Contingency Contracting: Improved Planning and Management Oversight Needed to Address Challenges with Closing Contracts
Published: 2011-09-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 2002, DOD obligated at least $166.6 billion on contracts supporting reconstruction and stabilization efforts in Iraq and Afghanistan. Many of these contingency contracts, in particular those awarded in Iraq, need to be closed. Contract closeout is a key step to ensure the government receives the goods and services it purchased at the agreed upon price and, if done timely, provides opportunities to use unspent funds for other needs and reduces exposure to other financial risks. To assess DOD's efforts to close its Iraq contracts, GAO examined the (1) number of contracts that are eligible for closeout and the extent to which they will be closed within required time frames, (2) factors contributing to contracts not being closed within required time frames, (3) steps DOD took to manage the financial risks associated with not closing contracts within required time frames, and (4) extent to which DOD captured and implemented lessons learned from closing its Iraq contracts. GAO reviewed contingency contracting guidance, analyzed contract and closeout data for contracts awarded between fiscal years 2003 and 2010, and interviewed DOD officials from six organizations responsible for awarding or closing out these contracts.
section_title: What GAO Found
paragraphs: DOD does not have visibility into the number of its Iraq contracts eligible for closeout, but available data indicate that DOD must still review and potentially close at least 58,000 contracts awarded between fiscal years 2003 and 2010. GAO's analysis indicates that relatively few of its contracts will be closed within required time frames. For example, about 90 percent of the limited number of contracts for which DOD could provide closeout data are already over age for closeout. The U.S. Central Command's Contracting Command (C3) and its predecessors, which awarded many of DOD's Iraq contracts, did not have sufficient internal controls to ensure that contracting data were accurate and complete. C3's management visibility was further affected by limitations of its information systems, staff turnover, and poor contract administration. DOD's ability to close its contracts has been hindered by the lack of advance planning, workforce shortfalls, and contractor accounting challenges. For example, DOD's contingency contracting doctrine and guidance do not specifically require advanced planning for contract closeouts. DOD took steps in 2008 to address its backlog of contracts needing to be closed but such actions came too late to make significant difference in closing contracts within required time frames. DOD is now transitioning responsibility for closing out C3's contracts to the Army Contracting Command. Staffing challenges, however, during this transition have hindered efforts to close these contracts. Efforts to close large, cost-type contracts have been further hindered by Defense Contract Audit Agency staffing shortages and unresolved issues with contractors' accounting practices, which have delayed audits of the contractors' incurred costs. DOD's efforts to identify unspent contract funds and improper payments--two examples of financial risks that timely closeout of contracts may help identify--are hindered by limited visibility into its Iraq contracts. DOD identified at least $135 million in unspent funds that could potentially not be available to meet other DOD needs. If not used, these funds will be returned to the U.S. Treasury at the end of fiscal year 2011. Should DOD identify a need to pay for an unanticipated cost on these contracts, it will need to use other funds that are currently available. Additionally, instances of improper payments and potential fraud were sometimes found years after final contract deliveries were made, making it harder for DOD to recover funds owed to it and increasing the risk that it may need to pay contractors interest fees on late payments. DOD has identified and addressed some of the problems related to the closeout of Iraq contracts, but the growing backlog of over 42,000 Afghanistan contracts that need to be closed suggests the underlying causes have not been resolved. DOD officials noted that the lessons learned in Iraq highlight the need to improve contract data, increase the emphasis on contract administration and closeout, and improve contingency contracting doctrine and guidance. DOD officials reported that actions are underway to correct these deficiencies in future contingencies, but fully implementing these initiatives may take several years.
section_title: What GAO Recommends
paragraphs: GAO is making three recommendations to ensure DOD has sufficient resources to close its Iraq and Afghanistan contracts and to better plan for and improve visibility of closeout efforts in future contingencies. DOD concurred with each of the recommendations.

section_title: Letter
paragraphs: Since 2002, the Department of Defense (DOD) has reported obligations  of at least $166.6 billion to acquire goods and services needed to support  its reconstruction and stabilization efforts in Iraq and Afghanistan,  according to the Commission on Wartime Contracting. Our work, as well  as that of others, has documented shortcomings in DOD’s strategic  planning for operational contract support, contract administration and  oversight, and its acquisition workforce in these contingency operations.  Many of the contracts that were awarded to support these efforts have  been completed and must be closed as the final step in the acquisition  process. Contract closeout includes a number of administrative actions,  including DOD confirming that all goods and services were received and  issuing final payment to the contractor, the contractor acknowledging that  the U.S. government does not owe it additional payment, and finally, the  government deobligating any unspent funds. For contracts awarded on a  cost-reimbursable basis, the Defense Contract Audit Agency (DCAA)  conducts audits to assist the contracting officer in determining that  contractor costs are allowable, allocable, and reasonable.
The Federal Acquisition Regulation (FAR) states that firm-fixed price  contracts should be closed within 6 months after the contract is physically  completed, which generally occurs when the government accepts final  delivery of goods and services. Cost-type contracts should be closed  within 36 months and can be more difficult to close than firm-fixed price  contracts as they require the settlement of indirect cost rates. Closing  contracts within these time frames can help to limit the government’s  exposure to certain financial risks by identifying and recovering improper  payments and avoiding paying interest fees when the government does  not pay contractors on time. Timely closeout also ensures that DOD  deobligates and uses unspent funds from completed contracts before the  funds are canceled and return to the U.S. Department of the Treasury  (Treasury). The timing for when funds are canceled is set by statute.
Many DOD organizations awarded contracts to support military  operations in Iraq, but the majority in our review were awarded in theater  by U.S. Central Command’s Contracting Command (C3) and its  predecessor organizations. In 2007, the Gansler Commission on Army  Acquisition and Program Management in Expeditionary Operations found  that only 5 percent of Iraq contracts were being closed. In response to  these findings, the Army established a Contract Closeout Task Force  Office (Task Force) to close C3’s Iraq and Afghanistan firm-fixed price  contracts and estimated its mission would be completed in January 2011.  C3, however, significantly underestimated the total number of contracts it  needed to close and is now transferring the Task Force’s mission to Army  Contract Command-Rock Island (ACC-RI). ACC-RI is also responsible for  managing the Army’s Logistics Civil Augmentation Program (LOGCAP)  contracts. C3 has also delegated closeout responsibilities of its cost-type  contracts to the Defense Contract Management Agency (DCMA)  Southern Europe. Additionally, U.S. Army Corps of Engineers (USACE)  and Air Force’s Center for Engineering and the Environment (AFCEE)  also awarded many Iraq contracts but generally retained responsibility for  closing those contracts.
To assess DOD’s efforts to close its Iraq contracts, under the authority of  the Comptroller General to conduct evaluations on his own initiative to  assist Congress with its oversight responsibilities, we examined the (1)  total number of its contracts with performance in Iraq that are eligible for  closeout and the extent to which DOD closed these contracts within  required time frames, (2) factors that contributed to contracts not being  closed within required time frames, (3) steps DOD took to manage the  financial risks associated with not closing contracts within required time  frames, and (4) extent to which DOD captured and implemented lessons  learned from closing its Iraq contracts.
To determine the number of DOD’s Iraq contracts eligible for closeout and  the extent to which DOD closed these contracts within required time  frames, we reviewed the FAR and the Defense Federal Acquisition  Regulation Supplement to determine when a contract is eligible for  closeout and the time frames and the procedures for closing contracts.  For the purpose of our review the term contracts refers to all base  contracts, task orders, and blanket purchase agreement call orders. We  obtained contract data from four DOD organizations that our prior work  indicated had been responsible for awarding many of the contracts with  performance in Iraq: C3, Army’s ACC-RI, USACE, and AFCEE. These  organizations may retain responsibility for administering and closing the  contracts they awarded, or they may delegate such responsibilities to  another organization. In those instances, we obtained contract data from  that organization. From each organization, we requested the contract  number, period of performance, contract type, contract status, total  obligations, total unliquidated obligations, and physical completion dates  for each contract for which they were responsible to close. The data we  obtained from the Task Force also included contracts with performance in  Afghanistan, which we identified separately in our analysis. In instances  in which DOD did not have complete data, we used available data to  determine the number of contracts eligible for closeout. We assessed the  reliability of these data reported by the contracting organizations through  interviews with knowledgeable officials and electronic data testing for  missing data, outliers, and obvious errors within each database. While we  found that C3’s contract data from fiscal years 2003 through 2008 were  generally unreliable for determining the closeout status of contracts, they  were sufficiently reliable for determining the minimum number of contracts  awarded during this time period. We did not assess the reliability of the  financial management systems used by DOD to provide financial data for  our review.
To identify the factors that contributed to contracts not being closed within  required time frames, we reviewed DOD’s closeout planning documents  and interviewed officials at each of the contracting organizations, DCAA,  and the Defense Finance and Accounting Service (DFAS), which is  responsible for making payments on many Iraq contracts, and U.S. Army  Central. We reviewed DOD’s policy and guidance to determine how  contract closeout should be incorporated into contingency contracting  planning. To understand any challenges faced by DOD contracting  personnel in closing individual contracts, we reviewed contract  documents for 25 firm-fixed price contracts purposefully selected to obtain  a variety of closeout organizations and a range of closeout difficulty and  interviewed contracting personnel on their experiences with closing them.  We also reviewed the Task Force’s and ACC-RI’s monthly closeout data  to assess the Army’s progress in closing C3’s contracts. In addition, to  identify the factors that affected the completion of audits of cost-type  contracts, we purposefully selected eight contractors based on the  number of over-age task orders, the amount obligated on the contract,  and the amount of unliquidated obligations. We reviewed completed audit  reports and interviewed DCAA officials at headquarters and eight field  offices to determine what factors affected their ability to complete planned  audits associated with those contractors.
To determine the steps DOD has taken to manage the financial risks  associated with closing contracts, we reviewed the DOD Financial  Management Regulation and closeout guidance and interviewed  contracting and financial management personnel at the Office of the  Under Secretary of Defense, Comptroller; Office of the Assistant  Secretary of the Army, Financial Management & Comptroller; Joint Chiefs  of Staff Force Structure, Resources, and Assessment Directorate (J-8);  and USACE Resource Management. In addition, we analyzed  unliquidated obligation data and interviewed contracting and financial  management personnel at each contracting organization we met with to  determine how these funds were managed and if any funds would be  returned to Treasury. We also reviewed contracts with known improper  payments and interviewed DFAS personnel to assess DOD’s ability to  recover such payments.
To assess the extent to which DOD captured and implemented lessons  learned from closing contracts in contingency operations, we interviewed  contracting officials at each of the organizations we visited and reviewed  C3 documents on contracting-related problems encountered in Iraq. We  also interviewed senior contracting officials in Iraq and Afghanistan to  identify any changes made in response to the lessons learned from  closing the C3 contracts. We obtained and reviewed C3 data on the total  number of contracts in Afghanistan that are eligible and over age for  closeout to assess its progress in closing these contracts. We also  interviewed Army, Joint Chiefs of Staff, and Acquisition, Technology, and  Logistics’ Office of Defense Procurement and Acquisition Policy officials  responsible for setting policy and issuing guidance to identify changes  made to respond to the problems encountered in Iraq. See appendix I for  additional details on our scope and methodology.
subsections: section_title: Background
paragraphs: DOD faces a number of long-standing and systemic challenges that have  hindered its ability to achieve more successful acquisition outcomes, such  as ensuring that DOD personnel use sound contracting approaches and  maintaining a workforce with the skills and capabilities needed to properly  manage the acquisitions and oversee contractors. While the issues  encountered in Iraq and Afghanistan are emblematic of these systemic  challenges, their significance and effect are heightened in a contingency  environment. For example, in 2004, we raised concerns about DOD’s  ability to effectively administer and oversee contracts in Iraq, in part  because of the continued expansion of reconstruction efforts, staffing  constraints, and the need to operate in an unsecure and threatening  environment. Similarly, we reported in July 2007 that DOD had not  completed negotiations on certain task orders in Iraq until more than 6  months after the work began and after most of the costs had been  incurred, contributing to its decision to pay the contractor nearly all of the  $221 million questioned by auditors. In 2008, we reported that not having  qualified personnel hindered oversight of contracts to maintain military  equipment in Kuwait and provide linguistic services in Iraq and  questioned whether DOD could sustain increased oversight of its private  security contractors.
The contract closeout process includes verifying that the goods or  services were provided and that all final administrative steps are  completed, including an audit of the costs billed to the government and  adjusting for any over- or underpayments on the final invoice. To close a  contract, DOD must complete a number of tasks, including making final  payment to the contractor, receiving a release of claims from the  contractor, and deobligating excess funds, among other tasks (see fig. 1).  A contract is eligible to be closed once the contract is physically  complete, which is generally when all option provisions have expired and  the contractor has completed performance and the government has  accepted the final delivery of goods or services in the form of a receiving  report or the government has provided the contractor a notice of complete  contract termination. From this point, contracts should be closed within  time frames set by the FAR—6 months for firm-fixed price contracts and  36 months for cost-type contracts and time and materials contracts.  Additional time is allowed for the closeout of these latter contract types as  the contracting officer and DCAA may need to ensure any incurred costs  are allowable, allocable, and reasonable. Additional time is also needed  to set the final indirect overhead rates, which determine, in part the  contractor’s final payment on cost-type contracts. When the contract  completion statement, also known as the DD 1594, is signed by the  contracting officer, the contract is considered closed and contract  documents can be stored and retained.
A contract not closed within the FAR time frames is considered to be over  age for closeout and increases an organization’s exposure to a number of  financial issues. If contract closeout does not take place in a timely  manner and funds are not deobligated when currently available, the  agency loses the use of those funds for new obligations. Even if funds are  expired when they are deobligated, the agency can still use them for up to  5 years after they expire to pay for authorized increases to existing  obligations made from the same appropriation. Any funds remaining after  the 5-year period are considered canceled and must be returned to  Treasury. If closeout does not take place until after they are canceled,  and the agency identifies a need for the government to pay the contractor  for an unanticipated cost, the government must use other funds that are  currently available. Additionally, the risk of late payments to contractors  increases when contracts are not closed within required time frames and  in turn may result in the government paying interest. Further, the longer  an organization waits to close a contract the more difficult it becomes to  identify and recover improper payments to contractors. In addition,  closing a contract years after the performance is complete can be more  time consuming because key documentation, such as invoices and  receiving reports, and contracting personnel with first-hand knowledge of  the contract may no longer be available.
section_title: DOD’s Visibility into the Number of Contracts Eligible for Closeout Is Hindered by Inadequate Data
paragraphs: DOD does not have visibility into the total number of its Iraq contracts  eligible for closeout, but our analysis of available data indicates that  relatively few of these contracts will be closed within the time frames  prescribed by the FAR. C3, which awarded the majority of the Iraq  contracts, did not have sufficient internal controls to ensure its contracting  data were accurate and complete, and was further affected by limitations  of its contracting systems, turnover in contracting personnel, and other  competing demands. In 2009, to help reduce the backlog of contracts to  be closed, C3 transferred 66,760 Iraq contracts and 14,336 contracts in  which a place of performance was not specified to the Task Force. As it  was unclear how many of these contracts were closed before being  shipped, Task Force personnel are in the process of reviewing each  contract and, as appropriate, closing any open contracts. As of  April 2011, however, over 54,000 of these contracts still needed to be  reviewed. DOD officials noted that record keeping generally improved for  C3’s firm-fixed price contracts awarded after fiscal year 2008. C3 also  improved visibility of its large, cost-type contracts awarded between fiscal  year 2003 and 2010 after delegating contract administration, including  closeout responsibilities, to DCMA Southern Europe in 2008. Based on  available data provided by C3 and the other DOD contracting  organizations we reviewed, there are at least an additional 4,298 Iraq  contracts—90 percent of which are already over age—that need to be  closed.
subsections: section_title: C3’s Visibility into Its Contracting Activity Improved in Fiscal Year 2009 but Reliability of Prior Years’ Data Is Questionable
paragraphs: C3 and its predecessor organizations awarded the majority of DOD’s  contracts to support reconstruction and stabilization efforts, yet weak  internal controls, turnover in contracting personnel, and competing  demands contributed to incomplete or inaccurate information that  hindered management oversight of its contracting activities, including  whether it was meeting FAR closeout requirements. DOD officials noted  C3 did not have a contract writing and management information system in  Iraq between 2003 and 2008, which contributed to the use of multiple  manual databases. Each regional contracting center awarded manually  written contracts and documented contract actions on independent  spreadsheets. C3 and Army officials noted some of the challenges with  manually written contracts included duplicate or inaccurate contract  numbers and inaccurate period of performance dates. They also noted  that each regional contracting center maintained and managed its  contract data on spreadsheets differently as there was not an Iraq-wide  standard for how to maintain contract data and that data input was often  unverified. These contract documentation challenges were exacerbated  by the constant turnover of contracting personnel and the command’s  emphasis on awarding contracts to support the warfighter. Additionally,  C3 and Army officials said that an unknown number of contracts were  never input into C3’s database and could not be accounted for because  contract files were lost, damaged, or destroyed.
Our analysis of C3’s data on its Iraq contracts found at least 55,000  contracts were recorded as being awarded between fiscal years 2003 and  2008, but we determined that the data had numerous discrepancies.  These discrepancies, which included missing or invalid period of  performance and physical completion dates as well as invalid or  duplicative contract numbers, affect the data needed to maintain visibility  on the contracts eligible to be closed. Army officials acknowledged that  the contract information reflected in C3’s database through fiscal year  2008 was unreliable for determining the actual number of contracts it  awarded or which contracts were eligible to be closed. Consequently, the  Army underestimated the total number of contracts that the Task Force  needed to close. In 2008, the Army estimated that the Task Force would  need to close approximately 24,000 contracts awarded by C3 in Iraq and  Afghanistan from 2003 to 2008, but the Task Force recorded that C3 sent  it 103,693 contracts (see table 1). Our analysis of the Task Force’s data  indicates that C3 transferred at least 66,760 Iraq contracts, including  approximately 8,500 more contracts awarded between fiscal years 2003  and 2008 than what was reflected in C3’s database. Additionally, the  Task Force inventoried another 14,336 contracts for which the place of  performance was not specified. Army officials stated that C3 had closed  some of these contracts before sending the files to the Task Force, but  acknowledged that the C3 data did not accurately reflect which contracts  were closed. Therefore, the Army required Task Force personnel to  review each contract and close those that remain open. Army officials  stated, however, that there have been no attempts to reconcile the C3  contracting data with the Task Force’s findings.
The extent to which the contracts that have not yet been reviewed by  Task Force personnel and will need to be closed is uncertain, in part,  because some that were reportedly closed by C3 still required contract  administration. For example, Task Force personnel stated that contracts  sometimes included a signed DD 1594 even though the contracts still  required administrative actions.
To improve the management of its contracts, C3 began using the  Standard Procurement System in fiscal year 2009. Both Army and C3  officials stated that the Standard Procurement System had better quality  control checks to generate valid contract numbers with automated  prompts requiring contracting personnel to insert required data fields,  such as period of performance, at the time of award. These officials also  said that the quality control checks improved the completeness and  quality of C3’s data and provided better insight needed to manage the  contract closeout process. Army officials said that once the Standard  Procurement System was deployed in Iraq, the regional contracting  centers were able to transmit data back to Army locations in the United  States which could be used to run automated reports on contracts closed,  eligible for closeout, and over age for closeout. Army and C3 officials  acknowledged that while the data improved, C3 continued to identify  problems with the data input by contracting personnel. In a July 2010  memorandum, C3 directed its personnel to take actions to improve the  overall quality, accuracy, and timelines of C3’s contracting actions. For  example, it identified specific data fields, including those that help to  determine a contract’s eligibility for closeout, that personnel are required  to capture in C3’s data systems.
C3 obtained better visibility of its firm-fixed price contracts awarded in  fiscal years 2009 and later as well as their large, cost-type contracts. C3’s  data on these firm-fixed price contracts indicates that C3 closed over  9,600 of its Iraq contracts awarded between fiscal years 2009 and 2010.  Similarly, DOD officials indicated that C3 had better visibility of its large,  cost-type contracts awarded between fiscal years 2003 and 2010, in part  because it generally delegated contract administration for these contracts,  including closeout responsibilities, to DCMA Southern Europe in 2008.  DCMA officials reported that when it accepted C3’s cost-type contracts,  the files were in generally poor condition and missing documents. DCMA  officials reported, however, that they devoted the resources necessary to  collect missing information for these contracts and developed their own  data to manage the closeout of these contracts and task orders. Our  analysis of these firm-fixed price and cost-type contracts indicates that 97  percent were over age as of May 2011 (see table 2).
ACC-RI, AFCEE, and USACE officials indicated that the use of existing  contracting systems at the onset of military operations in Iraq provided  them better visibility into the number of contracts they had awarded to  support efforts in Iraq. Agency officials acknowledged, however, that they  sometimes encountered challenges with using their existing systems. For  example, USACE officials noted that the standard reports used to  determine which Iraq contracts needed to be closed were initially  inaccurate because period of performance or physical completion dates  were not correctly entered into their contracting systems. As a result,  USACE officials found in March 2011 that USACE’s closeout reports  underestimated the number of contracts eligible and over age for closeout  due to inaccurate period of performance dates. USACE revised its reports  using period of performance dates from other data sources, which  identified that 639 contracts were eligible to be closed, more than 300  contracts than its initial report reflected. Similarly, AFCEE’s data indicate  that the period of performance ended for 154 of its Iraq contracts but the  data did not reflect whether final goods and services had been delivered  and whether the contract was physically complete. Our analysis indicates  that the period of performance ended at least 3 years ago for 37 of these  contracts, but AFCEE personnel stated that they cannot close these  contracts until they receive final documentation that the goods and  services have been delivered. Overall, we estimate that about 66 percent  of these organizations’ 907 eligible contracts are over age (see table 3).
Our analysis of data provided by these contracting organizations reflects  a higher percent of eligible firm-fixed price contracts that are over age  compared to eligible cost-type contracts, in part due to the longer period  of time allowed by the FAR to close out cost-type contracts. For  example, our analysis indicates that about 81 percent of the firm-fixed  price contracts eligible to be closed were over age compared to  approximately 40 percent of eligible cost-type contracts. Nevertheless,  these organizations have closed few of their cost-type Iraq contracts. For  example, USACE data indicate that it had closed 7 of its 77 Iraq cost-type  contracts and AFCEE had closed just 10 of its 239 Iraq cost-type  contracts awarded since 2003.
section_title: Planning, Workforce, and Contractor Accounting Issues Hinder Efforts to Close Contracts
paragraphs: DOD’s ability to close the contracts it awarded to support efforts in Iraq is  hindered by several factors, including the failure to plan for or emphasize  the need to close these contracts until reconstruction efforts were well  underway, staffing shortfalls, and contractor accounting issues. DOD did  not plan for or focus on closing its Iraq contracts until 2008, in part  because DOD’s contingency contracting policy and guidance do not  emphasize the need to plan for contract closeouts during the early stages  of a contingency operation. DOD has taken steps to reduce the number of  firm-fixed price contracts it needs to close, but ACC-RI has not been able  to hire enough personnel to replace Task Force personnel during the  transition of closeout responsibilities, which has slowed these efforts.  Similarly, efforts to close its large, cost-type contracts is hindered by  staffing shortages at DCAA and unresolved issues with contractors’ cost  accounting practices that preclude completing the necessary audits of the  contractors’ incurred costs. As a result, DOD is unlikely to close 226 cost- type contracts with over $19.1 billion in obligations in the near future.
subsections: section_title: DOD Doctrine and Policy Do Not Emphasize Advanced Planning for Closeout
paragraphs: DOD contingency contracting doctrine and policy do not specifically  include closeout as part of the advanced planning for a contingency  operation. Since 2006, a contract support integration plan annex termed  Annex W—which provide details on the contractor support required  during a contingency, including the military’s organizational requirements  needed to acquire and oversee such support—has been required to be in  DOD’s most detailed operation plans. In October 2008, DOD  established its first doctrine to standardize guidance for planning,  conducting, and assessing operational contract support integration,  contractor management functions, and contracting command and control  in support of joint operations in its Joint Publication 4-10, Operational  Contract Support. In part, this doctrine provides guidance for  contingency contracting requirements that should be planned for within  the Annex W. While it states that an Annex W should outline all activities  necessary to execute contract support integration requirements in an  operational area, it does not specifically direct DOD commands to  determine an approach for closing contracts in advance or even during  the initial stages of a contingency operation. Joint Publication 4-10  advises that contracts be closed as performance is completed, consistent  with the requirements established in the FAR, but makes no reference for  the need to plan for the resources needed to close contracts within  required time frames. Instead, contract closeout is described as part of  the redeployment and contract termination phase, the fourth and final  operational phase of a contingency. In 2009, DOD issued a template for  planners to use when developing Annex Ws and plans to incorporate the  template into planning policy. The template does not, however,  specifically call attention to the need to plan for the closeout of contracts.  Furthermore, in March 2010, we reported that few of the operation plans  approved by the Secretary of Defense or his designee even included an  Annex W and when they did, those annexes restated broad language  from DOD’s high-level guidance on operational contract support.
The contracting organizations included in our review generally did not  conduct any planning to close the contracts they awarded to support  operations in Iraq until several years after the contracts were initially  awarded. DOD officials noted that the department initially assumed that  post-conflict stability and reconstruction efforts would not last for an  extended period and as such, any organization that awarded contracts to  support these efforts would close contracts under the organization’s  standard processes. Officials acknowledged that as these efforts  continued and the level of contracting activity increased, C3’s  predecessors attempted to close contracts as time and resources  permitted, but did not develop a plan needed to do so. For example,    The Army did not develop a plan to close its Iraq contracts until 2008,  long after reconstruction efforts were underway in Iraq. According to  the Army, the 2007 Gansler Commission report’s finding that only 5  percent of eligible Iraq contracts were closed prompted the Army to  begin planning for and taking steps to address the backlog of over- age Iraq contracts. To do so, in October 2008, the Army established  the Task Force and delegated responsibility to DCMA Southern  Europe to close a number of C3’s cost-type contracts.    According to USACE personnel, they began focusing on contract  closeouts after the Army identified that the Army had more than  660,000 over-age contracts as of January 2009 and established a  goal to close all of its over-age contracts by the end of fiscal year  2011. In January 2011, USACE established a contract closeout cell in  Winchester, Virginia.    AFCEE personnel, with 96 over-age Iraq contracts, stated they have  not developed an Iraq contract closeout plan and continue to close  these contracts as part of their routine contracting activities. AFCEE  personnel stated, however, only two contracting personnel are  assigned to closing the Iraq contracts and do so only when time and  other responsibilities permit.
section_title: Commands Focused Limited Staff Resources on Awarding Contracts
paragraphs: DOD officials also noted that the need to focus limited staff resources on  fulfilling urgent requirements in support of the war effort, and other  contingency-related challenges, contributed to the backlog of contracts to  be closed. One senior Army official noted that as there were not enough  contracting officers in theater to handle both awards and closeouts, the  command focused its attention on awarding contracts. Similarly, C3 and  USACE contracting personnel we spoke with stated that they were  responsible for awarding, administering, and closing contracts, but to  meet urgent requirements, they prioritized contract awards over other  activities. In addition, an Army official noted that contracting personnel  have little incentive to close contracts, as their success is often measured  by contracts awarded. Contracting personnel who are responsible for  closing contracts stated, however, that emphasis on timely contract  closeout is especially important in a contingency environment because  the longer the time from when the contractor completes its work and  when the contract is closed, the more difficult it becomes to determine the  status of contracts, resolve documentation and administration issues,  obtain a release of claims, and negotiate final payments. For example,    To close a $16.8 million guard services contract, contracting  personnel in Iraq described the process of determining how payments  were made as “putting together pieces of a puzzle.” Personnel stated  that they spent several weeks identifying what the contractor billed  and was paid by reviewing invoices, contract modifications, and e- mails.    Similarly, contracting personnel in Iraq stated that resolving an  overpayment of over $500,000 has delayed the closeout of another  $17 million guard services contract. The contracting officer who  awarded and administered the contract was no longer in Iraq when  the contracting personnel began closing the contract. These  personnel stated that they relied on e-mails in the contract file and  obtained payment information from DFAS to determine the extent to  which the contractor was overpaid and are awaiting further guidance  from DFAS on what steps are needed to recover funds from the  contractor.    Task Force personnel noted that while closing a $1.3 million contract  for life support services, they found that there was no documentation  in the contract file to explain why services were not performed at three  camp sites listed in the contract. The contractor told Task Force  personnel that he was instructed not to perform the services but was  never provided anything in writing. Task Force personnel noted that  the contractor then refused to sign the release of claims, so personnel  unilaterally deobligated the remaining funds on the contract to close  the contract.    According to one senior C3 official, contracting officers sometimes  relied on documents provided by the contractor to resolve claims  because they were not maintained in the contract files. In one  instance, while closing a vehicle lease contract, C3 personnel stated  that they found 149 damage claims for vehicles, but oversight  personnel often did not keep records or pictures of the condition of the  vehicles when they were picked up and dropped off by the contractor.  The contracting personnel stated that they are coordinating with the  payment office and resource managers but said that it may not be  possible to locate someone who can verify or dispute the claims.
Task Force personnel stated that they often needed to perform routine  contract administration tasks on contracts, including reconciling payments  and obligations, acquiring receiving reports, contacting contractors in  theater to obtain invoices and release of claims, and piecing together  incomplete contract files to provide reasonable assurance that the  government received what it paid for and the contract could be closed.  Task Force personnel illustrated some of the challenges they often  encounter in the following two examples:  In one case involving the closeout of a $55 million contract for  shotguns, goggles, and radios, Task Force personnel stated that they  had to reconcile payments against nine different task orders because  payments were not made to the correct task orders, including one  lump-sum payment for $8 million that did not correspond to any task  order, and the contract was missing receiving reports and payment  documents. Task Force personnel contacted DFAS to determine how  much should have been paid on the task order and verified payments  through a data system. Task Force personnel eventually closed all of  the task orders between March and December 2010.    During the closeout of another contract for $101,000 to lease buses  from an Iraqi contractor, Task Force personnel found that the  contractor was not paid for 1 month of service and not compensated  for damages to two of the buses. After contacting DFAS and  determining that there were enough funds on the contract to cover the  missing payment and repair costs, Task Force personnel notified the  payment office to make a final payment to the contractor. Task Force  personnel were able to close the contract after the contractor was  paid and a release of claims was received.
section_title: Workforce Challenges Associated with Transitioning Closeout Responsibilities Have Reduced Capacity to Close Firm-Fixed Price Contracts
paragraphs: C3 has taken steps to reduce the number of firm-fixed price contracts it  needs to close, but difficulties with hiring ACC-RI personnel have slowed  these efforts. The Army and C3 initially established the Task Force to  address the backlog of C3’s firm-fixed price contracts awarded before  fiscal year 2009 and planned at that time to close any contracts awarded  in fiscal year 2009 and later in theater. To ensure the contracts remaining  in theater were closed, a senior C3 official established closeout goals in  October 2010 and required each regional contracting center to appoint  personnel responsible for completing contract closeout. While Army data  indicate that progress was made in closing contracts in Iraq, C3 officials  told us that closeout goals were tracked informally and acknowledged that  some regional contracting centers were unable to meet these goals. By  February 2011, the Army changed its strategy and decided that when the  Task Force is shut down in September 2011, all C3 contracts, including  those awarded after fiscal year 2009, would eventually be transferred to  ACC-RI for closeout. According to C3’s commanding general, this  decision was made because ACC-RI has a workforce that can handle  complex contract actions and has expertise in southwest Asia contracting.
By June 2011, the Army had transferred about 15,000 Iraq and  Afghanistan contracts awarded between fiscal years 2008 and 2010 from  the Task Force to ACC-RI. According to the Army, ACC-RI personnel are  in the process of inventorying these contracts and identifying which are  closed or require additional administration. Army officials stated that they  are reviewing ACC-RI closeout procedures and data collection efforts to  ensure Army data are accurate and complete.
During this transition period, ACC-RI has not been able to hire the  number of individuals it estimated it needed to manage the anticipated  workload and the number of contracts reviewed and closed by the Task  Force has fallen considerably. According to Army officials, ACC-RI will  need to hire 25 individuals by the time it fully assumes the Task Force’s  responsibilities. Army officials stated that ACC-RI has experienced  challenges hiring contracting personnel in part due to potential applicants’  hesitation to accept these positions, which are term positions that expire  by October 2012. Army officials stated as of June 2011, ACC-RI had only  hired 4 staff but efforts are underway to hire additional personnel. Until  these positions can be filled, other ACC-RI personnel are temporarily  supporting the closeout efforts. In addition, in July 2011, the ACC-RI  issued a task order for contract closeout support to AbilityOne, which  provides job opportunities on federal contracts for individuals who are  blind or have other disabilities. According to one ACC-RI official, ACC-RI  plans to hire nine AbilityOne employees under this contract. It remains  uncertain, however, when the Army will be able to review and, as  necessary, close the contracts that remain at the Task Force. Similarly,  Army officials stated that the Task Force’s capacity to close contracts has  decreased, as 10 of its 25 staff have resigned in advance of the Task  Force’s planned closure. During the week of September 3, 2010, the Task  Force closed 439 contracts but by the week of June 9, 2011, the Task  Force only closed 267 contracts.
section_title: Limited DCAA Staffing and Unresolved Contractor Accounting Challenges Hinder Closeout of Cost- Type Contracts
paragraphs: DOD’s efforts to close its large, cost-type contracts are hindered by  staffing shortages at DCAA and unresolved issues with contractors’ cost  accounting practices. DOD reported that it had 226 over-age, cost-type  Iraq contracts with approximately $19.1 billion in obligations (see table 4).  A critical step to closing these contracts is to determine how to allocate a  contractor’s general administrative and overhead costs to each of its  contracts. To do so, DCAA performs annual incurred cost audits on a  contractor-by-contractor basis—versus a contract-by-contract basis—by  reviewing incurred cost proposals from the contractor for each year of  performance. DCAA auditors test direct and indirect costs to determine  whether they are allowable, allocable, and reasonable. The direct and  indirect costs form the basis for DCAA’s recommended indirect cost rate,  which is usually used by the contracting officer to negotiate a final rate  with the contractor. When the indirect cost rate for the final year of  contract performance is settled and the final price of the contract is  determined, contract closeout may proceed.
DOD’s cost-type contracts related to Iraq often spanned multiple years  and as such DCAA must complete incurred cost audits for each year of  performance. For example, on one contract with performance from 2004  through 2008 and 5 divisions of the contractor claiming costs, DCAA is  required to complete 25 audits of costs incurred, one for each year of  performance per division. DCAA, however, is still completing audits for  this contractor for costs incurred in 2004 and 2005, with audits of the  remaining years scheduled for 2011 and after. DCAA officials told us that  this condition is due in part to a DCAA-wide shortage of auditors. DCAA  data indicates that from fiscal years 2000 to 2011, its workforce grew by  16 percent while DOD research and procurement spending, an indicator  of DCAA’s workload, increased by 87 percent. In addition, DCAA officials  stated that in response to GAO’s finding in 2009 on problems with  DCAA’s audit quality, including insufficient testing of contractors’ support  for claimed costs, DCAA now requires more testing and stricter  compliance with government auditing standards, which adds to the  amount of staff time required to complete each audit. DCAA officials  stated that as their workload increased and resources remained relatively  constant, auditors prioritized time-sensitive activities, such as audits to  support new awards, and incurred cost audits were not completed,  creating a backlog.
In planning for its fiscal year 2011 workload requirements, DCAA  determined that it had the resources to complete only about half of its  entire portfolio of required audits and activities, including both Iraq and  non-Iraq work. As a result, DCAA prioritized its high-risk audits, which  included the backlog of incurred audits for C3’s 106 over-age, cost-type  contracts. As of July 2011, DCAA reported that of the 116 incurred cost  audits needed to close these C3 contracts, it had completed 27 audits  and estimated another 19 audits will be completed by the end of fiscal  year 2011. The remaining 70 audits are planned to be completed after  fiscal year 2011. DCMA contracting officials responsible for closing C3’s  cost-type contracts stated that regardless of whether DCAA completes  the 19 audits as planned, none of the C3 contracts can be closed by the  end of fiscal year 2011 because most of the contractors claimed costs  through 2008 or 2009, and the audits will only be completed for costs  incurred mostly through 2004 and 2005. Further, there are an additional  31 AFCEE over-age cost-type contracts that will not have final incurred  cost audits completed before the end of fiscal year 2011.
To address its resource challenges, DCAA officials reported that it hired  over 500 new employees in the past 2 years. DCAA has also requested  authority to hire 200 auditors per year over each of the next 5 years.  DCAA officials noted, however, that it often takes several years before  auditors are properly trained to conduct an incurred cost audit. In addition,  in January 2011, DOD issued a memorandum that shifted some audit  responsibilities, such as lower dollar price proposal audits and purchasing  system reviews, to DCMA to allow DCAA to devote more resources to  high-risk work, like the incurred cost audits needed to support the  closeout of Iraq contracts. DCAA officials also stated that they plan to  dedicate additional auditors to solely focus on conducting incurred cost  audits in fiscal year 2012.
DCAA has identified a number of deficiencies at major defense  contractors, which provided support in Iraq, that need to be resolved  before the incurred cost audits can be completed. These deficiencies  include        accounting practices that are not compliant with cost accounting  inadequate incurred cost proposals and cost documentation;  inadequate contractor business systems;  standards, leading to misallocation of costs;    delays in providing DCAA access to needed records;    disputes with contractors over unallowable costs; and    other challenges, such as those due to ongoing litigation.
The following examples illustrate the challenges that DCAA reported for  several contractors.    Due to inadequate incurred cost proposals, DCAA has completed  incurred costs audits only through 2003 for one major Iraq contractor  that incurred costs through 2010. In total, DOD has $15.3 billion in  obligations on over-age, cost-type Iraq contracts awarded to this  contractor. DCAA reported that it issued the 2003 incurred cost audit  5 years after the costs were incurred, in part because the contractor  repeatedly submitted inadequate incurred cost proposals and did not  provide adequate support for costs (see fig. 2). Further, DCAA  officials stated that the incurred cost proposals submitted by the  contractor for 2004 through 2009 are inadequate but will continue its  audits of the 2004 and 2005 proposals.    Additionally, DCAA reported that this contractor had deficient  accounting systems, unresolved issues associated with unallowable  costs, noncompliant accounting practices, and legal investigations  that further delayed incurred cost audits. In 2006, DCAA reported that  the contractor had significant deficiencies in its accounting system  that resulted in the contractor charging over $370 million to incorrect  task orders from 2002 to 2004, requiring reclassification of costs to  the proper task orders. The reclassifications were completed in  January 2005. Then, in 2009 and 2010, DCAA found over  $185 million in unallowable costs that are pending negotiations with  DCMA and settlement of contractor claims. In 2010, DCAA auditors  found the contractor did not comply with the cost accounting standard  associated with insurance costs, which resulted in an estimated  $1.6 million in costs that were misallocated. DCAA reported that the  contractor did not respond to DCAA’s finding because it had not  completed its management review of the allocated costs. Further,  according to the auditors, DCAA’s incurred cost audit reports could be  delayed as the auditors coordinate the issuance of audit reports with  various investigative agencies. DCAA auditors do not expect to  complete the 2004 and 2005 incurred cost audits for this contractor  before the end of fiscal year 2011. In May 2011, the contractor  withdrew its 2006 through 2009 incurred cost proposals and stated  that it plans to delay its submission of the 2010 incurred cost proposal  until November 2011.    For another major contractor, DCAA identified that the contractor’s  accounting practices were not compliant with cost accounting  standards. DOD has $316 million in obligations on over-age, cost-type  Iraq contracts awarded to this contractor with performance between  2004 and 2009. DCAA reported in 2006 that the contractor’s  accounting practices did not sufficiently remove unallowable costs  from a cost proposal, which DCAA auditors stated put additional onus  on them to test whether the costs were allowable. In one case, DCAA  auditors found the contractor had included over $500,000 in bonuses  to senior executives in the incurred cost proposal, even though these  costs are expressly unallowable under law. The contractor disagreed  with DCAA’s findings but agreed to remove these costs from its  proposal. As of July 2011, DCAA has completed 5 of the 18 incurred  cost audits required to close the contracts.    DCAA identified deficient subcontract management systems, disputes  over unallowable costs, and challenges with access to records as  contributing to delays in completing incurred cost audits for another  contractor. DOD has $212 million in obligations on over-age, cost-type  Iraq contracts awarded to this contractor. In 2005, 2006, and 2009,  DCAA auditors reported significant deficiencies in the contractor’s  subcontract management system that resulted in potential  unreasonable and unallowable costs being billed to the government,  subcontracts being awarded noncompetitively, and inadequate price  analysis. As a result, DCAA auditors had to audit the subcontractors’  costs, even though doing so is generally the prime contractor’s  responsibility. The contractor generally disagreed with DCAA’s  findings but stated it would evaluate and revise its procedures where  necessary to comply with DCAA’s recommendations. In addition, in  2010 and 2011, DCAA auditors reported the contractor had over  $22.5 million in unallowable subcontract costs, some of which have  been appealed by the contractor and some of which are being settled  by DCMA. Finally, in 2010, DCAA auditors repeatedly requested but  were denied access to support for the 2006 incurred cost proposal,  including a $2.3 million procurement file. DCAA reported that its  auditors requested the data over a period of 5 months and stated that  when the contractor provided the data, they were still inadequate in  supporting the claimed costs. DCAA auditors stated as a result, it  deemed those costs as unallowable for reimbursement.
DOD has taken steps to address the challenges with auditing contractors’  incurred costs. For example, effective June 2011, the FAR was revised to  list the minimum information that contractors must include for proposals to  be adequate to address the delays resulting from inadequate incurred  cost proposals. Also, to improve its oversight of contractor business  systems, DOD revised the Defense Federal Acquisition Regulation  Supplement in May 2011 to more clearly define contractor business  systems, including accounting, estimating, and purchasing, and to allow  payments to be withheld from contractors if their business systems  contain significant deficiencies.
section_title: DOD Has Taken Steps to Mitigate Potential Loss or Misuse of Funds but Limited Visibility into Its Contracts Hinders Such Efforts
paragraphs: DOD has taken steps to identify unspent contract funds and recover  improper payments, but limited visibility into its contracts has hindered  such efforts. For example, DOD has deobligated some funds to make  them available to meet other DOD needs, but there remains at least  $135 million that will potentially not be available for use by DOD at the  end of fiscal year 2011. DOD generally cannot identify to which contracts  these funds are associated. Additionally, instances of improper payments  and potential fraud were sometimes found years after final deliveries were  made, but contracting personnel may not be able to recover funds owed  to the government.
subsections: section_title: DOD’s Efforts to Prioritize the Deobligation of Funds that Will Return to Treasury at the End of the Fiscal Year Are Affected by Poor Visibility into Its Contracts
paragraphs: DOD prioritizes deobligating funds that may potentially be returned to  Treasury at the end of each fiscal year so these funds would be available  for other DOD uses. DOD contracting organizations, however, have  varying degrees of visibility into the amount of funds remaining on their  Iraq contracts. Contracting organizations we met with generally could not  identify the total and unliquidated obligations associated with their Iraq  contracts, in part because the systems used to track contracting  information were not linked with systems used to track financial and  payment data. Similarly, DOD resource managers, who are responsible  for maintaining information on the availability of funding, tracked unspent  funds at the appropriation level but did not always have such information  on a contract-by-contract basis. DOD estimates that at least $135 million  in contract funding could return to Treasury by the end of fiscal year 2011  if not deobligated but there may be additional funds not yet identified (see  table 5).
C3, AFCEE, and USACE contracting organizations generally do not track  unspent funds that could be returned to Treasury on a contract-by- contract basis. As a result, resource management personnel stated they  are responsible for notifying contracting personnel of these funds.  Resource management personnel, however, reported that identifying the  appropriate contracting personnel can be time-consuming and labor- intensive, in part because of the rapid turnover of contracting personnel,  which often caused the contact information listed in the data systems to  be invalid. Contracting personnel stated that once they were aware that  funds may be potentially returned to Treasury, they took steps to prioritize  deobligating these funds, including checking whether there were pending  invoices or claims requiring payments. For example:  C3 did not maintain visibility of unspent funds at the contract level, in part  due to limitations in its contracting and financial management systems,  but available data indicate that DOD may lose $18.6 million for its use  and which will be returned to Treasury at the end of fiscal year 2011.  While C3 officials noted that some contracting officers may have tracked  unspent funds for contracts for which they were responsible, we found  that C3’s contracting data systems did not maintain such financial data.  After being delegated closeout responsibility for C3’s large, cost-type  contracts, DCMA Southern Europe undertook efforts to manually track  unspent funds on a contract-by-contract basis. DCMA personnel reported  that $15.0 million of funds that could be returned to Treasury remained on  C3’s cost-type contracts as of May 2011, but anticipated having most of  these funds deobligated by the end of July 2011. Similarly, without  visibility into which firm-fixed price contracts had unspent funds, Task  Force personnel focused their efforts on reviewing C3 contracts awarded  in fiscal year 2006 to deobligate funds but told us they do not believe they  will be able to close all of these contracts before these funds are returned  to Treasury. Resource managers at U.S. Army Central—which manages  the funds associated with C3’s contracts—stated they believe that, as of  June 2011, $3.6 million on these contracts will potentially be returned to  Treasury.
AFCEE contracting personnel stated that they generally do not maintain  visibility into AFCEE’s unspent funds at the contract level. For AFCEE’s  own contracts, contracting personnel generally deobligate funds down to  10 percent of the total obligated amount, or $100,000, whichever is less,  to pay for any additional costs that may be identified during DCAA’s  incurred cost audits. AFCEE contracting personnel reported that for these  contracts, they do not believe any funds will be returned to Treasury at  the end of fiscal year 2011. AFCEE contracting personnel stated that for  the contracts awarded on behalf of other organizations, they are notified  by the customers of unspent funds on an ad-hoc basis. AFCEE  contracting personnel stated that they prioritize the deobligation of these  funds when they are made aware of them, but do not track the total  amount of funds that may be returned to Treasury.
USACE contracting personnel stated that they do not maintain  information on unspent funds on a contract level, but rather USACE  resource managers tracked funds at the account level. For these  accounts, USACE resource managers notify contracting personnel, who  attempt to identify which contracts are associated with these funds and,  as appropriate, take steps to deobligate these funds. USACE reported,  however, that $104.9 million have not been deobligated as of March  2011. USACE personnel stated that a majority of these funds are on  contracts awaiting DCAA audits.
Conversely, ACC-RI’s LOGCAP office tracked funds that could be  returned to Treasury on a contract-by-contract basis. ACC-RI contracting  personnel stated that they hold weekly meetings with the contractor and  resource managers to reconcile financial records and identify funds that  could be deobligated. ACC-RI personnel told us that $12.3 million of  funds that could be returned to Treasury have not been deobligated as of  June 2011, but anticipated having most of these funds deobligated by the  end of July 2011.
section_title: DOD Incurred Unnecessary Costs because Improper Payments Were Discovered Late
paragraphs: In some instances, DOD discovered improper payments during the  contract closeout process years after the contractors delivered the final  good or service, but some attempts to recover overpayments were  unsuccessful and, at times, late payments to contractors resulted in  interest fees. According to DFAS personnel responsible for recovering  overpayments made on some Iraq contracts, if contracts were closed  immediately after final payments are made, overpayments could be  discovered earlier, which increases the likelihood of recovering payments.  For example, when the contractor is still conducting business with the  government, DFAS can reduce payments on one contract to offset  overpayments made on another contract. Task Force personnel noted  that for a 2005 vehicle lease contract, contracting personnel in theater  found the contractor was overpaid by over $41,000 on several invoices  and subsequently DFAS withheld payments on several of the contractor’s  other contracts to completely offset the overpayment. DFAS personnel,  however, stated that the more time that has passed from when the  contractor was mistakenly paid, the more difficult it becomes to recover  those payments because the contractor may no longer be in business  with the U.S. government or may have changed address or name. In  several instances, overpayments on contracts for goods or services  delivered in 2007 or earlier were not referred to DFAS until 2010 (see  table 6). DFAS personnel stated that in these cases, despite numerous  attempts to contact the contractor, they have yet to recover the  overpayments. As of June 2011, two of the contracts have been referred  to Treasury and one contract has been referred to another DFAS office  for further debt collection efforts.
In a few instances, Task Force personnel did not refer overpayments to  DFAS because they determined the excess payments were relatively  small in value or unlikely to be recovered. For example, Task Force  personnel found that the U.S. government overpaid a contractor by  $8,100 for trash services provided in 2006 and 2007. After unsuccessful  attempts to contact the contractor, Task Force personnel closed the  contract in 2009, noting that so much time had passed since the final  payment that it was unreasonable to expect that the overpayment could  be recovered.
C3 is unable to mitigate the amount of interest payments that may be  associated with late payments because the contracting and financial  management systems cannot identify which contracts still require  payment, especially for contracts awarded between 2003 and 2007. Task  Force personnel stated that given the limitations of these systems, they  must review the contract file to determine whether a contract requires  additional payment. For example, while closing a $94,500 contract for  vehicle lease services in Iraq, Task Force personnel discovered the  contractor may not have been paid for 2 months’ worth of vehicle lease  services, so the Task Force is attempting to contact personnel in theater  to confirm whether services were rendered. Additionally, some contracts  requiring final payments were not paid until years after the final delivery,  which resulted in interest payments. DFAS personnel reported that DFAS  has paid $2.8 million in interest payments on Iraq contracts as of June  2011, though it is not possible to determine the amount of interest  payments associated with over-age contracts.
DOD took steps to improve its payment processes in Iraq, but some  challenges with timely payments remain. According to DFAS officials, in  2008, DFAS became responsible for making payments for contracts  awarded in theater with obligations of $25,000 or more and in 2010 DFAS  and C3 agreed to lower this threshold to $3,000. DFAS officials stated  this decision was made to improve internal controls by ensuring that  adequate documentation was available before payments are made in  theater. DFAS officials noted, however, there were some payment delays  because payment documentation requirements were not always met. One  C3 official noted that these payment processing delays led to some Iraqi  vendors being unwilling to do business with the U.S. government and  walking off job sites. C3’s commanding general stated that when  contracts are not closed out and vendors have not been paid for goods  and services that they provided to the U.S. government, this contributes  to negative perceptions about Americans.
Finally, late contract closeouts may hinder efforts to identify and address  potential fraud found on the C3 contracts because they were reported to  investigators years after the potential fraudulent activities took place and  the contract files were poorly maintained. As Task Force personnel  reviewed and closed C3 contracts, they identified 151 contracts with  potential fraudulent activities and referred these contracts to the Army’s  Criminal Investigations Division. For example, in one contract for a cable  fiber network, Task Force personnel stated that they found evidence that  the contracting officer had made a payment of $84,000 in cash, but the  contractor’s invoice was only for $64,000. There was no documentation in  the file to account for the $20,000 difference between the disbursement  and invoice, so Task Force personnel referred this case to the Army’s  criminal investigators. According to an Army investigator, it was difficult to  determine whether this case and other cases were due to fraudulent  activity or contracting errors, in part because the contracts did not have  enough documentation to build a case. Furthermore, the Army  investigator stated that many of the referred contracts had been awarded  many years ago so following up on these cases has been challenging, as  many of the contracting personnel and contractors involved are no longer  available.
section_title: Growing Backlog of Afghanistan Contracts Suggests Problems Related to Closing Contracts Will Continue
paragraphs: DOD reported that actions are underway to address the lessons learned  in Iraq, including developing deployable contract management systems  and explicitly requiring that contract closeout requirements be  incorporated into contingency contracting planning documents. DOD  officials acknowledge, however, they are likely to face similar problems  with closing contracts awarded to support efforts in Afghanistan. For  example, the backlog of C3’s Afghanistan contracts that need to be  closed is growing steadily, but the Army’s capacity to close these  contracts in the United States remains in question due to challenges with  transitioning closeout responsibilities from the Task Force to ACC-RI.
subsections: section_title: DOD Has Identified and Addressed Some of the Problems Associated with Closing Iraq Contracts
paragraphs: In October 2010, as part of the Army’s Operational Contract Support  Lessons Learned Program, C3 identified lessons learned from contracting  in Iraq between 2005 and 2010. As part of this effort, C3 identified the  need to improve and consolidate data management, improve contract  oversight, and increase emphasis on contract administration and  closeout. DOD officials told us they had already implemented or planned  new practices, as the following examples illustrate.    C3 officials noted that they had implemented the Standard  Procurement System in both Iraq and Afghanistan to better document  information on contracts awarded during and after fiscal year  2009 and have worked to improve the data input into the system.  Defense Procurement and Acquisition Policy officials and a  representative from the Joint Chiefs of Staff told us they are also  identifying and developing deployable contract writing and  management systems with the intent that one day contingency  contracting personnel will use the same contract management tools in  theater that are used in the United States.    C3 also identified that contract oversight was a historic problem and  noted the need to ensure contracting officer’s representatives fulfilled  their oversight responsibilities. In March 2010, the Under Secretary of  Defense for Acquisition, Technology and Logistics issued new  certification requirements for contracting officer’s representatives to  ensure they are experienced and trained before they are appointed to  oversee contractor performance. In June 2011, we reported, however,  that DOD personnel in Afghanistan were not always fully prepared for  their roles and responsibilities to provide adequate oversight there.    Defense Procurement and Acquisition Policy has also issued and  since updated the Defense Contingency Contracting Handbook, which  includes reference material to ensure contingency contracting officers  maintain proper contract documentation and complete closeout  duties. For example, the handbook includes guidance on the essential  documents that should be in a contract file, identifies steps to ensure  contracts are properly enumerated to avoid duplicate contract  numbers, and recognizes the need to close contracts as soon as  possible.
Finally, DOD is in the process of determining how it will address the  problems C3 attributed to a lack of planning for the contracting  requirements in Iraq. A senior C3 official recommended that operational  campaign plans include a contracting annex, such as an Annex W. In  such cases when an Annex W would be required, we found that Joint  Publication 4-10 and DOD’s Annex W guidance do not fully address the  need to plan for contract closeout requirements—including identifying  responsibilities, either in or outside of theater, for closing contracts.  United States Forces-Iraq issued an Annex W in 2011, which included  directions for personnel to take steps to close contracts in Iraq, well after  C3’s backlog of contracts was identified. Representatives from the Joint  Chiefs of Staff responsible for revising Joint Publication 4-10 and the  Annex W guidance recognize the need to incorporate more specific  language on the need to plan for contract closeout during the contingency  contracting planning process. These officials stated that they plan to issue  new Annex W guidance by the end of 2011 and intend to add more  specific language regarding contract closeout.
section_title: Steadily Increasing Backlog of C3’s Afghanistan Contracts Suggests Closeout Problems May Persist
paragraphs: As was the case in Iraq, C3 officials stated that prior to the build-up of  forces in Afghanistan, contract closeout was a challenge because there  were not enough contracting personnel in theater to meet competing  contracting demands. To address its backlog of contracts awarded before  fiscal year 2009, C3 delegated responsibility for closing at least  22,597 Afghanistan inactive contracts to the Task Force. Task Force  data indicate that 3,510, or about 16 percent, of these contracts have  been reviewed as of April 2011. Task Force personnel stated that they  faced the same challenges with closing the Afghanistan contracts as  those associated with the Iraq contracts, such as poor contract  documentation and improper payments.
According to C3’s commanding general and senior contracting officials,  these challenges were exacerbated during the build-up of U.S. military  personnel in Afghanistan, and the focus remains on meeting the  warfighter’s needs. C3 officials told us the number of contracting officers  in Afghanistan increased from about 60 in 2008 to about 200 in  April 2011. In part, this increase in personnel enabled C3 to close over  18,600 contracts awarded between fiscal years 2009 and 2011. Despite  these efforts, however, the number of contracts eligible to be closed  continues to grow. For example, as of April 2008, C3 data indicated that  1,471 Afghanistan contracts remained in theater that were eligible but  over age for closeout. As of May 2011, the number of contracts eligible  but over age for closeout has increased to over 16,900 contracts.  Additionally, C3 will have to close over 7,000 other contracts awarded  during this period that are eligible but not yet over age for closeout. C3  officials told us they expect that more Afghanistan contracts will be  transferred out of theater to be closed by ACC-RI, likely after much of the  remaining Iraq contracts are closed. As previously noted, however, the  Army’s ability to close contracts remains in question due to challenges  with transitioning closeout responsibilities to ACC-RI.
section_title: Conclusions
paragraphs: Contract closeout is a key step to ensure the government receives the  goods and services it purchases at the agreed upon price and, if done in  a timely manner, provides opportunities to utilize unspent funds for other  DOD needs. In Iraq, however, contract closeout was often an afterthought  or was done as time permitted. The complications DOD has faced with  closing its Iraq contracts underscore the importance of advanced planning  to close contracts awarded in a contingency environment, encouraging a  greater command emphasis on completing and overseeing administrative  requirements, establishing a process to provide better management  visibility and insight into contracting efforts, and ensuring that DOD’s  contracting workforce has the capacity to provide appropriate contract  administration and contractor oversight. Meeting warfighter needs is  paramount, but doing so does not lessen the need to ensure that  contracts are properly administered and executed.
DOD’s recognition in 2008 that it needed to address the backlog of  contracts that are over age for closeout and its establishment of the Task  Force came too late in the operation to make a significant difference in  closing contracts within the required time frames. By not fully  understanding the scope of the backlog and waiting to address it, DOD  underestimated the efforts required to close these contracts. Further, the  limited visibility provided by the contracting and financial management  systems hindered DOD’s ability to identify and address improper  payments. Challenges with transitioning closeout responsibilities to ACC- RI appear to have hindered the progress the Army had made in closing its  Iraq contracts. With over 100,000 C3 Iraq and Afghanistan contracts that  need to be reviewed and closed, as appropriate, further delays in closing  these contracts can be expected. Finally, closing the large cost-type  contracts is further hindered by DCAA’s shortage of auditors and  problems with contractor accounting practices. DOD has recognized the  need to increase DCAA’s staffing and address contractor business  systems, but fully implementing these initiatives will take several years.
section_title: Recommendations for Executive Action
paragraphs: To help address the current backlog of contracts supporting the efforts in  Iraq and Afghanistan that need to be closed out, we recommend that the  Secretary of Defense direct the Secretary of the Army to take steps to  ensure ACC-RI’s planned resources are adequate to meet forecasted  closeout demands.
To help improve DOD’s ability to manage the closeout of contracts  awarded in support of future contingencies, we recommend that the  Secretary of Defense, in coordination with the Chairman of the Joint  Chiefs of Staff, take the following two actions:  revise DOD’s contingency contracting doctrine and guidance to reflect  the need for advanced planning for contract closeout; and  require senior contracting officials to monitor and assess the progress  of contract closeout activities throughout the contingency operation so  steps may be taken if a backlog emerges.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report. DOD concurred  with the three recommendations and identified a number of ongoing and  planned actions to address them. For example, DOD noted that Army  Contracting Command-Rock Island will utilize contractors and explore  additional options, such as the Wounded Warrior program, to assist in  closing contracts. DOD also noted that it recently amended the Defense  Federal Acquisition Regulation Supplement and provided additional  guidance to DOD personnel to underscore the need to understand the  unique requirements and considerations associated with planning and  executing contingency contract administration services in contingency  operations. DOD also plans to further revise its guidance to address the  need for contracting officers to do advance planning for closeout of  contracts performed in contingency areas. DOD also indicated it intends  to issue a revised Joint Publication 4-10, its contingency contracting  planning doctrine, in June 2012 to reflect the need for such planning.  DOD also provided technical comments, which were incorporated as  appropriate. DOD’s comments are reprinted in appendix II.
We are sending copies of this report to the Secretary of Defense, the  Secretaries of the Army and Air Force; the Under Secretary of Defense  (Acquisition, Technology, and Logistics); the Director, Defense  Procurement and Acquisition Policy; the Under Secretary of Defense  (Comptroller) and Chief Financial Officer; the Chairman, Joint Chiefs of  Staff; the Commander, U.S. Central Command; the Director, Defense  Contract Audit Agency; the Director, Defense Finance and Accounting  Service; and interested congressional committees. In addition, the report  will be made available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To assess the Department of Defense’s (DOD) efforts to close its Iraq  contracts, under the authority of the Comptroller General to conduct  evaluations on his own initiative, we examined the (1) total number of its  contracts with performance in Iraq that are eligible for closeout and the  extent to which DOD closed these contracts within required time frames,  (2) factors that contributed to contracts not being closed within required  time frames, (3) steps DOD took to manage the financial risks associated  with not closing contracts within required time frames, and (4) how DOD  captured and implemented lessons learned from closing its Iraq contracts.
To determine the number and value of DOD’s Iraq contracts eligible for  closeout and the extent to which DOD will close these contracts within  required time frames, we reviewed the Federal Acquisition Regulation  (FAR) and the Defense Federal Acquisition Regulation Supplement which  provide the time frames and the procedures for closing contracts. For the  purpose of our review the term contracts refers to all base contracts, task  orders, and blanket purchase agreement call orders. We obtained  contract data from four DOD organizations which our prior work indicated  had been responsible for awarding the majority of contracts with  performance in Iraq: CENTCOM Contracting Command (C3), Army  Contracting Command-Rock Island (ACC-RI), US Army Corps of  Engineers (USACE), and Air Force Center for Engineering and the  Environment. These organizations may retain responsibility for  administering and closing the contracts they awarded, or may they may  delegate such responsibilities to another organization. In those instances,  we obtained contract data from that organization, which includes Defense  Contract Management Agency, ACC-RI, and C3’s Contract Closeout  Task Force Office (Task Force). From each organization, we requested  the following data for contracts for which they are responsible: contract  and order numbers, period of performance, contract type, contract status,  total obligations, total unliquidated obligations, and physical completion  dates. We identified contracts that were eligible for closeout and over age  for closeout based on the time frames established in the FAR. We also  identified contracts that did not have complete data to determine eligibility  for closeout, but we determined these contracts to be eligible and over  age according to data available. We assessed the reliability of these data  reported by the contracting organizations through interviews with  knowledgeable officials and electronic data testing for missing data,  outliers, and obvious errors within each database. While we found that  C3’s contract data from fiscal years 2003 through 2008 were generally  unreliable for determining the closeout status of contracts, they were  sufficiently reliable for determining the minimum number of contracts  awarded during this time period. We did not evaluate or assess the  reliability of the financial management systems used to provide financial  data for the purpose of our review. We also did not independently  evaluate whether DOD closed individual contracts in accordance with the  procedures outlined in the FAR or other DOD guidance.
To identify the factors that contributed to contracts not being closed within  FAR-required time frames, we analyzed data provided by and interviewed  officials at each of the contracting organizations and the Defense Finance  and Accounting Service (DFAS), which is responsible for making  payments on some of the Iraq contracts. To understand any challenges  faced by DOD contracting personnel in closing individual contracts, we  reviewed contract documents for 25 firm-fixed price contracts purposefully  selected to obtain a variety of closeout organizations and a range of  closeout difficulty and interviewed contracting personnel on their  experiences with closing them. We also reviewed Task Force and ACC- RI closeout data to assess the Army’s ability to close C3’s contracts. In  addition, to identify the factors that affected the closeout of cost-type  contracts, we interviewed personnel at each of the contracting  organizations. In addition, we purposefully selected eight contractors with  varying amounts of over-age cost-type contracts, obligations on contracts,  and remaining unliquidated obligations and reviewed DCAA’s incurred  cost and other audit reports for these contracts, and interviewed DCAA  officials at headquarters and eight field offices to determine the factors  affected their ability to complete the audits. We also reviewed Joint  Publication 4-10; the Defense Contingency Contracting Handbook; and  the Defense Contract Management Agency’s contract closeout guidance  and handbook to assess the guidance provided to DOD contracting  personnel regarding the need to plan the contract closeout process.
To determine the steps DOD has taken to manage the financial risks  associated with not closing contracts within FAR time frames, we  reviewed the DOD Financial Management Regulation and each  contracting office’s closeout guidance. We also interviewed contracting  and financial management personnel at the Office of the Under Secretary  of Defense, Comptroller; Office of the Assistant Secretary of the Army,  Financial Management & Comptroller; U.S. Forces – Iraq, Force Structure  Resources and Assessment (J-8); U.S. Army Central Command; and  USACE. In addition, we analyzed unliquidated obligation data provided by  both the contracting personnel and financial management personnel to  determine how these funds were managed. To determine the steps DOD  has taken to manage other risks of not closing contracts timely, we  reviewed data and interviewed officials from C3; the Task Force; DFAS,  which is responsible for collecting overpayments and tracking interest  payments; and the Army’s Criminal Investigations Division, which is  responsible for investigating instances of fraudulent activity found in  contracts.
To assess the extent to which DOD captured and implemented lessons  learned from closing contracts in contingency operations, we interviewed  contracting officials at each of the organizations we visited to identify any  lessons learned and reviewed documentation when available. We also  interviewed senior contracting officials in Iraq and Afghanistan to identify  any changes made in response to the lessons learned from closing the  C3 contracts. We reviewed DOD’s current contingency contracting  doctrine and guidance, and interviewed officials from the Joint Chiefs of  Staff who are responsible for revising the doctrine and guidance. We also  interviewed officials from the Office of Under Secretary of Defense for  Acquisition, Technology, and Logistics’ Office of Defense Procurement  and Acquisition Policy and the Office of the Deputy Assistant Secretary  for the Army (Procurement) to identify any policy changes that may result  from the lessons learned in Iraq. We obtained and reviewed C3 data on  the total number of its Afghanistan contracts eligible and over age for  closeout to assess its ability to close these contracts.
We conducted this performance audit from July 2010 through September  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the individual named above key contributors to this report  were Timothy DiNapoli, Assistant Director; Johana Ayers; Noah Bleicher;  Seth Carlson; Morgan Delaney-Ramaker; Justin Jaynes; Julia Kennon;  John Krump; Claire Li; Anne McDonough-Hughes; and Roxanna Sun.