The broader context of U.S. efforts for Iraqi reconstruction is tied to how missions and projects are being conducted and managed. Over the past decade, DOD has increasingly relied on contractors to provide a range of mission-critical services. Overall, DOD’s obligations on service contracts rose from $82.3 billion in fiscal year 1996 to $141.2 billion in fiscal year 2005. According to DOD officials, the amount obligated on service contracts exceeded the amount the department spent on major weapon systems. The growth in spending for services has coincided with decreases in DOD’s workforce. DOD carried out this downsizing, however, without ensuring that it had the specific skills and competencies needed to accomplish DOD’s mission. For example, the amount, nature, and complexity of contracting for services have increased, which has challenged DOD’s ability to maintain a workforce with the requisite knowledge of market conditions and industry trends, the ability to prepare clear statements of work, the technical details about the services they procure, and the capacity to manage and oversee contractors. Participants in an October 2005 GAO forum on Managing the Supplier Base for the 21st Century commented that the current federal acquisition workforce significantly lacks the new business skills needed to act as contract managers. Contractors have an important role to play in the discharge of the government’s responsibilities, and in some cases the use of contractors can result in improved economy, efficiency, and effectiveness. At the same time, there may be occasions when contractors are used to provide certain services because the government lacks another viable and timely option. In such cases, the government may actually be paying more and incurring higher risk than if such services were provided by federal employees. In this environment of increased reliance on contractors, sound planning and contract execution are critical for success. We have previously identified the need to examine the appropriate role for contractors to be among the challenges in meeting the nation’s defense and other needs in the 21st century. The proper role of contractors in providing services to the government is currently the topic of some debate. In general, I believe there is a need to focus greater attention on what type of functions and activities should be contracted out and which ones should not, to review and reconsider the current independence and conflict of interest rules relating to contractors, and to identify the factors that prompt the government to use contractors in circumstances where the proper choice might be the use of civil servants or military personnel. Possible factors could include inadequate force structure; outdated or inadequate hiring policies, classification and compensation approaches; and inadequate numbers of full-time equivalent slots. Turning to Iraq, DOD has relied extensively on contractors to undertake major reconstruction projects and provide support to its troops. For example, DOD has responsibility for a significant portion of the more than $30 billion in appropriated reconstruction funds and has awarded and managed many of the large reconstruction contracts, such as the contracts to rebuild Iraq’s oil, water, and electrical infrastructure, and to train and equip Iraqi security forces. Further, U.S. military forces in Iraq have used contractors to a far greater extent than in prior operations to provide interpreters and intelligence analysts, as well as more traditional services such as weapon systems maintenance and base operations support. The Army alone estimates that almost 60,000 contractor employees currently support ongoing military operations in Southwest Asia and has spent about $15.4 billion on its single largest support contract—the Logistics Civil Augmentation Program (LOGCAP)—between 2001 and 2004. Reconstruction and support contracts are often cost-reimbursement-type contracts, which allow the contractor to be reimbursed for reasonable, allowable, and allocable costs to the extent prescribed in the contracts. Further, these contracts often contain award fee provisions, which are intended to incentivize more efficient and effective contractor performance. If contracts are not effectively managed and given sufficient oversight, the government’s risk is likely to increase. For example, we have reported DOD needs to conduct periodic reviews of services provided under cost-reimbursement contracts to ensure that services are being provided and at an appropriate level and quality. Without such a review, the government is at risk to pay for services it no longer needs. DOD’s reliance on contractors for key reconstruction efforts and support to deployed forces requires that DOD create the conditions conducive for success. Our work has shown that these conditions include a match between requirements and resources, sound acquisition approaches, leadership and guidance, visibility and knowledge of the number of contractors and the services they provide, and the capacity to manage and assess contractor performance. As we have previously reported, in many cases these conditions were not present on DOD reconstruction and support contracts, increasing the potential for fraud, waste, abuse, and mismanagement. Several of my colleagues in the accountability community and I have developed a definition of waste. As we see it, waste involves the taxpayers in the aggregate not receiving reasonable value for money in connection with any government funded activities due to an inappropriate act or omission by players with control over or access to government resources (e.g., executive, judicial or legislative branch employees, contractors, grantees or other recipients). Importantly, waste involves a transgression that is less than fraud and abuse. Further, most waste does not involve a violation of law, but rather relates primarily to mismanagement, inappropriate actions, or inadequate oversight. Illustrative examples of waste could include: unreasonable, unrealistic, inadequate or frequently changing proceeding with development or production of systems without achieving an adequate maturity of related technologies in situations where there is no compelling national security interest to do so; the failure to use competitive bidding in appropriate circumstances; an over-reliance on cost-plus contracting arrangements where reasonable alternatives are available; the payment of incentive and award fees in circumstances where the contractor’s performance, in terms of costs, schedule and quality outcomes, does not justify such fees; the failure to engage in selected pre-contracting activities for contingent events; Congressional directions (e.g. earmarks) and agency spending actions where the action would not otherwise be taken based on an objective value and risk assessment and considering available resources. A prerequisite to having good outcomes is a match between well-defined requirements and available resources. Shifts in priorities and funding, even those made for good reasons, invariably have a cascading effect on individual contracts, making it more difficult to manage individual projects to successful outcomes and complicate efforts to hold DOD and contractors accountable for acquisition outcomes. I should note such problems reflect some of the systemic and long-standing challenges confronting DOD, whether on contracts for services or major weapon systems. Contracts, especially service contracts, often do not have definitive or realistic requirements at the outset needed to control costs and facilitate accountability. U.S. reconstruction goals were based on assumptions about the money and time needed, as well as a permissive security environment, all of which have proven unfounded. U.S. funding was not meant to rebuild Iraq’s entire infrastructure, but rather to lay the groundwork for a longer- term reconstruction effort that anticipated significant assistance from international donors. To provide that foundation, the Coalition Provisional Authority (CPA) allocated $18.4 billion in fiscal year 2004 reconstruction funds among various projects in each reconstruction sector, such as oil, electricity, and water and sanitation. The CPA used a multitiered contracting approach to manage and execute the projects. In this case, the CPA, through various military organizations, awarded 1 lead contractor, 6 sector contractors, and 12 design-build contracts in early 2004 (see fig. 1). After the CPA dissolved, the Department of State initiated an examination of the priorities and programs with the objectives of reprioritizing funding for projects that would not begin until mid- to late-2005 and using those funds to target key high-impact projects. By July 2005, the State Department had conducted a series of funding reallocations to address new priorities, including increased support for security and law enforcement efforts and oil infrastructure enhancements. One of the consequences of these reallocations was to reduce funding for the water and sanitation sector by about 44 percent, from $4.6 billion to $2.6 billion. One reallocation of $1.9 billion in September 2004 led DOD’s Project and Contracting Office to cancel some projects, most of which had been planned to start in mid-2005. Additionally, higher than anticipated costs associated with using the large design-build contracts contributed to DOD’s decision to directly contract with Iraqi firms. For example, in the electricity sector, high cost estimates by one design-build contractor resulted in the termination of five task orders and the resolicitation of that work. After the task orders were canceled, the design-builder was slow to reduce overhead costs in accordance with the reduced workload, according to agency officials and documents. DOD is now directly contracting with Iraqi firms to reduce the costs of reconstruction efforts not requiring advanced technical and management expertise, such as erecting electrical distribution projects. Similarly, in the transportation sector, the design-build contractor demobilized and left Iraq shortly after award of the contract in March 2004 because DOD and the contractor agreed that the overall program costs were too high. Subsequently, DOD has made greater use of Iraqi contractors who were experienced in building roads and bridges. Further, the lack of a permissive environment resulted in higher than anticipated security costs, which in turn, resulted in diverting planned reconstruction resources and led to canceling or reducing the scope of certain reconstruction projects. As we reported in July 2005, U.S. civilian agencies and the reconstruction contractors we evaluated generally obtained security services from private security providers. We noted that the use of private security providers reflected, in part, the fact that providing security was not part of the U.S. military’s stated mission. We also found, however, that despite significant role played by private security providers, U.S. agencies generally did not have complete data on the costs associated with their use.