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

Letter

Background

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.

History of the Corps’ Continuing Contracts Authority

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.

The Corps Cannot Accurately Identify How Many Continuing Contracts It Has Awarded because It Does Not Track These Contracts

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.

The Corps Does Not Track Its Use of Continuing Contracts

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.

Continuing Contracts Most Likely Accounted for About 10 Percent of All Contracts Awarded by the Corps in Fiscal Years 2003– 2005

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.

Prior to 2005, the Corps Routinely Included a Continuing Contracts Clause in Most Contracts

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.

The Corps’ Revised Processes for Approving Continuing Contracts Has Reduced Their Use, but It Still Lacks Criteria for When Their Use Is Appropriate

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.

Fiscal Year 2005 Process Changes for Approving Continuing Contracts

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.

Fiscal Year 2006 Process Changes for Continuing Contracts

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.

Process Changes Have Reduced the Number of Continuing Contracts, but Approvals Continue for Short-Term, Low Dollar Value Contracts

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Scope and Methodology

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.

Appendix II: Characteristics of the Continuing Contracts Identified by GAO

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.

Appendix III: Comments from the Department of Defense

Appendix IV: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

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.