Contractors Watching Contractors? Where Is the True Oversight? (Part I)

This is the first part of a two part series looking at the trend by the DoD to hire contractors to oversee other DoD contractors instead of doing the management and oversight themselves. Both Charles Smith and Robert Bauman are former DoD oversight and investigative personnel and they will explain fundamental and insidious problems with this new DoD fad, how and why it got started, how it hurts our defense and troops and what to do to begin to change it. This whole initiative by the DoD to shirk its oversight and management duties while cutting their own personnel to such a level that they are unable to successfully oversee even the oversight contractors has an unreal feel to it. The logic the Army uses to justify this during wartime seems like a trip by Alice to Wonderland. I have not seen such strange contracting moves since the DoD tried, in the 1980s, to get their errant contractors to voluntarily disclose their mismanagement and fraud, i.e., asking the contractors to fill out their own self-arrest forms. This new trend to have oversight contractors is complicated and destructive, so they will explain the problem this week and provide more evidence and solutions next week. Fasten your seatbelts; it is going to be a bumpy ride explaining these bizarre moves in military procurement.

Dina Rasor, Editor, Solutions column

In late 2004, the Army Sustainment Command (ASC) management, responsible for the huge logistics civilian augmentation program (LOGCAP) contract used to provide support to the troops in Iraq, faced a dilemma. KBR, the LOGCAP III main contractor, had burgeoning costs on the LOGCAP III contract’s task orders in Iraq. The Defense Contract Audit Agency (DCAA), the primary audit agency within the DoD, which also audits many other governmental departments, submitted audits finding KBR’s business systems (such as cost estimating, procurement and cost accounting) were so inadequate that the audit agency would not recognize over $1 billion in questioned and unsupported costs. As a result, the LOGCAP contracting officer for the Army, following established acquisition regulations, instituted a 15 percent withhold on payment of KBR’s costs. KBR politically pushed back against ASC within the DoD, and the Congress and even threatened to withhold services to the troops in Iraq unless its invoices were paid.

In response, the Army relieved the personnel that were trying to get this new war service contractor under control and installed new ASC management. (Charles Smith, one of the authors for this column, was one of those personnel who was transferred.) Feeling the political heat, the new Army management did damage control by issuing a sole-source contract to a consulting firm, RCI, to conduct its own audit of KBR costs, in effect, duplicating the DCAA audits. Not to disappoint its Army customer, RCI, unlike the government-run DCAA, found that most of KBR costs were justified. ASC officials then discarded DCAA’s findings and, instead, used RCI’s results to settle KBR’s costs. The 15 percent withhold was rescinded while most of the questioned and unsupported costs were allowed. This was a form of buying the audit that you want and the Army, who was relying on KBR for the major troop support in Iraq, gave this contractor a green light for business as usual … running up as much costs as possible with the war as an excuse.

This may have been seen as a short-term solution for the Army to quell their fear of KBR withholding services to the troops, but it had a more insidious long-term effect on the bloated costs of the first operational Task Order, the first round of services KBR did during the war. Because true oversight and management was compromised, the follow-on LOGCAP IV contract costs were artificially inflated by approximately 90 percent. RCI, now Serco, Inc. (a British company), eventually became the “support and oversight contractor” for LOGCAP IV, providing oversight to the three logistical support contractors, and the cost games continued.

Outsourcing government contracts is a growing and disturbing trend that raises a number of issues. One of the most insidious is the risk of the government losing control over its contracting process and losing control of some other crucial “inherently governmental functions,” i.e., its traditional check-and-balance system over contractors. That traditional check-and-balance system has been weak in the DoD, but at least the government had direct control over the management and oversight of its contracts. Certain government contracting functions, such as analyzing a contractor’s financial and business systems, administering contracts, approving contractual documents, determining whether contract costs are allowable and reasonable, developing contract requirements and awarding contracts traditionally has been reserved for government officials. They are tasked to support the public interest and they have unique government authority: exercising decision-making authority on behalf of the government and the ability to obligate government money.

ASC management’s reliance on contractors for oversight of the LOGCAP contract, considered the 800-pound gorilla of Army support contracts, draws significant attention because it has grown to over $40 billion. One of the principle problems with management of this contract (along with political pressure) was the initial lack of purchasing and oversight resources within the ASC, the Defense Contract Management Agency (DCMA), which provides administrative support to the contract on the ground in Iraq, and the DCAA, which traditionally has provided auditing services to the contract.

The gutting of DoD acquisition and oversight personnel can be traced to the 1990s when defense industry sponsored “acquisition reform” legislation and former Vice President Al Gore’s “Reinvention of Government” initiatives were enacted. Acquisition staffing levels, especially within the DCMA, declined more than 55 percent, while DCAA auditors declined by 40 percent. This deeply affected the skyrocketing procurement dollars since September 11, 2001 and the exploding LOGCAP contract for troop support in Iraq beginning in 2003. The Gansler Commission (an independent commission on Army acquisition established by the Army) highlighted this problem, stating in 2007, “The Army currently lacks the leadership and personnel (military and civilian) to provide sufficient contracting support to either expeditionary or peacetime operations.”

As a result of being badly staffed, the ASC was not able to provide contract management and oversight necessary to protect the government’s (and troops’) interests. Outsourcing government work was in vogue during the Bush II administration, and finding contractors to do more of this work was considered a great free-market-style solution. Instead, it proved to be a grievous mistake.

Besides encroaching on inherently governmental functions, outsourcing of contract oversight also creates a potential conflict of interest. The possibility of the oversight contractor disclosing propriety or sensitive information belonging to other contractors or working on procurement actions that the oversight contractor might later bid on are glaring examples.

There is great risk in having an oversight contractor involved in the acquisition, planning and management support over the newly implemented LOGCAP IV and other contracts. Contractors have different agendas than Army internal contract personnel since the oversight contractor’s first priority is to make money for itself and please its Army’s internal program managers. Army internal program managers already have significant political pressure by Congress and the DoD to acquiesce to contractor mischief, but Serco’s relationships with the Army’s operational contractors like KBR in providing oversight, analysis and assessments of who wins contracts and at what cost, have an inherent conflict of interest built in that has not been assessed or controlled by the military.

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Given the risks of ceding governmental acquisition authority to contractors, the Government Accountability Office (GAO) recently cited an Army study, which found that 2,357 contractor employees were performing jobs that are considered to be inherently governmental. Another 1,877 contractor employees were providing unauthorized personal services that government employees should have been performing. Finally, 45,934 contractor employees were working in areas, including contract management, which have in the past been considered inherently governmental areas. By doing this, the Army is only hiding and crippling its inability to manage and oversee contracts itself.

Despite these problems, the number of oversight contractors is on the rise. Sources within the Army’s contracting agencies indicate that the use of contractors to provide oversight and management of other contractors has been on the increase. This trend is based on odd logic. For example, if contractor B was hired to provide oversight of contractor A, then contractor C would be needed to provide oversight of contractor B and so on. The lack of traditional Army acquisition and oversight staff triggered this outsourcing and, at some point, the government’s own oversight will continue to atrophy. The Army doesn’t have the personnel to do management and oversight in a meaningful way, so the more it contracts out, the more it will not hire and promote the government staff to do these traditionally government jobs. The experience with contractors overseeing contractors in the Iraq war is speeding up this downward spiral on management and oversight.

Unfortunately, there are some peculiar political and governmental incentives that push the DoD to look for contractor solutions to handle contract management and oversight. The current political situation, which is calling for the general reduction in government, may force agencies to reduce full-time employees and to rely on more contracting out of oversight. Despite the growing management and oversight workload due to much larger defense spending, it is difficult to increase full-time employees in an agency and contracts provide an immediate solution to the need for more oversight. Additionally, the different types of government funds often make funds available for contracts, where no funds are available to hire employees.

With the Army trend to increase the number of management and oversight contractors there is an increased incentive to go along with fraud and other malfeasance, with oversight contractors accepting poor work, providing high performance evaluations and accepting improper costs in order to keep a good working relationship with another contractor. Also, placing another contractor layer between the primary contractor and the DoD creates potential obstacles to conducting meaningful audits or finding fraud, waste and abuse.

A stark illustration of this problem is provided by a DCAA source who described such obstacles in Iraq when they attempted to conduct a performance audit of KBR. This source was met with roadblocks by Serco personnel at every turn. Instead of going directly to KBR as DCAA would normally do to obtain key reports to conduct their audit, they had to go through Serco, acting as a buffer to KBR, to obtain access to their reports. Serco, according to one DCAA source, “just kept putting up roadblocks” to obtain the reports and original source documents necessary for a meaningful audit. Serco even suggested that the DCAA auditors did not know what they were asking for. The source was frustrated that Serco wanted to give them useless, self-generated reports instead of what they actually needed. Creating another contractor layer for DCAA to go through, especially in a war zone, in order to conduct important performance audits can result in delayed and incomplete audits that otherwise could have revealed questioned and unsupported costs and helps to explode the costs in the future.

How did Serco get to the position of providing contract management and oversight while creating roadblocks for DCAA and, to some extent, DCMA? Serco’s predecessor, RCI, was initially hired by LOGCAP management to only perform administrative services in order to ease the burden on a strained contracting office. They didn’t exercise any type of discretion, provide any recommendations or prepare any decision reports. It didn’t take long for RCI to migrate from administrative tasks, in August 2004, to conducting financial audits and analysis of operational contractor proposals, evaluating contractor performance and conducting oversight over other contractors by January 2005. They have become the Army’s defacto technical and financial analysis organization for the LOGCAP contract by supplanting DCMA and DCAA. In addition, they have encroached into the Army’s legal office assisting with legal reviews and conducting legal research.

These are grave concerns. RCI’s work that discredited DCAA’s audit in 2004 provided LOGCAP’s new Army management, their customer, with results they wanted. If the customer wants a good report, they will generally get one whether it’s justified or not.

In February 2010, the DoD Office of Inspector General (DoD-OIG) issued a report to the Senate Armed Services Committee of their review of the Army’s decision not to withhold funds on the LOGCAP III contract, and it included a look at the use of contractors in support of the contract. They identified several concerns that called into question the use of RCI for accounting and auditing services that ASC did not obtain prior approval for; and that the services provided by RCI could be inherently governmental, which violates contract regulations.

In a follow-up review, the DoD-OIG issued a second report in January 2011 that criticized the ASC for allowing RCI to develop requirements for at least 71 non-LOGCAP work worth more than $1 billion. According to the report, this work created potential conflicts of interest, did not obtain cost savings and violated Federal Acquisition Regulations by obtaining access to other contractors’ proprietary information. In addition, the ASC was criticized for not providing adequate oversight of RCI and, as such, ASC had no assurance RCI was performing its services in accordance with federal regulations.

We know, from the DoD-OIG review, the Army did not have the ability to conduct oversight, leaving the oversight contractor to do what it wanted. In other words, the Army did not do effective oversight over the oversight contractor, let alone the main contractor. A consequence of the inadequate oversight was RCI may have received a portion of the performance-based award fees of $2.3 million that it may have not earned.

Now that we have outlined the mess of having contractors overseeing contractors, click in next week, where we will discuss how the GAO and DoD-OIG weigh in on the practice of the Army using oversight and managers’ contractors to oversee their main contractors and we will, as always, also present solutions to fix the problem.