Rebuilding Iraq: Continued Progress Requires Overcoming Contract Management Challenges
Published: 2006-09-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The United States, along with its coalition partners and various international organizations, has undertaken a challenging, complex, and costly effort to stabilize and rebuild Iraq. The Department of Defense (DOD) has responsibility for a significant portion of the reconstruction effort. Amid signs of progress, the coalition faces numerous political, security, and economic challenges in rebuilding Iraq. Within this environment, many reconstruction projects have fallen short of expectations, resulting in increased costs, schedule delays, reduced scopes of work, and in some cases project cancellations. This testimony (1) discusses the overall progress that has been made in rebuilding Iraq and (2) describes challenges faced by DOD in achieving successful outcomes on individual projects. This testimony reflects our reviews of reconstruction and DOD contract management issues, as well as work of the Special Inspector General for Iraq Reconstruction. In our previous reports, we have made several recommendations to improve outcomes in Iraq. DOD generally agreed with our recommendations.
section_title: What GAO Found
paragraphs: Overall, the United States generally has not met its goals for reconstruction activities in Iraq with respect to the oil, electricity, and water sectors. As of August 2006, oil production is below the prewar level, and the restoration of electricity and new or restored water treatment capacity remain below stated goals. One-third of DOD's planned construction work still needs to be completed and some work is not planned for completion until late 2008. Continuing violence in the region is one of the reasons that DOD is having difficulty achieving its goals. The contracting challenges encountered in Iraq are emblematic of systemic issues faced by DOD. When setting requirements for work to be done, DOD made assumptions about funding and time frames that later proved to be unfounded. The failure to define realistic requirements has had a cascading effect on contracts and has made it difficult to take subsequent steps to get successful outcomes. For example, in the absence of settled requirements, agencies sometimes rely on what are known as undefinitized contract actions, which can leave the government exposed to increased costs. Further, DOD lacked the capacity to provide effective oversight and manage risks. We also found that DOD, at times, improperly used interagency contracts and was not able to take advantage of full and open competition during the initial stages of reconstruction. Just as multiple factors contribute to success or failure, multiple actors play a role in achieving successful acquisition outcomes, including policy makers, program managers, contracting officers, and the contractors themselves.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the contracting challenges the  Department of Defense (DOD) faces in achieving successful acquisition  outcomes in its efforts to stabilize and rebuild Iraq. The United States,  along with its coalition partners and various international organizations,  has undertaken a challenging and costly effort to stabilize and rebuild Iraq.  This enormous effort is taking place in an unstable security environment,  concurrent with Iraqi efforts to transition to a permanent government, and  relies heavily on private companies for success. DOD has responsibility for  a significant portion of the reconstruction efforts and has awarded and  managed many of the large reconstruction contracts, such as contracts to  rebuild Iraq’s oil, water, and electrical infrastructure.
As we have previously noted, amid signs of progress, the coalition faces  numerous political, security, and economic challenges in rebuilding Iraq.  For example, our recent assessment of the security situation in Iraq found  that the conditions have deteriorated and grown more complex, as  evidenced by the increased number of attacks and growing sectarian  violence. Within this environment, many reconstruction projects have  fallen short of expectations, resulting in increased costs, schedule delays,  reduced scopes of work, and in some cases project cancellations. Poor  acquisition outcomes are not unique to Iraq; we designated DOD’s contract  management activities as a high-risk area more than a decade ago. In our  January 2005 high-risk report, we noted that DOD needs to use sound  business practices when buying goods and services and have the right  skills and capabilities in its acquisition workforce to properly manage  these acquisitions.
Today, I will briefly discuss the overall progress that has been made in  rebuilding Iraq and then describe challenges faced by DOD in achieving  successful outcomes on individual projects. This information is based on  completed and ongoing reviews of efforts to rebuild Iraq that we have  undertaken since 2003, as well as our work related to selected DOD  contract management issues. We conducted our reviews in accordance  with generally accepted government auditing standards. In our previous  reports, we have made several recommendations to improve outcomes in  Iraq. DOD generally agreed with our recommendations.
My statement also considers the work of the Special Inspector General for  Iraq Reconstruction, including audits of specific projects and lessons  learned reports. We and other accountability organizations coordinate our  oversight efforts with those conducted by the Inspector General to avoid  duplication and maximize resources. In that regard, the Inspector  General’s ability to provide in-country oversight of specific projects and  reconstruction challenges has enabled us to focus on national, sector, and  interagency issues.
subsections: section_title: Background
paragraphs: The contracting processes, activities, and challenges associated with  rebuilding Iraq can be viewed as similar to, albeit more complicated than,  those DOD normally confronts. We and others have already reported on  the large and continuing drain on reconstruction dollars to meet  unanticipated security needs. Further, multiple players with diffuse and  changing responsibilities have had large roles in rebuilding Iraq,  complicating lines of authority and accountability. Additionally, rebuilding  a nation after decades of neglect and multiple wars is an inherently  complex, challenging, and costly undertaking.
From May 2003 through June 2004, the Coalition Provisional Authority  (CPA), led by the United States and the United Kingdom, was the United  Nations recognized authority responsible for the temporary governance of  Iraq and for overseeing, directing, and coordinating reconstruction efforts.  During 2003, several agencies, most notably the U.S. Agency for  International Development (USAID) and the U.S. Army Corps of  Engineers, played a role in awarding and managing initial reconstruction  contracts. To coordinate and manage the $18.4 billion in reconstruction  funding provided in fiscal year 2004, the CPA established a multi-tiered  contracting approach for Iraq reconstruction activities. The CPA, through  various military organizations, awarded the following contracts: 1 program  management support contract to oversee reconstruction efforts; 6 sector  program management contracts to coordinate reconstruction efforts  specific to each sector; and 12 design-build contracts to execute specific  construction tasks. DOD is now emphasizing greater use of local Iraqi  firms to perform reconstruction work that was previously intended to be  performed by the design-build contractors.
With the establishment of Iraq’s interim government in June 2004, the  CPA’s responsibilities were transferred to the Iraqi government or to U.S.  agencies. The Department of State is now responsible for overseeing U.S.  efforts to rebuild Iraq. The Project and Contracting Office (PCO), a  temporary DOD organization, was tasked with providing acquisition and  project management support. In December 2005, DOD merged the PCO  with the U.S. Army Corps of Engineers Gulf Region Division, which now  supervises DOD reconstruction activities in Iraq. Additionally, the State  Department’s Iraq Reconstruction and Management Office is responsible  for strategic planning and for prioritizing requirements, monitoring  spending, and coordinating with the military commander. USAID  continues to award its own contracts, which are generally associated with  economic assistance, education and governance, and certain  infrastructure projects.
section_title: U.S. Efforts Have Produced Mixed Results in Restoring Iraq’s Essential Services
paragraphs: The United States has made some progress in restoring Iraq’s essential  services, but as of August 2006, such efforts generally have not met prewar  production levels or U.S. goals. Reconstruction activities have focused on  restoring essential services, such as refurbishing and repairing oil  facilities, increasing electrical generating capacity, and restoring water  treatment plants. About one-third of DOD’s construction work remains,  and DOD estimates that some work is not planned for completion until  late 2008. Continued violence, however, may make it difficult for the  United States to achieve its goals.
For August 2006, the U.S. embassy reported that the oil, electricity, and  water sectors generally performed below the planned U.S. goals.  Specifically,    Crude oil production capacity was reported as about 2.4 million barrels  per day (mbpd), below the prewar level of 2.6 mbpd and the desired  goal of 3 mbpd.
In the electricity sector, peak generation capacity was reported at   4,855 megawatts, above the prewar level of 4,300 megawatts, but below  the U.S. goal of 6,000 megawatts. Further, the current demand for  power continues to outstrip the available supply of electricity as more  Iraqis purchase consumer items and devices requiring electricity to  operate.
In the water sector, new or restored treatment capacity was reported at  about 1.44 million cubic meters per day, compared to the U.S. goal of  2.4 million cubic meters.
According to senior CPA and State officials responsible for the U.S.  strategy, the CPA’s 2003 reconstruction plan assumed that (1) creating or  restoring basic essential services for the Iraqi people took priority over  jobs creation and the economy and (2) the United States should focus on  long-term infrastructure projects because of the expertise the United  States could provide. Further, the strategy assumed that reconstruction  efforts would take place in a relatively benign environment. The difficult  security environment and persistent attacks on U.S.-funded infrastructure,  among other challenges, contributed to project delays, increased costs,  and canceling or reducing the scope of some reconstruction projects. As  we reported on September 11, 2006, the overall security conditions have  grown more complex, as evidenced by increased numbers of attacks and  Sunni/Shi’a sectarian strife. The continuing violence may make it difficult  for the United States to achieve its goals.
section_title: Iraq Contracting Challenges Reflect Systemic Issues Faced by DOD
paragraphs: The contracting challenges encountered in Iraq are emblematic of  systemic issues faced by DOD. A fundamental prerequisite to having good  outcomes is a match between well-defined requirements and available  resources. At the sector, program, and project levels, the failure to define  realistic requirements has had a cascading effect on contracts and made it  difficult to take subsequent steps necessary to get to successful outcomes.  For example, in the absence of settled requirements, DOD has sometimes  relied on what are known as undefinitized contractual actions, which were  used extensively in Iraq and can leave the government exposed to  increased costs. Managing risks when requirements are in flux requires  effective oversight, but DOD lacked the capacity to provide a sufficient  acquisition workforce, thereby hindering oversight efforts. In Iraq, as  elsewhere, we found instances in which DOD improperly used interagency  contracts to meet reconstruction needs. Finally, the underlying market  discipline offered by competition can help promote better outcomes, but  DOD, like other agencies, was challenged, particularly early on, in its  ability to realize the benefits of competition. One or more of these factors  can contribute to unsatisfactory outcomes on individual projects; the net  effect, however, is that many reconstruction projects did not achieve their  intended goals and DOD has incurred unanticipated costs and schedule  delays.
subsections: section_title: Matching Requirements with Available Resources
paragraphs: One of the factors that can contribute to poor DOD acquisition outcomes  is the mismatch between wants, needs, affordability, and sustainability.  This mismatch was evident in the reconstruction efforts in Iraq. U.S.  reconstruction goals were based on assumptions about the money and  time needed, which have proven unfounded. U.S. funding was not meant  to rebuild Iraq’s entire infrastructure, but rather to lay the groundwork for  a longer-term reconstruction effort that anticipated significant assistance  from international donors.
To provide that foundation, the CPA allocated $18.4 billion in fiscal year  2004 reconstruction funds among various projects in each reconstruction  sector, such as oil, electricity, and water and sanitation. As noted by the  Special Inspector General, almost immediately after the CPA dissolved,  the Department of State initiated an examination of the priorities and  programs with the objectives of reprioritizing funding for projects that  would not begin until mid- to late-2005 and using those funds to target key  high-impact projects. By July 2005, the State Department had conducted a  series of funding reallocations to address new priorities, including  increasing support for security and law enforcement efforts and oil  infrastructure enhancements. One of the consequences of these  reallocations was to reduce funding for the water and sanitation sector by  about 44 percent, from $4.6 billion to $2.6 billion. One reallocation of   $1.9 billion in September 2004 led the PCO to cancel some projects, most  of which were planned to start in mid-2005. Changes, even those made for  good reasons, make it more difficult to manage individual projects to  successful outcomes.
Further, such changes invariably have a cascading effect on individual  contracts. To produce desired outcomes within available funding and  required time frames, DOD and its contractors need to have a clear  understanding of reconstruction objectives and how they translate into   the terms and conditions of a contract: what goods or services are needed,  when they are needed, the level of performance or quality desired, and  what the cost will be. When such requirements were not clear, DOD often  entered into contract arrangements on reconstruction efforts that posed  additional risks. For example,  In June 2004, we reported that faced with uncertainty as to the full  extent of the rebuilding effort, DOD often authorized contractors to  begin work before key terms and conditions, including the work to be  performed and its projected costs, were fully defined. The use of  undefinitized contract actions, while allowing needed work to begin  quickly, can result in additional costs and risks to the government. We  found that as of March 2004, about $1.8 billion had been obligated on  reconstruction contract actions without DOD and the contractors  reaching agreement on the final scope and price of the work. In one  case, we found a contract action that had been modified nine times  between March and September 2003, increasing estimated costs from  $858,503 to about $204.1 million without DOD and the contractor  reaching agreement on the scope of work or final price.
In September 2005, we reported that difficulties in defining the cost,  schedule, and work to be performed associated with projects in the  water sector contributed to project delays and reduced scopes of  work. We reported that DOD had obligated about $873 million on   24 task orders to rebuild Iraq’s water and sanitation infrastructure,  including municipal water supplies, sewage collection systems, dams,  and a major irrigation project. We found, however, that agreement  between the government and the contractors on the final cost,  schedule, and scope of 18 of the 24 task orders we reviewed had been  delayed. These delays occurred, in part, because Iraqi authorities, U.S.  agencies, and contractors could not agree on scopes of work and  construction details. For example, at one wastewater project, local  officials wanted a certain type of sewer design that increased that  project’s cost.
Earlier this week, we issued a report on how DOD addressed issues  raised by the Defense Contract Audit Agency (DCAA) in audits of Iraq- related contract costs. We again noted that DOD frequently authorized  contractors to begin work before reaching agreement on the scope or  price of the work. In such cases, we found that DOD contracting  officials were less likely to remove costs questioned by DCAA from a  contractor’s proposal when the contractor had already incurred these  costs. For example, of the 18 audit reports we reviewed, DCAA issued  11 reports on contract actions where more than 180 days had elapsed  between the beginning of the period of performance to final  negotiations. For 9 of these audits, the period of performance DOD  initially authorized for each contract action concluded before final  negotiations took place. In one case, DCAA questioned $84 million in  its audit of a task order proposal for an oil mission. In this case, the  contractor did not submit a proposal until a year after the work was  authorized, and DOD and the contractor did not negotiate the final  terms of the task order until more than a year after the contractor had  completed work (see fig. 1). In the final negotiation documentation, the  DOD contracting official stated that the payment of incurred costs is  required for cost-type contracts, absent unusual circumstances. In  contrast, in the few audit reports we reviewed where the government  negotiated prior to starting work, we found that the portion of  questioned costs removed from the proposal was substantial.
section_title: Oversight and Workforce Issues
paragraphs: Instability—such as when wants, needs, and contract requirements are in a  state of flux—requires greater attention to oversight, which in turn relies  on a capable government workforce. Managing the attendant risks in  unstable situations grows in both importance and difficulty. Unfortunately,  attention to oversight and a capable government workforce has not always  been evident during the reconstruction effort. Such workforce challenges  are not unique to Iraq. DOD’s civilian workforce shrank by about   38 percent between fiscal years 1989 and 2002, but DOD performed this  downsizing without ensuring that remaining staff had the specific skills  and competencies needed to accomplish future DOD missions. In other  cases, contractors have taken over support positions that were  traditionally filled by government personnel. For example, a contractor  began providing intelligence support to the Army in Germany in 1999 and  deployed with the Army to Iraq in 2003. The Army, however, found itself  unprepared for the volume of Iraqi detainees and the need for  interrogation and other intelligence and logistics services.
We and others have reported on the impact of the lack of adequate  acquisition personnel and high turnover rates on reconstruction efforts.  For example, among the lessons learned identified by the Special  Inspector General was that one of the CPA’s critical personnel  shortcomings was the inadequate link between position requirements and  necessary skills. In this case, gaps existed in the experience levels of those  hired, as well as in the quality and depth of their experiences relative to  their assigned jobs. Similarly, in January 2004, an interagency assessment  team was sent to Iraq to review the CPA’s contracting capability. The team  found that existing contracting personnel were insufficient to handle the  increased workload that was expected with the influx of fiscal year 2004  reconstruction funding and that the CPA needed more individuals with  acquisition expertise who could help the programmatic side of the  operation. In part, the CPA’s decision to award seven contracts in early  2004 to help better coordinate and manage the fiscal year 2004  reconstruction efforts was in recognition of this shortfall. As a result, DOD  finds itself in the position of relying on contractors to help manage and  oversee the work of other contractors.
At the contract level, having personnel who are trained to conduct  oversight, assigned at or prior to contract award, and held accountable for  their oversight responsibilities is essential for effective oversight. Our  work has shown that if oversight is not conducted, is insufficient, or is not  well documented, DOD, and other reconstruction agencies, risk not  identifying and correcting poor contractor performance in a timely manner  and paying contractors more than the value of the services they perform.  For example,    Our June 2004 report found that early contract administration  challenges were caused, in part, by the lack of sufficient personnel.   We found that, due to the lack of government personnel to provide  oversight, one contractor may have purchased $7 million in equipment  and services that were not specifically authorized under the contract.  Similarly, on another contract, to provide subject matter experts to the  CPA and Iraqi ministries, DOD officials stated that some experts failed  to report to duty or when they did, did not perform as expected. DOD  officials attributed such performance issues to the lack of personnel to  provide oversight when the experts arrived in Iraq.
In July 2005, we noted that USAID obligated an additional $33 million  on one of its contracts to pay for unanticipated increases in security  costs, which left it short of funds to pay for construction oversight and  quality assurance efforts, as well as to fund administrative costs.
Our September 2005 report on water and sanitation efforts found that  frequent staff turnover affected both the definitization process and the  overall pace and cost of reconstruction efforts. For example, new  contracting officers had to be brought up to speed and would  sometimes ask the contractor to resubmit information in formats  different from those previously required. A PCO official also noted that  the contracting office in Iraq lacked sufficient staff and equipment and  that some of the staff assigned as contracting officers lacked  experience with the type of projects the PCO managed.
section_title: Using Interagency Contracting Vehicles
paragraphs: Another area in which workforce shortfalls proved problematic was in  DOD’s use and management of interagency contracting vehicles. We  identified management of interagency contracting as a high-risk area in  January 2005. In recent years, federal agencies have been making a major  shift in the way they procure many goods and services. Rather than  developing and awarding their own contracts, agencies are making greater  use of contracts already awarded by other agencies, referred to as  interagency contracting. This practice offers the benefits of improved  efficiency and timeliness. Such contracts, however, need to be effectively  managed, and their use demands a higher than usual degree of business  acumen and flexibility on the part of the acquisition workforce. Our work  and that of some agency inspectors general found instances of improper  use of interagency contracting, resulting from increasing demands on the  acquisition workforce, insufficient training, inadequate guidance, an  inordinate focus on meeting customer demands at the expense of  complying with sound contracting policy and required procedures, and the  lack of clear lines of responsibility and accountability.
During the initial stages of reconstruction, we and the DOD Inspector  General found instances in which DOD improperly used interagency  contracts for many of the same reasons. For example,  In March 2004, the DOD Inspector General reported that a review of   24 contract actions awarded by a DOD component on behalf of the  CPA revealed that DOD circumvented contracting rules, including  improperly using General Services Administration federal supply  schedule contracts and improperly contracting for personal services.  The Inspector General attributed this condition to the need to quickly  award contracts and to DOD’s failure to plan for the acquisition  support the CPA needed to perform its mission.
In June 2004, we noted that a task order awarded by the Air Force to  provide logistical support and equipment to support USAID’s mission  in Baghdad and at other sites in Iraq was, in part, outside the scope of  the contract. The Air Force indicated that it was issuing additional  guidance to ensure that future task orders were within the scope of the  contract.
In April 2005 we reported that a lack of effective management  controls—in particular insufficient management oversight and a lack of  adequate training—led to breakdowns in the issuance and  administration of task orders for interrogation and other services by  the Department of the Interior on behalf of DOD. These breakdowns  included  issuing 10 out of 11 task orders that were beyond the scope of  underlying contracts, in violation of competition rules;    not complying with additional DOD competition requirements when  issuing task orders for services on existing contracts;    not properly justifying the decision to use interagency contracting;    not complying with ordering procedures meant to ensure best value  for the government; and    not adequately monitoring contractor performance.
Because officials at Interior and the Army responsible for the orders did  not fully carry out their roles and responsibilities, the contractor was  allowed to play a role in the procurement process normally performed by  the government. Further, the Army officials responsible for overseeing the  contractor, for the most part, lacked knowledge of contracting issues and  were not aware of their basic duties and responsibilities.
section_title: Initial Inability to Benefit from Competition
paragraphs: Finally, one tool that can help mitigate acquisition risks is to rely on the  discipline provided by market forces when contracts are awarded under  full and open competition—that is, when all responsible prospective  contractors are afforded the opportunity to compete. During the initial  stages of reconstruction, we found that agencies were unable to take full  advantage of competition, in part because of the relatively short time— often only weeks—to award the first contracts. Our June 2004 report  found that agencies generally complied with applicable requirements for  competition when awarding new contracts but did not always do so when  issuing task orders against existing contracts. We found that 7 of the   11 task orders we reviewed were for work that was, in whole or in part,  outside the scope of the existing contracts. In each of these cases, the out- of-scope work should have been awarded using competitive procedures or  supported with a justification and approval for using other than full and  open competition in accordance with legal requirements. Given the urgent  need for reconstruction efforts, we noted that the authorities under the  competition laws provided agencies ample latitude to justify their  approach.
Such latitude presupposes that the rationale for such actions is valid; if  not, then the loss of the benefits from competition cannot be easily  justified. For example, in November 2005, we sustained a protest of a sole- source contract awarded by the Air Force in December 2004 for bilingual- bicultural advisers that was placed under an environmental services  contract, which, on its face, did not include within its scope the bilingual- bicultural adviser requirement. We concluded that the agency’s efforts  were so fundamentally flawed as to indicate an unreasonable level of  advance planning. In the same decision, we sustained a protest of a  second, follow-on sole-source contract awarded by the Air Force in July  2005 to the same company, in which the justification and approval  prepared in support of the contract was premised on the conclusion that  the contractor was the only responsible source, yet the capabilities of  other firms were not in fact considered. The lack of advance planning, the  failure to meaningfully consider other sources, and the attempts to justify  the use of sole-source contracts originated, in large part, from the desire  and pressure to meet the customer’s needs in a short time frame. At the  time of our decision, the initial contract was substantially complete, but  we recommended that the agency promptly obtain competition for the  requirement or prepare a properly documented and supported justification  and approval for the second contract.
Overall, the Special Inspector General has reported that competition has  improved for Iraq reconstruction projects since the early reconstruction  efforts. Next month we will issue a congressionally mandated report that  will provide an assessment of competition for actions subsequent to our  June 2004 report.
section_title: Conclusions
paragraphs: The reconstruction contracting problems we and others have reported on  over the last several years are emblematic of contracting problems we  have identified in numerous other situations but with more dramatic  consequences for failure, as the nature of the task for the United States is  so large and so costly. While some of the factors I discussed today— mismatches between needs, wants, affordability, and sustainability;  oversight and workforce challenges; improper use of contracting  approaches; and competition issues—were more prevalent in the initial  stages of reconstruction, the risks posed by others have not yet been fully  mitigated. Understanding not just where we are today, but why, is  important to enable DOD to make corrections and prevent repeating  mistakes.
Just as multiple factors contribute to success or failure, multiple actors  play a role in achieving successful acquisition outcomes, including policy  makers, program managers, contracting officers, and the contractors  themselves.
Looking to the future, about one-third of DOD’s planned construction  work remains to be completed, including some work that is not planned  for completion until the end of 2008. It is not too late for DOD to learn  from its past difficulties and provide adequate oversight on these  remaining projects. Delivering these projects on time and within cost is  essential if we are to maximize the return on this investment and make a  difference in the daily lives of the Iraqi people and help to provide the  services they need—safe streets, clean water, reliable electricity, and  affordable health care.  - - - - -  Mr. Chairman and members of the committee, this concludes my prepared  statement. I will be happy to answer any questions you may have.
section_title: Scope and Methodology
paragraphs: In preparing this testimony, we relied primarily on our completed and  ongoing reviews of efforts to rebuild Iraq that we have undertaken since  2003, as well as our work related to selected DOD contract management  issues. We conducted these reviews in accordance with generally accepted  government auditing standards. We also reviewed audit reports and  lessons learned reports issued by the Special Inspector General for Iraq  Reconstruction and work completed by the Inspector General,  Department of Defense. We conducted this work in accordance with  generally accepted government auditing standards in September 2006.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: For questions regarding this testimony, please call Katherine V. Schinasi at  (202) 512-4841 or on schinasik@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the back page  of this statement. Key contributors to this statement were Daniel Chen,  Lily Chin, Tim DiNapoli, Kate France, Dave Groves, John Hutton,   Chris Kunitz, Steve Lord, Micah McMillan, Kate Monahan, Mary Moutsos,  Ken Patton, Jose Ramos, and Bill Woods.
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