Army Corps of Engineers: Improved Monitoring and Clear Guidance Would Contribute to More Effective Use of Continuing Contracts
Published: 2006-09-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Army Corps of Engineers (Corps) is authorized under the River and Harbor Act of 1922 to issue contracts with a continuing contracts clause to carry out certain projects. This allows the Corps to award multi-year contracts without having received appropriations to cover the full contract amount. The Corps has used these contracts for decades, but modified their use in 2005, in response to congressional committee concerns that their use may have been ineffective. GAO was asked to determine (1) the number and dollar amount of continuing contracts the Corps awarded during fiscal years 2003?2005; (2) the circumstances in which the Corps used continuing contracts in fiscal years 2003-2005; and (3) how the Corps' process for approving and using continuing contracts changed since 2005, and whether the changes reduced the use of these contracts. For these objectives, GAO reviewed the Corps' contracting data, a random sample of 107 continuing contracts, and districts' requests to use continuing contracts
section_title: What GAO Found
paragraphs: The Corps does not know how many continuing contracts it awarded in fiscal years 2003-2005 or the dollar value of these contracts, because it does not track information on the contracts awarded with a continuing contracts clause. Although the Corps was directed to provide the appropriations committees with quarterly reports on their use of continuing contracts in fiscal year 2006, GAO found that the information was inaccurate. For example, at least 13 continuing contracts were missing from the reports and 10 continuing contracts had inaccurate values. Because the Corps could not provide information on the number of continuing contracts awarded for fiscal years 2003-2005, GAO analyzed the Corps' contracting data and determined that 1,592 contracts awarded in these 3 years most likely included and used a continuing contracts clause. These contracts were expected to cost more than $3.96 billion when awarded and would generally be funded to cover the full contract amount (fully funded) pursuant to requirements of the Antideficiency Act. However, continuing contracts are exempt from the act. Consequently, the Corps only obligated $655 million when it awarded these contracts, leaving an outstanding commitment of about $3.30 billion to be covered by future years' appropriations. During fiscal years 2003?2005, the Corps' standard operating practice was to include a continuing contracts clause in most contracts. As a result, many continuing contracts were used for short term and low dollar value contracts. The Corps might have been able to fully fund some of these contracts if, at the time of award, the Corps had adequate appropriations to cover the contract amount. For example, for the 107 continuing contracts GAO reviewed, about one-third were valued at less than $1 million. In only 8 of 107 continuing contracts that GAO reviewed, the contract value was more than $10 million and involved work that required more than 12 calendar months to complete. The Corps also used continuing contracts extensively to move funds among projects and help meet its policy of expending all available appropriations in the fiscal year appropriated. For fiscal years 2003-2005, GAO found that over half of the contracts reviewed were awarded during the last quarter of the fiscal year as continuing contracts with little or no associated obligations, thereby shifting the obligations to pay for these contracts into future years. The Corps responded to congressional committee direction in 2005 and again in 2006 to monitor the use of continuing contracts by, among other things, requiring districts to obtain headquarters' approval before using such contracts. The new processes reduced the use of continuing contracts, but have not prevented the approval of continuing contracts for short-term, low dollar value contracts. This occurred because the Corps established criteria on when contracts should be fully funded, but did not establish criteria for when continuing contracts should be used.

section_title: Letter
paragraphs: Each year, Congress provides funding to the U.S. Army Corps of  Engineers’ (Corps) Civil Works program to plan, construct, operate, and  maintain a wide range of water resources projects. During fiscal years  2005 and 2006, the Corps received annual appropriations of more than $4  billion for such projects. Water resources projects often take more than 1  fiscal year to complete, and the Corps usually relies on one or more  contractors to complete these projects. Generally, agencies are required to  obligate appropriations for all costs expected to be incurred at the time of  award (i.e., fully fund contracts). However, the River and Harbor Act of  1922 provides the Corps a unique authority to use what is referred to as a  “continuing contract” to carry out certain projects. The Corps’ continuing  contracts authority allows it to enter into, and commit the federal  government for, the full amount of contracts that span more than 1 fiscal  year—even though the Corps may not have sufficient funds to cover the  full contract amount at the time the contract is awarded. For example, the  Corps could award a 3-year, $12 million continuing contract even if it only  had appropriations to cover the first year’s work; the funds needed to  cover the remaining contract amount would be obligated to subsequent  years’ appropriations. A continuing contract contains a continuing  contracts clause that allows contractors to continue work on a project  even when appropriations are not available. When funding becomes  available, the Corps is committed to pay all of the outstanding costs  incurred by the contractor for work performed under the contract, as well  as any interest that may have accrued on these outstanding balances.
A provision of law enacted in the Water Resources Development Act of  1999 requires the Corps to use continuing contracts for certain water  resources projects for which sufficient funds are not available to complete  the project. However, in the conference report accompanying the Corps’  2004 appropriations, the conference committee noted its concerns about  the Corps’ policy of allowing contractors to choose their own pace for  working on continuing contracts, which effectively allowed contractors,  rather than the Corps, to determine how future appropriations would be  allocated. In fiscal year 2005, the conference committee noted that  continuing contracts are to allow the Corps to award large construction  elements of a project to take advantage of the economies of scale and  allow these large elements to be efficiently managed over several years.  The committee reiterated its past concerns that the Corps’ construction  projects may have used continuing contracts ineffectively.
In this context, you asked us to determine (1) the number and dollar  amount of continuing contracts the Corps awarded during fiscal years  2003–2005; (2) the circumstances in which the Corps used continuing  contracts in fiscal years 2003–2005; and (3) how the Corps’ process for  approving and using continuing contracts changed since 2005, and  whether these changes have reduced the use of these contracts.
To address these objectives, we analyzed the Corps’ contracting data for  Civil Works fixed-price and indefinite-delivery contracts (both  construction contracts and operation and maintenance contracts) for  fiscal years 2003–2005. Of the contracts we reviewed, we identified all of  the contracts for which the Corps did not obligate the full contract amount  (i.e., partially funded). We excluded from our analysis contracts that the  Corps identified as incrementally funded contracts. We assessed the  reliability of the Corps’ data and found that they were sufficiently reliable  for our use. In addition, we reviewed 107 randomly selected continuing  contract files from three Corps districts. The districts we selected used a  large number of continuing contracts and were located in divisions that  awarded a large percentage of continuing contracts in fiscal years 2003– 2005. We also reviewed Corps guidance for approving and using  continuing contracts before and after 2005, when the Corps revised its  process. We surveyed all eight Corps divisions to determine the total  number of continuing contract requests that were approved and denied by  Corps headquarters after the Corps revised its process. We performed our  work between December 2005 and July 2006, in accordance with generally  accepted government auditing standards. Appendix I provides a detailed  description of our scope and methodology.
subsections: section_title: Background
paragraphs: The Corps’ Civil Works program is responsible for planning, developing,  and maintaining the nation’s water and related environmental resources.  The Corps’ headquarters is in Washington D.C.; eight regional divisions  and 38 districts carry out its domestic civil works responsibilities.
Each year the Corps’ Civil Works program receives funding through the  Energy and Water Development Appropriations Act. The act normally  appropriates a sum for water resources projects to several different  appropriations accounts, including construction; operation and  maintenance; and flood control, Mississippi River and tributaries. The  construction account finances construction and major rehabilitation  projects that relate to navigation, flood control, water supply,  hydroelectric power, and environmental restoration. The operation and  maintenance account finances the preservation, operation, maintenance,  and care of existing river and harbor, flood-control, and related activities  at the projects that the Corps operates and maintains. The flood control,  Mississippi River and tributaries account provides flood protection for the  alluvial valley of the Mississippi River from Cape Girardeau, Missouri, to  the Head of Passes, Louisiana; and improvement of the Mississippi River  for navigation from Cairo, Illinois, to Baton Rouge, Louisiana. Table 1  shows the appropriations received in fiscal years 2003–2005 for these  accounts.
The conference report accompanying the Energy and Water Development  Appropriations Act generally lists individual projects and designates  amounts for each project. Through this report, the appropriations  committees essentially establish their priorities for the Corps’ water  resources projects. In recent years, Congress has appropriated less  funding than the sum of the amounts designated to individual projects in  the conference report. Districts are responsible for executing projects.
The Corps receives “no year” appropriations that remain available until  spent. As part of the budget process, the Corps has historically requested  appropriations from Congress to cover only those contract payments  expected to be made in the upcoming fiscal year; it generally has not  requested appropriations to fully fund its Civil Works contracts. According  to the Corps, to comply with congressional direction that the agency give  careful consideration to the disposition of appropriated funds to ensure  that they are applied effectively, and that the agency effectively move  (reprogram) funds from projects that are not moving forward, the Corps  developed policies and business practices to expend all available  appropriations in the fiscal year appropriated and thereby minimize  carrying appropriated funds over to following years. In fiscal year 2006,  again in response to changing congressional direction in the Energy and  Water Development Appropriations Act and the accompanying conference  report, the Corps modified its program execution process to focus on  expending funds only on the projects for which they were specified, even  if the appropriated funds could not be completely expended in the fiscal  year, and minimizing reprogramming unless it was absolutely essential.  Consequently, a higher level of carry-over balances is anticipated starting  in fiscal year 2006. The Corps has also stated that it will begin requesting  sufficient appropriations to fully fund most contracts beginning in fiscal  year 2008.
The Corps primarily uses fixed-price and indefinite-delivery contracts to  complete its work. Fixed-price contracts are awarded for a specific price,  regardless of the final cost to the contractor. If the contract is completed  for less than the fixed price, the contractor benefits from greater profits; if  the costs exceed the fixed price, then the contractor bears the loss.  Indefinite-delivery contracts allow the Corps to obtain services or supplies  through multiple task or delivery orders, as needed, to carry out project  construction, and operation and maintenance activities.
subsections: section_title: History of the Corps’ Continuing Contracts Authority
paragraphs: Starting with the River and Harbor Act of 1892 and continuing  intermittently through the River and Harbor Act of 1916, Congress gave the  Corps authorization to enter into contracts to complete a limited number  of projects even though the Corps did not have appropriations to cover the  full contract amounts. In 1922, the Corps sought and received from  Congress permanent authority to enter into these types of “continuing  contracts.” The River and Harbor Act of 1922 gave the Corps authority to  use continuing contracts for specifically authorized projects on canals,  rivers, and harbors.
When the Corps sought its 1922 authority to use continuing contracts, it  stated that this authority would enable it to enter into contracts that  exceeded the amount of funding that had been appropriated. At that time,  the Corps noted that the continuing contract option would be  advantageous for some projects—such as a lock and dam project that  required several million dollars and 3 to 4 years to complete—because it  would help avoid tying up appropriations over a long period of time and  carrying large sums of unexpended appropriations for several years. The  Corps also noted that awarding contracts with a larger scope of work that  covered several years would help encourage active competition among  contractors.
Since 1922, the Corps has used its continuing contracts authority to  varying degrees for different types of projects and activities. In recent  years, Congress has provided both guidance and specific direction to the  Corps on how to use continuing contracts. These include the following:    The Water Resources Development Act of 1999. Congress broadened the  types of projects and work covered by the Corps’ continuing contracts  authority. Specifically, it directed the Corps to award continuing contracts  if sufficient funding was not available to complete a project funded from  the construction; operation and maintenance; or flood control, Mississippi  River and tributaries appropriations accounts.
The Energy and Water Development Appropriations Act of 2004. Congress  included a provision, not limited to fiscal year 2004, to also allow the use  of continuing contracts for those contracts that were funded from the  investigations appropriations account. The investigations account is used  to collect and study basic information for, among other things, river and  harbor and flood control activities; miscellaneous investigations; and  surveys and detailed studies for projects before construction.
The committee report accompanying the Corps’ fiscal year 2005  appropriations. The conference committee expressed concern about the  Corps’ use of continuing contracts and noted that continuing contracts are  to allow the Corps to award large construction elements of a project and  take advantage of the economies of scale and allow these large elements  to be efficiently managed over several years.
The Energy and Water Development Appropriations Act of 2006. Congress  included a provision that modifies the types of projects and work for  which the Corps is required to use a continuing contract. The provision,  not limited to fiscal year 2006, states that the requirements regarding the  use of continuing contracts in the Water Resources Development Act of  1999 shall apply only to projects funded from the operation and  maintenance account and the operation and maintenance subaccount of  the Mississippi River and tributaries account. The 2006 act also prohibits  the Corps from entering into a continuing contract or modifying an  existing contract that commits an amount for a project “in excess of the  amount appropriated for such project pursuant to this act.”
The Corps’ continuing contracts contain either a “basic clause” or an  “alternate clause.” Districts may only use the basic continuing contracts  clause for those contracts awarded for congressionally authorized Civil  Works water resources projects, which are typically authorized in a Water  Resources Development Act. The alternate clause can be used for projects  that are not specifically authorized, but are covered by the Continuing  Authorities Program. The Corps’ continuing contracts authority applies to  specific types of projects, which do not include water-related  environmental infrastructure and resource development projects, such as  wastewater treatment, water supply, storm water retention and  remediation, environmental restoration, and surface water resource  protection and development. Districts historically made the decision to  use continuing contracts without oversight from the division or Corps  headquarters.
In our prior reports on governmentwide funding practices, we have  observed that full funding for capital asset acquisitions is the best way to  ensure that all financial decisions are fully accounted for and recognized  as part of the budget process, and that full funding also helps ensure that  governmentwide fiscal control is maintained. Unlike a project started with  a partially funded continuing contract, an agency receives budget  authority for the project’s full estimated costs before a commitment is  made for a fully funded capital project. Otherwise, distortions in resource  allocations can result when the full costs of the commitments are not  recognized at the time budget decisions are made.
section_title: The Corps Cannot Accurately Identify How Many Continuing Contracts It Has Awarded because It Does Not Track These Contracts
paragraphs: The Corps does not track information on the number of contracts that it  awards with a continuing contracts clause; therefore, it could not identify  the number or the dollar value of such contracts awarded in fiscal years  2003–2005. Because the Corps does not track its use of continuing  contracts, the quarterly reports it submitted to the appropriations  committees in fiscal year 2006, on the use of such contracts, were  inaccurate. We independently identified the number of continuing  contracts awarded by the Corps in fiscal years 2003–2005 by reviewing the  agency’s contracting data, and we determined that 1,592 (about 10  percent) of all contracts awarded during this 3-year period most likely  included and used a continuing contracts clause. These 1,592 contracts  accounted for more than 60 percent of the Corps’ annual obligations for  new contracts awarded during these 3 years.
subsections: section_title: The Corps Does Not Track Its Use of Continuing Contracts
paragraphs: The Corps does not systematically track the extent to which it uses a  continuing contracts clause, and could not provide reliable information on  the number of continuing contracts awarded in fiscal years 2003–2005 or  the dollar value of these contracts. Moreover, according to Corps officials,  nearly all multi-year contracts awarded by the Corps prior to fiscal year  2005 routinely included a continuing contracts clause, and the agency had  no requirement for districts to track when this clause was actually used.
In fiscal years 2005 and 2006, the conference committees, in the reports  accompanying the Corps’ appropriation acts, directed the Corps to  monitor its use of continuing contracts. The Corps was also directed to  provide the appropriations committees with a quarterly report on the  agency’s use of such contracts, starting in fiscal year 2006. Because the  Corps does not have a tracking system for continuing contracts, it  gathered the information submitted in the two quarterly reports for fiscal  year 2006 by asking each division to provide information on their existing  continuing contracts and expected obligations for the federal costs  associated with these contracts. We reviewed these two quarterly reports  and determined that they included inaccurate information. For example,  we found at least 13 continuing contracts that were missing from the  reports sent to the committees, and we found wrong contract values (the  expected total costs for a contractor to complete the work) listed for 10  contracts.
section_title: Continuing Contracts Most Likely Accounted for About 10 Percent of All Contracts Awarded by the Corps in Fiscal Years 2003– 2005
paragraphs: Our analysis of the Corps’ contracting data indicates that the Corps  awarded 16,532 fixed-price and indefinite-delivery contracts (both  construction contracts and operation and maintenance contracts) during  fiscal years 2003–2005. According to Corps officials, the agency included a  continuing contracts clause in most of its multi-year contracts. However,  most of the 16,532 contracts were fully funded and, therefore, would not  have needed to use a continuing contracts clause even if it was included in  the contract. We found 1,592 of the 16,532 contracts (about 10 percent)  were partially funded contracts at award and, therefore, most likely would  have included and used a continuing contracts clause. The 1,592 contracts  included 402 contracts that were partially funded at award but were fully  funded by the end of the first fiscal year. The 1,592 contracts accounted  for more than 60 percent of the Corps’ annual obligations for new  contracts awarded during these 3 years. The full costs to the federal  government of the 1,592 contracts were more than $3.96 billion at award.  However, the Corps only obligated $655 million to current appropriations  when these contracts were awarded; the outstanding commitment at the  time of award was about $3.30 billion, and the Corps expects to obligate  this amount to subsequent years’ appropriations. Table 2 summarizes the  total number and full costs to the federal government of continuing  contracts awarded during fiscal years 2003–2005.
Other characteristics that we identified for these 1,592 continuing  contracts included the following:    All 38 districts used at least one continuing contract during fiscal years  2003–2005. Five districts—Jacksonville, Vicksburg, Memphis, Walla Walla,  and Portland—awarded only about 2.8 percent of the total number of  contracts for this time period, but accounted for about 30 percent of the  continuing contracts.
About 65 percent of the continuing contracts were valued at $1 million or  less; 26 percent were valued at between $1 million and $5 million; 5  percent were valued between $5 million and $10 million; and 4 percent  were valued at more than $10 million.
Several appropriations accounts funded these continuing contracts.
About 54 percent of the obligations were from the construction account;  25 percent from the operation and maintenance account; 7 percent from  the flood control, Mississippi River and tributaries account; 9 percent from  the Inland Waterway Trust Fund; and 6 percent from other accounts.
When contractors continue to work even after appropriations are not  available, the Corps is committed to pay all of the outstanding costs  incurred by the contractor and any interest that may have accrued on  these outstanding balances. The Corps could not provide data on the  interest it paid in fiscal year 2003 for these continuing contracts, but for  fiscal years 2004 and 2005, the Corps paid about $497,000 and $288,000 in  interest payments, respectively. Monthly interest payments on these  contracts ranged from about $1 to more than $76,000 for individual  districts.
Continuing contracts were generally used more often for fixed-price  contracts than for indefinite-delivery contracts. About 50 percent of fixed- price contracts were continuing contracts, compared to only about 5  percent of indefinite-delivery contracts. The full costs to the federal  government of fixed-price continuing contracts ranged from about $21,000  to more than $564 million, while indefinite-delivery continuing contracts  ranged from as small as $12,000 to more than $22.5 million. The median  dollar value of all 1,592 continuing contracts was about $440,000; the  median value of the fixed-price continuing contracts was about $1.2  million; and the median value of the indefinite-delivery continuing  contracts was about $147,000.
Appendix II provides more information on the characteristics of the  continuing contracts that we identified for fiscal years 2003–2005.
section_title: Prior to 2005, the Corps Routinely Included a Continuing Contracts Clause in Most Contracts
paragraphs: The Corps’ routine practice was to include a continuing contracts clause in  most of the contracts it awarded during fiscal years 2003–2005. According  to the Corps, this occurred, in part, because a provision of the Water  Resources Development Act of 1999 requires the agency to use continuing  contracts for certain projects if sufficient funding is not available to  complete the project. The Corps interpreted this provision to mean that, if  sufficient funds were not available to complete the entire project, then all  contracts associated with the project must be continuing contracts. The  Corps’ interpretation of this provision resulted, in our opinion, in the  overuse of the continuing contracts authority because the provision does  not require all contracts awarded for a given project to be continuing  contracts. The Corps might have been able to fully fund some short-term,  low dollar value contracts if, at the time of award, the Corps had adequate  appropriations to cover the contract amount. Moreover, the Corps relied  on its use of continuing contracts to help meet its policy of not carrying  over unexpended appropriations into future fiscal years. By routinely  including a continuing contracts clause into all of its contracts, the Corps  could more easily move funds among contracts at the end of the year.  Appropriations that could not be expended on a contract would be  obligated to a contract that could expend the funds. In addition, districts  cited a variety of other reasons for a large number of continuing contracts  being awarded at the end of the fiscal year.
In the late 1990s, large carry-over amounts of unexpended Corps  appropriations at the end of each fiscal year became a concern to  Congress. Through a provision of the Water Resources Development Act  of 1999, Congress instructed the Corps to use continuing contracts for  certain water resources projects if sufficient funding was not available to  complete the project—in effect, this made permanent the direction that  the appropriations committees had given to the Corps for a number of  years through fiscal year 1998. As a result, the Corps implemented policies  designed to maximize expenditures from all available appropriations in the  year appropriated. These policies, in turn, encouraged the Corps’ use of  continuing contracts to ensure that only the appropriations required for  expenditure in a given year were obligated on the contract.
However, we believe that the Corps’ implementation of the 1999 law has  resulted in an overuse of the continuing contracts authority and the  frequent awarding of continuing contracts for short-term, low dollar value  contracts. The Corps might have been able to fully fund some of these  contracts if, at the time of award, the Corps had adequate appropriations  to cover the contract amount. For example, for the 107 randomly selected  continuing contracts awarded in fiscal years 2003–2005 that we reviewed,  we found only 8 continuing contracts that were valued at more than $10  million dollars and involved contracted work that required more than 12  calendar months to complete. In contrast, many of the 107 continuing  contracts we reviewed were short-term and/or low dollar value contracts.  For example, we found that, 39 continuing contracts were for work that  lasted 6 months or less; 34 continuing contracts had a contract value of  less than $1 million; and 10 continuing contracts had a contract value of  less than $1 million and included work that took less than 6 months to  complete. Some specific examples of the kinds of short-term, low dollar  value continuing contracts we identified were:    The Jacksonville district used a continuing contract to partially fund a  $695,285 contract that required 90 days to complete.
The Galveston district used a continuing contract for an $868,812 contract  that required 30 days to complete. The district awarded the contract on  September 29, 2004, and did not give the contractor permission to begin  the work until the next fiscal year on November 1, 2004. Therefore, the  contracted work was actually completed in one fiscal year and was not a  multi-year contract.
The Vicksburg district used a continuing contract for a $102,051 contract  that required 195 days to complete. Because the contract spanned more  than one fiscal year, the Corps considered this a multi-year contract that  justified the use of a continuing contract, even though the contract  required less than 7 months to complete and had a relatively low dollar  amount.
Table 3 summarizes the full contract costs and length of time needed to  complete contracted work for the 107 randomly selected continuing  contracts we reviewed.
The Corps also routinely included a continuing contracts clause in its  contracts to help meet its policy of expending all available appropriations  in the fiscal year appropriated, and to minimize carrying over unexpended  appropriations into the next fiscal year. According to the Corps, it  allocates appropriations to projects at the beginning of the fiscal year. The  only way to reallocate appropriations to avoid carryover is through  reprogramming. Reprogramming provides the Corps with the flexibility to  move excess funds from projects that are behind schedule to projects that  may be able to use the funds because they are ahead of schedule.  Generally, federal agencies are required to fully fund contracts at the time  of award. The Corps would not have been able to easily move the funds  from a contract unless it included a continuing contracts clause.  According to agency officials, the Corps has had a standard practice to  include a continuing contracts clause in most contracts as a precaution in  the event that it might need to move funds from a project at a later date in  the fiscal year to meet the agency’s policy of expending all available  appropriations in the fiscal year appropriated.
As we reported in 2005, the Corps had come to rely excessively on  reprogramming as its primary method to manage Civil Works project  funds, with little consideration to pending needs or long-term financial  planning and priority-setting. In our 2005 report, we identified numerous  instances where the Corps’ policy of expending all available  appropriations in the fiscal year appropriated had resulted in  reprogramming actions that were inconsistent with the Corps’  reprogramming guidance. Similarly, during this review of the Corps’ use of  continuing contracts, we found a number of instances where the Corps  used its continuing contracts authority primarily to reprogram funds in  furtherance of the agency’s policy of expending all available  appropriations in the fiscal year appropriated. For example, in some cases,  we found that the Corps included a continuing contracts clause even in  contracts that had been fully funded at the time of award, in case it needed  to reprogram funds sometime later during the year from these contracts.  In some other cases, according to Corps district officials, we found that  the Corps modified fully funded contracts and converted them into  continuing contracts so that obligations could be reprogrammed from  these contracts. In addition, other continuing contracts were awarded in a  manner that was inconsistent with the Corps’ own guidance for the use of  continuing contracts, but which allowed the agency to award end-of-year  contracts and not carry over any end-of-year balances. A continuing  contracts clause should identify the portion of the contract value that the  Corps will reserve for the contract for the first fiscal year. However, we  found four contracts that were awarded at the end of the fiscal year where  the district initially obligated $50,000 to each of the contracts, but  deobligated the entire $50,000 from each contract within 1 day. These  actions helped the Corps meets its policy of expending all available  appropriations in the fiscal year appropriated by allowing the money to be  spent on other contracts.
A variety of other factors may also lead to the award of many continuing  contracts late in the fiscal year. According to district officials, it is not  uncommon for a continuing contract to be awarded late in the fiscal year  in situations where (1) the district commander committed to awarding the  contract in that fiscal year, (2) the district had agreements with the  nonfederal sponsor that certain contracts would be awarded in that fiscal  year, or (3) the district ran out of money to fully fund a contract. Of the  107 contracts we reviewed, over half of these (58) were awarded in the  fourth quarter of the fiscal year. Of these, 27 were awarded in September,  the last month of the fiscal year, and 15 of the 27 September contracts  were awarded in the last week of the fiscal year. Because the Corps only  obligated a small portion of the total contract amount to these contracts in  the year that they were awarded, the bulk of the funds needed to cover  most of the contracts had to come from future years’ appropriations.
section_title: The Corps’ Revised Processes for Approving Continuing Contracts Has Reduced Their Use, but It Still Lacks Criteria for When Their Use Is Appropriate
paragraphs: In fiscal year 2005 and again in 2006, in response to congressional  committee direction, the Corps implemented new processes that require  districts to, among other things, obtain headquarters’ approval before  using continuing contracts. The new processes have reduced the total  number of continuing contracts the Corps awarded in fiscal years 2005 and  2006. However, the Corps has not established clear criteria for when it is  appropriate to request and approve the use of continuing contracts. As a  result, headquarters continues to receive and approve continuing  contracts for short-term, low dollar value contracts. The Corps might have  been able to fully fund some of these contracts if, at the time of award, the  Corps had adequate appropriations to cover the contract amount.
subsections: section_title: Fiscal Year 2005 Process Changes for Approving Continuing Contracts
paragraphs: Congressional committee direction contained in the conference report to  the Consolidated Appropriations Act of 2005 required the Corps to  monitor its use of continuing contracts and stated that the award of such  contracts should be guided by responsible financial management  practices. Further, according to Corps officials, based on their discussions  with the House Subcommittee on Energy and Water Development, the  Corps created a new process that required districts to obtain headquarters’  approval before using continuing contracts. Corps headquarters’ primary  criterion for approving a request to use a continuing contract was whether  or not the project was likely to receive appropriations in the next fiscal  year. The first continuing contracts were approved using this criterion on  March 30, 2005. In June 2005, the Corps documented this change in  procedure by issuing an interim policy guidance memorandum. The  guidance stated that headquarters’ approval was required for all  continuing contracts, and that districts should seek to fully fund contracts  whenever possible. The guidance also established criteria for the kinds of  situations in which a contract should generally be fully funded. These  situations include the following:    when the contract will span 2 fiscal years but will begin or end a short  amount of time before or after a fiscal year, and sufficient appropriations  can be made available to fully fund the contract without adversely  affecting progress on other projects or prior reprogramming  commitments;   when the contract will span 2 fiscal years but requires only a small amount  of funding in the first or last fiscal year, and sufficient appropriations can  be made available to fully fund the contract without adversely affecting  progress on other projects or prior reprogramming commitments;    when future allocations of appropriated funds in amounts needed to  support a continuing contract are unlikely, and appropriations already  allocated for the project could be used to fully fund the contract; and for all, or portions of, Continuing Authorities Program projects.
Unlike in the past when no oversight was provided to the districts’ use of  continuing contracts, Corps officials told us the new fiscal year 2005  process for approving and using continuing contracts involved all levels of  the agency—the district, division, and headquarters. The districts were  required to submit written requests to their divisions if they were seeking  approval to use continuing contracts. The requests were to include a  discussion of alternative contracting options, whether the project would  be budgeted for in subsequent fiscal years, the likelihood of the project  receiving appropriations in subsequent fiscal years, and whether the needs  identified in subsequent fiscal years’ appropriations were reasonable given  the Corps’ budget environment. After the division reviewed the districts’  request, the division either denied the request or forwarded it to  headquarters. If the division denied the request, it might have suggested  that the district provide additional information to support the request, fully  fund the work, use an alternate contracting option, or wait until the next  fiscal year to proceed with the work. Under the 2005 process, requests  forwarded to headquarters for review were approved, withdrawn by the  division, sent back to the division for more information, or denied.
section_title: Fiscal Year 2006 Process Changes for Continuing Contracts
paragraphs: For fiscal year 2006, Congress provided additional direction to the Corps  in the Energy and Water Development Appropriations Act of 2006. The law  states that, (1) with certain exceptions, none of the funds made available  in the act may be used to award any continuing contract or make  modifications to any existing continuing contract that commits an amount  for a project in excess of the amount appropriated for the project; and (2)  notwithstanding any other provision of the law, the requirements  regarding the use of continuing contracts under the Water Resources  Development Act of 1999 shall apply only to projects funded under the  operation and maintenance account and the operation and maintenance  subaccount of the flood control, Mississippi River and tributaries account.  To respond to these new congressional requirements, in December 2005,  the Corps issued additional guidance that is effective through the end of  fiscal year 2006, which, among other things:reaffirmed its policy that districts should use fully funded contracts as  their primary contracting option;   directed that continuing contracts should only be used as the contracting  option of last resort;   summarized new information that the districts are required to provide in  their requests to use continuing contracts, including an explanation on  why using a continuing contract is in the best interest of the government;  and   directed districts to take measures to ensure that contractor costs  generally do not exceed the amount appropriated for projects in fiscal year  2006.
The Corps also continued to make additional policy changes in fiscal year  2006 to better manage the use of continuing contracts in response to the  Energy and Water Development Appropriations Act of 2006. For example,  in March 2006, to help districts comply with the requirement that  contractors stop working on a contract once appropriations for the fiscal  year were spent, Corps headquarters developed two new continuing  contracts clauses. Corps headquarters directed districts to replace the  existing continuing contracts clause with either one of two new continuing  contracts clauses for most continuing contracts. These new clauses do not  permit the contractor to work beyond the amount obligated in the contract  for that year. Under the previous continuing contracts clause the  contractor could continue working on the contract, which required the  Corps to either reprogram funds or to make payments from the next fiscal  year’s funds when they were appropriated. By requiring the contractor to  stop work once all reserved funds for a given project are spent, the Corps  is effectively reasserting control in determining how future appropriations  will be spent for specific contracts.
The conference report accompanying the Energy and Water Development  Appropriations Act of 2006 also specified that the Assistant Secretary of  the Army for Civil Works would be responsible for approving the award of  each continuing contract. According to the Corps, to simplify the  administration of this provision, the Assistant Secretary of the Army for  Civil Works, after coordination with the House and Senate Subcommittees  for energy and water development appropriations, issued a memorandum  in March 2006 pre-approving continuing contracts that met certain  conditions for operation and maintenance work. These conditions include,  among other things, being financed from the operation and maintenance  account or the maintenance subaccount of the Mississippi River and  tributaries account, and that districts have determined that using a  continuing contract is the most cost-effective acquisition mechanism. In  May 2006, the Corps delegated, to the divisions and districts, the authority  to determine whether operation and maintenance contracts meet the  conditions for pre-approval. As a consequence, Corps headquarters is no  longer directly involved in the approval of these new operation and  maintenance continuing contracts. Because these changes are relatively  recent, it is too early to determine the effect that they will have on the  districts’ use of continuing contracts for operation and maintenance work.
section_title: Process Changes Have Reduced the Number of Continuing Contracts, but Approvals Continue for Short-Term, Low Dollar Value Contracts
paragraphs: The Corps process changes in fiscal years 2005 and 2006 reduced the  number of requests districts made to use continuing contracts. In fiscal  year 2005, headquarters approved 141 requests during the 6 months that  the new procedures were in place (March 30 through September 30,  2005), but only 17 requests were approved during the first 6 months of  fiscal year 2006 (October 1, 2005, through March 30, 2006). According to  the Corps, the process changes that were made in response to discussions  with the House Subcommittee on Energy and Water Development and the  enactment of the Energy and Water Development Appropriations Act of  2006 were key in reducing the use of continuing contracts.
Between March 30, 2005 (when the new approval process was  implemented), and March 30, 2006, Corps headquarters approved most of  the continuing contract requests that it received. The divisions received  180 requests from the districts, 175 of which were forwarded to  headquarters for approval and 5 of which were denied. Of the 175  requests forwarded to headquarters for approval, 10 were withdrawn by  the divisions prior to receiving approval. Headquarters approved 158 of  the 165 requests it considered and denied 7 of them. The seven requests  were denied primarily because they did not identify subsequent years’  funding in their requests. The districts ultimately fully funded five of the  seven requests that were denied. Table 4 summarizes headquarters’  reasons for denying the seven requests and how the districts proceeded  with the work after the denial.
Although the Corps’ revised approval processes reduced the number of  continuing contracts districts used, they have not adequately addressed  when the use of continuing contracts is appropriate. This is because the  Corps’ revised guidance established the situations in which districts  should consider fully funding contracts, but did not establish similar  criteria for when to use continuing contracts. Consequently, even with the  new process changes, districts requested and headquarters approved the  use of continuing contracts for contracted work that is of short term and  has a low dollar value. The Corps believes that these requests  demonstrated a strong business case for using a continuing contract;  however, we believe that the Corps might have been able to fully fund  some of these contracts if, at the time of award, the Corps had adequate  appropriations to cover the contract amount.
Moreover, under the new processes, in fiscal year 2005, Corps  headquarters’ primary criterion for approving a request to use a continuing  contract was whether or not the project was likely to receive  appropriations in the next fiscal year. If headquarters determined that  there was little likelihood of the project receiving future years’  appropriations it would generally deny the request for a continuing  contract. By focusing its review on just this criterion, the Corps did not  address factors such as length of work and dollar value of the contract,  which we believe are also important factors to consider when justifying  the need to use a continuing contract. Of the 141 requests approved by  headquarters between March 30 through September 30, 2005, only 24  (about 17 percent) were for contracts valued at more than $10 million and  that required more than 12 calendar months to complete. In contrast,  headquarters approved 38 of 141 requests (almost 27 percent) for  contracts valued at less than $10 million and that required less than 12  calendar months to complete, and included 3 requests that were for  contracts for less than $500,000. Table 5 summarizes information on the  requests approved in fiscal year 2005.
In fiscal year 2006, the Corps further revised headquarters’ criteria for  approving continuing contract requests (or for recommending approval by  the Assistant Secretary, pursuant to the conference report guidance);  however, these changes also did not address our concern about approving  short-term, low dollar value continuing contracts. As a result, the Corps  and the Assistant Secretary continued to approve such contracts as  continuing contracts in fiscal year 2006. Of the 17 requests approved by  headquarters in fiscal year 2006 (as of March 30, 2006), only 4 of the  requests (about 24 percent) were for contracted work that required more  than $10 million and more than 12 calendar months to complete; 2  approved continuing contract requests were for short-term, low dollar  value requests. Table 6 summarizes information on the requests approved  for fiscal year 2006, as of March 30, 2006.
Although the Corps’ current criteria does not consider the duration and  dollar value of contracts when making decisions about whether or not to  award continuing contracts, agency officials are evaluating guidance for  the fiscal year 2008 budget (and beyond) under which they would propose  full funding of the federal government’s commitment for contracts that are  below a certain threshold. According to the Corps, this approach would  reduce the use of continuing contracts up to 90 percent by fiscal year 2010.
section_title: Conclusions
paragraphs: The continuing contracts authority is a unique authority that provides the  Corps with important flexibilities to manage multi-year, multi-million- dollar water resources projects. However, this authority also allows the  Corps to commit the federal government to future financial obligations  without appropriated funds to meet them. Because of the potential to  create significant future liabilities for the federal government, it is critical  that the Corps have appropriate processes and practices in place to ensure  that the use of the continuing contracts privilege is not misused or  overused. We continue to advocate that fully funding contracts at the time  of award is the best way for federal agencies to manage contractual  obligations. If the Corps continues to use continuing contracts, then it  must be able to monitor and track the extent to which they are used. This  will enable the Corps to accurately determine the extent to which it has  committed future years’ appropriations, and also readily provide  information on the full amount of these financial commitments.
Moreover, the Corps’ past practice of routinely awarding continuing  contracts (especially at the end of the fiscal year) to reprogram funds and  avoid large carryover of unexpended balances, exemplifies, in our opinion,  the need for clear criteria on when continuing contracts should be used.  Even though the Corps has recently implemented new approval processes  to restrict the use of continuing contracts, it has not yet established clear  criteria to guide their use. As a result, while the Corps has reduced its  reliance on continuing contracts, it continues to approve short-term, low  dollar value contracts that may not justify the use of a continuing contract.  Without meaningful criteria that include factors such as the length of time  needed to complete the work and the dollar value of the contract, we  believe that the Corps will not be able to assure that it uses continuing  contracts appropriately.
section_title: Recommendations for Executive Action
paragraphs: To ensure the judicious use of continuing contracts by the Corps districts  and to provide better management of projects that use such contracts, we  recommend that the Secretary of Defense direct the Commanding General  and the Chief of Engineers of the U.S. Army Corps of Engineers to take the  following three actions:    eliminate the routine use of continuing contracts by adopting good project  planning and management practices rather than relying on continuing  contracts;   establish meaningful criteria for the use of continuing contracts, including  an assessment of dollar value and length of time needed to complete  contracted work so that districts have clear guidance on when a  continuing contract may be used; and    develop a tracking system to monitor the use of continuing contracts.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft copy of this report to the Department of Defense for  review and comment.  The Department stated that the report was very  constructive and concurred with our recommendations.  Specifically, the  Department concurred with the recommendation that the Corps eliminate  the routine use of continuing contracts by adopting good planning and  management practices rather than relying on continuing contracts.  The  Department stated that it incorporated the appropriations committees’  direction that discouraged continuing contracts and reprogramming in its  execution guidance for fiscal year 2006.  As a consequence, the number  and dollar volume of new continuing contracts fell substantially in fiscal  year 2006 compared to previous years.  For its implementation guidance  for fiscal year 2007, the Department stated that it will incorporate any new  direction in law or committee reports, as well as lessons learned from  fiscal year 2006.
The Department concurred with our recommendation that the Corps  establish meaningful criteria for the use of continuing contracts, including  an assessment of dollar value and length of time needed to complete  contracted work so that districts have clear guidance on when a  continuing contract may be used.  The Department stated that in its fiscal  year 2007 implementation guidance it will include, among other things,  clearer criteria on when it is appropriate to use continuing contracts  including explicit consideration of dollar value and length of time.
The Department concurred with our recommendation that the Corps  develop a tracking system to monitor the use of continuing contracts.  The  Department said it has reviewed its data on continuing contracts and  included corrections in its third quarterly report to the appropriations  committees.  The Department also stated that an automated tracking  system will be established for its fiscal year 2007 appropriations and  retained indefinitely.
The Department of Defense’s comments on our draft report are included  in appendix III.
We will send copies of this report to interested congressional committees,  the Commanding General and Chief of Engineers of the U.S. Army Corps  of Engineers, the Secretary of Defense, and the Director of the Office of  Management and Budget. We will make copies available to others on  request. In addition, this report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have questions about this report, please call me at  (202) 512-3841 or contact me at mittala@gao.gov. 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 key contributions to this  report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the number and dollar amount of continuing contracts the  U.S. Army Corps of Engineers (Corps) awarded during fiscal years 2003– 2005, we reviewed the Corps’ quarterly reports to the appropriations  committees on their use of these contracts. We also obtained the Corps’  contracting data from the Army’s Standard Procurement System. We  analyzed information on the Corps’ domestic Civil Works fixed-price and  indefinite-delivery contracts (both construction contracts and operation  and maintenance contracts) for fiscal years 2003–2005. We excluded the  base contract of indefinite-delivery contracts from our analysis because  these base contracts have no value and no work associated with them.  Like the Corps, we treated individual task orders awarded against the base  contract to carry out the work as separate contracts. Because the Corps  does not track information on contracts that included a continuing  contracts clause, we developed a methodology for identifying these  contracts. Of the contracts we reviewed, we identified all of the contracts  for which the Corps did not obligate the full contract amount. According  to the Corps, in order to partially fund a contract, the contract has to be  either an incrementally funded contract or a continuing contract. Using  the data, we eliminated contracts identified by the Corps as incrementally  funded that used either the limitation of funds clause or the Defense  Federal Acquisition Regulations Supplement’s incremental funding clause.  We based our analyses on the most current data available and only  included the federal portion of the continuing contracts’ costs. We  obtained from Corps officials monthly interest payment information  contained in the Corps of Engineers’ Financial Management System. We  determined, based on interviews with Corps officials, comparison of data  to contract files, and electronic data testing, that the data were sufficiently  reliable for our purposes.
To determine the circumstances in which the Corps used continuing  contracts in fiscal years 2003–2005, we judgmentally selected three Corps  districts that used a large number of continuing contracts and were  located in divisions that awarded a large percentage of continuing  contracts in fiscal years 2003–2005. We selected Galveston (Southwest  division), Jacksonville (South Atlantic division), and Vicksburg  (Mississippi Valley division). We identified and reviewed a random sample  of 107 continuing contracts from these three districts. Within the three  districts, we ordered the districts’ continuing contracts in a random list  using the continuing contracts identified in the Corps of Engineers’  Financial Management System and a list of contracts the Corps identified  as continuing contracts. We reviewed the continuing contract files based  on this random list. We reviewed fixed-price and indefinite-delivery  contracts and eliminated from our sample contracts that were fully  funded. For each contract, we reviewed the contract files and entered  information into a data collection instrument to ensure uniformity. We  also interviewed the contracting and program management officials to  obtain additional information on the contract, including information on  the circumstances when continuing contracts were used. We entered  information from the data collection instruments into a database for  analysis and independently verified the contents of the database with  information from the data collection instruments. We also reviewed the  Corps’ guidance documents and interviewed Corps officials at districts,  divisions, and headquarters to determine the Corps’ polices and  procedures for using a continuing contract. We compared the information  collected from each contract to the Corps’ general policies and procedures  for using continuing contracts.
To determine how the Corps’ process for approving and using continuing  contracts changed since 2005 and whether the changes reduced their use  of these contracts, we obtained Corps guidance documents for approving  and using continuing contracts and interviewed Corps officials at districts,  divisions, and headquarters. We also obtained information from Corps  headquarters on districts’ requests to use continuing contracts. For the  purpose of our review, we treated a request as being equivalent to a  contract. For example, if in one request, a district submitted information  to justify the use of a continuing contract for two different contracts, then  we counted this as two individual requests. We also surveyed the Corps’  eight divisions to obtain information on the total number of requests to  use continuing contracts submitted by each of their districts, requests  forward by the division to headquarters, requests that were denied by the  division, and requests that were denied by headquarters. We obtained  responses from all eight divisions to our survey. We compared the  information from the divisions’ surveys to information that we obtained  from Corps headquarters, and reconciled any differences. We entered  information from the requests to use a continuing contract into a  spreadsheet for analysis and independently verified the contents of the  spreadsheet with information from the requests. We compared the  requests to the Corps’ internal guidance on the use of continuing  contracts.
We performed our work between December 2005 and July 2006, in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Characteristics of the Continuing Contracts Identified by GAO
paragraphs: This appendix provides additional characteristics of the continuing  contracts awarded by the Corps during fiscal years 2003–2005 that we  identified using the Corps’ contracting data in the Army’s Standard  Procurement System. We summarize the 1,592 continuing contracts and  include information on the total number of continuing contracts awarded  by contract value and award date during this 3-year time frame. We also  summarize the total number of continuing contracts awarded in each  division and district during fiscal years 2003–2005.
According to the Corps’ contracting data for fiscal years 2003–2005, the  contract values of 1,043 of 1,592 (over 65 percent) continuing contracts  awarded were less than $1 million; only 64 of 1,592 (about 4 percent) of  the contracts were for more than $10 million. Table 7 summarizes the full  costs to the federal government for the 1,592 continuing contracts.
Our analysis of the Corps’ contracting data indicates that 402 of 1,592  (about 25 percent) of the continuing contracts awarded in fiscal years  2003–2005 were fully funded within the fiscal year that they were awarded.  About half of these contracts were awarded in the first fiscal quarter while  the Corps was under a continuing budget resolution authority and its final  appropriation was not yet known. We found another 66 contracts where a  continuing contract was used to start a contract with no money. Table 8  summarizes the total number of continuing contracts by the percentage of  federal funds made available in the first year for continuing contracts  awarded in fiscal years 2003–2005.
According to the Corps’ contracting data for fiscal years 2003–2005, a large  portion of each year’s appropriations was obligated to continuing  contracts awarded in previous fiscal years. For example, in fiscal year  2005, the Corps obligated more than $781 million to continuing contracts  awarded in fiscal years 2003 and 2004. Figure 1 summarizes the Corps’  obligations by fiscal year for the 1,592 continuing contracts awarded  during fiscal years 2003–2005.
According to the Corps’ contracting data for fiscal years 2003–2005, almost  44 percent of the 1,592 continuing contracts were awarded during the  fourth quarter of the fiscal year. Figure 2 summarizes the total number of  continuing contracts awarded, by quarter, in fiscal years 2003–2005.
According to the Corps’ contracting data for fiscal years 2003–2005, most  of the commitments for continuing contracts came from the construction  appropriations account. Table 9 summarizes the commitments for  continuing contracts by appropriations accounts.
The construction appropriations account was the source for the largest  number of continuing contracts awarded. Some continuing contracts  received appropriations from more than one account. Table 10  summarizes the total number of continuing contracts funded by each  appropriations account.
Of the Corps’ eight divisions, four divisions—Mississippi Valley, South  Atlantic, Great Lakes, and Northwest—account for about 72 percent (and  over 66 percent of the value) of the 1,592 continuing contracts awarded  during fiscal years 2003–2005. Table 11 summarizes the total number and  full costs to the federal government of continuing contracts awarded by  division.
All 38 of the Corps’ domestic districts awarded at least one continuing  contract during fiscal years 2003–2005. Districts’ use of continuing  contracts ranged from Honolulu’s 1 continuing contract to Jacksonville’s  142 continuing contracts during the 3-year time frame. Table 12  summarizes the total number and full costs to the federal government of  continuing contracts awarded by each district during fiscal years 2003– 2005.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Edward Zadjura, Assistant  Director; Lisa Berardi; Brandon Booth; Diana Cheng Goody; Joel  Grossman; Ken Lightner; John Mingus; Alison O’Neill; and Barbara  Timmerman made key contributions to this report. Also contributing to  this report were Thomas Armstrong, Christine Bonham, Molly Boyle,  Doreen Feldman, Cynthia Norris, and Amelia Shachoy.