Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management Challenges
Released: 2004-06-01T00:00:00

Letter

Scope and Methodology

We reviewed reconstruction contracts that had been funded, in whole or in part, with U.S. appropriated funds. We focused our review on new contracts, modifications, task orders under existing contracts, and contract actions using the General Services Administration’s (GSA) federal supply schedule program as of September 30, 2003. We did not review contracts that were funded entirely with international or Iraqi national funds, such as funds seized after the 1991 Gulf War or funds that were discovered during Operation Iraqi Freedom in 2003. We also did not review contracts or task orders that were used only for support of military operations or grants and cooperative agreements awarded to international or nongovernmental organizations. We continue to evaluate various issues related to military operations and the progress in rebuilding Iraq under separate reviews.

To determine the number of reconstruction contract actions, the types of contract actions, the procedures used to make the awards, and the funding sources, we requested information from each of the principal organizations responsible for rebuilding activities in Iraq: the CPA, the Office of the Secretary of Defense, the Department of the Army, the Army Corps of Engineers, USAID, and the Departments of State and Justice. To verify the information provided, we requested copies of each contract action issued as of September 30, 2003, and corrected the information provided as appropriate. Agency officials could not provide the contract files for a limited number of small-dollar contracts awarded during the early stages of the reconstruction effort. To determine the amount obligated for reconstruction, we primarily used the obligation data recorded in the contracts. We also reviewed the data maintained by the agencies’ budget offices and information reflected in the Office of Management and Budget’s (OMB) quarterly status reports. To obtain information on contract activities since September 2003, we interviewed CPA and agency officials, attended industry day conferences, and reviewed solicitations and other relevant agency documents.

To determine whether agencies had complied with applicable laws and regulations governing competition when awarding contracts and issuing task orders, we reviewed the requirements of the Competition in Contracting Act (CICA) of 1984 and other relevant laws and regulations. We judgmentally selected 25 contract actions, consisting of 14 new contracts awarded using other than full and open competition and 11 task orders issued under existing contracts. These 25 contract actions represented about 97 percent of the total dollars obligated for reconstruction through September 30, 2003. New contracts accounted for nearly 80 percent of this spending.

We selected the 25 contracts or task orders based on various factors. We focused on high-dollar value contracts and task orders, and on contracts awarded using other than full and open competitive procedures. We also considered whether audits by the DOD or USAID Inspectors General were under way. Overall, the 25 contracts or task orders consisted of the following: the largest contract awarded and the 4 largest task orders, by dollar value, issued to support CPA operations; 9 contracts awarded and 1 task order issued by USAID, as well as 1 task order issued under an Air Force contract to provide logistical support for USAID-managed efforts; 2 contracts awarded and 4 task orders issued by the Army Corps of Engineers and the Army Field Support Command to help restore Iraq’s oil or electrical infrastructure; 1 contract awarded and 1 task order issued by the Army to train or equip the New Iraqi Army; and 1 contract awarded by the Department of State to support Iraqi law enforcement efforts.

For new contract awards, we determined whether agency officials followed appropriate procedures in using other than full and open competition and assessed the agency’s justification for its contracting approach. For task orders issued under existing contracts, we determined whether the task orders were within the scope of the existing contracts, and if not, whether the agencies had followed proper procedures to add the work. To do so, we obtained the contracts or task orders and associated modifications, justification and approval documentation, negotiation memoranda, audit reports, and other relevant documents. We discussed the award and issuance process with agency procurement personnel, including contracting officers, program managers, and, in some cases, agency counsel. We also reviewed audit reports on various procurement issues prepared by the DOD and USAID Inspectors General and the Defense Contract Audit Agency (DCAA).

To assess agencies’ initial contract administration efforts, we interviewed procurement officials to determine how contract administration for their contracts was initially staffed, including the use of support contracts to assist in administering the contracts. We obtained information on plans for reaching agreement on key contract terms and conditions. We also reviewed the 25 contracts or task orders to determine whether they included provisions related to contract administration, such as quality assurance plans, requirements for monthly status reports, and subcontractor management plans. As part of our monitoring of reconstruction activities, we conducted field visits in October 2003 in Baghdad and in other areas in Iraq, including Al Hillal and Al Basrah. During these visits, we held discussions with officials and visited project sites, including power plants, oil wells, oil processing facilities, water and sewage systems, schools, and many other reconstruction activities. During these visits, we observed the challenges faced in carrying out reconstruction efforts, including the hostile security environment, poor communications, and unsettled working conditions.

Appendix I lists the agencies visited during our review. We conducted our work between May 2003 and April 2004 in accordance with generally accepted government auditing standards.

Background

During the latter part of 2002, as diplomatic efforts to convince the former Iraqi regime to comply with United Nations Security Council resolutions continued, discussions took place within the administration about the need to rebuild Iraq should combat operations become necessary. In October 2002, OMB established a senior interagency team to establish a baseline assessment of conditions in Iraq and to develop relief and reconstruction plans. According to an OMB official, the team developed plans for immediate relief operations and longer-term reconstruction in 10 sectors: health, education, water and sanitation, electricity, shelter, transportation, governance and the rule of law, agriculture and rural development, telecommunications, and economic and financial policy.

Though high-level planning continued through the fall of 2002, most of the agencies involved in the planning were not requested to initiate procurement actions for the rebuilding efforts until early in 2003. Once assigned the responsibilities, agency procurement personnel were instructed to be ready to award the initial contracts within a relatively short time period, often within weeks. During 2003, several agencies played a role in awarding or managing reconstruction contracts, most notably USAID and the Army Corps of Engineers. Various agencies awarded contracts on behalf of the CPA and its predecessor organization, the Office of Reconstruction and Humanitarian Assistance. Table 1 shows the principal areas of responsibility assigned to the CPA and other agencies.

As of September 30, 2003, the agencies had obligated nearly $3.7 billion on 100 contracts or task orders for reconstruction efforts (see table 2). These obligations came from various funding sources, including U.S. appropriated funds and Iraqi assets. The Army Corps of Engineers and USAID together obligated about $3.2 billion, or nearly 86 percent of this total. The majority of these funds were used to rebuild Iraq’s oil infrastructure and to fund other capital-improvement projects, such as repairing schools, hospitals, and bridges. This spending reflects a relatively small part of the total amount that may be required to rebuild Iraq, with estimates ranging from $50 billion to $100 billion. Appendix II lists the 100 reconstruction contracts and task orders we identified and the associated obligations as of September 30, 2003.

In November 2003, Congress appropriated an additional $18.4 billion for rebuilding activities. The CPA’s projected uses for the funds reflect a continued emphasis on rebuilding Iraq’s infrastructure and on providing improved security and law enforcement capabilities (see table 3). In appropriating these funds, Congress required that the CPA Administrator or the head of a federal agency notify Congress no later than 7 calendar days before awarding a contract, with these funds, valued at $5 million or more for reconstruction using other than full and open competition procedures.

U.S.-funded reconstruction efforts were undertaken through numerous contracts awarded by various U.S. agencies. CICA generally requires that federal contracts be awarded on the basis of full and open competition— that is, all responsible prospective contractors must be afforded the opportunity to compete. The process is intended to permit the government to rely on competitive market forces to obtain needed goods and services at fair and reasonable prices. Within this overall framework, agencies can use various procurement approaches to obtain goods and services. Each approach, as listed in table 4, involves different requirements with which agencies must comply. In some cases, agency officials may determine that a contractor working under an existing contract may be able to provide the required goods or services through issuance of a task order, thus obviating the need to award a new contract. Before awarding a task order under an existing contract, however, the agency must determine that the work to be added is within the scope of that contract (i.e., that the work fits within the statement of work, performance period, and maximum value of the existing contract). In making this determination, the contracting officer must decide whether the new work is encompassed by the existing contract’s statement of work and the original competition for that contract.

New Contract Awards Generally Complied with Competition Requirements, but Task Orders Were Less Compliant

Agencies generally complied with applicable laws and regulations governing competition when using sole-source or limited competition approaches to award the initial reconstruction contracts we reviewed. The exigent circumstances that existed immediately prior to, during, and following the war led agency officials to conclude that the use of full and open competitive procedures for new contracts would not be feasible. We found these decisions to be within the authority provided by law. We found several instances, however, in which agencies had issued task orders for work that was outside the scope of existing contracts. Such task orders do not satisfy legal requirements for competition. In these cases, the out-of-scope work should have been awarded using competitive procedures or supported with a Justification and Approval for other than full and open competition in accordance with legal requirements. Given the urgent need for reconstruction efforts, the authorities under the competition laws for using noncompetitive procedures provided agencies ample latitude to justify other than full and open competition to satisfy their needs.

Agencies Properly Justified Use of Other Than Full and Open Competition in Awarding New Contracts

The agencies responsible for rebuilding Iraq generally complied with applicable requirements governing competition when awarding new contracts. While CICA requires that federal contracts be awarded on the basis of full and open competition, the law and implementing regulations recognize that there may be circumstances under which full and open competition would be impracticable, such as when contracts need to be awarded quickly to respond to unforeseen and urgent needs or when there is only one source for the required product or service. In such cases, agencies are given authority by law to award contracts under limited competition or on a sole-source basis, provided that the proposed actions are appropriately justified and approved.

We reviewed 14 new contracts that were awarded using other than full and open competition: a total of 5 sole-source contracts awarded by the Army Corps of Engineers, the Army Field Support Command, and USAID and 9 limited competition contracts awarded by the Department of State, the Army Contracting Agency, and USAID (see table 5). Because of the limited time available to plan and commence reconstruction efforts, agency officials concluded that the use of full and open competitive procedures in awarding new contracts would not be feasible. For 13 of these new contracts, agency officials adequately justified their decisions and complied with the statutory and regulatory competition requirements. In the remaining case, the Department of State justified and approved the use of limited competition under a unique authority that, in our opinion, may not be a recognized exception to the competition requirements. State took steps to obtain competition, however, by inviting offers from four firms. State could have justified and approved its limited competition under recognized exceptions to the competition requirements.

Agencies Did Not Always Satisfy Competition Requirements When Issuing Task Orders under Existing Contracts

We found a lesser degree of compliance when agencies issued task orders under existing contracts. When issuing a task order under an existing contract, the competition law does not require competition beyond that obtained for the initial contract award, provided the task order does not increase the scope of the work, period of performance, or maximum value of the contract under which the order is issued. The scope, period, or maximum value may be increased only by modification of the contract, and competitive procedures are required to be used for any such increase unless an authorized exception applies.

Determining whether work is within the scope of an existing task order contract is primarily an issue of contract interpretation and judgment by the contracting officer (in contrast to the contract’s maximum value and performance period, which are explicitly stated in the contract). Other than the basic requirement that task orders be within scope, there are no statutory or regulatory criteria or procedures that guide a contracting officer in making this determination. Instead, guiding principles for scope of contract determinations are established in case law, such as bid protest decisions of the Comptroller General. These decisions establish that the key factor is whether there is a material difference between the new work and the contract that was originally awarded—in other words, whether new work is something potential offerors reasonably could have anticipated in the competition for the underlying contract.

Of the 11 task orders we reviewed, 2 were within the scope of the underlying contract and 7 were, in whole or part, not within scope; we have reservations concerning whether 2 others were within scope (see table 6).

The seven instances in which agencies issued task orders for work that was, in whole or in part, outside the scope of an existing contract are described on the following pages. In each of these cases, the out-of-scope work should have been awarded using competitive procedures or supported with a Justification and Approval for other than full and open competition in accordance with legal requirements. Given the urgent need for reconstruction efforts, the authorities under the competition laws for using noncompetitive procedures provided agencies ample latitude to justify other than full and open competition to satisfy their needs.

DCC-W improperly used a GSA schedule contract to issue two task orders with a combined value of over $107 million for work that was outside the scope of the schedule contract.

Under GSA’s federal supply schedule program, GSA negotiates contracts with multiple firms for various commercial goods and services and makes those contracts available for other agencies to use. In March 2003, DCC-W placed two orders with Science Applications International Corporation (SAIC) under SAIC’s schedule contract. One order involved development of a news media capability—including radio and television programming and broadcasting—in Iraq. The other required SAIC to recruit people identified by DOD as subject matter experts, enter into subcontracts with them, and provide them with travel and logistical support within the United States and Iraq. The schedule contract, however, was for management, organizational, and business improvement services for federal agencies. In our view, the statements of work for both task orders were outside the scope of the schedule contract, which typically would encompass work such as consultation, facilitation, and survey services. The period of performance for the media services task order has expired, and the task order for subject matter experts was extended through April 30, 2004.

Over $91 million was obligated under an Air Force Contract Augmentation Program contract for delivery of commodities to USAID for reconstruction activities and logistical support for USAID’s mission in Iraq. The contract is intended primarily to provide base-level logistical and operational support for Air Force deployments. Under an interagency agreement, the Air Force used the contract to provide USAID a variety of support tasks related to storage, inventory control and management, and other logistical and operational support. Some of these funds, however, had been obligated for services such as building materials for Iraqi schools and planning for fixing electrical power generation for Baghdad water treatment plants. Because these types of services—though related to USAID’s foreign assistance mission—are not related to support for a deployment, they appear to be outside the scope of the contract. When we brought this issue to the attention of Air Force officials, they agreed that some of the work was outside the scope of the contract, and they are issuing guidance to ensure that logistical support for USAID does not go beyond the scope of the contract.

The Army Field Support Command issued a $1.9 million task order for contingency planning for the Iraqi oil infrastructure mission under its LOGCAP contract with Kellogg Brown & Root. The task order was not within the scope of that contract. This task order, issued in November 2002, required the contractor to develop a plan to repair and restore Iraq’s oil infrastructure should Iraqi forces damage or destroy it. Because the contractor was knowledgeable about the U.S. Central Command’s planning for conducting military operations, DOD officials determined the contractor was uniquely positioned to develop the contingency support plan. DOD determined that planning for the missions was within the scope of the LOGCAP contract, but it also determined that the actual execution of the Iraq oil mission, including prepositioning of fire-fighting equipment and teams, was beyond its scope.

We agree with the DOD conclusion that repairing and continuing the operations of the Iraqi oil infrastructure are not within the scope of the contract. But unlike DOD, we conclude that preparation of the contingency support plan for this mission was beyond the scope of the contract. We read the LOGCAP statement of work as contemplating planning efforts for missions designated for possible contractor execution under the contract. Consequently, the Army Field Support Command should have prepared a written justification to authorize the work without competition. The resulting contingency plan was used as justification for subsequently awarding a sole-source contract to Kellogg Brown & Root for restoring the oil infrastructure, for which nearly $1.4 billion was obligated during fiscal year 2003. As noted in table 5, we found that the award of this contract generally complied with applicable legal standards.

In March 2003, the Army Corps of Engineers conducted a limited competition resulting in multiple-award contracts with three firms— Washington International, Inc., Fluor Intercontinental, Inc., and Perini Corporation—for construction-related activities in the Central Command’s area of responsibility. These contracts had a maximum value of $100 million each. In the latter part of August 2003, as efforts to restore electricity throughout Iraq lagged and amid concerns that the electrical shortages presented social unrest and security threats to the CPA and the military forces, the Central Command tasked the Army Corps of Engineers with taking steps to rebuild the electrical infrastructure as quickly as possible. In response, the Army Corps of Engineers issued task orders under each of these contracts causing them to exceed their maximum value. Consequently, the orders are outside the scope of the underlying contracts.

The Army Corps of Engineers prepared a justification for award of the underlying contracts in August 2003 and a subsequent justification in September 2003 to increase the maximum value of each contract from $100 million to $500 million. Neither justification had been approved as of March 31, 2004.

Finally, we note that section 803 of the National Defense Authorization Act for Fiscal Year 2002 (Pub. L. No. 107-107) requires that an order for services in excess of $100,000 issued under a multiple-award contact by or on behalf of a DOD agency be made on a competitive basis, unless a contracting officer justifies an exception in writing. The Army Corps of Engineers did not compete these task orders among the three multiple- award contractors. Rather, the agency and the contractors collectively decided to allocate the electrical infrastructure work based on geographical sectors and the capabilities of the contractors in the theater. We found that the contracting officer had not prepared a justification for these noncompetitive task orders. After we raised this issue with agency officials, the contracting officer prepared the required documentation in April 2004.

As described in table 6, we also have reservations about whether work ordered under two other Army task orders was within the scope of an underlying contract for combat support. These task orders were issued by the Army Field Support Command for the CPA’s logistical support and for a base camp used in training the New Iraqi Army. In these, as in the other cases, the competition laws provided agencies ample latitude to justify using other than full and open competition to satisfy their needs.

Effective Contract Administration Remains a Key Challenge as Contracting Activity Increases

The need to award contracts and begin reconstruction efforts quickly—the factors that led agencies to use other than full and open competition—also contributed to initial contract administration challenges. Faced with uncertainty as to the full extent of the rebuilding effort, agencies often authorized contractors to begin work before key terms and conditions, including the statement of work to be performed and the projected cost for that work, were fully defined. Until agreement is reached, contract incentives to control costs are likely to be less effective. Staffing constraints and security concerns posed further challenges. Agencies have made progress in addressing these issues, but there remains a backlog of contracts for which final agreement has not yet been reached. The CPA has created a new office to better manage and coordinate reconstruction efforts to be conducted over the next year.

Reaching Agreement on Key Contract Terms and Conditions

To meet urgent operational needs, as is the case in Iraq’s reconstruction, agencies are permitted to authorize contractors to begin work before contracts or task orders have been definitized—that is, before key terms and conditions, including price, have been defined and agreed upon. While this approach allows agencies to initiate needed work quickly, it also can result in potentially significant additional costs and risks being imposed on the government. Agencies generally are required to definitize contractual actions within 180 days.

For many of the contracts we reviewed, agencies authorized the contractors to begin work before terms were fully defined, and later reached final agreement on the scope and price of the work. There remain six DOD contracts or tasks orders, however, that had yet to be definitized as of March 2004, two involved work that had been completed more than a year earlier (see table 7). In total, nearly $1.8 billion had been obligated on these contracts or task orders as of September 30, 2003. These contracts or task orders had been awarded or issued by either the Army Corps of Engineers or the Army Field Support Command, and they include efforts to restore Iraq’s oil and electrical infrastructures and to provide logistical support to the CPA.

Agency officials attribute much of the delay in reaching agreement to continued growth in reconstruction efforts, which in turn have required numerous revisions to contract statements of work. The continued growth in requirements has resulted in an increase in both contractor costs and administrative workload on both contractor and agency procurement personnel. For example, the Army Corps of Engineers’ contract to restore Iraq’s oil infrastructure had individual task orders placed in March and May 2003 that were supposed to be definitized within 180 days. Similarly, the Army Field Support Command has four task orders that have to be definitized. For example, the Army Field Support Command’s task order to support the CPA was originally issued in March 2003, at an estimated cost of $858,503. As of September 30, the Army had obligated $204.1 million, and the statement of work had been modified a total of nine times. With each change, the contractor had to revise its cost and technical proposals, which also increased the workload for agency procurement personnel.

The Army Field Support Command’s revised schedule now calls for definitizing the task orders between June and October 2004.

Some of the delays reflect concerns over the adequacy of the contractors’ proposals. For example, on the task order awarded to restore Iraq’s electrical infrastructure, DCAA found a significant amount of proposed costs for which the contractor had not provided adequate support. Consequently, DCAA believed that the proposal was inadequate for the purposes of negotiating a fair and reasonable price. As of March 2004, negotiations between the contractor and the Army Corps of Engineers were still ongoing. To reduce risks, the Army Corps of Engineers has proposed paying the contractor only 85 percent of incurred costs until the contractor has adequately fulfilled its contract closeout responsibilities and acceptable business systems were in place.

The lack of timely contract definitization potentially can have a significant impact on total contract costs and related risks. Specifically, the major reconstruction efforts have used cost-reimbursement type contracts under which the government has agreed, subject to cost ceilings, to reimburse the contractor for all reasonable and allowable costs incurred in performing the work. In two of the largest contract actions—the contract to repair and maintain Iraq’s oil infrastructure and the task order to support the CPA operations—the agencies have included an award fee provision under which the contractor can earn additional profit for meeting set targets in specified areas, such as cost control. As long as work continues to be performed under an undefinitized contract, however, the award fee incentive is likely to be less effective as a cost control tool since there is less work remaining to be accomplished and therefore less costs to be controlled by the contractor. Given the high cost involved, particularly for the Iraq oil mission (over $2.5 billion), any reduction in cost control incentives potentially involves a significant contract cost risk.

Providing Adequate Staff to Oversee Contracts

The lack of adequate staffing presented challenges to several agencies involved in reconstruction efforts and, at times, resulted in inadequate oversight of the contractors’ activities. While agencies have taken actions, some of these early contract administration issues have yet to be fully resolved.

When the CPA’s predecessor organization—Office of Reconstruction and Humanitarian Assistance---was established in mid-January 2003, it lacked an in-house contracting capability. It was not until February 27, 2003, that the Defense Contract Management Agency (DCMA) was asked to provide contracting support, including providing acquisition planning assistance and awarding and administering contracts. DOD officials noted that this tasking was unusual for DCMA, as it is typically responsible for administering, rather than awarding, contracts.

According to DOD officials, they found that the Office of Reconstruction and Humanitarian Assistance did not have an official responsible for authorizing contract actions and supervising contracting officers and others performing procurement-related duties. Further, DOD had authorized positions for only two contracting officers, who had yet to arrive. In addition, DCMA officials reported that the lack of an organizational structure led to contractors providing draft statements of work and cost estimates to the contracting officers so that contracts could be awarded more quickly. Normally, it is the government’s responsibility to provide statements of work and develop independent cost estimates.

We found that there were not always sufficient in-country personnel to administer the contracts or task orders when they were initially awarded or issued. For example, for the federal supply schedule order issued in March 2003 by DCC-W to establish an Iraqi media capability, contractor personnel purchased property that was not part of the task order, including purchases that may not have been necessary or appropriate. According to DOD officials, contractor personnel purchased about $7 million in equipment and services not authorized under the contract, including a H-2 Hummer and a pickup truck, and then chartered a flight to have them delivered to Iraq. According to DCMA officials, these actions were primarily due to inadequate government property management to control or monitor the contractor’s purchases. DCMA officials decided in May 2003 that it was in the best interests of the government to modify the approved equipment list, and include the materials purchased by the contractor.

The lack of in-country procurement staff proved problematic in another task order issued by the DCC-W to help recruit and support subject matter experts to assist the CPA and Iraqi ministries. According to DCC-W and DCMA officials, there was initially neither contractor staff nor government officials to monitor the subject matter experts once they arrived in Iraq. DCMA officials indicated that some experts failed to report to duty or perform their responsibilities as expected or were no longer performing work under the task order.

Staffing concerns affected other agencies as well. For example, USAID recognized early that its resources were insufficient to administer and oversee the contracts it expected to award. Consequently, USAID arranged for the Army Corps of Engineers to provide oversight on its $1.0 billion infrastructure contract, arranged to have DCAA audit contractors, and made plans to augment its mission in Iraq. As of January 2004, however, a senior USAID procurement official stated that its Iraq mission remained understaffed to provide adequate contract oversight in Iraq. USAID stated it has four full-time procurement staff that will be assigned to work in Iraq for 3 years. According to the senior official, this long-term commitment is essential to establishing the institutional knowledge needed to monitor and administer the contracts effectively. However, USAID indicated that given the workload, providing an appropriate degree of oversight would require at least seven additional personnel. Consequently, USAID found it necessary to augment the mission staff with personnel on temporary assignment from other USAID missions, who will serve between 1 and 3 months.

Similarly, State Department officials noted that the Bureau of International Narcotics and Law Enforcement Affairs—the bureau responsible for monitoring State’s law enforcement support contract—is understaffed. For example, the department official responsible for contract oversight had multiple, time-consuming roles. This official currently serves as both the program manager and the contracting officer’s representative for the law enforcement support contract. As such, the official approves the contractor’s monthly vouchers along with carrying out other detailed procurement tasks. The same official also had responsibilities for the department’s efforts to recompete a $1.3 billion effort to provide worldwide law enforcement support and for law enforcement support efforts in Liberia and Haiti. To address the workload issue, the bureau has assigned two additional staff to assist in overseeing contract activities in Iraq and is exploring options for reorganizing the bureau to use resources more efficiently.

Providing adequate oversight on reconstruction efforts is challenging given the uncertain security environment and harsh working conditions. During site visits to Iraq in October 2003, we observed the considerable degree to which these factors were affecting reconstruction efforts. For example, travel outside secure compounds occurred only in convoys of armored vehicles with armed security forces. Flak jackets and helmets were required to be worn or, at a minimum, carried. Communications were generally difficult and unreliable. In addition, the living and working environment afforded individuals little privacy or time to rest. We observed that personnel generally worked 12 to 15 hour days and often shared cramped living and working quarters. In Al Hillah, for example, five USAID personnel shared two small offices with their security team.

Revised Approach Planned for Fiscal Year 2004 Reconstruction Efforts

To better coordinate and manage the $18.4 billion in reconstruction funding provided for fiscal year 2004, the CPA established a program management office that is responsible for infrastructure-related programs. The office, which includes representatives from USAID and the Army Corps of Engineers, is responsible for coordinating the efforts of the CPA, the Iraqi ministries, and other coalition partners.

The office’s acquisition strategy reflects a plan to award 1 program management support contract to support the program management office and to oversee reconstruction efforts of specific sectors—electricity, oil, public works and water, security and justice, transportation and communications, and buildings and health; 6 program management contracts to coordinate reconstruction efforts specific to each sector; and 15 to 20 design-build contracts to execute specific tasks.

In March 2004, various DOD components, on behalf of the CPA, awarded 17 contracts—the program management support contract, the 6 sector- specific program management and the 10 design-build contracts. These contracts were awarded pursuant to a DOD decision to limit competition to firms from the United States, Iraq, coalition partners, and force contributing nations.

In addition to these contracts, other agencies will continue to award and manage contracts for areas within their assigned area of responsibility. For example, in January 2004, USAID competitively awarded a $1.8 billion contract to enable further reconstruction efforts, while the Army Corps of Engineers competitively awarded two contracts with a combined value of $2.0 billion to further repair and rehabilitate Iraq’s oil infrastructure. USAID announced its intent to solicit bids on at least seven new contracts. One of these contracts is intended to provide USAID with an enhanced capability to carry out data collection, performance monitoring, and evaluation of USAID’s ongoing work in Iraq.

Conclusions

The United States, along with its coalition partners and various international organizations and donors, has undertaken an enormously complex, costly, and challenging effort to rebuild Iraq. At the early stages of these efforts, agency procurement officials were confronted with little advance warning on which to plan and execute competitive procurement actions, an urgent need to begin reconstruction efforts quickly, and uncertainty as to the magnitude of work required. Their actions, in large part, reflected proper use of the flexibilities provided under procurement laws and regulations to award new contracts using other than full and open competitive procedures.

With respect to several task orders issued under existing contracts, however, some agency officials overstepped the latitude provided by competition laws by ordering work outside the scope of the underlying contracts. This work should have been separately competed, or justified and approved at the required official level for performance by the existing contractor. Given the war in Iraq, the urgent need for reconstruction efforts, and the latitude allowed by the competition law, these task orders reasonably could have been supported by justifications for other than full and open competition. In some cases, such as the task order for the Iraqi media capability, the work has been completed so there is no practical remedy available. In several other cases, however, the opportunity exists to bring task orders into compliance with requirements, as well as to ensure that future task orders are issued properly.

Providing effective contract administration and oversight remains challenging, in part due to the continued expansion of reconstruction efforts, the staffing constraints, and the need to operate in an unsecure and threatening environment. Indeed, the magnitude of work that remains undefinitized is symptomatic of changing requirements and the lack of sufficient agency and contractor resources. Nevertheless, timely definitization of outstanding contracts and task orders is needed to promote effective cost control. More broadly, these challenges suggest the need to assess the lessons learned from the contract award and administration processes in Iraq to identify ways to improve similar activities in the future.

It is too early to gauge whether the CPA approach to improving its ability to monitor and coordinate reconstruction efforts through the use of a new program management office and the planned award of various types of construction and management support contracts will be effective. However, recent congressional action requiring the CPA Administrator and heads of federal agencies to report on contracts awarded using other than full and open competition will provide more transparency and accountability in the award of new Iraq reconstruction contracts.

Recommendations for Executive Action

To ensure that task orders issued to rebuild Iraq comply with applicable requirements, and to maximize incentives for the contractors to ensure effective cost control, we recommend that the Secretary of the Army take the following four actions: Review the out-of-scope task orders for Iraqi media and subject matter experts issued by the Defense Contracting Command-Washington and take any necessary remedial actions.

Ensure that any future task orders under the LOGCAP contract for Iraq reconstruction activities are within the scope of that contract.

Address and resolve all outstanding issues in connection with the pending Justifications and Approvals for the contracts and related task orders used by the Army Corps of Engineers to restore Iraq’s electricity infrastructure.

Direct the Commanding General, Army Field Support Command, and the Commanding General and Chief of Engineers, U.S. Army Corps of Engineers, to definitize outstanding contracts and task orders as soon as possible.

To improve the delivery of acquisition support in future operations, we recommend that the Secretary of Defense, in consultation with the Administrator, U.S. Agency for International Development, evaluate the lessons learned in Iraq and develop a strategy for assuring that adequate acquisition staff and other resources can be made available in a timely manner.

Agency Comments and Our Evaluation

DOD and the Department of State provided written comments on a draft of this report. Their comments are discussed below and are reprinted in appendixes III and IV. USAID concurred with the draft report as written. USAID’s response is reprinted in appendix V. GSA also provided comments regarding its efforts to ensure that agencies properly use the federal supply schedule program. GSA’s comments are reprinted in appendix VI.

DOD generally concurred with our recommendations. DOD noted that it is in the process of taking appropriate remedial actions on the task orders issued by the Defense Contracting Command-Washington, and is resolving outstanding issues related to the task orders issued by the Army Corps of Engineers to restore Iraq’s electrical infrastructure. As part of its efforts to definitize contracts, DOD noted that the Army Field Support Command has, among other things, established firm dates for the submission of contractor proposals and to complete negotiations. DOD also noted that progress on these efforts is being reviewed by senior Command officials on at least a weekly basis. DOD did not indicate, however, what steps the Army Corps of Engineers is taking to definitize the actions for which they are responsible. As we noted in the report, the Army Corps of Engineers had two undefinitized contracts on which they had obligated more than $1.5 billion as of March 2004. Lastly, DOD reported that efforts are already underway to conduct a study to evaluate the lessons learned in Iraq and develop a strategy for assuring that adequate staff and other resources can be made available.

DOD partially concurred with our recommendation to ensure that future task orders issued on the LOGCAP contract are within the scope of that contract. DOD noted that the LOGCAP contracting officer reviews each proposed scope of work and determines whether the action is within the scope of the contract, and obtains legal advice as needed. DOD also noted that the recommendation appeared to be based on only one action, namely the task order for contingency planning for the Iraq oil infrastructure mission. We also expressed concern, however, about whether the task orders to provide logistical support for the CPA and to the New Iraqi Army training program were within the scope of the underlying LOGCAP contract. Consequently, the steps taken by the contracting officer—while necessary and appropriate—may not be sufficient to ensure that work outside the scope of the LOGCAP contract is either competed or properly justified.

DOD provided two comments on our findings. First, DOD took exception to our observations on the manner by which the Deputy Secretary limited competition for contracts awarded in fiscal year 2004 to firms from the United States, Iraq, coalition partners and force contributing nations. DOD noted that the Deputy Secretary has broad authority from the Secretary to act on his behalf, which we do not dispute. We note, however, that the plain language of the law provides that authority to approve public interest exceptions may not be delegated. While the Deputy Secretary may have broad authority to act on the Secretary’s behalf, he was not authorized to do so in this case. Second, regarding our conclusion that the LOGCAP contingency planning order was not within the scope of the contract, DOD commented that our conclusion should be couched in terms of opinion. While legal analysis by its nature reflects opinion, we remain convinced of our conclusion and emphasize the need for more analytical rigor in the review of LOGCAP task orders.

The Department of State disagreed with our assessment that the authority it cited to limit competition may not be a recognized exception to competition requirements. The department believed that the authority it cited—section 481 of the Foreign Assistance Act of 1961, as amended— was used appropriately. The specific section of the Act cited by the department—section 481(a)(4)—speaks to the authority of the President to furnish assistance to a country or international organization, but does not provide relief from statutory competition requirements. In its comments and in earlier discussions, State did not provide us with a persuasive basis to conclude that the authority is a recognized exception to the competition requirements. However, we did not need to resolve the issue because State appears to have maximized competition under the circumstances, and we believe State could have used other recognized exceptions, such as 40 U.S.C. §113(e), to meets its requirements. This authority permits the waiver of competitive contracting procedures when use of those procedures would impair foreign aid programs.

GSA recognized that it has a responsibility to ensure that agency personnel are adequately trained in the proper use of the federal supply schedule program. GSA noted that it has been working with DOD and other federal agencies to ensure that their contracting officers are fully trained on the proper use of the program and identified some of its ongoing and planned efforts toward this objective.

We are sending copies of this report to the Director, Office of Management and Budget; the Secretaries of Defense and State; the Administrator, U.S. Agency for International Development; the Commanding General and Chief of Engineers, U.S. Army Corps of Engineers; the Director, Defense Contract Management Agency; and the Director, Defense Contract Audit Agency. We will make copies available to others on request. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov.

The major contributors to this report are listed in appendix VII. If you have any questions about this report, please contact me on (202) 512-4841 or Timothy DiNapoli on (202) 512-3665.

Appendix I: List of Organizations Contacted

During the course of the review, we contacted the following organizations: Office of Management and Budget, Washington, D.C.; Office of Reconstruction and Humanitarian Assistance, Washington, Coalition Provisional Authority, Washington, D.C., and Baghdad, Iraq; Department of Defense, the Comptroller, Pentagon, Washington, D.C. Department of the Army, Pentagon, Washington, D.C; Washington Headquarters Services, Pentagon, Washington, D.C.; Defense Contracting Command-Washington, Pentagon, Washington, Southern Region Contracting Center, Army Contracting Agency, Fort Northern Region Contracting Center, Army Contracting Agency, Fort Army Field Support Command, Rock Island, Illinois; Headquarters, U.S. Army Corps of Engineers, Washington, D.C.; U.S.

Army Engineer Division, Southwestern, Dallas, Texas; U.S. Army Engineer District, Fort Worth, Fort Worth, Texas; Engineering and Support Center, Huntsville, Alabama; Transatlantic Program Center, Winchester, Virginia; U.S. Army Engineer District, Philadelphia, Philadelphia, Pennsylvania; and Vicksburg Consolidated Contracting Office, Alexandria, Virginia; Defense Information Systems Agency, Arlington, Virginia, and Scott Air Force Base, Illinois; Department of Defense, Inspector General, Arlington, Virginia; Defense Contract Management Agency, Alexandria, Virginia; Defense Contract Audit Agency, Fort Belvoir, Virginia; U.S. Agency for International Development, Washington, D.C.; U.S. Department of State, Washington, D.C.; and U.S. Department of Justice, Washington, D.C.

Appendix II: Iraq Reconstruction Contracts/Task Orders and Obligations as of September 30, 2003

Appendix III: Comments from the Department of Defense

The following are GAO’s comments on the Department of Defense’s letter dated May 13, 2004.

GAO Comments

1. The Department of Defense (DOD) incorrectly noted that the recommendation was based on only one instance. In addition to the example cited by DOD, we also expressed concern about whether the task orders to provide logistical support for the Coalition Provisional Authority (CPA) and to the New Iraqi Army training program were within the scope of the underlying Logistics Civil Augmentation Program (LOGCAP) contract. 2. The actions being taken by the Army Field Support Command are positive steps to monitor progress in reaching agreement on the contracts’ key terms and conditions. DOD did not indicate, however, what steps the Army Corps of Engineers was taking to definitize the actions for which the Corps is responsible. As noted in table 7, the Army Corps of Engineers had two undefinitized contracts on which had obligated more than $1.5 billion as of March 2004. 3. DOD asserts that the determination and finding was not made on a class basis because it included a common justification for 26 specifically identified “particular procurements.” The Federal Acquisition Regulation (FAR) provides for determination and findings for individual contract actions (FAR 1.702) and a class of contract actions (FAR 1.703). Because the determination and finding encompasses 26 contract actions, we conclude that it is a class determination and finding. Specifically enumerating members of the class does not alter the fundamental fact that it is for more than one action. Class determination and findings are specifically prohibited by FAR 6.302-7(c)(4). As to the question of authority to execute the determination and finding, we do not dispute that the Deputy Secretary has broad authority to act on behalf of the Secretary. We note, however, that the plain language of the law provides that authority to approve public interest exceptions may not be delegated and conclude that the Deputy Secretary did not have authority in this instance. 4. Legal analysis by its nature reflects opinion. In the opinion of GAO, the Army, and DOD, the actual restoration of Iraqi oil infrastructure was not within the scope of the LOGCAP contact. We also noted that the LOGCAP contract anticipates contingency planning for work that can be executed under the contract. In other words, contingency planning is within the scope of the contract only if the actual work is also within the scope of the contract. In this instance, all parties agree that actual restoration of the oil infrastructure was not within the scope of the contract. Consequently, we conclude that planning the oil infrastructure restoration was also not within the scope of the contract.

We would encourage the contracting officer to continue to obtain legal assistance given the complexity of the LOGCAP contract, but we also believe that DOD needs to ensure analytical rigor in its review of task orders.

Appendix IV: Comments from the Department of State

Appendix V: Comments from the U.S. Agency for International Development

Appendix VI: Comments from the General Services Administration

Appendix VII: GAO Contacts and Acknowledgments

GAO Contacts

Acknowledgments

Major contributors to this report were Robert Ackley, Ridge Bowman, Carole Coffey, Muriel Forster, Glenn D. Furbish, Charles D. Groves, John Heere, Chad Holmes, John Hutton, Ronald Salo, Karen Sloan, Lillian Slodkowski, Steve Sternlieb, Susan Tindall, Adam Vodraska, and Tim Wilson.