Improper time-and-materials contracts prove costly

Army contracting officials improperly awarded time-and-materials contracts and task orders to support the wars in Iraq and Afghanistan, potentially costing taxpayers nearly $3.7 million, according to the Defense Department inspector general.

The report, released on Aug. 27, found that contracting and program officials regularly ignored federal and defense acquisition regulations mandating competition and adequate justification when using time-and-materials contracts.

"As a result, the Army did not have the opportunity to obtain cost savings through competition and may have incurred additional costs by not negotiating reasonable prices and by unnecessarily using the riskiest contract type," the audit said.

Time-and-materials awards have fallen out of favor because the contractor's profit is built into the labor rates, reducing the company's incentive to control costs and work efficiently. The Obama administration has directed agencies to cut their use of time-and-materials contracts, and the Defense Department has indicated it will phase out this type of contract altogether.

The IG reviewed seven contracts and 11 task orders with a total value of $605 million. Investigators reported that Army acquisition officials failed to open three of the contracts and seven task orders to competition.

In September 2006, for example, the Army Contracting Agency at White Sands Missile Range in New Mexico awarded a $9.9 million sole-source task order to Computer Sciences Corp. for "operation, training and maintenance of foreign aviation systems at Kabul Afghanistan International Airport." The Army had noted CSC was the only firm capable of performing the work due to its specialized nature, but officials offered no evidence to back up their claim, auditors said.

"The justification also included an unexplained assertion that it would take 24 months and cost $25 million for another contractor to acquire the skills needed to gain proficiency for this effort," the report said. "This assertion was shown to be false a year later, when CSC was forced to compete for the follow-on contract and lost to Northrop Grumman."

In reviewing the Kabul airport contract, the watchdog agency found a pattern of "questionable" sole-source task orders issued at the White Sands Missile Range dating back to 2003.

The original contract was awarded without competition to Research Analysis and Maintenance Inc. in July 2003, for operation and maintenance support services at Fort Bliss, Texas. The contract then was extended the following year without competition. But in 2005, after the Army determined the incumbent contractor was incapable of continuing with the contract, CSC was awarded the task order on a sole-source basis. The company continued the work uninterrupted, even as the contract requirements were changed to accommodate work in Afghanistan.

"Ultimately, the sole-source justification … which was for specialized work in Kabul, was based on a contract awarded three years earlier to a different contractor for work performed in Texas," the report said. "The sole-source justification was inadequate, and there was no legitimate reason why [the task order] could not have been competed."

The report identified other contract deficiencies. Procurement officials conducted a proper price analysis for only one of the 18 awards the IG reviewed and provided justification for using a time-and-materials contract in just six instances. Auditors also cited weak contract oversight, noting contracting officer representatives were rarely on-site to supervise the vendors' performance.

The IG documented instances of unauthorized labor rate increases resulting in overpayments to contractors and payments to subcontractor employees who might not have performed any work. The report identified $3.68 million in savings the government potentially could recoup by requesting refunds from the contractors.

Army Contracting Command Executive Director Jeffrey Parsons generally agreed with the recommendation, noting the department would pursue refunds for most of the potential overpayments cited. Parsons also pledged to take administrative action against the contracting officers named in the report.

The IG is planning a follow-up report on deficiencies with time-and materials contracts awarded by the Air Force Center for Engineering and the Environment.