The United States has  relied heavily on private-sector contractors to provide the goods and  services needed to support both the military and reconstruction efforts in  Iraq. DCAA defines questioned costs as costs considered to be not  acceptable for negotiating a reasonable contract price, and unsupported  costs as costs that lack sufficient supporting documentation. DCAA Audit Reports Identified Billions of Dollars of Questioned and Unsupported Costs on Iraq Contracts

Between February 2003 and February 2006, DCAA issued hundreds of  audit reports that collectively identified $3.5 billion in questioned and  unsupported costs on Iraq-related contracts, primarily through audits of  contractor proposals. Based on information provided by DCAA, contracting  officials have responded to audit findings that questioned $1.4 billion. As a result, contracting officials negotiated contract cost reductions of   $386 million according to DCAA. Of this total, DCAA classified $2.1 billion as  questioned, and $1.4 billion as unsupported. Based on the  information provided by DCAA, as of July 2006, the remaining $700 million  in questioned costs is still in process. Because unsupported costs indicate a  lack of contractor information that is needed to assess costs, DCAA  cannot and does not render an opinion on those costs. Therefore, DCAA  does not track the resolution of unsupported costs. DOD Contracting Officials Have Taken a Range of Actions to Address Audit Findings

For the 18 audit reports selected for this review, we found that DOD took  a variety of actions in response to audit findings, including not allowing  some contractor costs. Based on contract documentation we reviewed, the  DOD contracting officials generally considered DCAA’s questioned and  unsupported cost findings when negotiating with the contractor. We found  that DOD contracting officials were more likely to use DCAA’s advice  when negotiations were timely and occurred before contractors had  incurred substantial costs. In addition to identifying questioned and  unsupported costs, DCAA can also withhold funds from the contractor,  which it chose to do in eight of the cases included in our review. DOD Contracting Officials Less Likely to Remove Questioned Costs Already Incurred by the Contractor

To address the more than $1 billion in questioned costs related to the  audits selected, we found that the DOD contracting officials were less  likely to remove questioned costs from a contractor proposal when the  contractor had already incurred these costs. For example, in 5 audit  reports comprising about $600 million of questioned costs reviewed, we  found that the DOD contracting officials determined that the contractor  should be paid for nearly all of the questioned costs (all but $38 million),  but reduced the base used to calculate the contractor’s fee (by   $205 million). By reducing the base, the DOD contracting official reduced  the contractor’s fee by approximately $6 million. According to contract officials, urgent conditions in  Iraq led the government to initiate such contract actions without first  specifying their scope of work and agreeing to the contract price. For example, in 3 audit  reports related to a logistics support task order, DCAA questioned   $204 million. According to DCAA’s calculations, $120 million of these questioned costs  was removed from the contractor’s proposal as a result of its audit  findings. In some cases, DOD officials conducted additional analyses in response to  DCAA’s audit findings. We requested comments from DOD on a draft of this report, but none were  provided. To determine the actions taken by the Department of Defense (DOD) in  response to DCAA audit findings, including the extent to which funds were  withheld from contractors, we selected 18 audit reports comprised of   (1) the 10 reports with the highest dollar amounts of questioned and  unsupported costs and (2) a selection of 8 of the remaining audit reports  with questioned and unsupported cost dollars above $5 million.
Why GAO Did This Study

The government has hired private contractors to provide billions of dollars worth of goods and services to support U.S. efforts in Iraq. Faced with the uncertainty as to the full extent of rebuilding Iraq, the government authorized contractors to begin work before key terms and conditions were defined. This approach allows the government to initiate needed work quickly, but can result in additional costs and risks being imposed on the government. Helping to oversee their work is the Defense Contract Audit Agency (DCAA), which examined many Iraq contracts and identified costs they consider to be questioned or unsupported. The Conference Report on the National Defense Authorization Act for Fiscal Year 2006 directed GAO to report on audit findings regarding contracts in Iraq and Afghanistan. As agreed with the congressional defense committees, GAO focused on Iraq contract audit findings and determined (1) the costs identified by DCAA as questioned or unsupported; and (2) what actions DOD has taken to address DCAA audit findings, including the extent funds were withheld from contractors. To identify DOD actions in response to the audit findings, GAO selected 18 audit reports representing about 50 percent of DCAA's questioned and unsupported costs on Iraq contracts. GAO requested comments from DOD on a draft of this report, but none were provided.

What GAO Found

Defense Contract Audit Agency audit reports issued between February 2003 and February 2006 identified $2.1 billion in questioned costs and $1.4 billion in unsupported costs on Iraq contracts. DCAA defines questioned costs as costs that are unacceptable for negotiating reasonable contract prices, and unsupported costs as costs for which the contractor has not provided sufficient documentation. This information is provided to DOD for its negotiations with contractors. Based on information provided by DCAA, DOD contracting officials have taken actions to address $1.4 billion in questioned costs. As a result, DOD contracting officials negotiated contract cost reductions of $386 million according to DCAA. Based on the information provided by DCAA, as of July 2006, the remaining $700 million in questioned costs is still in process. Because unsupported costs indicate a lack of contractor information that is needed to assess costs, DCAA cannot and does not render an opinion on those costs. Therefore, DCAA does not track the resolution of unsupported costs. For the 18 audit reports selected for this review, GAO found that DOD contracting officials took a variety of actions to address DCAA's audit findings, including not allowing some contractor costs. In the contract documentation GAO reviewed, DOD contracting officials generally considered DCAA's questioned and unsupported cost findings when negotiating with the contractor. GAO found DOD contracting officials were more likely to use DCAA's advice when negotiations were timely and occurred before contractors had incurred substantial costs. For example, in three audit reports related to a logistics support task order negotiated prior to the onset of work, DCAA questioned $204 million. According to DCAA's calculations, $120 million of these questioned costs was removed from the contractor's proposal as a result of its audit findings. In contrast, DOD officials were less likely to remove questioned costs from a contract proposal when the contractor had already incurred these costs. For example, in five audit reports comprising about $600 million of questioned costs reviewed, GAO found that the DOD contracting officials determined that the contractor should be paid for all but $38 million of the questioned costs, but reduced the base used to calculate the contractor's fee by $205 million. By reducing the base, the DOD contracting official reduced the contractor's fee by approximately $6 million. In addition to identifying questioned and unsupported costs, DCAA has the option of withholding funds from the contractor and chose to withhold a total of $236 million for eight cases included in this review.