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: