The contracting processes, activities, and challenges associated with rebuilding Iraq can be viewed as similar to, albeit more complicated than, those DOD normally confronts. We and others have already reported on the large and continuing drain on reconstruction dollars to meet unanticipated security needs. Further, multiple players with diffuse and changing responsibilities have had large roles in rebuilding Iraq, complicating lines of authority and accountability. Additionally, rebuilding a nation after decades of neglect and multiple wars is an inherently complex, challenging, and costly undertaking. From May 2003 through June 2004, the Coalition Provisional Authority (CPA), led by the United States and the United Kingdom, was the United Nations recognized authority responsible for the temporary governance of Iraq and for overseeing, directing, and coordinating reconstruction efforts. During 2003, several agencies, most notably the U.S. Agency for International Development (USAID) and the U.S. Army Corps of Engineers, played a role in awarding and managing initial reconstruction contracts. To coordinate and manage the $18.4 billion in reconstruction funding provided in fiscal year 2004, the CPA established a multi-tiered contracting approach for Iraq reconstruction activities. The CPA, through various military organizations, awarded the following contracts: 1 program management support contract to oversee reconstruction efforts; 6 sector program management contracts to coordinate reconstruction efforts specific to each sector; and 12 design-build contracts to execute specific construction tasks. DOD is now emphasizing greater use of local Iraqi firms to perform reconstruction work that was previously intended to be performed by the design-build contractors. With the establishment of Iraq’s interim government in June 2004, the CPA’s responsibilities were transferred to the Iraqi government or to U.S. agencies. The Department of State is now responsible for overseeing U.S. efforts to rebuild Iraq. The Project and Contracting Office (PCO), a temporary DOD organization, was tasked with providing acquisition and project management support. In December 2005, DOD merged the PCO with the U.S. Army Corps of Engineers Gulf Region Division, which now supervises DOD reconstruction activities in Iraq. Additionally, the State Department’s Iraq Reconstruction and Management Office is responsible for strategic planning and for prioritizing requirements, monitoring spending, and coordinating with the military commander. USAID continues to award its own contracts, which are generally associated with economic assistance, education and governance, and certain infrastructure projects. The United States has made some progress in restoring Iraq’s essential services, but as of August 2006, such efforts generally have not met prewar production levels or U.S. goals. Reconstruction activities have focused on restoring essential services, such as refurbishing and repairing oil facilities, increasing electrical generating capacity, and restoring water treatment plants. About one-third of DOD’s construction work remains, and DOD estimates that some work is not planned for completion until late 2008. Continued violence, however, may make it difficult for the United States to achieve its goals. For August 2006, the U.S. embassy reported that the oil, electricity, and water sectors generally performed below the planned U.S. goals. Specifically, Crude oil production capacity was reported as about 2.4 million barrels per day (mbpd), below the prewar level of 2.6 mbpd and the desired goal of 3 mbpd. In the electricity sector, peak generation capacity was reported at 4,855 megawatts, above the prewar level of 4,300 megawatts, but below the U.S. goal of 6,000 megawatts. Further, the current demand for power continues to outstrip the available supply of electricity as more Iraqis purchase consumer items and devices requiring electricity to operate. In the water sector, new or restored treatment capacity was reported at about 1.44 million cubic meters per day, compared to the U.S. goal of 2.4 million cubic meters. According to senior CPA and State officials responsible for the U.S. strategy, the CPA’s 2003 reconstruction plan assumed that (1) creating or restoring basic essential services for the Iraqi people took priority over jobs creation and the economy and (2) the United States should focus on long-term infrastructure projects because of the expertise the United States could provide. Further, the strategy assumed that reconstruction efforts would take place in a relatively benign environment. The difficult security environment and persistent attacks on U.S.-funded infrastructure, among other challenges, contributed to project delays, increased costs, and canceling or reducing the scope of some reconstruction projects. As we reported on September 11, 2006, the overall security conditions have grown more complex, as evidenced by increased numbers of attacks and Sunni/Shi’a sectarian strife. The continuing violence may make it difficult for the United States to achieve its goals. The contracting challenges encountered in Iraq are emblematic of systemic issues faced by DOD. A fundamental prerequisite to having good outcomes is a match between well-defined requirements and available resources. At the sector, program, and project levels, the failure to define realistic requirements has had a cascading effect on contracts and made it difficult to take subsequent steps necessary to get to successful outcomes. For example, in the absence of settled requirements, DOD has sometimes relied on what are known as undefinitized contractual actions, which were used extensively in Iraq and can leave the government exposed to increased costs. Managing risks when requirements are in flux requires effective oversight, but DOD lacked the capacity to provide a sufficient acquisition workforce, thereby hindering oversight efforts. In Iraq, as elsewhere, we found instances in which DOD improperly used interagency contracts to meet reconstruction needs. Finally, the underlying market discipline offered by competition can help promote better outcomes, but DOD, like other agencies, was challenged, particularly early on, in its ability to realize the benefits of competition. One or more of these factors can contribute to unsatisfactory outcomes on individual projects; the net effect, however, is that many reconstruction projects did not achieve their intended goals and DOD has incurred unanticipated costs and schedule delays. One of the factors that can contribute to poor DOD acquisition outcomes is the mismatch between wants, needs, affordability, and sustainability. This mismatch was evident in the reconstruction efforts in Iraq. U.S. reconstruction goals were based on assumptions about the money and time needed, 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 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. As noted by the Special Inspector General, almost immediately 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 increasing 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 the PCO to cancel some projects, most of which were planned to start in mid-2005. Changes, even those made for good reasons, make it more difficult to manage individual projects to successful outcomes. Further, such changes invariably have a cascading effect on individual contracts. To produce desired outcomes within available funding and required time frames, DOD and its contractors need to have a clear understanding of reconstruction objectives and how they translate into the terms and conditions of a contract: what goods or services are needed, when they are needed, the level of performance or quality desired, and what the cost will be. When such requirements were not clear, DOD often entered into contract arrangements on reconstruction efforts that posed additional risks. For example, In June 2004, we reported that faced with uncertainty as to the full extent of the rebuilding effort, DOD often authorized contractors to begin work before key terms and conditions, including the work to be performed and its projected costs, were fully defined. The use of undefinitized contract actions, while allowing needed work to begin quickly, can result in additional costs and risks to the government. We found that as of March 2004, about $1.8 billion had been obligated on reconstruction contract actions without DOD and the contractors reaching agreement on the final scope and price of the work. In one case, we found a contract action that had been modified nine times between March and September 2003, increasing estimated costs from $858,503 to about $204.1 million without DOD and the contractor reaching agreement on the scope of work or final price. In September 2005, we reported that difficulties in defining the cost, schedule, and work to be performed associated with projects in the water sector contributed to project delays and reduced scopes of work. We reported that DOD had obligated about $873 million on 24 task orders to rebuild Iraq’s water and sanitation infrastructure, including municipal water supplies, sewage collection systems, dams, and a major irrigation project. We found, however, that agreement between the government and the contractors on the final cost, schedule, and scope of 18 of the 24 task orders we reviewed had been delayed. These delays occurred, in part, because Iraqi authorities, U.S. agencies, and contractors could not agree on scopes of work and construction details. For example, at one wastewater project, local officials wanted a certain type of sewer design that increased that project’s cost.