Commentary

Making the Army an Offer It Can’t Refuse

By David Isenberg
This article appeared in the Huffington Post on February 24, 2010.

It’s raining, it’s pouring, the oversight bodies are roaring. Well, maybe not roaring, but last week saw the release of yet another report dealing with oversight on private military contractors.

This audit report, released by the Department of Defense’s Inspector General was overshadowed by the release this past Monday of a report by the Special Inspector General for Iraq Reconstruction.

But the DoD IG report is extremely significant, as it deals with LOGCAP, the mother of all private military contracts. The Logistics Civil Augmentation Program (LOGCAP) provides contingency support to augment the Army force structure.

LOGCAP was established in 1985 to primarily preplan for contingencies and to leverage existing civilian resources. The United States Army Corps of Engineers (USACE) awarded the first contract under LOGCAP umbrella concept to Brown and Root Services (now KBR) in August 1992 as a cost-plus-award-fee contract, which was used in December that year to support the United Nations forces in Somalia. This contract was also used to support forces in Bosnia, Kosovo, Macedonia, Hungary, Saudi Arabia, and Rwanda.

When this first umbrella contract had expired, it was competed again, with DynCorp being awarded the second contract in January 1997. This time, Army Materiel Command (AMC) took over management of the LOGCAP from USACE. From 1997 to 2001, DynCorp supported US forces in the Philippines, Guatemala, Colombia, Ecuador, East Timor, and Panama.

AMC awarded LOGCAP III, the third contract, to KBR in 2001. Since then, it has been primarily supporting the Global War on Terrorism in Iraq, Afghanistan, Kuwait, Djibouti, and Georgia. Through December 26, 2008, the Army paid out a cumulative total of $28.4 billion under the LOGCAP III contract.

However, as a result of the criticisms leveled against KBR, AMC ended LOGCAP III, which was replaced by the current LOGCAP IV round. Unlike the previous rounds, under LOGCAP IV three contractors (KBR, DynCorp, and Fluor Corporation were awarded contracts, whereupon the three could compete for future task orders.

The DoD IG audit, titled “Report on Review of Army Decision Not to Withhold Funds on the Logistics Civil Augmentation Program III Contract” dated Feb. 16, but released yesterday, found that the Army broke federal procurement rules in 2004, when two commanding generals improperly directed a contracting officer to pay millions of dollars in fees to KBR Inc. The summary says:

The decision to postpone the withholding of funds was influenced by contractor claims that the withholding might adversely impact their ability to provide vital support services to the troops. The Army Sustainment Command, [formerly known as the Army Field Support Command] request for a deviation from the Federal Acquisition Regulation did not include all relevant facts necessary for the approving official to make an informed decision. In the deviation request, the Army also could not support its claim that it had considered alternatives in obtaining the LOGCAP III services.

The background to this is that under LOGCAP III, work is awarded to the contractor on a sole-source basis through the issuance of individual task orders. Task order 59, which provided initial support services to U.S. Forces stationed in Iraq, was among the largest of the LOGCAP III task orders. To meet urgent operational needs, as was the case in supporting U.S. Forces in Iraq, the Army frequently authorized the contractor to begin work before a task order was definitized. An undefinitized task order refers to an order where work has commenced before the Government and contractor agree on the price, terms, or specifications. Although undefinitized task orders allow the contractor to begin work quicker, they carry associated risks to the Government. Recognizing those risks, the FAR and Defense Federal Acquisition Regulation Supplement (DFARS) place limits on the length of time a contract action can remain undefinitized, and the percentage of costs that can be reimbursed before definitization. For example, DFARS 217.7404-3 generally requires definitization within 180 days after work begins. In two separate reports issued in June and July of 2004, the Government Accountability Office noted that the Army had not definitized several LOGCAP III task orders in a timely manner. As of June 2004, the Army had not definitized 31 LOGCAP III task orders, and several of those exceeded the 180-day limit.

FAR clause 52.216-26, Payments of Allowable Costs Before Definitization, imposes specific limits on reimbursement of allowable costs incurred by a contractor before definitization. Reimbursements to a contractor for cost-reimbursement subcontracts must not exceed 85 percent of allowable costs. In other words, the remaining 15 percent of allowable costs billed by a contractor for cost-reimbursement subcontracts must be withheld until the contract action is definitized. Army contracting officials often refer to this clause as “the 15 percent withhold.” The clause serves to protect the Government’s interests and to incentivize contractors to submit adequate and timely cost proposals in order to facilitate timely contract definitization.

The LOGCAP III contract contained FAR clause 52.216-26, and it applied to LOGCAP III undefinitized task orders. In February 2004, more than 3 years after awarding LOGCAP III, the Army learned that it had failed to withhold a portion of contractor reimbursements required by the clause. Therefore, in noncompliance with FAR clause 52.216-26, the Army had paid the contractor for all of its incurred costs on LOGCAP III undefinitized task orders. After postponing enforcement of the clause for several months in 2004, the Army asked the Director of Defense Procurement and Acquisition Policy to grant a deviation from FAR clause 52.216-26 which would allow the Army to reimburse all costs billed on LOGCAP III undefinitized task orders. The Director of the Defense Procurement and Acquisition Policy granted the deviation on February 2, 2005.

A former Chief of Field Support Contracting at the Army Sustainment Command testified in August 2004 before the Senate Armed Services Committee on July 9, 2008. He said that the Commanding General of the Army Field Support Command directed the LOGCAP III contracting officer to retract a letter informing the LOGCAP III contractor that the “15 percent withhold” was being implemented. The ASC Commanding General directed the contracting officer to ask the contractor for an operational impact estimate in the event the Army decided to implement the 15 percent withhold.

The former Chief of Field Support Contracting also testified that the Commanding General hired Resource Consultants, Inc. (now SERCO), to replace the DCAA audits as a basis for definitizing estimated costs on task orders.

The former ASC Chief of Field Support Contracting further testified that he believed the ASC Commanding General’s direction to postpone enforcement of the “15 percent withhold” and to use Resource Consultants, Inc., to replace the DCAA audits was inappropriate and resulted in excessive contractor costs paid to the contractor.

Why is this important? Consider that for many years one of the few points of agreement between both supporters and critics of private military contractors is that the number and quality of auditors to oversee contracts has been insufficient.

Yet according to this report two auditors did exactly what they were supposed to do. They properly oversaw the contract and tried to implement the withholding of payments as the contract required, even though enforcement of that withholding was delayed for 150 days beyond the deadline.

Yet all it took to overturn proper procedure was a conversation between the contractor and the military. According to the audit:

Question 2. Did anybody in the chain of command discuss the withhold issue with contractor officials in August 2004, and did any such discussions influence the Army’s position on withholding funds from the contractor. Yes. Throughout 2004, contractor representatives discussed the withhold issue with senior officials at ASC and the Army Materiel Command. The contractor’s claim that the withholding of funds might impact vital support services to the troops influenced the Army’s position not to implement the 15 percent withhold. Taking into account the contractor’s claim and ASC’s lack of an alternative plan for obtaining the services from other sources, the ASC Commanding General felt that enforcing the clause could jeopardize battlefield operations. ASC had thus failed to comply with DoD Instruction 3020.37 by not maintaining a contingency plan for continuing essential LOGCAP III services in the event the contractor did not fulfill its contractual obligations. ASC has since changed its acquisition strategy on LOGCAP IV to avoid the reliance on one contractor and to help ensure that enforcement of contract clauses is not jeopardized.

Now KBR can say that the decision to not implement the 15 percent withhold was the Army’s decision and there is truth to that. But consider that private military advocates always tout the cost-effectiveness of the private sector as a reason that it, and not the active duty military , should be doing the work. But the sine qua non of cost-effectiveness is competition. And, at least up until LOGCAP IV the idea that the military could just shift to another vendor if work was unsatisfactory was, to put it politely, highly unrealistic. The only real recourse the military has is to withhold payment. But if the military withholds payment because it fears an adverse impact on its operations then it is left without any effective way to influence behavior.

As the audit notes:

In explaining ASC’s actions, the ASC Commanding General and other Senior ASC officials said they were concerned that enforcing the clause could seriously jeopardize battlefield operations. ASC relied exclusively on one prime contractor and its subcontractors to provide most of the logistical support to troops in theatre. According to ASC contracting officials, this reliance diminished the government’s leverage in enforcing critical contract clauses such as FAR clause 52.216-26. Several ASC and Army Materiel Command officials told us they did not have an alternative plan for obtaining the essential support services from other sources.

Additionally, it seems the contractor took other steps to ensure the Army saw other things its way.

In an August 4, 2004, letter to the LOGCAP III contracting officer, the contractor requested another 60-day postponement in enforcing the FAR clause based on progress made in definitizing LOGCAP III task orders. According to testimony, the contractor also spoke with several Army officials to aggressively dispute enforcement of the clause. The contractor warned the Army that it would pass the withholding of funds to its subcontractors, which could cause a severe disruption of vital support services provided to the troops. Two officials, one from ASC and one from the Army Materiel Command, testified that a contractor representative had even threatened to initiate a lawsuit against them personally as well as the Army over any withholding of funds. When the contracting officer hand-delivered the draft letter on August 16, 2004, contractor representatives again expressed their strong disagreement with the decision and stated that the withholding of funds “would get turned around.”

Influence on Army Decision. The contractor’s claims concerning the potential impact on LOGCAP III support services did influence the ASC Commanding General’s decision to postpone enforcement of the FAR clause and ultimately request a FAR deviation. ASC would have likely begun clause enforcement in March 2004 had the contractor not argued aggressively against it.

Regardless of what the ASC Commanding General thought the impact of implementing the withhold on battlefield operations might be his action was clearly wrong.

The ASC Commanding General’s decision to postpone the withholding of funds in August 2004 was inconsistent with the FAR. The ASC Commanding General did not have legal authority to postpone enforcement of the FAR clause prior to receiving the approved FAR deviation in February 2005. In addition, the failure to enforce the clause from inception of the contract in December 2001 (nearly 3 years) represents a significant internal control weakness that put the Government at significant risk for overpayment. We also determined the Army’s request for deviation omitted relevant facts about the financial impact on the contractor. In addition, the Army could not support the statement in the deviation request that it had examined available alternatives. These discrepancies could have affected the decision to approve the deviation.

This is not the way to maintain “the best supported, supplied military in any military operation in history.”

David Isenberg is an analyst in national and international security affairs and a US Navy veteran. He is also a member of the Coalition for a Realistic Foreign Policy, an adjunct scholar with the Cato Institute, and the author of a new book, Shadow Force: Private Security Contractors in Iraq.