U.S. Department of Homeland Security 

Washington, DC 20528

DEPARTMENT OF HOMELAND SECURITY Office of Inspector General 

Office of Inspector General 

Hurricane Katrina Multitier Contracts 

OIG-08-81 July 2008
 

Office of Inspector General 

U.S. Department of Homeland Security 

Preface 

The Department of Homeland Security (DHS) Office of Inspector General was established by 

the Homeland Security Act of 2002 (Public Law 107-296), by amendment to the Inspector 

General Act of 1978. This is one of a series of audit, inspection, and special reports prepared 

as part of our oversight responsibilities to promote economy, efficiency, and effectiveness 

within the department. 

This report addresses multitier contracting issues in the aftermath of Hurricane Katrina and the 

potential effect of recent legislation enacted to control the excessive use of subcontractors that 

do not contribute substantially to the contracted work. It is based on interviews with 

employees and officials of relevant agencies and federal contractors, direct observations, and a 

review of applicable documents. 

The analysis herein has been developed to the best knowledge available to our office, and has 

been discussed with those responsible for DHS contracting. It is our hope that this report will 

result in more effective, efficient, and economical operations. We express our appreciation to 

all of those who contributed to the preparation of this report. 

Washington, DC 20528 

July 15, 2008 

Richard L. Skinner 

Inspector General 
 

Table of Contents/Abbreviations 

Executive Summary ............................................................................................................................ 1 

Background ......................................................................................................................................... 2 

Results of Review ............................................................................................................................... 4 

Extent of Multiple Subcontracting Tiers .............................................................................. 4 

Effect of Subcontracts on Costs ........................................................................................... 5
 

Prime Contractors Use of Small and Local Businesses ....................................................... 7 

Effect of Post-Katrina Act on Future Disaster Contracting ................................................. 9 

 Legislative Update ............................................................................................................. 11 

Conclusion and Recommendation ..................................................................................... 12 

Miscellaneous Issue ........................................................................................................... 13 

Management Comments and OIG Evaluation ................................................................... 13 

Appendices 

Appendix A: Purpose, Scope, and Methodology .................................................................... 14 

Appendix B: Management Comments to the Draft Report .................................................... 16 

Appendix C: Public Law 109-295, Title VI, Section 692 ....................................................... 18 

Appendix D: Public Law 109-364, Title VIII, Section 852 .................................................... 19 

Appendix E: Major Contributors to this Report ..................................................................... 21 

Appendix F: Report Distribution ............................................................................................ 22 

Abbreviations 

DHS Department of Homeland Security 

FAR Federal Acquisition Regulation 

FEMA Federal Emergency Management Agency 

IA-TAC Individual Assistance Technical Assistance Contract 

NDAA John Warner National Defense Authorization Act for Fiscal Year 2007 

OFPP Office of Federal Procurement Policy 

OIG Office of Inspector General 

Post-Katrina Act Post - Katrina Emergency Management Reform Act of 2006 

USACE United States Army Corps of Engineers 
OIG 

Department of Homeland Security 

Office of Inspector General 

Executive Summary 

We initiated this audit in response to Congressional concerns that, in the wake 

of hurricanes Katrina and Rita, multitier subcontracting (1) increased costs to 

the government, (2) limited opportunities for small and local businesses to 

participate in response and recovery efforts, and (3) resulted in layers of 

subcontractors being paid profit and overhead while adding little or no value 

to the work performed under the contract. Our objectives were to determine 

the validity of these concerns, as well as to determine the potential effect 

Section 692 of the Post-Katrina Emergency Management Reform Act of 2006 

could have on future disaster contracting. 

It does not appear that multitier subcontracting, as an isolated factor, caused 

significant increases in costs to the government, nor did it reduce 

subcontracting opportunities for small and local businesses. The prime 

contractors subcontracted a significant amount of the value of their contracts 

to small and local businesses. 

Although FEMA relied on large national prime contractors, initially 

preventing small and local businesses from participating as prime contractors 

themselves, the national prime contractors generally did well hiring small and 

local subcontractors. However, because subcontractor invoices generally do 

not include specific information on lower tier subcontractors, we could not 

determine how many layers of subcontracting existed on contracts or whether 

any layers involved contractors charging profit without contributing 

substantially to the work being performed on the contract. 

Although Section 692 of the Post-Katrina Emergency Management Reform 

Act of 2006 would limit subcontracting to 65% of total contract costs, nothing 

in this legislation specifically restricts the number of tiers of subcontractors. 

Further, by limiting subcontracting, Section 692 could restrict funding 

available to small and local businesses while potentially impairing FEMA’s 

ability to respond quickly to future catastrophic disasters. The Department of 

Defense has promulgated less restrictive rules to control multitiering that 

reduce the risks inherent in Section 692. Therefore, we recommend FEMA 

officials work with DHS officials, the Office of Federal Procurement Policy 

and Congress to promulgate less restrictive rules over multitier contracting. 

Hurricane Katrina Multitier Contracts 

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Background 

Hurricane Katrina, which struck the Gulf Coast on August 29, 2005, was the 

most destructive and costly natural disaster in United States history. It caused 

over $81 billion in estimated property damage and resulted in more than 1,500 

deaths. Three weeks later, Hurricane Rita also struck the Gulf Coast, making 

landfall just west of where Katrina came ashore. In the wake of these two 

storms, the Federal Emergency Management Agency (FEMA) received 2.4 

million applications for individual assistance. Faced with unprecedented 

needs for assistance, the federal government turned to contractors to play an 

essential role in its disaster response. 

A massively destructive storm hitting a metropolitan area, coupled with 

insufficient predisaster acquisition planning and the need for an immediate 

and urgent response and recovery effort, compelled the federal government to 

primarily rely on large prime contractors rather than contract directly with 

small and local businesses. These large prime contractors had the financial 

strength and operational expertise to immediately manage billion-dollar 

projects and possessed the ability to plan, coordinate, and hire resources to 

respond quickly to the disaster. These contractors and their subcontractors 

removed over 99 million cubic yards of debris, temporarily repaired 109,000 

roofs, and installed approximately 120,000 trailers–at times installing an 

average of 500 trailers per day. 

In the aftermath of Hurricane Katrina, Congress enacted the Post-Katrina 

Emergency Management Reform Act of 2006, which was adopted as Title VI 

of the Department of Homeland Security Appropriations Act of 2007 (P.L. 

109-295, Title VI – National Emergency Management) (hereinafter referred to 

as the Post-Katrina Act). Section 692 of the Post-Katrina Act, “Limitations on 

Tiering of Subcontractors,” is intended to address what many in Congress and 

the small business community, particularly in the hurricane-affected areas, felt 

was excessive tiering of subcontracts. The tiering was due to layers of 

subcontractors between the prime contractor and the subcontractor that 

actually performs the work, which result in additional costs without serving a 

legitimate purpose or adding value to the work under the contract.1 

Section 692 of the Post-Katrina Act requires the Secretary of Homeland 

Security to promulgate regulations to minimize the excessive use by 

contractors of subcontractors, or tiers of subcontractors, to perform the 

1 Congress also included a provision in the John Warner National Defense Authorization Act for Fiscal Year 2007 

(NDAA) (P.L. 109-364) that requires the Department of Defense to issue regulations addressing “excessive pass-through 

charges” on subcontracts under certain prime contracts (See Appendix C). 

Hurricane Katrina Multitier Contracts 

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principal work of the contract. The law specifies that the regulations must 

require, at a minimum, that a contractor may not use subcontracts for more 

than 65% of the cost of the contract or the cost of any individual task or 

delivery order not including overhead and profit, unless the Secretary 

determines that such requirement is not feasible or practicable (Appendix B). 

Although Section 692 of the Post-Katrina Act limits subcontracting to 65% of 

total contract costs, nothing in the Post-Katrina Act specifically restricts the 

number of tiers of subcontractors. Further, by limiting subcontracting, the 

Post-Katrina Act could restrict funding available to small and local businesses 

while potentially impairing FEMA’s ability to respond quickly to future 

catastrophic disasters. (See page 9 for further discussion.) 

While the large prime contractors had the financial and operational assets to 

step in and manage large projects, they did not necessarily have the personnel 

and material to perform all of the work themselves. They did have the ability 

to plan, coordinate, and hire resources more quickly than the federal 

government. As a result, these companies made extensive use of 

subcontractors. However, during Congressional testimony, local business 

representatives expressed concern that they were excluded from participating 

in disaster contracting. Small business representatives also suggested that 

prime contractors allowed multiple layers of unnecessary and costly 

subcontracts—a practice referred to as multitiering.2 

While this report focuses on FEMA contracts, it should be noted that the U.S. 

Army Corps of Engineers (USACE) was engaged by FEMA for two major 

initiatives that also involved extensive subcontracting—debris removal and 

Operation Blue Roof. Under the Operation Blue Roof program, contractors 

and their subcontractors covered damaged roofs with blue plastic tarps to help 

prevent further property damage until more permanent repairs could be made.3 

Figure 1 shows an example of this program. 

2

 Multitiering as used in this report is defined as more than one vertical layer of subcontractors under a prime contractor. 

3

 A review of Operation Blue Roof is available at http://www.dodig.osd.mil/Audit/reports/FY07/07-038.pdf. 

Hurricane Katrina Multitier Contracts 

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Figure 1: FEMA Trailer and House with “Operation Blue Roof” Tarp 

Source: FEMA 

Results of Review 

Although we could not readily determine the extent of multitier contracting in 

the contracts we reviewed, we do not believe multitier contracting, as an 

isolated factor, caused higher costs or resulted in less opportunity for small 

and local businesses to participate in disaster response and recovery efforts. 

We believe Section 692 of the Post-Katrina Act may adversely affect future 

disaster response and recovery contracting by reducing the funds available to 

small and local businesses while potentially impairing FEMA’s ability to 

respond quickly to catastrophic disasters. Although Section 692 was 

designed, in part, to minimize the excessive use of tiers of subcontractors, it 

does not specifically restrict the number of tiers of subcontractors allowed on 

a contract. 

Extent of Multiple Subcontracting Tiers 

We could not readily determine the extent of subcontracting tiers because 

subcontractor invoices typically do not include information on lower-tier 

subcontractors. The Federal Acquisition Regulation (FAR) 52.209 instructs 

the contracting officer to insert into cost-reimbursement contracts the clause at 

FAR Part 52.215-2, Audit and Records. This clause provides that the 

government shall have the right to audit contractor records. Fixed priced 

contracts do not include this clause, and other than investigations regarding 

Hurricane Katrina Multitier Contracts 

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fraud or other improprieties, no audit privilege exists. No federal or state 

laws, regulations, or contract terms required the prime contractors or 

subcontractors to submit cost information for lower-tier, fixed-unit-rate 

subcontracts. Furthermore, it is not a common business practice for a 

subcontractor to disclose the identity of, or amounts paid to, lower-tier 

subcontractors. We reviewed $236 million (12%) of $2.04 billion in 

Individual Assistance Technical Assistance Contract (IA-TAC) subcontractor 

invoices (See Appendix A). Few of these invoices included cost or other 

information on lower-tier subcontractors. Generally, the IA-TAC 

subcontractor invoices we reviewed described the type and location of the 

work performed and the amount charged, but provided no further details. 

Effect of Subcontracts on Costs 

Unnecessary tiers of subcontractors may have existed in the aftermath of 

Hurricane Katrina. Business representatives and media sources provided 

anecdotal accounts of multiple subcontracting tiers, at times five and six levels 

deep, in some cases generating “excessive pass-through charges.”4 However, 

in the invoices we reviewed, multitier subcontracting as an isolated factor was 

not a significant cause of higher costs. This was because all four IA-TAC 

prime contractors paid subcontractors based on fixed unit rates for the 

majority of their work (84% of the $236 million reviewed). Fixed-unit-rate 

contracts do not allow subcontractors to pass overhead and other operating 

costs above the agreed-upon fixed rate to prime contractors. 

Once the federal government and the prime contractor agree on a price for a 

particular service, and the prime contractor issues a fixed-price subcontract, 

the number of tiers of subcontractors has no effect on the cost to the 

government. What might be a legitimate concern is whether the agreed-upon 

contract price between the government and the prime contractor is too high or 

whether the contractor subcontract rates were excessive. 

Another potential concern is when the subcontractor that actually performs the 

work is paid an amount significantly lower than that paid by the government 

to the prime contractor. There also may be a perception of unfairness when it 

is believed that some tiers simply charge overhead and profit without 

4 As defined in NDAA, “the term ‘excessive pass-through charge’, with respect to a contractor or subcontractor that adds 

no, or negligible, value to a contract or subcontract, means a charge to the Government by the contractor or subcontractor 

that is for overhead or profit on work performed by a lower-tier contractor or subcontractor (other than charges for the 

direct costs of managing lower-tier contracts and subcontracts and overhead and profit based on such direct costs).” See 

also GAO, Defense Contracting: Contract Risk a Key Factor in Assessing Excessive Pass-Through Charges, GAO-08-

269, January 2008. 

Hurricane Katrina Multitier Contracts 

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performing any real work. However, under current practice, the government 

is not a party to the subcontractor agreement or pricing structure and it is 

generally not privy to the tiers of subcontractors below the first tier. 

A brief illustration of a cost-reimbursable5 federal contract is provided in 

Figure 2. In this illustration, the prime contractors hold cost-reimbursable 

contracts with the federal government and then subcontract for some of the 

goods or services necessary to fulfill the requirements of their contracts. In 

this illustration, the subcontractors hold firm-fixed-price6 contracts with the 

prime contractors or their subcontractors. 

Figure 2: Multitiering Illustration 

To understand the effect of multiple tiers of subcontracts on the cost to the 

government, using the illustration, we will assume that each prime contractor 

awards subcontracts to the Tier 1 subcontractors for a firm-fixed-price of 

$1,000 for a particular service. That means the direct cost of that service that 

the prime contractor can pass on to the government is $1,000. Whether the 

5 “Cost-reimbursement types of contracts provide for payment of allowable incurred costs, to the extent prescribed in the 

contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling 

that the contractor may not exceed (except at its own risk) without the approval of the contracting officer.” FAR Part 

16.301-1. 

6 “A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s 

cost experience in performing the contract. This contract type places upon the contractor maximum risk and full 

responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs 

and perform effectively, and imposes a minimum administrative burden on the contracting parties.” FAR Part 16.202-1. 

Hurricane Katrina Multitier Contracts 

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Tier 1 subcontractor performs the service itself or subcontracts to a Tier 2 

subcontractor, or whether the tiers of subcontracts are 4 or 5 layers deep, the 

Tier 1 subcontractor can charge the prime contractor only $1,000 for the 

service. This, in turn, limits what the prime contractor can charge the 

government. Further, under the firm-fixed-price subcontract, whether the 

actual cost to the Tier 1 subcontractor is $900, $500, or $300, the Tier 1 

subcontractor is entitled to charge only $1,000 to the prime contractor. 

Therefore, multiple tiers of contractors, as an isolated factor, do not increase 

costs to the government. 

It is important to note that, in most cases, the government has only a legal 

relationship, or privity of contract, with the prime contractors. This limits the 

amount of information on subcontracts to which the government is entitled. 

Typically, the government has some visibility into the first tier of 

subcontractors through their invoices to the prime contractors, but often the 

government has little to no visibility into the levels of subcontractors below 

the Tier 1 subcontractors. This means that the government usually does not 

have any right to know how many layers of subcontracts exist on a contract or 

what those subcontractors are charging to the contractor or subcontractor 

above them. 

Prime Contractors Use of Small and Local Businesses 

In Congressional hearings, small business representatives expressed concern 

that small and local firms were not provided an adequate opportunity to 

participate in response and recovery contracts. FEMA’s reliance on large 

national prime contractors initially prevented small and local businesses from 

participating as prime contractors. However, the IA-TAC prime contractors 

subcontracted a significant portion of their work to small and local businesses. 

Based on the subcontracting reports provided by the IA-TAC prime 

contractors, they exceeded FEMA’s goal for subcontracting to small 

businesses (see Table 1).7 Although FEMA did not set specific goals for 

hiring local businesses, FEMA instructed its IA-TAC contractors to use local 

businesses to the maximum extent practicable. FEMA set the small business 

subcontracting goal at 40%. Overall, the IA-TAC contractors reported that, of 

7 The U.S. Small Business Administration relies on small businesses to self-designate and accurately report their small 

business status. We did not confirm the small business results provided by the prime contractors other than to compare a 

sample of claims of small business status to the federal government’s Central Contractor Registration Internet site. 

Hurricane Katrina Multitier Contracts 

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the $2.04 billion paid to subcontractors, $1.45 billion (71%) went to small 

businesses and $1.26 billion (62%) went to local businesses.8 

Table 1: IA-TAC Subcontracting Results 

IA-TAC 

Subcontracting Results 

(dollars in millions) Fluor Shaw Bechtel 

CH2M 

Hill Percent 

Total Contract Value9 $1,350 $950 

Amount Subcontracted $712 $646 

 - to Small Businesses $475 $441 

 - to Local Businesses $378 $494 

Source: FEMA 

$517 

$323 

$265 

$227 

$434 

$355

$270 

$160 

63%

71% 

62% 

The term “small business,” as defined by the U.S. Small Business 

Administration for purposes of federal small business programs, might not be 

considered “small” by a layman unfamiliar with federal small business 

programs. The U.S. Small Business Administration uses “size standards” to 

numerically define a small business. In most retail and service industries, a 

company qualifies as a “small business” when its annual revenue is less than 

$6.5 million. For most general and heavy construction industries, the size 

standard is $31 million.10 

While FEMA uses the U.S. Small Business Administration standards to 

determine whether a business is “small,” prior to Hurricane Katrina, FEMA 

had not developed clear definitions for how to determine whether a business 

qualified as “local” for contracting purposes. In mid-2006, post-Katrina, the 

General Services Administration issued new guidance to contracting officers 

to use in determining whether a business is local to the disaster-affected area. 

This guidance is available for use in future disasters. 

8 Many subcontractors were both small and local, and were therefore counted in both categories. Similarly, some 

businesses could have been large, while still local to the disaster. For example, one large prime contractor was 

headquartered in Louisiana. Also, subcontracting results only reflect the status of first-tier subcontractors. The status of 

lower tiered subcontractors is not included. 

9 Katrina Small Business Subcontracting Report for February 2007. Source: FEMA 

10 13 Code of Federal Regulations Part 121.201. 

Hurricane Katrina Multitier Contracts 

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FEMA, under its Stafford Act authority, assigned the task of debris removal 

and disposal to the USACE. The USACE then awarded four $500 million 

contracts to large companies. In 2006 Congressional testimony, business 

representatives expressed concern that the USACE excluded small and local 

businesses from fully participating in the debris removal program. However, 

the USACE prime contractors also reported success subcontracting with small 

and local businesses. The U.S. Army Audit Agency reported that the four 

prime debris removal contractors paid a majority of the $889 million in 

subcontracting to local small businesses. As of May 10, 2006, the prime 

contractors reported they paid $762 million (86%) to small businesses and 

$582 million (65%) to local small businesses. 

Effect of Post-Katrina Act on Future Disaster Contracting 

Section 692 of the Post-Katrina Act may adversely affect future disaster 

response and recovery efforts, including goals to use small and local 

businesses, by limiting the amount of funds available for subcontracting. It 

would limit first-tier subcontracting on certain contracts and task or delivery 

orders but would not directly limit the number of tiers allowable; thus, it does 

not specifically prevent multitiering. 

Section 692 of the Post-Katrina Act would limit the use of subcontractors to 

perform the principal work of a disaster response and recovery contract. It 

requires that disaster-related, cost-reimbursable contracts and task or delivery 

orders involve subcontracting of no more than “65 percent of the cost of the 

contract or the cost of any individual task or delivery order (not including 

overhead and profit).” It allows the DHS Secretary, however, to waive this 

requirement when it is determined that it is not feasible or practicable to 

restrict subcontracting to 65% of the prime contract amount. DHS is in the 

process of amending its Homeland Security Acquisition Regulations to 

implement this new contracting requirement. 

Had the Post-Katrina Act been in effect immediately following Hurricane 

Katrina and been applied to the four large IA-TAC contracts and their related 

task orders, it could have had the effect of requiring some of the work that was 

subcontracted to be done in-house by the prime contractors. This could have 

decreased the amount of dollars available to subcontractors, and possibly 

could have affected the ability of the prime contractors to fulfill their disaster 

response assignments in an effective and timely manner. 

To demonstrate the possible future effect Section 692 of the Post-Katrina Act 

could have on small and local businesses, we applied the subcontracting 

Hurricane Katrina Multitier Contracts 

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limitations, as they would likely be implemented, to the Hurricane Katrina IATAC prime contractor billings. We calculated that, had the requirement been 

in effect following Hurricane Katrina, approximately $300 million worth of 

subcontracting would not have been allowed (see Figure 3). 

Figure 3: IA-TAC Subcontracting Dollars and Small and Local Business 

Dollars Potentially Lost 

Potential Loss Under 692 Regulations 

$1,449,422,351 

Potential Loss 

$314,245,166 

Note: This calculation is based on task orders from the four IA-TAC 

contracts (See Appendix A). 

Federal laws require FEMA to promote small and local business participation 

in disaster response and recovery contracts. However, it is not always 

practical for FEMA to have prime contracts with small and local businesses in 

place prior to a disaster, or to contract directly with numerous small and local 

businesses immediately after a disaster. Further, the response and recovery 

tasks that follow catastrophic disasters like Hurricane Katrina are generally 

too large for small businesses to perform effectively. However, to increase 

small and local business participation once it became feasible, FEMA 

awarded contracts for trailer maintenance and other services primarily to small 

and local businesses.11 

11 DHS OIG, FEMA's Award of 36 Trailer Maintenance and Deactivation Contracts, OIG-07-36, March 30, 2007. 

Hurricane Katrina Multitier Contracts 

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The 65% subcontracting limitation also could have a negative effect on 

FEMA’s ability to respond quickly to future catastrophic disasters. This is 

because subcontracting is the principal means available to prime contractors to 

obtain the surge capacity needed to respond quickly. 

Without a waiver from the Secretary of DHS, Section 692 of the Post-Katrina 

Act could limit small and local business participation and reduce FEMA’s 

ability to respond quickly. Further, while the Post-Katrina Act imposes limits 

on the dollar amount of subcontracting, it would not actually restrict the 

number of subcontracting tiers. 

Legislative Update 

Congress is concerned about excessive tiering and related pass-through costs, 

and has not settled on a single remedy. Since multitiering came to the 

forefront of congressional interest in the wake of hurricanes Katrina and Rita, 

as well as military actions in Iraq and Afghanistan, language has been 

included in several bills to set limits on what is perceived as excessive 

multitiering. 

The language included in the Post-Katrina Act, enacted October 4, 2006, is 

the most restrictive, specifying that the Secretary shall promulgate regulations 

that require prime contractors to subcontract no more than 65% of the value of 

the contract (see Appendix B). Also, the NDAA, enacted October 17, 2006, 

requires the Secretary of Defense to: 

“prescribe regulations to ensure that pass-through charges on contracts 

or subcontracts (or task or delivery orders) ... are not excessive in 

relation to the cost of work performed by the relevant contractor or 

subcontractor.” (see Appendix C). 

In response to P.L. 109-364, the Department of Defense issued an interim rule 

on April 26, 2007,12 that requires contractors to identify the percentage of 

work that will be subcontracted and, when subcontract costs will exceed 70% 

of the total cost of work to be performed, to provide information on indirect 

costs, profit, and value added with regard to the subcontract work.13 It is 

important to note that the Department of Defense rule does not limit 

12 Federal Register, Vol. 72, No. 80, April 26, 2007, p. 20758.
 13 The interim rule amends the Defense Federal Acquisition Regulation Supplement at 48 Code of Federal Regulations
 

Parts 215, 231, and 252, effective April 26, 2007, DFARS Case 2006-D057.
 

Hurricane Katrina Multitier Contracts 

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subcontracting, it requires additional reporting only when subcontracting 

exceeds 70% of the total cost of the work to be performed. 

On November 7, 2007, the Senate passed S. 680, the Accountability in 

Government Contracting Act of 2007. As introduced, the bill included a 

clause nearly identical to the tiering language in the Post-Katrina Act. This 

clause required the Administrator of the Office of Federal Procurement Policy 

(OFPP) to promulgate regulations to limit subcontracting to no more than 65% 

of the value of the work to be performed under the contract.14 The language 

was essentially identical to that in the Post-Katrina Act. S. 680 requires the 

Administrator of OFPP to promulgate regulations to be applied governmentwide. Rather than specifying a specific limit on tiering, the Act requires the 

OFPP Administrator to: 

“promulgate regulations...to minimize the excessive use by 

contractors of subcontractors or tiers of subcontractors in cases where 

a subcontractor does not perform work in proportion to any overhead 

or profit that the subcontractor receives under the contract.”15 

In the report accompanying S. 680, the Committee wrote that it 

“does not intend to impose an absolute limit on tiering, but does intend 

that non-value added tiering be eliminated.”16 

DHS is bound by the more restrictive language of the Post-Katrina Act. 

However, the Department of Defense is in the process of finalizing 

regulations, and the Administrator of OFPP may in the future promulgate 

regulations for civilian agencies that use less restrictive language. DHS is 

currently developing regulations according to the restrictions of the PostKatrina Act. However, should S. 680 be enacted in its present form, the 

department should consider adopting the government-wide multitiering 

regulations to be set by OFPP. 

Conclusion and Recommendation 

Regulations required by Section 692 of the Post-Katrina Act could result in 

reduced subcontracting opportunities for small and local businesses while 

potentially impairing FEMA’s ability to respond quickly to catastrophic 

14 Accountability in Government Contracting Act of 2007, S.680, 110th Cong., 1st Sess. (2007), Subtitle C, Section 126. 

15 Accountability in Government Contracting Act of 2007, S.680, 110th Cong., 1st Sess. (2007), Title III, Section 305. 

16 S. Rep. No. 201, 110 Cong., 1st Session (2007). 

Hurricane Katrina Multitier Contracts 

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disasters. The Department of Defense has taken a less restrictive approach to 

subcontract tiering that does not present the risks inherent in Section 692. 

Also, pending legislation may allow other federal agencies to take a less 

restrictive approach to controlling tiering of subcontractors. Should this 

pending legislation be adopted in its present form, the department should 

consider requesting that it be allowed to adopt the less restrictive approach. 

We recommend that FEMA: 

1.	 Work with DHS officials, the Office of Federal Procurement Policy and 

Congress to promulgate less restrictive regulations over multi-tier 

contracting. 

Miscellaneous Issue 

One prime contractor made two identical $625,225 invoice payments to a 

subcontractor for the installation of travel trailers in Louisiana. We discussed 

these duplicate charges with the IA-TAC contractor who said the second 

payment was a clerical error. The subcontractor immediately issued a 

$625,225 reimbursement check to the IA-TAC contractor who then 

reimbursed FEMA for the overcharges. 

Management Comments and OIG Evaluation 

FEMA provided written comments on the draft of this report and generally 

concurred with the recommendation. FEMA commented that even though 

Section 692 would negatively impact small businesses, DHS remains required 

by law to promulgate regulations precluding contractors from using 

subcontractors for more than 65% of the cost of the contract or delivery order. 

However, FEMA agreed to work with DHS and OFPP to promulgate less 

restrictive regulations, and to work with Congress should legislation be 

considered that might provide an opportunity to modify the law. (FEMA’s 

written comments are contained in Appendix B.) 

Hurricane Katrina Multitier Contracts 

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Appendix A 

Purpose, Scope, and Methodology 

Our objectives were to identify the extent and effect of multitier contracting, 

and assess the potential effect Section 692 of the Post-Katrina Act could have 

on future disaster contracting. Our fieldwork consisted of interviews with 

FEMA and contractor personnel, document reviews, and analyses of financial 

data. We gathered and reviewed information relating to the multitiering of 

Hurricane Katrina contracts in order to gain an understanding of the issues 

involving increased costs and small and local business participation. We 

reviewed information from congressional testimony and prior OIG, Army 

Audit Agency, Defense Contract Audit Agency, and Government 

Accountability Office audit reports. We also reviewed relevant laws, 

regulations, and FEMA policies, procedures and procurement guidelines. 

We reviewed FEMA’s IA-TACs because they were among the largest disaster 

response and recovery contracts, and they included $2.04 billion in 

subcontracting. These contracts also constituted virtually all of DHS’ 

Hurricane Katrina cost-reimbursable contracting. As of the end of calendar 

year 2006, the IA-TACs billed FEMA approximately $2.88 billion of the 

$6.42 billion (45%) for Hurricane Katrina related work. We focused on trailer 

installation task orders because they included the largest amount of 

subcontracting. In total, we reviewed $236 million of the $2.04 billion in 

subcontracting invoices (12%). 

We conducted our fieldwork between February 2007 and July 2007. We 

visited the four IA-TAC contractors and interviewed key personnel at each 

location: 

• Fluor (Greenville, South Carolina); 

• Shaw (Findlay, Ohio); 

• Bechtel (Oak Ridge, Tennessee); and 

• CH2M Hill (Englewood, Colorado). 

During our visits, we reviewed invoices, accounting records, and subcontract 

agreements. We also traced subcontractor invoices to prime contractor 

invoices submitted to FEMA. 

To perform the calculations reported in Figure 3, we obtained task order cost 

information from all four IA-TACs and reduced the overall task order costs by 

their related overhead and profit. We then compared these figures, (i.e., the 

amount that would presumably be allowed under Section 692), to the amount 

that was actually subcontracted to identify the dollar value of subcontracting 

that would have exceeded the 65% limitation. 

Hurricane Katrina Multitier Contracts 

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Appendix A 

Purpose, Scope, and Methodology 

The Defense Contract Audit Agency assisted us by verifying the IA-TAC 

financial data provided by the contractors to the contractor’s financial 

accounting system. 

We conducted the audit under the authority of the Inspector General Act of 

1978, as amended, and according to generally accepted Government Auditing 

Standards. 

Hurricane Katrina Multitier Contracts 

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Appendix B 

Management Comments to the Draft Report 

Hurricane Katrina Multitier Contracts 

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Appendix B 

Management Comments to the Draft Report 

Hurricane Katrina Multitier Contracts 

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Appendix C 

Public Law 109-295, Title VI, Section 692 

Section 692 of the Post-Katrina Emergency Management Reform Act of 2006, adopted as Title VI of 

the Department of Homeland Security Appropriations Act of 2007 (P.L. 109-295), which was signed 

into law on October 4, 2006. 

SEC. 692. LIMITATION ON TIERING OF SUBCONTRACTORS. 

(a) REGULATIONS.—The Secretary shall promulgate regulations applicable to contracts 

described in subsection (c) to minimize the excessive use by contractors of subcontractors 

or tiers of subcontractors to perform the principal work of the contract. 

(b) SPECIFIC REQUIREMENT.—At a minimum, the regulations promulgated under 

section (a) shall preclude a contractor from using subcontracts for more than 65 percent 

of the cost of the contract or cost of any individual task or delivery order (not including 

overhead and profit), unless the Secretary determines that such requirement is not 

feasible or practicable. 

(c) COVERED CONTRACTS.—This section applies to any cost-reimbursable type contract 

or task or delivery order in an amount greater than the simplified acquisition threshold (as 

defined by section 4 of the Office of Federal Procurement Policy Act (41 U.S.C. 403) 

entered into by the Department to facilitate response to or recovery from a natural 

disaster or act of terrorism or other manmade disaster. 

Hurricane Katrina Multitier Contracts 

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Appendix D 

Public Law 109-364, Title VIII, Section 852 

Section 852 of the John Warner National Defense Authorization Act for Fiscal Year 2007 (P.L. 109-

364), which was signed into law on October 17, 2006. 

SEC. 852. REPORT AND REGULATIONS ON EXCESSIVE PASS-THROUGH CHARGES. 

(a) Comptroller General Report on Excessive Pass-Through Charges- 

(1) IN GENERAL- Not later than 180 days after the date of the enactment of this Act, the 

Comptroller General shall issue a report on pass-through charges on contracts or subcontracts 

(or task or delivery orders) that are entered into for or on behalf of the Department of 

Defense. 

(2) MATTERS COVERED- The report issued under this subsection-- 

(A) shall assess the extent to which the Department of Defense has paid excessive 

pass-through charges to contractors who provided little or no value to the 

performance of the contract; 

(B) shall assess the extent to which the Department has been particularly vulnerable 

to excessive pass-through charges on any specific category of contracts or by any 

specific category of contractors (including any category of small business); and 

(C) shall determine the extent to which any prohibition on excessive pass-through 

charges would be inconsistent with existing commercial practices for any specific 

category of contracts or have an unjustified adverse effect on any specific category of 

contractors (including any category of small business). 

(b) Regulations Required-

(1) IN GENERAL- Not later than May 1, 2007, the Secretary of Defense shall prescribe 

regulations to ensure that pass-through charges on contracts or subcontracts (or task or 

delivery orders) that are entered into for or on behalf of the Department of Defense are not 

excessive in relation to the cost of work performed by the relevant contractor or 

subcontractor. 

(2) SCOPE OF REGULATIONS- The regulations prescribed under this subsection-- 

(A) shall not apply to any firm, fixed-price contract or subcontract (or task or delivery 

order) that is-- 

(i) awarded on the basis of adequate price competition; or 

(ii) for the acquisition of a commercial item, as defined in section 4(12) of the 

Office of Federal Procurement Policy Act (41 U.S.C. 403(12)); and 

(B) may include such additional exceptions as the Secretary determines to be 

necessary in the interest of the national defense. 

(3) DEFINITION- In this section, the term ‘excessive pass-through charge’, with respect to a 

contractor or subcontractor that adds no, or negligible, value to a contract or subcontract, 

means a charge to the Government by the contractor or subcontractor that is for overhead or 

Hurricane Katrina Multitier Contracts 

Page 19 
Appendix D 

Public Law 109-364, Title VIII, Section 852 

profit on work performed by a lower-tier contractor or subcontractor (other than charges for 

the direct costs of managing lower-tier contracts and subcontracts and overhead and profit 

based on such direct costs). 

(4) REPORT- Not later than one year after the date of the enactment of this Act, the 

Secretary of Defense shall submit to the congressional defense committees a report on the 

steps taken to implement the requirements of this subsection, including-- 

(A) any standards for determining when no, or negligible, value has been added to a 

contract by a contractor or subcontractor; 

(B) any procedures established for preventing excessive pass-through charges; and 

(C) any exceptions determined by the Secretary to be necessary in the interest of the 

national defense. 

(5) EFFECTIVE DATE- The regulations prescribed under this subsection shall apply to 

contracts awarded for or on behalf of the Department of Defense on or after May 1, 2007. 

Hurricane Katrina Multitier Contracts 

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Appendix E 

Major Contributors to this Report 

Donald Bumgardner, Disaster Acquisition Division Director 

Mary Anne Strasser, Audit Manager 

Christopher Dodd, Audit Manager 

John Polledo, Auditor-in-Charge 

William Lough, Auditor 

Patricia Leroux, Program Analyst 

Cheryl Johnson, Auditor 

Hurricane Katrina Multitier Contracts 

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Appendix F 

Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

General Counsel 

Executive Secretary 

Under Secretary for Management 

Assistant Secretary for Office of Policy 

Assistant Secretary for Office of Public Affairs 

Assistant Secretary for Office of Legislative Affairs 

Chief Procurement Officer 

Director, DHS GAO/OIG Liaison Office 

Chief Privacy Officer 

FEMA Deputy Administrator 

FEMA Audit Liaison 

FEMA Director of Management and Chief Acquisition Officer 

FEMA Chief Procurement Officer 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as appropriate 

Hurricane Katrina Multitier Contracts 

Page 22 
Additional Information and Copies 

To obtain additional copies of this report, call the Office of Inspector General 

(OIG) at (202) 254-4199, fax your request to (202) 254-4305, or visit the OIG web 

site at www.dhs.gov/oig. 

OIG Hotline 

To report alleged fraud, waste, abuse or mismanagement, or any other kind of 

criminal or noncriminal misconduct relative to department programs or operations: 

• Call our Hotline at 1-800-323-8603; 

• Fax the complaint directly to us at (202) 254-4292; 

• Email us at DHSOIGHOTLINE@dhs.gov; or 

•	 Write to us at: 

DHS Office of Inspector General/MAIL STOP 2600, Attention: 

Office of Investigations - Hotline, 245 Murray Drive, SW, Building 410, 

Washington, DC 20528 

The OIG seeks to protect the identity of each writer and caller.