Report says Defense weighed audit findings on questioned payments

The Government Accountability Office is set to release a report finding that the Pentagon considered the recommendations of its auditing arm before deciding to pay millions of dollars in questioned costs to KBR, the contractor charged with importing fuel and rebuilding the oil infrastructure of Iraq.

A copy of the report, obtained by Government Executive, appears to counter claims made last year by Rep. Henry Waxman, D-Calif, chairman of the House Oversight and Government Reform Committee, that a settlement of $221 million in disputed contract charges shows that the Defense Department "ignored auditor findings."

The report was requested by Waxman, Rep. Tom Davis, R-Va., ranking member of the committee, and Sen. Daniel Akaka, D-Hawaii, chairman of the Senate Homeland Security and Governmental Affairs Subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia.

In a July 30 letter to Comptroller General David M. Walker, Waxman asked that GAO grant his staff access to its audit documentation before the public release of the report, and provide copies of the documentation upon the release. Congressional sources familiar with the study said Waxman's office has requested a 30-day hold on the public release in order to examine the documentation. Requests for holds are fairly common, often to prepare for a report's public rollout.

In keeping with GAO protocol, the requested audit documents have been provided to Waxman's office, said Katherine Schinasi, managing director of the acquisition sourcing management team at GAO. The final report, she said, is expected to be made public on or around Aug. 30.

Waxman's office did not respond to repeated requests for comment Wednesday.

The report dates back to a March 2003 contract to restore and operate Iraq's oil infrastructure at the start of the American invasion. The Restore Iraqi Oil (RIO) contract was awarded without competition by the Army Corps of Engineers to KBR, then a subsidiary of Halliburton. The company eventually billed nearly $2.5 billion for 10 task orders that were split among fuel importation and infrastructure projects.

Similar to many Iraqi contracts, RIO was a cost-plus-award-fee agreement, allowing for the payment of the contractor's costs, along with additional fees -- some negotiated beforehand and others based on performance. Under the contract, KBR was paid a fixed fee of 2 percent of the negotiated estimated contract cost plus an award fee of up to 5 percent, based on how Defense evaluated the contractor's performance.

The Defense Contract Audit Agency identified $221 million in questionable costs in its final audits of the task orders, mostly related to the costs paid for fuel and fuel delivery. However, after consulting with Defense contracting officials and conducting its own analysis, the Corps paid nearly all of the questioned costs, refusing to pay just $26 million.

But after negotiations with the contractor, the Defense Department removed roughly $112 million of the questioned costs from the amount used to establish KBR's fee pool, thereby lowering the award fees earned by the company by $5.8 million, according to the GAO report.

The report found that the Pentagon's decision to pay most of disputed costs was influenced primarily by the lack of timely negotiations between the Corps and the contractor. Since all 10 task orders were negotiated more than 180 days after the work had begun, most of the contractor's costs had been incurred before the final contract was signed. In its response to the GAO report, the Pentagon attributed the delays to inadequate contractor proposals, changing contract requirements and a lack of firm funding for the mission.

Corps officials told investigators they decided to pay the costs because they would most likely not win a court battle for costs that KBR already incurred. A Defense contracting official further told GAO that "while the contractor probably did not do everything it could have to lower prices, it took reasonable actions to do so." Meanwhile, DCAA officials involved in the process told GAO that the Defense contracting officer "did the best job he could, given the circumstances," and that they did not expect every questioned cost they cited to be sustained.

GAO did find, however, that the Defense Department failed to follow key internal guidelines when it paid KBR $57 million in award fees -- just over half the maximum possible -- on the contract. Despite its plans to conduct formal award fee evaluations, the report found, Defense did not convene a meeting of the award fee board until the contract performance was nearly completed.

"As a result, DoD was not able to provide the contractor with formal award fee feedback while work was ongoing, which federal regulations state should be done in order to motivate a contractor to either improve poor performance or continue good performance," the report found.

Pentagon officials said RIO contracting officials were overworked because of conditions in Iraq and that "holding an award fee board was not a high priority because their focus was making sure that the work under the contract was accomplished."

Nonetheless, GAO found that the fees paid on the task order, which ranged from 4 percent to 72 percent of the fee available, were within the low range of those paid on similar contracts in Iraq.

While addressing the Defense Department's contract management, the report does not address whether the Pentagon should have paid the disputed fees or the award fees, issues central to Waxman's allegations. After an article about the cost reimbursements and award fees appeared in The New York Times, Waxman wrote to Davis on Feb. 27, 2006, that "this information shows that the Corps of Engineers ignored auditor findings in three ways: by reimbursing Halliburton for costs determined to be unreasonable or unsupported, by permitting Halliburton to collect profits on challenged costs, and by giving Halliburton unwarranted bonuses."

In a statement to Government Executive, Davis said, "This report puts to rest some of the wild and premature charges that were leveled by some members against government contract and audit officials and against KBR. There's more than enough going wrong in Iraq; we don't need to make stuff up. No one ignored auditor findings here, as has been charged. And no one did KBR any special favors."

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