As the Commission on Wartime Contracting in Iraq and Afghanistan (CWC) was conducting a hearing on March 29, 2010 to discuss “rightsizing and managing contractors during the drawdown in Iraq,” a DOD Inspector General report was being brought to the attention of the press.  The report alleged that maintenance services provided by LOGCAP III contractor KBR (aka Kellogg, Brown & Root, formerly known as Halliburton) were in excess of the level actually needed.  In the words of the DOD IG—

--the utilization of contractor-provided tactical vehicle field maintenance services was less than the 85 percent required by Army Regulation 750-1.  Specifically, from September 1, 2008, through August 31, 2009, the rate ranged from a low of 3.97 percent to a high of 9.65 percent. This occurred because the task order 159 statement of work did not contain requirements for the contractor to report utilization data and supporting documentation to the Army. In addition, the Army was not conducting adequate reviews of contractor utilization data provided by KBR and taking proper corrective action. As a result, about $4.6 million of the $5 million in costs incurred by DOD were for tactical vehicle field maintenance services that were not required. The Army internal controls were ineffective in monitoring contractor-provided tactical vehicle field maintenance services.

Mother Jones is a “bimonthly magazine of investigative journalism that exposes the evils of the corporate world, the government, and the mainstream media.” Mother Jones, bastion of “smart, fearless journalism” read the DOD IG report from which the above quote was taken, and reported it to their readers with the headline, “KBR Bills $5 Million For Mechanics Who Work 43 Minutes a Month.”  If you click on the link, you’ll see that the Mother Jones article included quotes from CWC co-chair Chris Shays and member Charles Tiefer, both critical of KBR.

The DOD IG report was issued in early March; the media picked it up on March 25, just a couple of days before the CWC hearing on the same subject.  Coincidence?  We think not.

As Mother Jones reported—

On March 29, the bipartisan Commission on Wartime Contracting—which Congress set up in early 2007 to investigate waste and corruption in the military private sector—will hold a hearing to examine whether contractors are doing their part to prepare for leaving Iraq. Some commissioners are raring for a showdown with KBR over its drawdown plan—or lack thereof. The commission's co-chair, former Republican congressman Christopher H. Shays, said in a statement: ‘Considering that KBR was just awarded a task order—now under protest—that could bring them up to $2.3 billion in new [Iraq-related] revenues, it's very important that we get a clear picture of the quality of planning and oversight during the Iraq drawdown.’  The Balad report is likely to be a hot potato at the hearing. Commissioner Charles Tiefer tells Mother Jones the report is a ‘dynamite critique’ of the firm's practices. ‘The numbers translate into an astonishingly large pool of KBR employees standing around idle and having the government be charged,’ he says.

It’s interesting (to us, at least) that the thrust of the media reports is that, somehow, KBR is at fault for maintaining staffing levels in excess of those needed.  While KBR may not be entirely innocent in this debacle, the DOD IG report (quoted above) clearly points a finger at the Army’s contracting and oversight as the root cause of the problem—and holds KBR largely blameless.  (We note assertions that KBR failed to cooperate with Army oversight officials, including refusing to provide information regarding its staffing levels.  If the contract was a Firm, Fixed-Price (FFP) type, the contractor may not have been required to provide that kind of detailed information.)

Over the past year, the CWC has been vocal in its criticism of the Defense Department’s ineffective oversight and management of contractors supporting warfighters in Southwest Asia.  It’s puzzling that their public criticism on this issue would focus on the contractor and omit any finger-pointing at the Army contracting officers and support staff (which is where the DOD IG said the problem lay).  So while the CWC blames everybody except the culprits, Mother Jones and other media outlets get a nice opportunity to voice outrage at KBR and other contingency contractors.

Pat Fitzgerald’s First Testimony

While we’re on this subject, we note that the CWC hearing marked Pat Fitzgerald’s first public testimony as Director of DCAA.  His sixteen-page typewritten testimony can be found here.  Mr. Fitzgerald’s testimony covered—

• Update on DCAA Contingency Contracting Audit Efforts
• Oversight of Contingency Contractors
• Contractor Business System Audits
• Economy and Efficiency Audits
• Current Status of the Drawdown Audit

Mr. Fitzgerald made some interesting points in his testimony.  Following is a brief recap of some of those points; if you would like the details, then clink on the link above.

Since May 2009 (a period of about 10 months), DCAA has issued 23 “suspected irregularity referrals” (aka Form 2000).  DCAA uses Form 2000 when it suspects that fraud, or other “irregular conduct” has occurred.  Appendix 1 to his testimony lists those 23 referrals by issue.  The issues range from “billed retainage from subcontractors” to “failure to eliminate subcontractor errors” to “travel invoices appear fraudulent” to “possible bid rigging of insurance coverage” to “human trafficking and withholding of employee passports” to “avoidance of paying payroll taxes.”  In other words, the list is a veritable “soup-to-nuts” litany of soupçons of suspicious behavior. 

With respect to audits of contractor “business systems,” Mr. Fitzgerald noted that “We believe that the real time reporting of significant deficiencies/material weaknesses of a particular system as opposed to an overall audit opinion on the adequacy of each of those systems is a better approach.”  DCAA’s “revised approach … will no longer require an opinion on the overall adequacy of the system of internal controls. Instead, the opinion will be limited to determining compliance with the applicable DFARS criteria. Our approach will result in increased transaction testing while ensuring that deficiencies are reported on a real time basis.”

We are excited to see DCAA move away from its binary pass/fail system audits towards a more meaningful report of control system deficiencies.  Our optimism is tempered however, by our concerns for the proposed DFARS contractor business systems rule that seems to omit any discussion of materiality and to expect perfection, with onerous penalties for a single mistake.  We are also concerned about a soi-disant independent and bipartisan commission that seems determined to make headlines at the expense of the truth, aided and abetted by certain media outlets that seem to favor attention-grabbing headlines instead of simply reporting the facts.  Color us naïve and idealistic, but we think taxpayers deserve better.

On March 26, 2010 the Department of Justice reported that a former Department of Energy (DOE) employee, Ms. Donna Scott, had pled guilty to criminal conflict of interest and her husband had pled guilty to making a false statement to a federal agent.  We have written before about both organizational and personal conflicts of interest—notably here and here.  There is a proposed rule in play that would establish standards for contractor personal conflicts of interest similar to those already in place for government employees, making this an issue applicable to pretty much everybody.

According to the DOJ announcement, Mrs. Scott “coordinated the use and renovation of DOE office space.”  Included in her duties was the oversight of the renovation of a lobby and conference room in a DOE building in Germantown, MD.  Her duties also included the acquisition of new furniture for those spaces.  While employed by DOE, she “recommended to a co-worker that the co-worker obtain price quotes for furniture from her husband, Timothy Scott. Timothy Scott provided these price quotes to Donna Scott’s co-worker, both of which referenced Timothy Scott as the manufacturer’s representative.”  However, the co-worker was told that she needed two additional price quotes in order to “satisfy competitive bidding requirements.”

So, to help her co-worker satisfy “competitive bidding requirements,” Mrs. Scott—

--admitted that she subsequently obtained two additional price quotes for each transaction from her husband and provided them to her co-worker as the competitive price quotes. Donna Scott admitted that she knew, unlike the original price quotes, that none of these new price quotes referenced Timothy Scott by name. Moreover, the additional quotes bid a higher price for the furniture than the initial quote, making Timothy Scott’s original bid the lowest.

Mrs. Scott’s co-worker used the three quotes to justify why Mr. Scott’s low bid was fair and reasonable, and DOE then purchased the furniture from Mr. Scott.

In addition to the foregoing, Mrs. Scott—

--selected furniture worth approximately $300,000 from particular manufacturers for the cafeteria renovation project. [She] admitted that she knew these manufacturers’ representatives planned to use her husband as their dealer of record for these transactions, thus earning her husband a commission. [She] arranged for the furniture to be purchased by the General Services Administration (GSA) on behalf of the DOE. As a result, Timothy Scott earned approximately $24,174 in commissions from the manufacturers.

According to the DOJ announcement, “Donna and Timothy Scott each face maximum sentences of five years in prison and fines of $250,000 or the greater of twice the gross gain or loss from the offense. U.S. District Judge Peter J. Messitte has scheduled sentencing for June 3, 2010.”