Under this contract, the Corps  awarded 10 task orders to the contractor worth a total of $2.5 billion. Nearly 80 percent of the questioned costs related to the costs paid for fuel  and fuel delivery. Delayed Negotiations Shaped DOD’s Decision to Pay the Contractor for Nearly All of the Costs Questioned on the RIO I Contract

DOD considered DCAA’s audit findings and conducted additional analysis  before deciding to pay the RIO I contractor nearly all of the $221 million in  costs that DCAA questioned, and to remove $112 million from the amount  used to establish the contractor’s fixed and award fees. DCAA considers $26 million of the costs  questioned on the RIO I contract to be sustained, which DCAA defines as  cost reductions directly attributable to its questioned cost findings. Consequently, removing $112 million from the amount used  to establish the fee pool resulted in an effective lowering of the fees the  contractor received by about $5.8 million (see table 1 for details). Delays in Negotiations Influenced the Contracting Officer’s Decision to Pay Questioned Costs

All 10 RIO I task orders were negotiated more than 180 days after the work  commenced, and all were negotiated after the work had been completed. Changing Requirements, Funding Challenges, and Inadequate Contractor Proposals Contribute to Negotiation Delays and Increase Risk to the Government

Several factors contributed to the delay in negotiations, including DOD’s  changing requirements, DOD’s funding challenges, and inadequacies in  several of the contractor’s business systems. The Sustention Rates on the DCAA Audits of the RIO I Contract and the Sustention Rates on DCAA Audits of Other Iraq Contract Actions Both Varied Widely

We compared the sustention rates for the 11 RIO I audit reports to the  sustention rates for 100 DCAA audits of other Iraq contract actions, and  found a similar pattern in the distribution and range of sustention rates for  both groups. The contractor was notified  of its award fee scores in January 2005, after completion of all work on the  contract. This process was in contrast to the rationale for award fee  evaluations explained in federal regulations: Evaluation at stated intervals  during performance, accompanied by partial payment of the fee generally  corresponding to the evaluation periods, can induce the contractor to  improve poor performance or to continue good performance. The Percentage of Award Fee Earned on the RIO I Contract Fell within the Range of Award Fees Earned on a Sample of Other Iraq Reconstruction Contracts

To put the RIO I award fee into context, we also analyzed the award fees  earned on other selected Iraq reconstruction contracts and found that the  percentage of award fee earned on the RIO I contract was within the range  of award fees earned on these other contracts. According to  DOD officials, efforts to hold award fee boards during the period of  performance were stymied in part by the logistical conditions in Iraq. Appendix I: Objectives, Scope, and Methodology

To determine how the Department of Defense (DOD) addressed the  Defense Contract Audit Agency’s (DCAA) audit findings on the Restore  Iraqi Oil (RIO I) contract and the factors that contributed to DOD’s  decision of how to address those findings, we reviewed negotiation  memorandums and 22 DCAA audit reports, including 11 final audit reports,  for the 10 RIO I task orders. We  also interviewed Corps, DCAA, and other government officials as well as  contractor representatives. To determine the extent to which DOD paid award fees for the RIO I  contract and followed its planned process for making that decision, we  collected and reviewed key documents related to the award fee process,  including the award fee provisions of the RIO I contract, the award fee  determining official’s decision, the award fee plan, and minutes from the  award fee board meeting.
Why GAO Did This Study

The Department of Defense's (DOD) U.S. Army Corps of Engineers (Corps) awarded the $2.5 billion Restore Iraqi Oil (RIO I) contract to Kellogg Brown & Root in March 2003 in an effort to reestablish Iraq's oil infrastructure. The contract was also used to ensure adequate fuel supplies inside Iraq. RIO I was a cost-plus-award-fee type contract that provided for payment of the contractor's costs, a fixed fee determined at inception of the contract, and a potential award fee. The Defense Contract Audit Agency (DCAA) reviewed the 10 RIO I task orders and questioned $221 million in contractor costs. We were asked to determine (1) how DOD addressed DCAA's RIO I audit findings and what factors contributed to DOD's decision and (2) the extent to which DOD paid award fees for RIO I and followed the planned process for making that decision. To accomplish this, we reviewed DOD and DCAA documents related to RIO I and interviewed Corps, DCAA, and other officials.

What GAO Found

DOD considered DCAA's audit findings on the RIO I contract and performed additional analysis before deciding to pay the contractor nearly all of the $221 million in costs that DCAA questioned. DOD did, however, remove about $112 million of the questioned costs from the amount used to establish the contractor's fee pool, which resulted in an effective lowering of the fee received by the contractor by approximately $5.8 million. Lack of timely negotiations contributed significantly to DOD's decision on how to address the questioned costs--all 10 task orders were negotiated more than 180 days after the work commenced. As a result, the contractor had incurred almost all its costs at the time of negotiations, which influenced DOD's decision to pay nearly all of the questioned costs. The negotiation delays were in part caused by changing requirements, funding challenges, and inadequate contractor proposals. In our previous work, we have found that negotiation delays can increase risk to the government. Overall, DCAA considers $26 million of the costs questioned on the RIO I contract to be sustained, which DCAA defines as cost reductions attributable to its audit findings. We compared the sustention rates on DCAA's 11 RIO I contract audits to the sustention rates for 100 DCAA audits of other Iraq contract actions, and found that the sustention rates varied widely for both groups. DOD's Army Corps of Engineers paid $57 million in award fees on the RIO I contract, or 52 percent of the maximum possible, and on individual task orders the fee awarded ranged from 4 to 72 percent of the fee available. While the award fee plan required regular award fee boards during the life of the contract, DOD did not conduct a formal board until nearly all work on the contract was complete. 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. DOD officials told us the workload of RIO staff members and logistical difficulties stemming from the challenging conditions in Iraq hindered efforts to hold evaluation boards during the period of performance. DOD also was unable to give us enough documentation for a full assessment of its compliance with other parts of its plan--it did not, for example, provide the scores the award fee board assigned to the contractor on the individual award fee criteria, so we could not see if the award fee board had followed contract criteria and weighting in evaluating performance. We compared the percentage of award fees earned on the RIO I contract to the fees earned on a group of other selected Iraq reconstruction contracts and found that the percentage of award fees earned on RIO I fell within the lower range of fees earned on the other contracts.