The U.S. government is launching new crackdowns on federal contractors at a time when the Defense Department and other agencies depend more than ever on private-sector help.
The most recent regulatory clampdowns target contractor expenses that increasingly are being challenged by federal auditors. More assertively than in years past, the government is questioning both overhead and direct costs that companies charge under Pentagon contracts, experts said.
Disputes mostly unfold and get resolved behind the scenes, except for the sporadic headline-making feuds between Army auditors and warzone contractors. Just last month, the Justice Department filed a “false claims” suit against the military’s largest battlefield contractor, Kellogg, Brown & Root, for passing unauthorized costs for private security guards in Iraq. The company said it intends to fight the allegations.
Tugs of war over expenses have intensified in recent years, said attorneys who represent federal contractors. And clashes are expected to continue as the military increases its reliance on contractors.
“Our way of waging war brings a contractor for every soldier,” said Ashton Carter, undersecretary of defense for acquisition, technology and logistics. In Vietnam, there was one contractor for every five soldiers. In Iraq, the ratio increased to one contractor for every 1.2 troops. In Afghanistan, there are more contractors — currently 107,000 — than troops, or the equivalent of one per 0.7 soldiers, Carter said in a speech last month at the Center for Strategic and International Studies.
The independent federal Commission on Wartime Contracting in Iraq and Afghanistan estimated that contracts for logistical support, translation, maintenance, security and other services have exceeded $80 billion over the past five years. Services contracts account for nearly two-thirds, and are mostly managed by the Army.
The Pentagon’s penchant for outsourcing work is not going to fade in the foreseeable future. Although the government plans to shift some administrative jobs currently held by contractors to civil servants, the military still will continue to depend on contractors for battlefield support, at least as long as troops are at war.
“We kept saying it’s not going to last much longer. … Now we have to get used to it,” Carter said, speaking about the Defense Department reliance on contractors. “We will have to keep doing it.”
With vast amounts of money in play, it is no wonder that disagreements over what expenses contractors are allowed to charge are soaring.
Especially in today’s political atmosphere, companies should expect disputes to drag on for years because of internal wrangling within the Defense Department over who has final authority to allow or disallow costs, said John W. Chierichella, a government contracts attorney at Sheppard Mullin Richter & Hampton LLP.
“This is a big issue,” Chierichella said in an interview. There is a power struggle within the government among contracting officers, auditors at the Defense Contract Audit Agency (DCAA) and the inspector general over who’s in charge, he said. The consequence of this turf war is that contractor disputes are becoming harder to settle and, in the process, companies will wait much longer to get paid, he says. “Rates remain unsettled years into the future,” Chierichella says. “Companies can’t close books” so they have to be prepared to live with less cash flow.
“This topic comes up in every meeting,” he said. “Everyone talks about it in industry.”
With the Pentagon under mounting political pressure to be more accountable for its money, costs are being challenged with “more frequency and more aggressiveness,” said Chierichella.
It is not unusual now to see internal clashes that pitch contracting officers against IG and DCAA representatives, he said. In many cases, contracting officers are investigated by the IG office for what are perceived as contractor-friendly decisions, says Chierichella.
Discrepancies usually involve overhead costs and other indirect expenses that contractors typically pass on to the government, said Anne B. Perry, also an attorney at Sheppard Mullin. Differences over costs are nothing new, she said. What’s changed is the relationship between contracting officers — who are vested legally with the authority to determine what costs are allowed — and auditors. Increasingly, the authority of contracting officers is “being hijacked,” Perry said. “They’re fearful of making decisions that are contrary to DCAA or the IG.”
Another move that has riled contractors is a new policy introduced by the Federal Acquisition Regulation Council that would allow the government to withhold 10 percent of a company’s fees if DCAA determines that the firm’s accounting systems don’t accurately track costs. In the past, an auditor would have to prove that any flaws in the accounting system actually affected a particular federal contract. “Now, even if the flaw has no impact on the government, they can still withhold 10 percent of your billings,” said Chierichella. “That’s a big deal. … Contractors are entitled to some predictability, that’s why you have the rule of law.”
DCAA Director Patrick J. Fitzgerald discussed the topic during a recent congressional hearing. “Historically, contracting officers who are charged with resolving DCAA reported deficiencies with the contractor have generally considered a business system to be adequate when the contractor submits an acceptable corrective action plan,” he told a Senate panel. “Often, we have found that once the system has been deemed adequate, contractors have lost the incentive to devote the resources necessary to implement corrective actions to address reported deficiencies,” he said.
The proposed new rule is supported by Shay Assad, director of defense procurement and acquisition policy, who wants to improve Pentagon oversight over contractor business systems, Fitzgerald said.
At a separate hearing, Assad explained: “The distinction is that the auditor is providing us an audit opinion. And the contracting officer is ultimately held responsible for deeming whether [a contractor’s business] system is adequate or not adequate. We do want to keep that separation. And we absolutely want independent audit opinions. … And we want the contracting officer, in concert with the auditor, to make a determination of do they believe it’s deficient or not.”
These latest measures reflect an anti-contractor mood that hangs over Washington, D.C., said Chierichella. “Everybody thinks they’re crooks,” even though only a small fraction of federal contractors ever are convicted of actual wrongdoing.
Politicians are “playing to the cheap seats,” Chierichella said.
The industry understands that the eye-popping sums of money the government spends on contract services naturally will draw more scrutiny, he said. But there are other factors at play, too. The False Claims Act suit against KBR, for instance, “raises some interesting issues on an emotional level,” he said, because contractors are doing dangerous jobs in war zones and the government is going to want to avoid being portrayed as not caring for their security.
The government also should acknowledge that the current situation is one of its own making. “The Pentagon wanted to cut the budget, and outsourced those functions,” Chierichella said. “Now all they want to do is second-guess the costs. If they don’t want to pay, the government should [do the contractors’ jobs] themselves.”
Government auditors, meanwhile, are not only wrangling with companies over allowable costs but also are fending off accusations by lawmakers that they are being too soft on contractors.
Members of the House Armed Services Committee’s acquisition reform panel lashed out at DCAA at a recent hearing.
“One of the most disturbing things this committee found was the fact that the Defense Audit Agency, at least in a sample of their work, had almost completely abandoned the principles of accounting,” said Rep. Jim Cooper, D-Tenn. “You worry about incompetence. You even worry about corruption,” he said.
Pentagon Comptroller Robert Hale, who was one of the witnesses at the hearing, agreed that there were “serious problems” at DCAA. “I’m afraid we had a maxim in acquisition — faster, cheaper, better. We got two out of three with DCAA, but it definitely wasn’t better,” he said. “We’ve appointed a new director, making a number of changes … and are committed to making some significant ones within the year,” said Hale.
On Capitol Hill last month, DCAA’s Fitzgerald assured the Senate Commission on Wartime Contracting that the agency is stepping up efforts to prevent taxpayer gouging.
“The DCAA mission is to perform all necessary audits of contractors for DoD components that are responsible for the negotiation, administration, and settlement of contracts and subcontracts,” he said. “DCAA’s mission supports DoD’s efforts to obtain maximum value for the dollars spent in defense contracting.”
In 2009, DCAA’s 26,000 officers performed 21,276 audits covering $330 billion in proposed or claimed contractor costs. Fitzgerald said these audits recommended reductions in proposed or billed costs of $20.4 billion and $12.1 billion in estimated costs where the contractor did not provide sufficient information to explain the basis of the estimated amounts.
“We anticipate expending roughly 12,000 hours in Iraq and Afghanistan during fiscal year 2010 to perform these operations audits,” said Fitzgerald. “This is a significant commitment when compared to 2008 and 2009 when we expended roughly 900 and 3,500 hours respectively.”