Kellogg-Brown & Root Services (KBR) is the poster child for those who claim that government contractors are evil war-profiteers engaged in fraud, waste and abuse. Nary a Commission on Wartime Contracting hearing goes by without at least a token finger being pointed at the company; and we’ve devoted several blog articles to its travails. For example, DCAA Director Pat Fitzgerald testified before the CWC that his auditors had recently questioned “more than 40 percent” of KBR’s proposed subcontractor costs because of a lack of supporting documentation. We also reported that, in April 2010, the U.S. Department of Justice had filed suit against KBR, alleging violations of the False Claims Act stemming from KBR’s use of private security subcontractors. In that same article, we noted that “hundreds” of National Guardsmen had filed suits against KBR for allegedly exposing them to hexavalent chromium … not to mention the “Franken Amendment” that reportedly originated from a KBR employee’s rape at the hands of her co-workers. We could continue but we think the point’s been made.

In short, KBR’s LOGCAP III and LOGAP IV contracts have made it one of the largest defense contractors in the world—but that success has come at a price. The price is a tattered reputation in the eyes of the general public.

The latest chapter in this tawdry tale is kind of puzzling, though. The U.S. DOJ announced that it had intervened in a False Claims Act qui tam suit filed by a former KBR employee, alleging that KBR had violated the False Claims Act on its LOGCAP III contract “because it was unable to account for materials paid for” under a subcontract with a Turkish company named Yuksel-Reysas. According to the announcement, Yuksel-Reyas performed operations and maintenance (O&M) services at various U.S. Army camps located near Mosul, Iraq.

Which is kind of puzzling, isn’t it? Because while failing to account for contractor-acquired material may be a lot of things—such as violations of the property control system, or breakdowns of the material management and accounting system, or even violations of accounting system internal controls—it’s hard to picture how that would lead to presentation of a knowingly false claim to the U.S. Government.

But the Project on Government Oversight (POGO) was able to dig up some more details. While we’ve not always been kind to POGO, we can’t deny that the group often supplements the official record with interesting and useful facts. POGO found the qui tam relator’s original complaint and reported that the relator “alleges that at least $31 million worth of property and materials purchased under the subcontract was lost--air conditioners, refrigerators, generators and motor vehicles, among other valuable items, just vanished into the desert air.”

Looking at the complaint, we saw that the relator was a Government Property Administrator employed by KBR, and allegedly tasked to investigate an $80 million “overexpenditure” on the Yuksel subcontract. During that investigation, the relator alleged that the subcontractor had spent at least $31 million in “unauthorized purchases of property and materials”—which had never been entered into the property control system. (The relator’s complaint appeared to acknowledge that roughly $5 million of that amount was subsequently located, leaving $26 million of unaccounted-for property.)

Because of KBR’s alleged property control system failures and inaccurate property reports, the relator alleged a “reverse False Claim” situation—which is (in layperson’s terms) where a knowingly false statement is made with the intention of wrongfully lowering an amount of money normally due to the U.S. Government. The thing is, we’re not sure that KBR would normally owe the U.S. Government any money even if $31 million worth of stuff had gone missing.

Obviously, we don’t have access to KBR’s LOGCAP III contract and we don’t know the exact language of its property clauses. But normally, the standard Government Property clause (52.245-1) states—

(h) Contractor Liability for Government Property.

(1) Unless otherwise provided for in the contract, the Contractor shall not be liable for loss, theft, damage or destruction to the Government property furnished or acquired under this contract, except when any one of the following applies—

(i) The risk is covered by insurance or the Contractor is otherwise reimbursed (to the extent of such insurance or reimbursement). The allowability of insurance costs shall be determined in accordance with 31.205-19.

(ii) The loss, theft, damage or destruction is the result of willful misconduct or lack of good faith on the part of the Contractor’s managerial personnel.

(iii) The Contracting Officer has, in writing, revoked the Government’s assumption of risk for loss, theft, damage or destruction, due to a determination under paragraph (g) of this clause that the Contractor’s property management practices are inadequate, and/or present an undue risk to the Government, and the Contractor failed to take timely corrective action. If the Contractor can establish by clear and convincing evidence that the loss, theft, damage or destruction of Government property occurred while the Contractor had adequate property management practices or the loss, theft, damage or destruction of Government property did not result from the Contractor’s failure to maintain adequate property management practices, the Contractor shall not be held liable.

Astute readers will notice that there are several scenarios where a contractor (such as KBR) might be held liable for the loss, theft, damage, or destruction of government property. As we said, though, normally the U.S. Government prefers to “self-insure”. So it seems to us that the relator and the U.S. Department of Justice will have a tough time proving to a judge and jury why KBR would go to such lengths to lie about missing and/or unaccounted-for materials.

Well, we’ve seen sketchier allegations before. Time will tell whether the prosecution can prove its case.

It’s no secret that the DCAA has been under fire from nearly all sources over the past 30 months. The GAO issued two scathing reports alleging widespread noncompliance with generally accepted governmental auditing standards (GAGAS) and various other audit quality issues. The DOD Inspector General issued several reports related to DCAA audit quality—not only confirming GAO’s 2008 findings but alleging several others of a more recent vintage. The Senate Committee on Homeland Security and Governmental Affairs permitted an “ad hoc” group of Senators (prominently featured among them Claire McCaskill of Missouri) to establish a Subcommittee on Subcommittee on Contracting Oversight, which has held several hearings devoted to problems at DCAA. The House of Representatives’ Armed Services Committee (HASC) convened a Panel on Defense Acquisition Reform that recommended several fixes to the DOD oversight environment, some of which ended-up in the 2011 National Defense Authorization Act.

And from Robert Brodsky at GovExec.com to Nick Schwellenbach at the Project on Government Oversight, the media have fanned the fires of outrage regarding audit lapses, oversight failures, and just plain bureaucratic bungling at the Department of Defense’s premier audit agency.

(No, we are not going to link to our previous articles discussing the foregoing. Use of our site search feature will be left as an exercise for our readership.)

But there’s one place where the DCAA seems to get the kid-gloves treatment, one safe harbor where softball questions are tossed so that DCAA representatives—whether it be April Stephenson or Pat Fitzgerald—get to make their talking points without interference. There’s one group of interlocutors that always seems to bend over backwards to praise DCAA (often while criticizing DCMA), and whose main concern seems to be that there aren’t enough auditors to audit all the contractors receiving government funds.

Can you guess what safe haven we’re talking about? Can you guess DCAA’s safe harbor?

Yes, indeed. It’s the “independent, bipartisan” Commission on Wartime Contracting. If you guessed the answer, give yourself a prize.

While the CWC was praising DCAA and calling its auditors “recognized experts on accounting matters, internal controls, and business systems,” the GAO was telling Senators “about shoddy reviews and inappropriate changes made to multimillion-dollar audit reports ….” As a result of GAO’s review findings, the DCAA rescinded eighty (80) individual audit reports—a figure that GAO called “unprecedented” in testimony before the Senate. Yet the CWC never seemed troubled by the GAO’s concerns.

While the HASC Panel on Defense Acquisition Reform was hearing testimony about DCAA’s audit quality failures, the CWC was criticizing DCMA for taking “untimely—or no—action on DCAA findings.” While Senator McCaskill was grilling then-Director April Stephenson, the CWC thanked Ms. Stephenson for her “excellent cooperation” and “candid responses” to their questions.

So with those thoughts in the background, when the Commission on Wartime Contracting issues another “interim report” to Congress, perhaps we might be forgiven for wondering how tough it’s going to be on the Federal auditors who largely execute DOD’s contract oversight mission (from a dollars and cents perspective).

“At What Risk? Correcting Over-Reliance on Contractors in Contingency Operations,” is the CWC’s second interim report, and it offers thirty-two (32) recommendations designed to “address the underlying causes of the poor outcomes of contracting,” and “institutionalize changes so as to have lasting effects.” Candidly, we did not review all thirty-two recommendations in great detail. Some of the recommendations struck us as infeasible in today’s environment of slash-n-burn fiscal conservatism. Others struck us as naïve or even misguided. Others we thought fell into the “too little, too late” category. And then there were the recommendations on contractor competition and contractor oversight ….

Infeasible recommendations included such items as “grow agencies’ organic capacity,” “establish a contingency contracting directorate in the Office of the Joint Chiefs of Staff,” and “establish a new, dual-hatted position at OMB and the NSC to provide oversight and strategic direction for contingency operations.” Look folks, Secretary of Defense Gates and USD (AT&L) Dr. Ash Carter are currently on the warpath to cut DOD bureaucracy in a bid to drive “efficiency” and “affordability” into DOD programs. They are cutting heads and functions and directorates; we’re not seeing them as being eager to add some back into the mix.

“But gosh,” we hear you arguing. “Won’t those additional positions pay for themselves many times over through reductions in contingency contractors’ notorious waste, fraud and abuse?” Yeah, about that. No. Not in our estimation anyway.

Don’t get us wrong. We’re not saying that there’s zero waste, fraud and abuse over in Southwest Asia. Lord knows we’ve posted enough stories on the topic. But hiring more HQ REMFs won’t solve that problem. What you want to do is add more investigators, more police-types, more experienced auditors, who actually will put boots on the ground and go in there and pull some paperwork for an in-depth review. Adding more (and more competent) COTRs --- great idea! Training-up Contracting Officers and ensuring there are enough to manage the contractors – great idea! The other stuff? Not so much.

Naïve/misguided recommendations included such items as “restrict reliance on contractors for security,” and “measure senior military and civilian officials’ efforts to manage contractors and control costs.” Our big concern here—and it’s one that the CWC never saw fit to investigate—is that what little data has been reviewed shows that it is cheaper to use private security contractors than it is to use government employees for the same function. So if you want to reduce the number of contractors in theater, then you better pony up some extra appropriations and funding plus-ups. Which is going to go over nicely with the new freshmen Congressmen, don’t you think?

In addition, we really don’t endorse the concept of getting into the faces of “senior military officials” and impacting their careers based on how they manage contractors and control costs. Really, we think their proper focus ought to be on achieving military objectives and we’re fine with grading them on how they do in that arena. You want to make civilian staff more accountable? That’s fine with us. But let’s all leave the military leadership alone to focus on winning the war(s), so we can bring the troops home as quickly as possible.

“Too little, too late” recommendations included “require competition reporting and goals for contingency contracts,” “break out and compete major subcontract requirements from omnibus support contracts,” and “limit contingency task-order performance periods.” Folks, we’re winding down major activities in Iraq. Though we’ll have a large force there for a very long time, supported by contractors (of course), the fact of the matter is that it’s simply too late to affect the LOGCAP contracts at this late stage of the game. Do you really want to recompete what’s already in place? We sure as heck don’t. We say, let the contractors finish their work and get them out of the theater as quickly as possible. Save the scarce and precious DOD acquisition resources you would waste on recompeting the work and use them instead to properly manage the contractors in Afghanistan. And speaking of Afghanistan, if you want to break out major subcontracts from the LOGCAP contractors management systems, then you better plan to have plenty of new acquisition resources to manage them.

What’s that? You say you don’t have enough contracting officers, technical representatives, and functional specialists as it is? You can’t handle the additional workload? Oh, yeah—about that whole insufficient acquisition workforce thing? Maybe you’re going to want to pay those evil LOGCAP contractors to manage the subcontractors for you until you figure out how to pay for all the new DCMA heads you’re going to need. Which is why breaking-out the LOGCAP subcontract efforts isn’t the smartest near-term idea to be published this month.

Okay, let’s wrap this up by talking about some of the CWC recommendations that hit close to home—the ones dealing with contract competition, oversight and audit.

Recommendation #20 – Allow contractors to respond to, but not appeal, agency performance assessments. Sure. Except for the whole U.S. Court of Federal Claims precedent that permits contractors to appeal their agency performance assessments. That’s going to be overturned by Congress? We guess that hokey old three Branches of Government thing in the Constitution was just for show, right? And of course, the unspoken assumption here is that the government always gives contractors accurate and fair past performance ratings. Hey, we’ve got a recommendation! How about contracting officers and technical representatives certify, under penalty of perjury, that they have given a fair and supportable past performance rating? If you’re not willing to consider that one, then we’re not willing to accept that they always get it right. The status quo seems about right to us.

Recommendation #26 – Make consent to U.S. civil jurisdiction a condition of contract award. Sure, let’s ignore current court decisions on legal jurisdiction and make those foreign companies that support our warfighters have to comply with Cost Accounting Standards, Truth in Negotiation Act, the False Claims Act and all the same burdens we impose on our domestic companies. Because that’s working out so well (for lawyers anyway).

Let’s impose our legal system on all those nasty foreigners who hide behind their country’s sovereignty and won’t subject themselves to our super-fast and inexpensive investigations and trials. Just like McDonnell Douglas Service and its subcontractor, Alsalam, who were accused of defective pricing in 2001 (after a 3 year-long audit by DCAA), and received a final decision from a contracting officer in June, 2008. An appeal was filed three months later and, in December 2009, a decision was issued by the Armed Services Board of Contract Appeals (ASBCA). Just to be clear, the U.S. “justice” system took eleven years for Alsalam to be cleared of wrong-doing, though (to be fair) the company eventually had its case dismissed on a legal technicality (the Contract Disputes Act’s statute of limitations). Yeah, no. Our standing in the world is already too low as it is; let’s not expose any more foreign companies to first-hand encounters with the legal framework surrounding contract oversight.

Our counter recommendation? Require DCAA to issue all audit reports within six months of beginning them. Require DCMA to issue a final decision on DCAA audit reports within six months of receiving them. Require Department of Justice and military investigators to commence prosecutions within one year of receiving referrals, or let the contractor in question go on its way. Establish an expedited hearing process for contingency contractors. In other words, speed up the legal system before you bog it down with more cases from companies currently exempt from its jurisdiction.

Recommendation #31 – Strengthen authority to withhold contract payments for inadequate business systems. Well, it’s nice that the CWC acknowledges what we (and others) have pointed out to the DAR Council, which is that DOD contracting officers already have sufficient authority to reduce or withhold payment for inadequate business systems. But we must say that giving that same authority to civilian agencies seems to be a bit of a paper tiger, since those same civilian agencies lack sufficient manpower to audit those business systems. But whatever….

You know, if the CWC has done nothing else, it’s focused the rule makers on contractor “business systems” (which is a term the CWC invented because “internal control system” sounds so boring and accountant-y). We’re okay with that—to some extent. But we can’t help noting that the criteria that define what makes a business system “adequate” spring largely out of the DCAA’s audit programs and from nowhere else. There is very little input from any objective, independent third party regarding when a timekeeping system (for example) is adequate. And the adequacy of a contractor’s business systems will be determined by a contracting officer based on findings in a DCAA audit report—from those same auditors that the GAO and DOD IG said couldn’t audit the broad side of a barn. So forgive us, but we’re just a tad skeptical that this is going to work out all fair and reasonable for the contractors, with no unsupported or erroneous audit findings leading to a negatively impacted cash flow.

Recommendation #32 – Amend access-to-records authority to permit broader access to contractor records. Here’s another recommendation that will overturn legal precedent and make contractors provide “reports and documentation related to … internal audits and to other types of management reviews” so that … well, there’s really no rationale for this one. This recommendation simply reiterates a long-standing DCAA grievance that the agency’s auditors can’t look at whatever they want to see and talk to whomever they want to talk with, with no accountability for audit procedures and no relationship between any possible audit objective and the information being demanded. Frankly, it undercuts the credibility of the other recommendations, in our view.

We’ve already blown-up the notion that there is any widespread problem obtaining contractor records. There’s no industry-wide “access to records” problem and even the DOD has pooh-poohed the idea. DCAA can’t complete the audits it starts and is starting fewer and fewer each year—and that situation has almost nothing to do with any lack of contractor cooperation.

Moreover, exactly what information does DCAA (and/or the CWC) expect will be provided in the contractors’ internal audit reports? Do they think that there’s going to be a flashing red neon arrow pointing to an internal finding of fraud, waste, and/or abuse? Going a bit further, do they expect that, once contractors know those reports will be reviewed by DCAA on a regular basis, they are going to keep pumping them out with the same frequency and keep all the findings intact? Really, nobody can be that naïve.

Okay. That’s about it for now. Looking back over this article, we think we should clarify that we don’t hate the CWC or think that the Commission hasn’t performed a valuable function. We respect the Commissioners and think that contract oversight is a fruitful area for probing and investigating. It’s just that it’s all so … well, so political. It doesn’t seem that this has about substance; but instead more about show. Many of the people proffering testimony before the CWC were the “usual suspects” who repeated the same clichéd talking points. Others offered glib sound bites without sufficient support. Many unsupported assertions were accepted as being gospel instead of being challenged, and found their way into this interim report.

It’s hard to get to meaty recommendations when you’re on the rubber chicken circuit.

And some of the Commission members may not be as independent as the casual reader might think. A Google search on the employment histories of Michael Thibault and Charles Tiefer, for instance, might lead one to a better understanding as to why DCAA always seemed to fare so well before the Commission, and why contractors always seemed to fare so poorly.

As always, your comments in support of this article—or in derision—are welcomed.