The United States, along with its coalition partners and various international organizations and donors, has embarked on a significant effort to rebuild Iraq. The United States is spending billions of dollars to reconstruct Iraq while combating an insurgency that has targeted military and contractor personnel and the Iraqi people. The United States has relied heavily on private-sector contractors to provide the goods and services needed to support both the military and reconstruction efforts in Iraq. DCAA is responsible for providing contract audits for DOD, along with general accounting and financial advice to DOD acquisition officials negotiating government contracts. DCAA performs many types of audits for DOD, including audits of contractor proposals, audits of estimating and accounting systems, and incurred cost audits. Generally, the results of a DCAA audit are intended to assist contracting officials in negotiating reasonable contract prices. Normally, DCAA audits contractors’ proposals and provides contracting officials advice on the reasonableness of contractor costs prior to negotiations. DCAA also conducts audits of cost- type contracts after they are negotiated to ensure costs incurred on these contracts are acceptable. Relying on cost information provided by the contractor and assessing whether the costs comply with government regulations, DCAA may identify certain costs as questioned or unsupported. DCAA defines questioned costs as costs considered to be not acceptable for negotiating a reasonable contract price, and unsupported costs as costs that lack sufficient supporting documentation. DCAA reports its findings to contracting officers for consideration in negotiating reasonable contract prices. DCAA audit reports represent one way DCAA can assist contracting officials as they negotiate government contracts. Also, contracting officials may invite DCAA to participate in contract negotiations to explain audit findings and recommendations, and may factor DCAA audit findings into evaluations of contract proposals. The Federal Acquisition Regulation (FAR) acknowledges that DCAA’s role is advisory, and assigns the contracting officer responsibility for ensuring that the contractor’s proposed price is fair and reasonable. While DCAA audit recommendations are nonbinding, DCAA’s Contract Audit Manual states that contracting officials deviating from DCAA advice during negotiations should explain the reasons why they disagreed with DCAA. DOD Directive 5105.36 also enables DCAA to withhold payments by (1) suspending payment for specific incurred costs lacking documentation or (2) disapproving costs that do not conform with applicable regulations. DCAA can issue a Form 1 to a contractor notifying it that funds will be withheld, which initiates review of the challenged costs by the contracting officer. Between February 2003 and February 2006, DCAA issued hundreds of audit reports that collectively identified $3.5 billion in questioned and unsupported costs on Iraq-related contracts, primarily through audits of contractor proposals. In some cases, DCAA was asked to audit multiple iterations of contractor proposals as these proposals were revised over a period of time. Based on information provided by DCAA, contracting officials have responded to audit findings that questioned $1.4 billion. As a result, contracting officials negotiated contract cost reductions of $386 million according to DCAA. DCAA does not render an opinion about costs it determines to be unsupported; therefore they do not track the resolution of unsupported costs. Between February 2003 and February 2006, DCAA tracked 349 audit reports that identified about $3.5 billion in questioned and unsupported costs on Iraq contracts. Of this total, DCAA classified $2.1 billion as questioned, and $1.4 billion as unsupported. DCAA identified these questioned and unsupported costs in audits related to 99 different contractors. Most of the questioned and unsupported costs were identified through audits of contractor proposals. Specifically, in DCAA’s database, more than three-quarters of the audits with questioned and unsupported costs were classified as “forward pricing activity,” which primarily involves auditing contractor proposals or parts of proposals. In some cases, DCAA reviewed multiple contractor proposals for the same work. DOD officials told us that contractors submitted multiple proposals because requirements changed or the proposal was considered inadequate for negotiations. For example, over a 6-month period, DCAA issued four audit reports on three different proposals for a task order related to an oil mission. Each audit superseded the prior one, and DCAA updates its information to reflect the most recent report. While DCAA tracks and records how questioned costs are addressed by the contracting official in negotiation, it does not track similar information about unsupported costs. Based on the data provided to us by DCAA, as of July 3, 2006, contracting officials had responded to 169 of DCAA’s 349 Iraq audit reports. DCAA considered the findings to be addressed because the contracting official had documented the result of negotiations with the contractor. Based on information provided by DCAA, for the $1.4 billion in questioned costs addressed by contracting officials, contracting officials sustained $386 million of the total questioned costs. DCAA defines sustained costs as the costs reduced through negotiations directly attributable to findings reported by the DCAA auditor for proposal audits. Based on the information provided by DCAA, as of July 2006, the remaining $700 million in questioned costs is still in process. DCAA’s information does not reflect what actions, if any, the contracting officials have taken to respond to these audit report findings. According to a DCAA official, DCAA does not track how unsupported costs are addressed. DCAA guidance implementing the FAR requires the contracting official to report on the disposition of questioned amounts, but not specifically on whether contractors provided sufficient documentation to eliminate unsupported costs. Because unsupported costs indicate a lack of contractor information that is needed to assess costs, DCAA cannot and does not render an opinion on those costs. Therefore, DCAA does not track the resolution of unsupported costs. For the 18 audit reports selected for this review, we found that DOD took a variety of actions in response to audit findings, including not allowing some contractor costs. Based on contract documentation we reviewed, the DOD contracting officials generally considered DCAA’s questioned and unsupported cost findings when negotiating with the contractor. We found that DOD contracting officials were more likely to use DCAA’s advice when negotiations were timely and occurred before contractors had incurred substantial costs. In contrast, DOD officials were less likely to remove questioned costs from a contract proposal when the contractor had already incurred these costs. In addition to identifying questioned and unsupported costs, DCAA can also withhold funds from the contractor, which it chose to do in eight of the cases included in our review. Other actions taken by the DOD contracting officials included inviting DCAA to attend meetings or negotiations with the contractor and conducting additional analyses to respond to audit findings. Our review of the government’s documentation of contract negotiations for the selected audit reports showed that DOD generally considered DCAA audit findings. The majority, or 13 of the 15 memorandums, identified how the contracting officials addressed DCAA audit findings. Most memorandums discussed questioned and unsupported costs identified by DCAA in areas such as labor, equipment, material, and subcontracts, but some lacked specific detail on how DCAA audit findings were addressed. However, in two cases we were unable to determine from the negotiation documentation how DCAA audit findings were used. To address the more than $1 billion in questioned costs related to the audits selected, we found that the DOD contracting officials were less likely to remove questioned costs from a contractor proposal when the contractor had already incurred these costs. For example, in 5 audit reports comprising about $600 million of questioned costs reviewed, we found that the DOD contracting officials determined that the contractor should be paid for nearly all of the questioned costs (all but $38 million), but reduced the base used to calculate the contractor’s fee (by $205 million). By reducing the base, the DOD contracting official reduced the contractor’s fee by approximately $6 million. Generally, when entering into a contract, the government and contractor reach agreement on the key aspects of the contract, including the scope and price of the work, before the work is authorized to start. However, the FAR enables the government to authorize the contractor to begin work before doing so in certain cases, such as when the government demands the work start immediately and it is not possible to negotiate a fully defined contract in sufficient time to meet the requirement. Our past work has shown that the use of undefinitized contract actions can pose risks to the government, such as potentially significant additional costs. Acquisition regulations generally require that the contracting official define the scope and costs of such contracts within 180 days of the contract’s start date. According to contract officials, urgent conditions in Iraq led the government to initiate such contract actions without first specifying their scope of work and agreeing to the contract price. In many cases we reviewed, contractors completed some work and incurred substantial costs well before the government negotiated the contract price. Of the 18 audits covered in our review, 11 audit reports corresponded to contract actions where more than 180 days had elapsed from the beginning of the period of performance to final negotiations. For nine of these audits, the period of performance DOD initially authorized for each contract action concluded before final negotiations took place. For example, DCAA questioned $84 million in its audit of a task order proposal for an oil mission. In this case, the contractor did not submit a proposal until a year after the work was authorized, and DOD and the contractor did not negotiate the final terms of the task order until more than a year after the contractor had completed work (see fig. 1). The DOD contracting officer paid the contractor for all questioned costs but reduced the base used to calculate contractor profit by $45 million. As a result, the contractor was paid about $3 million less in fees. In the final negotiation documentation, the DOD contracting official stated that payment of incurred costs is required for cost-type contracts, absent unusual circumstances. This same rationale was used in negotiations on several other task orders. In contrast, in the few audit reports we reviewed where the government negotiated prior to starting work, we found that the portion of questioned costs removed from the proposal was substantial.