DOD’s 

Decision to Pay the 

Contractor for Nearly

All of the Costs 

Questioned on the 

RIO I Contract 

 10 In a March 2006 policy memo, DOD established limitations on the use of award fee

rollover provisions, including that the use of rollover provisions should be the exception

rather than the rule and is a business decision that should be addressed in the acquisition 

strategy. According to the memo, if the fee-determining official approves the use of 

rollover, the contract file must be documented accordingly.

Page 9 GAO-07-839 Defense Contract Management
To address the $221 million in costs questioned by DCAA, DOD collected 

additional information and conducted additional analysis. For example, 

after DCAA issued its final audits, DOD collected additional information 

related to the difference in costs paid by the contractor and those paid by 

DESC for fuel and fuel delivery from Kuwait, as well as price adjustments 

the contractor paid to the subcontractor for fuel from Turkey, the two 

largest reasons for questioned costs. The DOD contracting officer also 

convened a meeting with contractor representatives, DCAA officials, and 

other Corps officials to discuss the additional information. As a result of 

the additional information and analysis presented in the meeting, the DOD 

contracting officer asked DCAA to conduct financial analyses to quantify 

options—referred to as financial positions—that he could use in 

developing the government’s objectives for negotiations with the 

contractor. The financial positions differed from DCAA’s final audit 

reports in some areas, for example, reflecting a narrower gap between the

costs paid by the contractor and the costs paid by DESC for the fuel and 

fuel delivery from Kuwait.11

DOD Decided to Pay the 

Contractor for Nearly All 

of the $221 Million in 

DCAA Questioned Costs, 

but Removed $112 Million 

from the Amount Used to 

Establish the Contractor’s

Fee on the RIO I Contract 

DOD decided to address the $221 million in questioned costs in the 

following ways: 

• Pay both the costs and fees. The DOD contracting officer decided to

pay the contractor costs and associated fees for nearly half of the costs 

questioned by DCAA. In general, these costs reflected the financial 

positions prepared for negotiations by DCAA after DOD collected 

additional information about some of the questioned costs. For 

example, although DCAA’s final audits questioned the costs paid for 

fuel from Turkey, the financial positions did not include reductions for 

these costs. The contracting officer used the financial positions as a 

basis for deciding to pay the contractor for the costs for fuel from 

Turkey. 

• Not pay the contractor costs or fees. For less than $10 million of 

the questioned costs, DOD decided not to pay the contractor for its 

costs and the associated fees. For example, the Corps decided not to 

reimburse approximately $4 million the contractor spent on leasing 

diesel trucks that were not used. 

 11 DCAA officials told us the memos that outlined the financial positions do not supercede 

DCAA’s final audit reports, but were provided to the contracting officer to assist with 

negotiations. 

Page 10 GAO-07-839 Defense Contract Management
• Pay the costs but not the fees. For almost half of the questioned 

costs, DOD decided to pay the contractor but removed those costs 

from the amount used to calculate the contractor’s fee. These costs 

were composed primarily of the difference that remained between the 

prices paid by the contractor and by DESC for fuel and fuel delivery 

from Kuwait after the contracting officer took into account the 

financial positions. 

When asked about the reason for paying for questioned costs but removing 

those same costs from the amount used to establish the contractor’s fee, 

the DOD contracting officer told us that this outcome was a result of 

negotiations. He stated that while the contractor probably did not do 

everything it could have to lower prices, it took reasonable actions to do 

so. For example, Corps officials stated that the contractor attempted to 

obtain lower prices for the fuel and fuel delivery from Kuwait through 

competition on several occasions. Also, the officials told us that DOD 

decided to pay for these questioned costs because it felt that it would have 

been unlikely to prevail in an attempt not to pay costs that had already

been incurred by the contractor. Specifically, Corps officials told us they 

believed that in the event of litigation, they would have been ordered to 

pay the contractor for incurred costs because, for example, the Corps 

continually directed the contractor to perform work under the contract.12 

However, these officials told us they believed there was adequate 

justification to negotiate the exclusion of some questioned costs from fee 

eligibility. 

The DOD contracting officer also believed there were several limitations 

to the primary reason for DCAA’s questioned costs—the comparison of the 

price paid by the contractor for fuel and fuel delivery from Kuwait to the 

price paid by DESC, which took over the fuel importation mission in 2004.

Specifically, the contracting officer attributed the contractor’s higher price 

to factors such as the Kuwaiti subcontractor’s perception of the risk of 

working in Iraq, short-term subcontracts for the fuel and fuel delivery 

because of the incremental funding provided, and differences in overhead 

costs. DESC officials also told us there were several factors that limited 

the usefulness of the comparison between the prices paid by DESC and 

the prices paid by the contractor for fuel and fuel delivery from Kuwait, 

such as the fact that DESC could commit to longer contracts with the 

 12 The decision to pay the questioned costs rather than assume the litigative risk and 

attendant costs associated with defending a claim for disallowance of incurred costs is 

essentially a matter of the contracting officer’s business judgment. See FAR 1.602-2. 

Page 11 GAO-07-839 Defense Contract Management
Kuwaiti subcontractor and the fact that by contracting with the same 

subcontractor, DESC could use the fuel transportation infrastructure 

established under the prior contract (i.e., the start-up costs faced by DESC

were lower).

In total, $112 million of the questioned costs were removed from the 

amount used to establish the contractor’s fee pool. The contractor’s fixed 

and award fees were calculated as a percentage of the costs included in 

the fee pool. Consequently, removing $112 million from the amount used 

to establish the fee pool resulted in an effective lowering of the fees the

contractor received by about $5.8 million (see table 1 for details).13

Table 1: GAO’s Analysis of the Resolution of DCAA’s Questioned Costs 

Dollars in thousands 

Changes resulting from DCAA’s 

questioned costs 

Task 

order Purpose

Primary reason for 

questioned costs 

DCAA 

questioned 

costs

Adjustments 

to the amount

used to establish 

the fee poola

Effective fee

 adjustments 

resulting

 from changes

 to the amount

used to establish

the fee poolb

1 Pre-positioning and training Differences between proposed

and actual costs $904 -$904 -$38

2 Quick fix design Differences between proposed

and actual costs 200 -197 -11

3 Infrastructure repair and

restoration 

Costs not allocable to task order

11,698 -4,830 -184

4 Life support Indirect costs due to rate and 

base differences 86 1,745c

66c

4 Equitable adjustment claim 

- life support 

Indirect costs due to rate and 

base differences 39 -39 N/Ad

5 Fuel import and distribution Kuwait and Turkey fuel and fuel 

delivery charges 84,446 -45,129 -2,437

6 Infrastructure repair and

restoration 

Timing of obtaining contracting 

officer consent 32,078 -5,289 -116

 13 We calculated the $5.8 million in the following manner: For each task order, we 

multiplied the award and fixed fee percentages received by the contractor by the 

adjustment to the amount used to establish the fee pool (this amount totaled -$112 million 

across the task orders). We then summed this total for each task order. 

Page 12 GAO-07-839 Defense Contract Management
Dollars in thousands 

Changes resulting from DCAA’s 

questioned costs 

Task 

order Purpose 

Primary reason for 

questioned costs 

DCAA 

questioned 

costs

Adjustments 

to the amount

used to establish 

the fee poola

Effective fee

 adjustments 

resulting

 from changes

 to the amount

used to establish

the fee poolb

7 Fuel import and distribution Kuwait and Turkey fuel and fuel 

delivery charges 35,681 -16,598 -896

8 Fuel import and distribution Kuwait and Turkey fuel and fuel 

delivery charges 22,781 -14,562 -786

9 Fuel import and distribution Kuwait and Turkey fuel and fuel 

delivery charges 19,903 -15,578 -841

10 Fuel import and distribution Kuwait and Turkey fuel and fuel 

delivery charges 13,603 -10,782 -582

Total $221,418 -$112,163 -$5,826

Source: GAO analysis of DOD data. 

a

Numbers in this column reflect our analysis of cost adjustments made to the amount used to 

establish the fee pool as result of DCAA’s questioned costs. At negotiations, DOD also adjusted other 

contract costs not resulting from DCAA’s questioned costs, which are not reflected in this table. 

b

Numbers in this column reflect our analysis of what would have happened if DOD had applied the 

fixed and award fee percentages earned for each of the task orders to the adjustments to the amount

used to establish the fee pool resulting from DCAA’s questioned costs. 

c

Certain costs were questioned by DCAA based on the task order to which they were allocated. The 

increase to the amount used to establish the fee pool for task order 4 reflects allocation adjustments 

made based on DCAA’s findings associated with task order 3. 

d

Because the equitable adjustment claim exceeded the not-to-exceed amount for task order 4, the 

contracting officer decided that no fixed or award fees would be paid on the claim. 

DCAA officials said they believed the DOD contracting officer followed the 

standard process for addressing questioned costs. For example, the 

Director of DCAA testified before Congress that the process worked as it 

is defined, and that in making its decision of how to address the costs, the 

Corps “rightly considered other evidence other than the audit reports and 

considered extenuating circumstances that might have affected the 

contractor’s actions.”14 When asked if he was satisfied with the resolution 

of the questioned costs, a DCAA official involved in the process told us he 

 14 Iraq Reconstruction: Hearing before the House Comm. on Oversight and Government

Reform, 110th Cong. (2007). 

Page 13 GAO-07-839 Defense Contract Management
thought the DOD contracting officer did the best job he could, given the 

circumstances. 

Delays in Negotiations 

Influenced the Contracting 

Officer’s Decision to Pay 

Questioned Costs 

All 10 RIO I task orders were negotiated more than 180 days after the work 

commenced, and all were negotiated after the work had been completed. 

The RIO I task orders were considered undefinitized contracting actions 

because DOD and the contractor had not reached agreement on the terms, 

specifications, and price of the task orders before performance began. 

Undefinitized contract actions are used when government interests 

demand that the contractor be given a binding commitment so that work 

can begin immediately, and negotiating a definitive contract is not possible 

in time to meet the requirement. DOD requires that contract actions be 

definitized within 180 days after issuance of the action or when the 

amount of funds obligated under the action is over 50 percent of the notto-exceed price, whichever occurs first. The head of an agency may waive 

these limitations in certain circumstances that likely would have applied 

for this contract, including for a contingency operation, but Corps officials 

told us that waivers were not requested for these task orders. Figure 2 

shows the time it took for DOD and the contractor to reach agreement on

the terms and conditions for the task orders. Because of the delays in 

negotiations, virtually all of the costs had been incurred by the contractor 

at the time of negotiations. 

Page 14 GAO-07-839 Defense Contract Management
Figure 2: Elapsed Days from Notice to Proceed to Definitization

0 100 200 300 400 500 600 700 800 900 1,000

1

2

3

4

5

6

7

8

9

10

Task orders

Elapsed days

Source: GAO analysis of DOD data.

Work completed

Days from work completion to definitization

180 days

The contracting officer determined that the questioned costs he decided to 

pay were reasonable and in accordance with the FAR, and his decision to

pay nearly all of the questioned costs was influenced by (1) the fact that 

nearly all of the costs had been incurred at the time of negotiations and (2) 

his belief that payment of incurred costs was required, absent unusual 

Page 15 GAO-07-839 Defense Contract Management
circumstances.15 The contracting officer stated in final negotiation 

documentation that unusual circumstances did not exist for most of the 

questioned costs. For example, the DOD contracting officer indicated that 

because DCAA chose not to suspend or disallow the funds, which DCAA 

can do by issuing a Form 1, unusual circumstances did not exist. 16 

Changing Requirements, 

Funding Challenges, and 

Inadequate Contractor 

Proposals Contribute to 

Negotiation Delays and 

Increase Risk to the 

Government 

Several factors contributed to the delay in negotiations, including DOD’s 

changing requirements, DOD’s funding challenges, and inadequacies in 

several of the contractor’s business systems. Based on contract 

documentation as well as interviews with DOD officials and contractor 

representatives, these factors made it difficult for the contractor to submit

proposals in a timely fashion. Without a qualifying contractor proposal, the 

government and the contractor are not able to reach agreement on the 

terms and conditions of a task order.17 For many of the task orders, the 

contractor did not submit qualifying proposals until late in the period of 

performance or after the work had been completed. For example, for 6 of 

the 10 task orders, the contractor did not submit a qualifying proposal that 

was audited by DCAA until after the period of performance was complete. 

 15 Under the FAR, there is no presumption of reasonableness when costs are incurred by

the contractor. If the contracting officer challenges a specific cost, the contractor has the

burden of proof to establish that such cost is reasonable. A cost is reasonable if, in its

nature and amount, it does not exceed that which would be incurred by a prudent person in

the conduct of competitive business. What is reasonable depends upon a variety of 

considerations and circumstances, including whether it is the type of cost generally 

recognized as ordinary and necessary for the conduct of the contractor’s business or the 

contract performance. FAR 31.201-3. The contracting officer is allowed wide latitude to

exercise business judgment and could still decide to pay the costs after consideration of

the audit findings based on a judgment of what the best business decision would be, 

including the desire to avoid the cost of litigation. 

16 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 that time. Such costs may be determined 

reimbursable after the contractor provides the auditor additional documentation or

explanation. Disapproved costs are costs that have been determined to be unallowable, 

that is, not reimbursable under the contract terms. 

17 The Defense Federal Acquisition Regulation Supplement defines a qualifying proposal as

a proposal containing sufficient information for DOD to do complete and meaningful 

analyses and audits of the (1) information in the proposal and (2) any other information the

contracting officer has determined DOD needs to review in connection with the contract. 

DFARS 217.7401(c). 

Page 16 GAO-07-839 Defense Contract Management
Corps officials told us that changing requirements made it difficult for the 

contractor to submit a proposal. In particular, the requirements for the 

fuel mission were not well defined and changed over time, particularly in 

terms of the quantity of fuel needed and the period of performance for the

work. According to Corps officials, the fuel mission was initially 

envisioned as a 21-day requirement, but ultimately extended into many 

months. The extension of the requirements is reflected in modifications to

task order 5, the initial fuel mission task order, where the period of 

performance was extended. Additionally, numerous correspondences 

between DOD officials demonstrate the uncertainty as to how much fuel 

was required and the time frame during which fuel importation would be 

needed. For example, one correspondence indicates that as of April 21, 

2003, there was no immediate need for the importation of fuel products 

because Iraq was able to provide sufficient refined products to satisfy the 

domestic need, and one DOD official considered it unlikely that the need 

would arise.18 Less than 2 weeks later, on May 2, 2003, DOD 

correspondence indicates that fuel shortages were anticipated, and DOD 

officials began preparations to execute the fuel importation mission. At 

that time, officials anticipated the need for 10- to 30-day supplies of fuel, 

not a mission that would expand into many months. In addition, the 

statements of work for the fuel mission did not outline the quantities 

needed to fulfill the mission. The quantities of fuel required changed 

numerous times. For example, between July 16, 2003, and August 3, 2003, 

the Corps issued four separate letters to the contractor, each one 

increasing the quantities of fuel required to fulfill the mission. Overall, 

through numerous modifications, the Corps increased the funding on task

order 5 from $24 million to $871 million, a value more than 36 times 

greater than the initial allocation. 

The Corps also experienced challenges in establishing and maintaining a 

consistent, reliable, and sufficient source of funding for the RIO I contract, 

which exacerbated the problem of fully defining the requirements. The 

RIO I task orders were funded using several sources, including the Army’s 

Operation and Maintenance Appropriation, Iraqi vested assets, and the 

 18 However, DOD did recognize the need to have a contingency plan available in case the 

need arose. 

Page 17 GAO-07-839 Defense Contract Management
Development Fund for Iraq.19 For the fuel mission, a high-level Corps 

official involved in the funding aspect of the contract told us that the 

Corps had a difficult time finding enough funding to support the mission, a 

fact that contributed to short-term requirements. For example, this official

told us that the Corps received funding on a short-term basis rather than 

the longer-term funding it requested, which affected the quantity of fuel 

the Corps could direct the contractor to purchase. Additionally, to support 

the fuel mission when funding was tight, the Corps began using funds from 

the infrastructure repair and restoration task orders to fund the fuel 

mission task orders, resulting in the delay of work the Corps believed was 

critical to the repair of the oil infrastructure. 

DOD officials and contractor representatives also told us that the 

contractor’s business systems were not fully prepared to handle the 

growth in work the company experienced as a result of the war in Iraq, 

and this contributed to the delays in proposal submission. From 2002 to 

2004, the contractor’s revenues grew from $5.7 billion to $11.9 billion. 

Subsequent to the issuance of the RIO I contract, and after the war in Iraq 

began, DCAA identified deficiencies in several of the contractor’s business 

systems. For example, DCAA considered the contractor’s estimating 

system—a system important for proposal development—adequate prior to

the issuance of the RIO I contract. However, subsequent to the issuance of

the RIO I contract, DCAA issued an audit that found the contractor’s 

estimating system to be inadequate for providing verifiable, supportable, 

and documented cost estimates that are acceptable for negotiating a fair 

and reasonable price.20

 19 “Vested assets” refers to former Iraqi regime assets held in U.S. financial institutions that

the President confiscated in March 2003 and vested in the U.S. Treasury. The United States

froze these assets shortly before the first Gulf War. The USA PATRIOT ACT of 2001 

amended the International Emergency Economic Powers Act to empower the President to

confiscate certain property of designated entities, including these assets, and vest 

ownership in an agency or individual. The President has the authority to use the assets in 

the interests of the United States. In this case, the President vested the assets in March 

2003, and these funds were made available for the reconstruction of Iraq in May 2003. 

20 In its most recent audit of the contractor’s estimating system, issued in September 2005, 

DCAA found that the contractor had taken corrective action and made improvements to 

the system. However, DCAA continued to cite some deficiencies in the system. As of

December 2004, the DOD systems administrative contracting officer who is responsible for

determining the acceptability of the contractor’s estimating system determined the system 

to be acceptable with corrective action. This determination was in effect as of the issuance

of this report. 

Page 18 GAO-07-839 Defense Contract Management
We have shown through our previous work the link between delays in 

definitization and challenges with requirements, funding, and proposal 

submission. For example, in a review of 77 undefinitized contract actions 

issued by various DOD agencies, we found that contracting officers cited 

timeliness of a qualifying proposal, changing or complex requirements, 

and changes in funding availability as three of the top four reasons for 

delays in definitization.21 In a previous review of Iraq reconstruction 

contracts, agency officials told us that delays in reaching agreement on the 

terms and conditions of a contract resulted from the growth in 

requirements and from concerns over the adequacy of contractor 

proposals.22

Delays in definitization can increase the risk to the government because 

when contracts remain undefinitized, the government bears most of the 

risk. For example, in a prior review of how DOD addressed DCAA’s audit 

findings on 18 audits of Iraq contract actions, we found that DOD 

contracting officials were less likely to remove questioned costs from a 

contract proposal if the contractor had incurred these costs before 

reaching agreement on the work’s scope and price.23 In a previous review 

of Iraq reconstruction contracts, as well as a review of DOD’s logistics 

support contracts, we found that delays in definitizing contract actions can 

increase the risk to the government by reducing cost control incentives, 

particularly for cost reimbursement type contracts like the RIO I 

contract.24

DCAA Attributes $26 

Million in Cost Reductions 

on the RIO I Contract to Its 

Audit Findings 

In total, DCAA considers $26 million of the costs questioned on the RIO I 

contract to be sustained. DCAA defines questioned costs sustained as the 

negotiated cost reductions directly attributable to questioned cost findings 

reported by the DCAA auditor. DCAA’s calculation of questioned costs 

sustained includes costs DOD decided not to pay to the contractor and 

other types of cost reductions. Specifically, the $26 million of questioned 

 21 GAO, Defense Contracting: Use of Undefinitized Contract Actions Understated and

Definitization Time Frames Often Not Met, GAO-07-559 (Washington D.C.: June 2007). 

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

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

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

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

24 GAO-04-605 and GAO, Military Operations: DOD’s Extensive Use of Logistics Support 

Contracts Requires Strengthened Oversight, GAO-04-854 (Washington D.C.: July 2004). 

Page 19 GAO-07-839 Defense Contract Management
costs sustained includes (1) $9 million composed primarily of costs DOD 

decided not to pay to the contractor and including some costs DOD 

decided to pay but moved from one task order to another because of 

improper allocation25 and (2) $17 million in costs removed from the 

contractor’s final proposals but questioned by DCAA in prior audits of 

previous contractor proposals. For example, in an early version of a 

proposal for one of the fuel mission task orders, the contractor proposed 

demobilization costs that DCAA questioned. The contractor removed these 

costs in a subsequent proposal, and DCAA considered the removal of 

these costs attributable to its audit findings, and therefore counted that 

amount as sustained. For purposes of calculating a sustention rate, which 

is a calculation of questioned costs sustained divided by questioned costs, 

in its internal management system DCAA increased its questioned costs on

the final audits from $221 million to $237 million to reflect the $17 million 

sustained from prior audits.26

Table 2 shows the questioned costs sustained and the sustention rate for 

each of the audits of the RIO I contract. The sustention rates ranged from 

0 to 20 percent for the fuel mission task orders, which represented a large 

portion of the questioned costs. As discussed earlier in the report, the 

DOD contracting officer collected additional information and conducted 

additional analysis to address some of these questioned costs. 

Additionally, he identified limitations to the comparison between the 

prices paid by the contractor and DESC used by DCAA to question some 

of the fuel costs, such as differences in the length of contract terms for 

purchase of fuel and fuel delivery from Kuwait, and referred to these 

limitations in his rationale for his decision on these costs. 

 25 For example, in one audit, DCAA questioned whether some costs were properly allocated 

to the task order, and suggested the costs should be allocated to another task order under 

the contract. The DOD contracting officer agreed the costs were improperly allocated, and 

moved the costs to the appropriate task order. Because DCAA calculates questioned costs 

sustained for each audit, DCAA considered these questioned costs sustained. 

26 Numbers do not add due to rounding. DCAA officials told us that, in general, DCAA

calculates a sustention rate across all audits for each fiscal year. They use the sustention 

rates for internal management purposes—for example, they compare the sustention rate

from fiscal year to fiscal year to see if there is variation. When there is variation, they try to

identify reasons for that variation. The officials told us they do not have a specific goal for 

an overall sustention rate, and that it is not unusual for an individual audit to have a 

sustention rate of 0 percent or of 100 percent.

Page 20 GAO-07-839 Defense Contract Management
Table 2: DCAA’s Questioned Costs Sustained on the RIO I Contract Audits 

Dollars in thousands 

Task 

order Purpose

Primary 

questioned costs reason

Questioned

 costs based on

 DCAA’s internal 

management systema

Questioned

 costs sustained

Sustention rate

by audit report

1 Pre-positioning and

training 

Differences between 

proposed and actual costs $904 $904 100%

2 Quick fix design Differences between 

proposed and actual costs 200 197 99%

3 Infrastructure repair and

restoration 

Costs not allocable to task 

order 20,290 12,555 62%

4 Life support Indirect costs due to rate 

and base differences 86 0 0%

4 Equitable adjustment 

claim - life support 

Indirect costs due to rate 

and base differences 39 39 100%

5 Fuel import and

distribution 

Kuwait and Turkey fuel and 

fuel delivery charges 84,446 0 0%

6 Infrastructure repair and

restoration 

Timing of obtaining 

contracting officer consent 32,194 0 0%

7 Fuel import and

distribution 

Kuwait and Turkey fuel and 

fuel delivery charges 35,681 0 0%

8 Fuel import and

distribution 

Kuwait and Turkey fuel and 

fuel delivery charges 27,423 5,509 20%

9 Fuel import and

distribution 

Kuwait and Turkey fuel and 

fuel delivery charges 22,552 4,618 20%

10 Fuel import and

distribution 

Kuwait and Turkey fuel and 

fuel delivery charges 13,603 2,336 17%

Contract 

total $237,418 $26,158 11%

Source: GAO analysis of DOD data. 

a

Data in this column include costs questioned in the final audits and costs questioned in prior audits 

that DCAA considers sustained. 

Page 21 GAO-07-839 Defense Contract Management
We compared the sustention rates for the 11 RIO I audit reports to the 

sustention rates for 100 DCAA audits of other Iraq contract actions, and 

found a similar pattern in the distribution and range of sustention rates for 

both groups.27 Specifically, as shown in figure 3, the sustention rates for 

both groups of audit reports varied widely. DCAA officials told us that it is

not unusual to have a sustention rate of 0 percent or of 100 percent on an 

individual audit, and these were common values in the two groups we 

looked at. 

The Sustention Rates on 

the DCAA Audits of the 

RIO I Contract and the 

Sustention Rates on DCAA 

Audits of Other Iraq 

Contract Actions Both 

Varied Widely

Figure 3: Comparison of Sustention Rates 

0

10

20

30

40

50

0 to 24.9 25 to 49.9 50 to 74.9 75 to 100

Number of audit reports

Percentage of questioned costs sustained

Source: GAO analysis of DOD data.

Other Iraq audit reports

RIO I audit reports

Note: While this analysis provides a basis for context, the circumstances surrounding each of the 

contracts or task orders audited are unique. Consequently, sustention rates between individual audit 

reports may not be directly comparable. 

 27 For comparison purposes, we used the audit report as our unit of analysis. By using the

audit report as the unit of analysis, each sustention rate generally reflects a contracting

officer’s decision on how to address DCAA’s findings for that particular audit. As a

management tool used by DCAA, sustention rates do not represent an analysis of the 

validity of underlying costs or how the contracting officer made a decision on the 

reasonableness of specific costs.

Page 22 GAO-07-839 Defense Contract Management
DCAA officials told us that they do not expect every questioned cost to be 

sustained, because reasonable people can disagree about how some of 

these costs should be resolved. Additionally, as discussed earlier, 

contracting officers may consider other information provided subsequent 

to DCAA’s issued audit as part of the process of resolving DCAA audit 

findings. 

DOD paid approximately $57 million in award fees, or 52 percent of the 

maximum possible award fee, for the RIO I contract. However, DOD 

missed potential opportunities to motivate contractor performance by not 

following steps outlined in its award fee plan to provide performance 

feedback to the contractor. Further, DOD was unable to provide sufficient

documentation to enable us to fully evaluate its adherence to its award fee 

plan. In comparing the RIO I award fee to award fees earned on other 

selected Iraq reconstruction contracts, we found that the percentage of 

award fee earned on the RIO I contract fell within the lower range of fees 

earned on these other contracts. 

The overall award fee paid to the contractor on the RIO I contract totaled

about $57 million, just over half of the maximum possible award fee. The 

contract provided for a fixed fee of 2 percent of the negotiated estimated 

contract cost and an award fee of up to an additional 5 percent that could 

be earned based on the government’s evaluation of the contractor’s 

performance in areas including technical and cost performance and

business management. The possible 5 percent award fee was based on a

negotiated estimated contract cost of about $2.2 billion, translating into a 

maximum award fee of about $109 million.28 The award fee decision states

that, overall, while the quality of the contractor’s work was generally rated

highly, the contractor did not do as well in the areas of adherence to 

schedule and business management. As shown in table 3, the award fee 

DOD Paid About Half 

of the Maximum

Possible Award Fee 

for the RIO I Contract,

but Did Not Fully 

Adhere to Key Steps 

in Its Award Fee Plan 

for Providing 

Performance 

Feedback to the 

Contractor 

DOD Paid Approximately 

$57 Million in Award Fees 

for the RIO I Contract 

 28 The total value of the RIO I contract was about $2.5 billion, including the negotiated costs 

to be paid and the fixed and potential award fees that could be earned by the contractor. 

Page 23 GAO-07-839 Defense Contract Management
varied by task order, ranging from 4 percent to 72 percent of the possible 

award fee. 

Table 3: Award Fee Paid for RIO I Task Orders 

Dollars in thousands 

Task order Purpose 

Award

 fee possible

Award

 fee paid

Percentage

 of possible

 award fee paid

1 Pre-positioning and training $399 $175 44

2 Quick fix design 54 39 72

3 Infrastructure repair and restoration 32,333 11,640 36

4 Life support 2,207 794 36

5 Fuel import and distribution 39,208 26,662 68

6 Infrastructure repair and restoration 9,700 388 4

7 Fuel import and distribution 14,354 9,761 68

8 Fuel import and distribution 7,679 5,222 68

9 Fuel import and distribution 1,896 1,289 68

10 Fuel import and distribution 802 546 68

Contract total $108,631 $56,515 52%

Source: GAO analysis of DOD data. 

Note: A separate request for equitable adjustment was also negotiated for task order 4. However, 

because the equitable adjustment claim exceeded the not-to-exceed amount for task order 4, the 

contracting officer decided that no fixed or award fees would be paid on the claim. 

DOD Missed Opportunities 

to Motivate Contractor 

Performance by Not 

Following Key Steps 

Outlined in Its Award Fee 

Plan 

DOD’s award fee plan for the RIO I contract included several steps related 

to providing the contractor with ongoing performance feedback. For 

example, the plan called for award fee evaluations to be conducted on a 

regular basis during the period of performance.29 These evaluations were 

to include a meeting of the award fee board to determine a recommended 

award fee for the contractor and a final decision by the award fee 

determining official. After each award fee evaluation, the contractor was 

to be notified of the percentage and amount of award fee earned. In 

addition to these formal award fee evaluations, the plan also called for 

monthly interim evaluations to be conducted in which award fee board 

members would consider performance evaluation reports submitted by 

 29 Specifically, the plan noted that end-of-period evaluations were to be conducted 

semiannually for the first evaluation period and quarterly for all remaining performance 

periods thereafter. 

Page 24 GAO-07-839 Defense Contract Management
DOD staff designated as performance monitors, reach an interim 

evaluation decision, and then notify the contractor of the strengths and 

weaknesses for the evaluation period.

However, despite its plans to conduct formal award fee evaluations during 

the period of performance, DOD did not convene an award fee board for 

the RIO I contract until contract performance was almost entirely 

completed. DOD officials told us that they were unable to hold boards due 

to the heavy workload of RIO staff and logistical challenges such as 

difficulties with communications, travel, and security conditions. DOD 

officials and contractor representatives also indicated that holding an 

award fee board was not a high priority because their focus was on 

making sure that the work under the contract was accomplished. 

Ultimately only one award fee board was held, in July 2004, after fieldwork 

on all but one task order had been completed. The contractor was notified 

of its award fee scores in January 2005, after completion of all work on the 

contract.30 This process was in contrast to the rationale for award fee 

evaluations explained in federal regulations: Evaluation at stated intervals

during performance, accompanied by partial payment of the fee generally 

corresponding to the evaluation periods, can induce the contractor to 

improve poor performance or to continue good performance. 

In addition to not holding formal evaluations as planned during the period 

of performance, DOD did not meet the rigor called for in the award fee 

plan when providing interim performance feedback to the contractor. 

DOD did provide some interim feedback to the contractor on its 

performance during the period of performance. For example, DOD 

officials and contractor representatives told us that DOD contracting staff 

and contractor staff had daily informal discussions about contractor 

performance. In addition, RIO administrative contracting officers sent the 

contractor letters on a semiannual basis that provided feedback on the 

contractor’s performance. However, as discussed previously, the award 

fee plan states that the award fee board should hold monthly interim 

evaluations of the contractor’s performance and provide the contractor 

 30 After receiving DOD’s initial award fee decision in January 2005, the contractor requested 

the opportunity to have its award fee scores reconsidered. The award fee determining 

official granted this request. After the contractor presented additional information, the 

award fee determining official made some upward adjustments to the award fee in his final 

decision when he determined that new information provided by the contractor was

sufficiently significant to do so. In this report, all award fee amounts and percentages refer 

to the award fee determining official’s final decision. 

Page 25 GAO-07-839 Defense Contract Management
with feedback from the evaluations. DOD officials were only able to 

provide us with information about one interim evaluation board, and the 

contractor was not provided with results from this evaluation. Contracting 

staff and others providing feedback to the contractor expressed to us 

views ranging from very negative to very positive on the contractor’s 

performance during the same time period. Thus, without feedback 

reflecting consensus judgment, the contractor may not have been fully

aware of the government’s views on the strengths and weaknesses of its 

performance. Given that the award fee is intended to motivate excellence

in contractor performance, providing the contractor with this type of 

feedback is an important step in achieving this aim. 

The lack of adherence to the award fee plan also made it difficult to 

ensure that all aspects of the contractor’s performance were considered in

the final award fee decision. Although performance monitors were 

supposed to complete reports monthly and at the end of each evaluation 

period in order to provide the award fee board with information about the 

contractor’s performance, which would mean that hundreds of reports 

should have been completed during the course of the contract, a DOD 

official told us that fewer than 10 performance monitor reports were ever 

provided to the award fee board. The board received so few reports 

because (1) written reports were not prepared on a regular basis, as 

required by the award fee plan, and (2) reports that were prepared were 

not submitted to the award fee board. Specifically, DOD officials and 

correspondence indicated that performance monitor reports did not begin

to be completed until several months into the contract period of 

performance and even then were not completed on a monthly basis. In 

addition, DOD officials provided us with more than 25 reports that they 

told us had been completed but not provided to the award fee board 

members. DOD officials told us that board members were not provided 

with these documents because the Corps had received a large number of 

documents related to the RIO I contract from Iraq that had not been sorted 

through by the time the award fee board was held in July 2004. Because

the DOD officials had not sorted through all of the documents, the award 

fee board was also not provided with full information about an interim 

evaluation board held in May 2003. Specifically, award fee board members 

were provided with only one task order score from the interim evaluation

board, despite the fact that documentation of consensus scores and 

contractor strengths and weaknesses was prepared for four task orders. 

DOD officials responsible for selecting the award fee board members told

us that they selected board members to ensure that they included 

individuals who had directly observed the contractor in different time 

periods and locations. However, because the award fee board meeting was 

Page 26 GAO-07-839 Defense Contract Management
near the end of fieldwork on the contract and because RIO staff rotated 

during the period of performance, written observations of contractor 

performance would have been important in ensuring that the board had 

full knowledge of all aspects of the contractor’s performance. 

We have previously reported on problems with DOD adhering to its award 

fee process in contingency situations. In our review of DOD’s use of 

logistics support contracts, for one large contract we found that the Army 

was not holding award fee boards according to the terms of the contract.

We also found that Army officials were not evaluating and documenting 

the contractor’s performance on that contract.31

DOD Could Not Provide 

Sufficient Documentation 

to Enable Us to Fully 

Evaluate Its Adherence to 

Its Award Fee Plan 

To evaluate the extent to which DOD followed its planned process for 

making the RIO I award fee decision, we attempted to review DOD’s 

adherence to the process outlined in its award fee plan, but were not able

to fully do so because DOD could not provide us with documentation of 

some elements of the process. For example, according to DOD officials 

and the award fee board minutes, the board determined its recommended 

score for each task order by first reaching a consensus on individual 

criteria outlined in the contract, and then computing the overall score 

based on the weighting included in the contract for those criteria. 

However, according to DOD officials, they could not provide us with the 

consensus scores on the individual criteria because records of those 

scores were destroyed after the final award fee decision was reached.32

Without these scores, we could not determine whether the award fee 

board adhered to the weighting of the criteria outlined in the contract in 

reaching its recommendation. We also had limited insight into any 

additional factors the award fee determining official considered in making 

his initial decision, which included upward adjustments to the award fee 

board’s recommendation, because DOD officials could not provide us with 

documentation of the reasons for the difference and told us they did not 

believe such documentation had ever been developed. This apparent lack

of documentation was not in accordance with the award fee plan, which 

 31 GAO-04-854. 

32 The Defense Federal Acquisition Regulation Supplement provided that the basis for all 

award fee determinations was required to be documented in the contract file. DFARS § 

216.405-2(a)(ii) (Currently, this provision is in DFARS Procedures, Guidance, and 

Information § 216.405-2(2)). However, there is no specific requirement that records of the 

award fee board’s consensus scores on individual criteria be kept. 

Page 27 GAO-07-839 Defense Contract Management
states that reasons for any differences between the award fee determining 

official’s decision and the award fee board’s recommendation must be 

fully documented. 

DOD officials also could not provide us with complete information 

regarding the monitoring of the contractor’s performance during the 

period of performance. For example, we could not obtain full

documentation of interim boards referred to in the award fee board 

minutes, including documentation of the number of boards held, the dates 

of the boards, or the results from the boards. Without such information, 

we could not determine how results from interim evaluations were figured 

into the award fee board’s recommendation, as the award fee plan 

indicates they should be. 

The Percentage of Award 

Fee Earned on the RIO I 

Contract Fell within the 

Range of Award Fees 

Earned on a Sample of 

Other Iraq Reconstruction 

Contracts

To put the RIO I award fee into context, we also analyzed the award fees 

earned on other selected Iraq reconstruction contracts and found that the 

percentage of award fee earned on the RIO I contract was within the range 

of award fees earned on these other contracts. More specifically, we 

reviewed 11 contracts that DOD awarded in 2004 to conduct 

reconstruction activities in Iraq, which, like the RIO I contract, were largescale cost-plus-award-fee contracts. During the period we looked at, 

January 2004 through June 2006, a total of 37 award fee evaluation periods 

were conducted for the 11 contracts. As illustrated in figure 4, the 

percentage of award fee earned during the period varied by contract, 

ranging from 20 percent to nearly 100 percent. 

Page 28 GAO-07-839 Defense Contract Management
Figure 4: Percentage of Award Fee Earned on the RIO I Contract and on 11 Other 

Selected Iraq Reconstruction Contracts from January 2004 to June 2006 

0

10

20

30

40

50

60

70

80

90

100

Percentage of award fee earned

Source: GAO analysis of DOD data.

Contracts in GAO’s sample

Other selected Iraq reconstruction contracts RIO I contract

20

36

41

52

74

80

86 86 88

94 95

99

Notes: Because some of these contracts were still active as of June 2006, the ultimate amount and 

percentage of award fees earned may have changed depending on contractor performance over the 

remainder of the contract. In 11 of the 37 award fee evaluation periods we analyzed, the award fee 

determining official chose to roll over the unearned award fee from one evaluation period to a 

subsequent evaluation period or periods. In these cases we excluded rolled-over fees from the 

available fee pool. While this analysis provides a basis for context, the circumstances surrounding 

each contract are unique. Consequently, the percentage of award fee earned may not be directly 

comparable between contracts. 

To meet the urgent operational needs of reestablishing Iraq’s oil 

infrastructure and importing fuel, the Corps authorized the contractor to 

begin work before task orders had been definitized. Factors such as 

changing requirements, funding challenges, and problems with contractor

proposals delayed negotiations until well past the timing required by DOD 

for definitization. For all 10 RIO I task orders, the work was completed 

before negotiations were finalized. Delays in definitizing contract actions 

can increase the risk to the government by reducing cost control 

incentives, particularly for cost reimbursement type contracts. In 

addition, our findings on the agreement reached between DOD and the 

contractor on the RIO I contract build on other significant evidence in our 

prior work that the value of DCAA’s audits of contractor proposals is 

limited when negotiations take place too long after work has begun. 

Conclusion 

Page 29 GAO-07-839 Defense Contract Management
Award fees can serve as a valuable tool to help control program risk and 

encourage excellence in contract performance. To reap the advantages 

that cost-plus-award-fee contracts offer, the government must implement 

an effective award fee process, which requires additional administrative 

effort and cost to monitor and evaluate performance. The FAR requires 

that the expected benefits of using a cost-plus-award-fee contract are 

sufficient to warrant this additional effort and cost, but in the case of the 

RIO I contract, even if this condition had been met, DOD’s Army Corps of 

Engineers did not carry out its planned award fee process. According to 

DOD officials, efforts to hold award fee boards during the period of 

performance were stymied in part by the logistical conditions in Iraq. We 

have previously identified problems with DOD’s award fee process in 

contingency environments. Given that the award fee is intended to 

motivate excellence in contractor performance, providing the contractor

with regular feedback that reflects the consensus of the government about 

its strengths and weaknesses is important to enable the contractor to put 

forth its best effort to excel in the areas deemed important to the 

government. While contingency situations may pose additional challenges 

for adhering to an award fee process, without an effective process, the 

government risks incurring the additional cost and administrative effort of

an award fee contract without receiving the expected benefits. 

To ensure that cost-plus-award-fee contracts provide the intended 

benefits, we recommend that the Secretary of the Army take the following

action: 

• In contingency situations, as a part of weighing the costs and benefits 

of using a cost-plus-award-fee contract, ensure that an analysis of the 

administrative feasibility of following a rigorous award fee process is 

conducted before the contract is awarded. 

We provided a draft of this report to DOD for comment. In written 

comments, DOD concurred with our recommendation. The department’s 

comments are reproduced in appendix II. In concurring with the 

recommendation, DOD noted a number of factors that exist in this 

contingency operation that it believed demonstrated the difficulty of 

conducting an analysis of the administrative feasibility of using an award 

fee contract in future contingency situations. These factors included 

urgent contracting time frames, uncertain requirements, and difficulties in

identifying appropriate oversight personnel. As specified in federal 

regulations, the use of an award fee contract is suitable when the expected 

Recommendation for 

Executive Action 

Agency Comments 

and Our Evaluation 

Page 30 GAO-07-839 Defense Contract Management
benefits of such a contract are sufficient to warrant the additional effort 

and cost required to monitor and evaluate contractor performance. It is 

precisely factors such as those outlined by DOD that we believe are 

important for consideration when determining the administrative 

feasibility of a cost-plus-award fee contract in a contingency environment. 

As agreed with your offices, unless you publicly announce the contents of

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Defense 

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 

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

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

Ahearn, Penny Berrier Augustine, Greg Campbell, Arthur James Jr., Eric 

Lesonsky, Stephen Lord, Anne McDonough-Hughes, Janet McKelvey, and 

Kenneth Patton. 

John P. Hutton 

Director 

Acquisition and Sourcing Management 

Page 31 GAO-07-839 Defense Contract Management
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

To determine how the Department of Defense (DOD) addressed the 

Defense Contract Audit Agency’s (DCAA) audit findings on the Restore 

Iraqi Oil (RIO I) contract and the factors that contributed to DOD’s 

decision of how to address those findings, we reviewed negotiation 

memorandums and 22 DCAA audit reports, including 11 final audit reports, 

for the 10 RIO I task orders. Additionally, we reviewed other documents 

related to the negotiation process and resolution of DCAA’s findings. We 

also interviewed Corps, DCAA, and other government officials as well as 

contractor representatives. Because a contracting officer has the 

discretion to determine whether or not to pay questioned costs when 

reaching agreement with a contractor, our review does not include a

determination of whether the DOD contracting officer should have 

approved payment for the questioned costs. Additionally, to put DOD’s 

decisions of how to address DCAA’s RIO I contract audit findings into 

context, we compared the resolution of DCAA’s questioned cost findings 

on 100 audits of other Iraq-related contract actions to the resolution of the 

questioned cost findings on the RIO I task order audits. We selected the 

100 audits for comparison because they represented all audits of Iraqrelated contract actions other than the RIO I contract for which DCAA had 

calculated the questioned costs sustained as of the end of fiscal year 2006, 

excluding those calculated automatically.1

 To ensure we used a consistent 

unit of measurement, we used the audit report as the unit of analysis for 

comparison. To develop an understanding and assess the reliability of the 

information included in the database that contained the results for these 

100 audits, we held discussions with and obtained documentation from 

DCAA officials located at Fort Belvoir and we conducted electronic and 

manual testing for obvious inconsistencies and completeness. We 

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

purposes. 

To determine the extent to which DOD paid award fees for the RIO I 

contract and followed its planned process for making that decision, we 

collected and reviewed key documents related to the award fee process, 

including the award fee provisions of the RIO I contract, the award fee 

 1

 According to DCAA guidance, for certain types of audit assignments with questioned 

costs lower than $500,000, DCAA’s internal management system automatically calculates 

questioned costs sustained based on the actual average sustention rate of proposals for an 

agency with questioned costs over $500,000 for the prior 3 fiscal years. Because questioned 

costs sustained is calculated automatically for these assignments, the sustention rate does 

not reflect the contracting officer’s decision on the specific audit, and therefore we 

excluded these cases from our analysis. 

Page 32 GAO-07-839 Defense Contract Management
Appendix I: Objectives, Scope, and 

Methodology 

determining official’s decision, the award fee plan, and minutes from the 

award fee board meeting. We also interviewed Corps officials, including 

the award fee determining official and members of the award fee board, to 

develop an understanding of the process and outcome for the award fees, 

and contractor representatives to obtain their perspective on award fees. 

Additionally, to put the award fee for the RIO I contract into context, we 

gathered and analyzed award fee documentation provided by the Joint 

Contracting Command-Iraq/Afghanistan for 11 contracts that DOD 

awarded in 2004 to conduct reconstruction activities in Iraq. We selected

these contracts because, like the RIO I contract, they were large-scale,

cost-plus-award-fee contracts. During the period we looked at, January 

2004 through June 2006, a total of 37 award fee evaluation periods were 

conducted for the 11 contracts. In 11 of the 37 award fee evaluation 

periods we analyzed, the award fee determining official chose to roll over 

the unearned award fee from one evaluation period to a subsequent 

evaluation period or periods. In these cases we excluded rolled-over fees 

from the available fee pool. Because an award fee determination is a 

unilateral decision made solely at the discretion of the government based 

upon judgmental evaluations of contractor performance, our review does 

not include an assessment of whether DOD reached the appropriate award 

fee decision for the RIO I contract. 

We conducted our work from October 2006 through July 2007 in 

accordance with generally accepted government auditing standards. 

Page 33 GAO-07-839 Defense Contract Management
Appendix II: Comments from the Department Appendix II: Comments from the Department of Defense 

of Defense 

Page 34 GAO-07-839 Defense Contract Management
Appendix II: Comments from the Department 

of Defense 

Page 35 GAO-07-839 Defense Contract Management
Appendix II: Comments from the Department 

of Defense 

(120596) Page 36 GAO-07-839 Defense Contract Management
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