The United States, along with its coalition partners and various international organizations and donors, has embarked on a significant effort to rebuild Iraq. As of October 2006, the United States had obligated about $29 billion for reconstruction and stabilization efforts in Iraq. The United States has relied heavily on private sector contractors to provide the goods and services needed to support the reconstruction efforts in Iraq. Congress has appropriated substantial amounts to support rebuilding efforts such as restoring Iraq’s oil and electric infrastructures, assisting in developing a market-based economy, and improving the country’s health, education, and medical services. With regard to Iraq’s oil sector, U.S. support has included efforts to (1) restore Iraq’s oil infrastructure to sustainable prewar crude oil production and export capacity, and (2) deliver and distribute refined fuels for domestic consumption. Specific U.S. activities and projects for the restoration of Iraq’s oil production and export capacity include repairing the Al-Fathah oil pipeline crossing, restoring several gas and/or oil separation plants near Kirkuk and Basrah, and repairing natural gas and liquefied petroleum gas plant facilities in southern Iraq. U.S. activities also include the restoration of wells, pump stations, compressor stations, export terminals, and refineries, and providing electrical power to many of these oil facilities. In addition to infrastructure restoration activities, from late May 2003 through August 2004, the United States facilitated and oversaw the purchase, delivery, and distribution of refined fuels throughout Iraq, primarily funded using the Development Fund for Iraq (DFI). These imports—used for cooking, heating, personal transportation, and private power generation—were required to supplement domestic production due to increased demand and Iraq’s limited refining capacity. In early 2003, DOD assigned the Corps the responsibility of the oil restoration activities known as Restore Iraqi Oil. In March 2003 the Corps awarded a cost-plus-award-fee contract, referred to as the RIO I contract, to support the oil restoration mission. Under this contract, the Corps awarded 10 task orders to the contractor worth a total of $2.5 billion. Two task orders related to oil restoration planning and extinguishing oil fires; two task orders were for the construction and repair of the oil infrastructure; one was for life support activities, such as lodging and dining services; and five task orders were for the importation, delivery, and distribution of refined fuels throughout Iraq. At the request of the Corps, DCAA audited the contractor’s proposals for the RIO I contract. 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 DCAA audits of contractor proposals are intended to assist contracting officials in negotiating reasonable contract prices. Typically, 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. DCAA defines questioned costs as costs considered to be not acceptable for negotiating a fair and reasonable contract price. DCAA reports its findings to contracting officers for consideration in negotiating fair and 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. DCAA’s role is advisory, and the contracting officer is responsible for ensuring that the contractor’s proposed price is fair and reasonable. While DCAA audit recommendations are nonbinding, federal regulations specify that when significant audit recommendations are not adopted, the contracting officer should provide rationale that supports the negotiation result in the price negotiation documentation. In its final 11 audits of the 10 task orders, DCAA identified $221 million in questioned costs on the RIO I contract. In total, DCAA issued 22 proposal audits of the RIO I contract because DCAA audited multiple proposals for some of the task orders. The final 11 audits included one audit of each task order and an audit of a contractor claim on the life support task order. Nearly 80 percent of the questioned costs related to the costs paid for fuel and fuel delivery. For example, DCAA questioned $139 million of the costs the contractor paid for fuel and fuel transportation in Kuwait based on a comparison of the price paid by the contractor and the price paid by the Defense Energy Support Center (DESC) when it took over the mission for the contractor in April 2004. Figure 1 outlines the reasons for DCAA’s questioned costs on the RIO I contract. The RIO I contract provided for payment of a fixed fee of 2 percent of the negotiated estimated contract cost plus an award fee amount of up to 5 percent, based on the government’s evaluation of the contractor’s performance. Award fee contracts allow an agency to adjust the amount of fee paid based on contractor performance. The award fee is intended to motivate excellence in contractor performance, and can also serve as a tool to control program risk and cost. However, the monitoring and evaluation of contractor performance necessary under an award fee contract requires additional administrative effort and cost, and federal regulations provide that the use of such a contract is suitable when the expected benefits of an award fee contract are sufficient to warrant this additional effort and cost. In general, for award fee contracts, DOD personnel (usually members of an award fee evaluation board) conduct periodic evaluations of the contractor’s performance against specified criteria in an award fee plan and recommend the amount of fee to be paid. These evaluations are informed by input provided by government personnel who directly observe the contractor’s performance. Typically, award fee contracts emphasize multiple aspects of contractor performance, such as quality, timeliness, technical ingenuity, and cost-effective management. Because award fees are intended to motivate contractor performance in areas that are susceptible to judgmental and qualitative measurement and evaluation, these criteria and evaluations tend to be subjective. After receiving the recommendation of the award fee evaluation board, a fee-determining official makes the final decision on the amount of fee the contractor will receive. In certain cases the fee-determining official may also decide to move unearned award fee from one evaluation period to a subsequent evaluation period or periods, thus providing the contractor an additional opportunity to earn previously unearned fee—a practice called rollover. DOD considered DCAA’s audit findings and conducted additional analysis before deciding to pay the RIO I contractor nearly all of the $221 million in costs that DCAA questioned, and to remove $112 million from the amount used to establish the contractor’s fixed and award fees. The reduction in the amount used to establish the fee pool resulted in an effective reduction of the contractor’s fee by about $5.8 million. DOD’s decision to pay most questioned costs was shaped by the fact that negotiations did not begin until most of the work was complete and the costs had already been incurred. The delay in negotiations was influenced by factors such as changing requirements, funding challenges, and problems with the contractor’s business systems. DCAA considers $26 million of the costs questioned on the RIO I contract to be sustained, which DCAA defines as cost reductions directly attributable to its questioned cost findings. We compared the sustention rates on DCAA’s 11 RIO I contract audits to the sustention rates for 100 DCAA audits of other Iraq contract actions, and found that the sustention rates varied widely for both groups. To address the $221 million in costs questioned by DCAA, DOD collected additional information and conducted additional analysis. For example, after DCAA issued its final audits, DOD collected additional information related to the difference in costs paid by the contractor and those paid by DESC for fuel and fuel delivery from Kuwait, as well as price adjustments the contractor paid to the subcontractor for fuel from Turkey, the two largest reasons for questioned costs. The DOD contracting officer also convened a meeting with contractor representatives, DCAA officials, and other Corps officials to discuss the additional information. As a result of the additional information and analysis presented in the meeting, the DOD contracting officer asked DCAA to conduct financial analyses to quantify options—referred to as financial positions—that he could use in developing the government’s objectives for negotiations with the contractor. The financial positions differed from DCAA’s final audit reports in some areas, for example, reflecting a narrower gap between the costs paid by the contractor and the costs paid by DESC for the fuel and fuel delivery from Kuwait. DOD decided to address the $221 million in questioned costs in the following ways: Pay both the costs and fees. The DOD contracting officer decided to pay the contractor costs and associated fees for nearly half of the costs questioned by DCAA. In general, these costs reflected the financial positions prepared for negotiations by DCAA after DOD collected additional information about some of the questioned costs. For example, although DCAA’s final audits questioned the costs paid for fuel from Turkey, the financial positions did not include reductions for these costs. The contracting officer used the financial positions as a basis for deciding to pay the contractor for the costs for fuel from Turkey. Not pay the contractor costs or fees. For less than $10 million of the questioned costs, DOD decided not to pay the contractor for its costs and the associated fees. For example, the Corps decided not to reimburse approximately $4 million the contractor spent on leasing diesel trucks that were not used. Pay the costs but not the fees. For almost half of the questioned costs, DOD decided to pay the contractor but removed those costs from the amount used to calculate the contractor’s fee.