Oversight of war zone subcontractors is lacking, panel finds

Prime contractors in Iraq and Afghanistan are not managing their subcontractors' performance and fees consistently, the Defense Department's top auditing official told the Commission on Wartime Contracting on Monday.

A Defense Contract Audit Agency review of prime contractors' billing and cost records identified several situations in which they failed to award fixed-price subcontracts based on fair and reasonable prices, often leading to unreasonable or unallowable costs.

"Prime contractors must be held accountable for establishing fair and reasonable subcontract prices," Patrick Fitzgerald, director of DCAA told commission members.

Subcontractors comprise about one-third of the roughly 200,000 contractor employees in Iraq and Afghanistan, according to the commission's data. But federal regulations limit government officials' visibility into the activities of in-theater subcontractors.

Federal agencies enter into agreements with the prime contractors and have no direct business relationship, known as privity of contract, with subcontractors. Prime contractors are legally responsible for managing subcontractors, but many lack the internal controls or oversight mechanisms to carry out that role, the panel suggested.

For example, DynCorp International billed the government roughly $6 million for work performed by Kuwaiti-owned subcontractor Al-Shora International General Trading and Contracting Co. The cost-type subcontract terms required Al-Shora to provide cost data to support its invoices. When DCAA requested that Al-Shora open its books to document its costs, the company declined, citing Kuwaiti law. DCAA has since suspended payment for DynCorp's billed costs from Al-Shora.

"If foreign companies want to be in business with this government, they ought to play by our rules," said commission member Dov Zakheim.

DCAA plans to recommend that Pentagon officials consider adding a contract clause that would require primes to manage its subcontractors more closely.

"Prime contractors should have systems or processes in place to review subcontractor billing processes to ensure [they] are in accordance with subcontract terms and conditions," Fitzgerald said.

In addition, the Defense Contract Management Agency has yet to approve the purchasing systems of two of the three prime contractors -- DynCorp and Fluor -- for the Army's multibillion-dollar LOGCAP IV logistical-support contract for operations in Iraq and Afghanistan. The government relies on data from prime contractors' purchasing systems to ensure subcontract costs are reasonable.

Commission members cited ethical, security and logistical concerns with wartime subcontractors, including allegations of exploitation of unskilled foreign laborers, human trafficking and excessive costs from tiering contracts, or adding layers of subcontractors to obscure fees and credentialing.

"Subcontracting is a normal business practice," said commission co-chairman Christopher Shays. "But what makes sense for an office renovation project in Maryland can create some unique risks when the contractor is hiring subcontractors in a combat zone half a world away."

The daylong hearing included officials from four federal agencies, four prime contractors and six subcontractors. Each agreed that subcontracting in a wartime environment presents unique security and operational concerns.

"We recognize the risks of contracting in a contingency operation," said Edward Harrington, deputy assistant secretary of the Army for procurement. "We must ensure that America's integrity is not harmed by the actions of our contractors and subcontractors."

Both State Department and U.S. Agency for International Development officials said prime contractors must obtain their contracting officers' written consent prior to the award of a subcontract.

Prime contractors told the panel that oversight of subcontractors was lacking at the start of the wars in Iraq and Afghanistan, in part, because relatively few foreign-owned firms in the region had any experience working with the U.S. government. They said the environment has improved considerably in recent years, but challenges remain.

For example, the federal government frequently prevents local citizens from working on U.S. bases, where much of the subcontract work is performed, said John Supina, DynCorp's senior vice president of business administration.

"Vetting of host country employees to ensure that they do not support insurgents, will not divert funds to insurgent causes, or pose a threat to U.S. and allied personnel is very difficult," he said.