Overhead reached 55 percent in some Iraq contracts

Overhead and administrative costs on Iraq reconstruction projects have run as high as 55 percent of total spending and could be even higher with full accounting, according to data in a new inspector general report.

In a review of 12 large reconstruction contracts awarded in early 2004 by an Army contracting office, the Special Inspector General for Iraq Reconstruction found that contractors -- including construction giants Parsons Delaware Inc., Halliburton subsidiary KBR Inc. and Fluor Corp. -- charged the government from 11 percent to 55 percent for overhead and administration.

The contracts, all for design-build projects in which a single contract covers both stages of construction, were to be issued using new administrative task orders to help managers see the balance of direct and indirect costs, minimize administrative expenses and better understand how extending contracts affects indirect expenses, the Oct. 23 report stated.

Reviewers found that the long idle periods between the time that contractors were first told to mobilize their employees to Iraq and when substantive work began on projects, contributed significantly to indirect costs. Due partly to political changes on the ground in Iraq, the five contracts for which officials used the new administrative task orders were largely idle from March to November 2004. During that time, the contractors were fully mobilized and incurred expenses to house, manage and protect their employees. The companies submitted invoices for $62.1 million in indirect costs, while claiming just $26.7 million in direct costs.

For the contract with the longest idle time -- a KBR contract in which nine months passed between mobilization and the start of substantial work -- the government received invoices for $52.7 million through an administrative task order, and only $13.4 million in direct costs. In August 2004, the contracting officer wrote to KBR expressing concern that the company was "accruing exorbitant costs at a rapid pace," according to the report.

The contract with the lowest rate of indirect costs, at 11 percent, was with Lucent Technologies. But reviewers noted that the Lucent administrative task order was constructed differently from those for KBR and Parsons. It included only one of the four cost categories included for the others. Actual indirect costs were likely higher, the SIGIR report said.

The inspector general attributed the lag time to poor planning on the government's part.

Despite the high indirect costs, auditors found that they probably were even higher than the task orders show. One reason for this was that the administrative task orders were not issued at the start of the contracts, so the companies used direct and mobilization tasks to invoice for all types of expenses.

The inspector general also reviewed audits by the Defense Contract Audit Agency that showed significant problems in the accounting and billing systems used by most of the companies in question. For four of the five contracts that used administrative task orders, DCAA found the contractors' accounting and billing systems inadequate.

Based on these findings, the SIGIR recommended that future Iraq reconstruction contracts include requirements to track and bill administrative costs separately. The inspectors also recommended that project planning minimize contractors' idle time between mobilization and significant work, and that processes to monitor administrative costs be developed.

Stan Soloway, president of the Professional Services Council, an industry group that worked with the IG's office on a previous Iraq contracting report, said the strategy of using administrative task orders throughout the life of a contract was a creative way to gain greater visibility into project spending.

He said administrative task orders are generally used for minor expenses toward the end of a contract's life to "mop up" from delays and minor changes. Used as it was in Iraq, the strategy could give both the government and contractors a better way to track what is happening on a contract at any point in time.

Soloway said visibility into complex projects is often poor. "This is a really complicated problem, and this is a tool that could help improve that," he said. Any extra administrative burden that arose from using an additional task order would probably be outweighed by the benefits of greater transparency, he said.

The report only looked at the $5.8 billion in design-build reconstruction contracts for which Army contracting officials made a special effort to track administrative costs, and did not address the full $18.4 billion for U.S.-financed Iraq reconstruction appropriated in 2003 through the Iraq Relief and Reconstruction Fund.