On December 17, 2009 the Ad Hoc Senate Committee on Contracting Oversight (a subcommittee of the Senate Committee on Homeland Security and Governmental Affairs) held hearings regarding oversight of contracting in the Afghanistan theater of operations.  In the words of the Subcommittee website, the hearing was to “review whether the lessons learned from Iraq are being applied in Afghanistan. The hearing will also examine new findings from federal auditors and explore abuses in the award, management, and oversight of Afghanistan contracts.”

To accomplish its objectives, testimony was taken from officials from five agencies with active contracts in the area—Department of State, Department of Defense, USAID, the US Army, and the Joint Contracting Command.  As Senator McCaskill (R-MO) noted, the agencies cumulatively are responsible for billions of dollars of contracting activity.  She noted that “contracting in Afghanistan has exceeded $23 billion since the beginning of the war; [however] we also know that, because of problems with tracking Afghanistan contracts, the real value of contracts is likely to be much higher.”

Senator McCaskill continued, “We know that federal auditors have already identified nearly a billion dollars in wasteful spending on Afghanistan contracts. That’s nearly 1 of every 6 dollars.  And we also know that, because auditors have only looked at a fraction of contracts, the real amount of waste is likely to be much higher.”

We were more interested in Senator McCaskill’s numbers than in the rather predictable testimony from the agency officials.  So rather than delve into the testimony, we thought we’d look at the background information provided to the Subcommittee.  In a somewhat unusual step, the Subcommittee provided a link to a staff “backgrounder” memo that seemed to be the source of Senator McCaskill’s information.

The Staff Memo, entitled “An Overview,” was prepared by the Subcommittee Majority Staff for the Senators’ use. The 15-page memo can be found here.  Following is a discussion of some of the memo’s talking points that we found to be of interest.

• In 2008, the Defense Department, State Department, and the U.S. Agency for International Development (USAID) combined had more than 16,000 active contracts in Afghanistan. (Source: GAO Report GAO-10-01, October 2009.)
• Wasteful Spending on Defense Department Contracts Nears $1 Billion. According to federal auditors, approximately $950 million in questioned and unsupported costs has been submitted by Defense Department contractors for work in Afghanistan. This represents 16% of the total contract dollars examined.
• Number of Defense Department Contractors in Afghanistan May Reach 160,000. There are currently 104,000 Defense Department contractors currently working in Afghanistan. The increase in troops may require an additional 56,000 Defense Department contractors, bringing the total number of Defense contractors in Afghanistan to 160,000.
• As of September 30, 2009, there were approximately 104,000 Defense Department contractors and approximately 64,000 U.S. military personnel in Afghanistan. In other words, contractors comprised more than 60% of the Defense Department’s workforce in Afghanistan. In December 2008, contractors comprised 69% of the Defense Department’s workforce, the highest ratio of contractors to military personnel in US history. From June 2009 to September 2009, there was a 40% increase in Defense Department contractors in Afghanistan. During the same period, the number of armed private security contractors working for the Defense Department in Afghanistan doubled, increasing from approximately 5,000 to more than 10,000. (Source: Congressional Research Service Reports (09/21/09 and 12/14/09) and DOD reports.)

With respect to “waste, fraud, and abuse,” the Staff Memo provided several anecdotes for the Senators’ consideration.  Without repeating the anecdotes, suffice to say that the focused on projects that were overspent and/or behind schedule.  In the main, the issues seemed to be lack of management oversight and lack of visibility into project status and results, rather than allegations of contractor fraud. That said, the Memo also noted that “DCAA recently suspended $14.3 million in costs billed by Fluor under LOGCAP IV. According to DCAA, the contractor needs to provide further clarification about its price competition and the potentially disproportionate share of corporate office expenses allocated to government contracts.”

The Memo devoted a section to information provided by DCAA during a December 9, 2009 “briefing” to the Subcommittee Staff.  In that briefing, DCAA claimed that it had identified “$533 million as questioned costs and $417 million as unsupported costs.”  The aggregate amount represents 16% of the $5.9 billion in examined costs.  However, the Memo notes that—

The DCAA auditors also informed the Subcommittee that the Defense Department has rejected the majority of their recommendations to disallow questioned costs. Of the $533 million in questioned costs, the Defense Department and contractors have reached a resolution on only $223 million. Of this $223 million, Defense Department officials have agreed with DCAA recommendations to withhold $78.8 million. This represents only 35% of the costs questioned in audits of Afghanistan contracts.

We note that the 35% sustainment rate is not dramatically different from DCMA’s overall DCAA questioned cost sustainment rate, which is roughly 38%.  (See the semiannual DOD IG report.)  It is also worth noting that no DCAA personnel were invited to testify before the Subcommittee.

To conclude, the Senators are making much of the fact that lessons supposedly learned in Iraq are not being implemented in Afghanistan.  That’s probably true.  It takes time to hire and train acquisition professionals.  It is rather far-fetched to expect seasoned contracting officers and COTRs to spring up overnight, as if from a tree.  Until the DOD and the other agencies involved in Southwest Asia contracting oversight will have to make do with the existing resources they’ve been given through the prior years’ budgets.

In a recent article on the DOD Inspector General’s semiannual report to Congress, we noticed that the DOD IG reported on the status of “significant post-award contract audits”.  (See Appendix E of the DOD IG report, linked at the end of this article.)  According to the IG’s report, as of September 30, 2009 there were 1,617 open audits that covered $5.06 billion dollars worth of DCAA-questioned costs.  Of that total, 153 were in litigation and 1,085 were considered “overage”—i.e., not dispositioned by the cognizant Contracting Officer within 6 months of receipt.   The amount of questioned costs associated with the overage contract post-award audit reports was $2.66 billion.

This matters because Contracting Officer delays in dispositioning audit findings can lead to a forfeiture of amounts to which the government would have otherwise been entitled in a court of law, as a very recent case at the Armed Services Board of Contract Appeals (ASBCA) demonstrates.

McDonnell Douglas Services, Inc. (MDS) vs. United States (ASBCA No. 56568, 12/02/2009) involved a “post-award” (aka “defective pricing”) DCAA audit finding related to MDS’ subcontractor’s proposed costs under its contract with the Royal Saudi Air Force for Foreign Military Sales (FMS) Technical Support Program (TSP) services in support of the Saudi F-15 fleet.  (Note we have written about the FMS program, in general, here.) MDS was awarded a letter contract effective May 1, 1997 and that contract was definitized in early October, 1997. Pursuant to the Truth-in-Negotiations Act and its contract clauses (52.215-22 and 52.215-24), MDS certified that its cost or pricing data was current, accurate, and complete as of October 2, 1997.

MDS’s subcontractor, Alsalam Aircraft Company (Alsalam) submitted its proposal to MDS on or about October 8, 1996.  As the court noted, “Prior to award, Alsalam had submitted numerous documents to the Defense Contract Audit Agency (DCAA) containing or transmitting cost and pricing data.  DCAA reviewed the documents and data and issued pre-award audit reports on 16 December 1996 and 16 April 1997.” Alsalam certified that its cost or pricing data were current, accurate, and complete as of April 25, 1997, and it began performance on May 1, 1997.  (These dates are important to the case, trust us.)

Less than a year after starting contract performance (February 10, 1998), DCAA’s European Branch Office (DCAA EBO) initiated a “post-award” audit to evaluate whether Alsalam had complied with the disclosure requirements related to its subcontract pricing.  On July 31, 1998 (five months later), the DCAA EBO issued a “preliminary Audit Report” in which it alleged that Alsalam had overstated both its site overhead and TSP program overhead costs because (1) Alsalam failed to include forecasts for future contract direct labor dollars in its proposed site overhead allocation base, and (2) Alsalam had failed to exclude unallocable amortization costs from its TSP overhead pool.  (With respect to the latter finding, it seems that Alsalam had included an amount for amortization of “pre-operating costs” in its TSP overhead pool.)  The DCAA recommended a downward price adjustment of $3.12 million.

Subsequently (May 3, 2000), DCAA revised its report and recommended a downward adjustment of $2.9 million.  The revised audit report did not change any of the findings; it simply changed the resulting impact of the findings. Alsalam disputed the preliminary findings in a September 2, 2000 response.  DCAA EBO issued its final audit report to DCAA’s Boeing St. Louis Resident Office on March 22, 2001.  In the final report, DCAA EBO recommended a downward price adjustment of $1.67 million—but, again, the underlying findings did not change significantly. The final report noted “coordination” between DCAA and the cognizant Air Force Contracting Officer at Warner Robins Air Logistics Center.

Just to recap the timing, DCAA initiated its audit of Alsalam in February, 1998 and issued its final audit report on March 22, 2001—more than three years after starting its audit work.  But that delay wasn’t really a problem; the problem was how long it took the St. Louis DCAA auditorso do anything with the DCAA EBO audit report.

It took an additional 14 months (until May 14, 2002), for the local DCAA St. Louis auditors to send a letter to the Boeing Company (who had acquired MDS during the time period) seeking “comments before we issue our final audit report” which recommended a prime contract price adjustment of $2.025 million (an amount that included MDS overhead and profit applied to Alsalam’s questioned costs).  In that letter, DCAA St. Louis reiterated the basis for the recommended price adjustment, which again had not changed from the original DCAA EBO findings.  The final Audit Report was issued to the cognizant Warner Robins Contracting Officer by DCAA St. Louis on June 17, 2002—nearly 52 months after DCAA EBO initiated its audit work.  But that delay wasn’t the problem; the problem was how long it took the cognizant Contracting Officer to do anything with the DCAA St. Louis audit report.

It took nearly another six years for the cognizant Contracting Officer to issue a final decision on the matter.  (In the meantime, there had been a change in Contracting Officer assignment to the contract.) As the judge noted—

The CO cited DCAA’s Audit Report No. 3421-2002H42097001, the incorporated subcontractor Audit Report No. 2191-1998S42000315, and the same three bases for price adjustment asserted therein. He decided that MDS and Alsalam had failed to submit accurate, complete and current cost and pricing data as required by TINA and implementing contract provisions, thereby increasing the contract price by $2,024,877. He reduced the contract price by that amount and asserted that the Air Force was entitled to a refund in that amount, plus interest.

The Contracting Officer’s final decision was issued on June 3, 2008 (and was confirmed on June 17, 2008).  MDS appealed the decision to the ASBCA roughly three months later.  Before the court was the question as to whether the Government’s claim for a price reduction was time-barred by the six-year statute of limitations found in the Contract Disputes Act (CDA), 41 U.S.C. § 605(a). A similar provision is also found in the FAR, at 33.206 (Initiation of a claim).

The CDA language is as follows—

Each claim by a contractor against the government relating to a contract and each claim by the government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim. The preceding sentence does not apply to a claim by the government against a contractor that is based on a claim by the contractor involving fraud.

As the court noted, the CDA does not define the phrase “accrual of a claim”—and that was the critical issue.  If the claim accrued when the DCAA St. Louis office issued its final audit report (June 17, 2002) then the government’s claim was just inside the six-year limit and would be valid. The government argued that was the date on which it knew of its damages in a “sum certain”. On the other hand, if the claim accrued on March 21, 2001 (when the DCAA EBO issued its report and “coordinated” the findings and issues with the cognizant contracting officer), then the government’s claim would be outside the six-year limit and would be rejected.

To answer the question, the court looked at the definitions section of FAR Part 33, at 33.201.  The court found the definition it had been looking for, which read—

Accrual of a claim occurs on the date when all events, which fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be fixed, some injury must have occurred. However, monetary damages need not have been incurred.

The court recited that the government had the burden of proving a claim for defective pricing damages—“In a defective pricing claim the government is required to prove that: (1) the information in dispute is 'cost or pricing data' under TINA; (2) the cost or pricing data was not meaningfully disclosed; and (3) the government relied to its detriment upon the inaccurate, noncurrent or incomplete data presented by the contractor.”

The court adjudged that—

Here, we do not need to determine a precise date on which the government was on notice of, was aware of, or should have been aware of, its potential defective pricing claim against the prime contractor, because the undisputed and uncontrovertible facts demonstrate that the government had established the basis for its defective pricing claim against the prime contractor well before, and definitely no later than, 14 May 2002, more than six years before the COs’ June 2008 decisions issued. Furthermore, in connection with its motion, appellant has not disputed the government’s contention that the alleged defective pricing increased the contract price. This occurred as of contract definitization, with the logical consequence that the government incurred increased costs when contract performance began and, again, definitely no later than 14 May 2002.

The government’s claim was determined to be time-barred and thus “it is not viable and cannot be considered.”  With a bit of finality, the court concluded as follows—

Because the government’s defective pricing claim upon which the COs’ decisions were based is time-barred and not cognizable under the CDA, the COs’ decisions asserting the claim were not valid. If there is no valid CDA claim, any purported CO’s decision on the matter is a nullity and we do not have jurisdiction to entertain an appeal from the purported decision.

The case is provided here.

DOD Instruction 7640.02 (“Policy for Follow-up on Contract Audit Reports”) requires that “Findings and recommendations contained in contract audit reports shall be resolved and dispositioned in a timely manner which is consistent with legal statutes, regulations, and DoD policy.”  The DoDI requires, as a matter of policy, that the Director, DCAA must “Issue timely audit reports and provide timely and complete responses to contracting officers or review officials who request clarification or information supporting the audit findings and recommendations.”  Moreover, the DOD contracting officers are required to “resolve reportable audit reports within 6 months of report issuance.”  The Instruction provides for a Contract Audit Follow-Up (CAFU) database and periodic status reports. Obviously, one of the purposes of such a system is to prevent such a delay in resolution that a claim asserted by the government is time-barred, as happened in the MDS case before the ASBCA.

So as one ponders why it would take DCAA more than four years to notify the prime contractor of its recommended price adjustment related to a subcontractor’s defective pricing, and why it would take the DOD contracting officer(s) another six years to officially issue a final decision demanding the price adjustment (plus interest), one might also wonder if the audit reports had been entered into the CAFU database, as DOD policy required.  And if the DOD Instruction had been followed, would that have accelerated the process and lead to a successful government claim?

Perhaps that is merely idle speculation.  But when we read from the DOD IG report that there are more than 1,000 “overage”:post-award audit reports awaiting disposition, we can’t help but asking how many of those are in a situation that is similar to the MDS case discussed here.  And perhaps more worrisome is the question regarding how many audit reports aren’t even in the CAFU database, leaving them invisible and uncounted in the DOD IG report?