In other news, the sun rose today.

While the report, entitled At What Cost?, found that the actual services provided by contractors were satisfactory, the systemic problems outweighed the positives. Thanks to a contracting system where grifting thrives due to weak government auditing practices and federal management techniques that would even be frowned upon at your local CVS, the American public is stuck with a very expensive bill.

The contracting commission will have hearings throughout the year, looking at how to improve the wartime contracting system. Final recommendations are due to Congress in 2010.

“I pick ... the guy from the Inspector General's office.”

The bipartisan CWC, commissioned by Senators Claire McCaskill (D-Mo.), James Webb (D-Va.), and Susan Collins (R-Maine), took several months to study the multitude of ways in which the government has been scammed. Staffed by employees of the relevant government agencies, branches of the military and the private sector, the group analyzed hundreds of audits and reports before seeking out answers in the field.

Their studies led them to investigate relevant government and contractor organizations in Washington, interviewing various employees. Not content with second hand accounts, the CWC then flew staff to Iraq and Afghanistan, where they observed, interviewed and analyzed contractors, and the government employees supposed to be overseeing them.

What they found confirmed their worst fears. Not only is the weather in Iraq unpleasantly hot, but the contracting system is completely broken.

A perfect illustration of the dysfunction: one soldier's testimony about his experience supervising contractors for the Pentagon summed up the Bush Administration's attitude towards holding contractors accountable. This soldier was named a contracting officer's correspondent (COR) upon arrival in Afghanistan, without receiving any prior training. He likened the nomination and appointment process to a schoolyard “pick-up game,” noting “We were given a two-hour course and told to run with it.”

Overseeing the Overseers

Piecemeal training programs weren't the only problems, and the Department of Defense wasn't the only irresponsible offender. But DoD made the other contracting agencies look like the Knights of Columbus in comparison.

Funding for oversight failed to keep up with the blistering pace of expenditures on contractors. The CWC found that between 2000 and 2006, the number of contractor transactions by the Pentagon increased by 328%. In that same period, the size of the Defense Contract Audit Agency (DCAA) barely changed.

The CWC also found understaffing to be a problem for oversight in the theater of battle. For example, the Defense Contract Management Agency (DCMA) has expressed concern that a lack of CORs has left the government vulnerable to scams. This vulnerability will only increase in Iraq, said one DCMA representative, if the government continues to withdraw CORs prematurely. The situation in Afghanistan isn't rosy, either. One military officer said that he knew of contracts in Afghanistan that were being “monitored” by a COR, located in the United States.

USAID was also guilty of underfunding in-country oversight, the CWC found. From 2002 to 2009, USAID spent in Iraq and Afghanistan totaled $14.3 billion. Yet, only seven auditors and two investigators are keeping tabs on contracts in Baghdad, and fourteen auditors and two investigators are keeping tabs on contracts in Afghanistan to date.

It gets worse. The Inspector General's Afghanistan office is located in Manila. Though plans exist to open a satellite office in Kabul, USAID is planning to fill it with a robust staff of two employees—one to answer the phones, the other to run out to get kabuli palaw at lunchtime, presumably.

It would be easy to blame the problem on understaffing, hire more auditors and accountants, and call it a day. But auditing and supervision practices leave much to be desired, too. The CWC found that agencies need to improve analyses of contractors' business plans (especially the cost estimates), the way in which contractor performance is evaluated and, most importantly, an overall overhaul of auditing, financial accounting and administrative practice. Contract incentives, for example, such as the withholding of funds when contractors are not living up to their word, are sometimes overlooked by indifferent government managers.

Better decision making and a higher level of contractor scrutiny should help the government avoid people who put the “con” in “contract”, like those who convinced the government to build the mess of a $30 million dollar mess hall in Iraq, which has been hailed by some as a monument to government waste and inefficiency.  

Knowledge is power

As if these deficiencies in assessing the qualities of contractors weren't bad enough, those overseeing and managing contracts are impeded by a lack of information needed to make informed decisions on spending. Part of this is due a dearth of inter-agency cooperation; not only do civilian organizations such as USAID depend on the DoD for security, but USAID and the military could cut costs better by ameliorating contract coordination.

This is particularly true in regard to the Commander's Emergency Response Program (CERP), a useful tool (albeit one that has defrauded) designed to give military officers the capability to award contracts to locals in a bid to expedite development. CERP and USAID projects often overlap.

Although cooperation could be facilitated by provincial reconstruction teams (PRTs)—those highly lauded cogs in the wartime statecraft machine—the commission found that PRTs, too, suffer from a lack of government staffing. Sometimes, a civilian representative of the government cannot be found at PRTs, the commission said. Often, only members of the military and contractors are present. Oops.

Sharing information about contracts and expenditures, however, can only do so much when that information is incomplete. Attempts to build a more complete information system shared by State, Defense and USAID only began recently. In October 2007, the Department of Defense took the initiative and begun work on expanding the use of the Synchronized Pre-deployment Operational Tracker (SPOT). USAID and the Department of State followed suit a year later.

The best laid plans of mice and government agencies, however, often go awry. USAID still refuses to adopt SPOT as the exclusive contractor information system in Afghanistan. To date, the Department of Defense only has two-thirds of all contractor information entered on SPOT, despite the fact that the Pentagon promised to complete the information system in the fall of 2008.

Broken beyond repair?

Contractor oversight, important as it may be to fix, is somewhat irrelevant if the system itself is fundamentally flawed. Unfortunately, the commission discovered that it was, and recommended giving the whole system need a makeover. What needs addressing immediately, the CWC said, is the subcontractor system, the lack of competition, and the definition of what duties are “inherently governmental,” and should not be outsourced whatsoever.

Subcontracting can, in theory, save time and money, but it can also be used by contractors as a way of making a quick buck, which is essentially what is happening. Though they are required to supervise the subcontractor and ensure that the principal is serviced in a cost efficient and timely manner, this is rarely the case, the CWC discovered. Just how much total wartime spending was lost to middlemen who added little value to contracts is unknown. However, it is bound to be substantial: spending on subcontract services account for 70% of prime contractor costs.

For an example of subcontractor foibles, look no further than USAID's mission in Afghanistan. USAID's support costs in Afghanistan were found to be noticeably high thanks to subcontracting. In June 2008, for every dollar USAID spent in Afghanistan, 45 cents were eroded by “support costs”. By February 2009, this amount climbed to 61 cents.

The high amount of subcontracting, in part, arise from a lack of competition amongst prime contractors — another source of inefficiency. For example, the military logistics program, Logistics Civil Augmentation Program (LOGCAP), was awarded to a sole contractor, KBR, in 2001. KBR alone is still responsible for military logistics operations in both Afghanistan and Iraq.

Different oversight groups, including the GAO and DCAA, found that KBR did little to actively combat wasteful spending, though once government regulators involved themselves, cost cutting measures were adopted by the firm. Barely. The CWC concluded that awarding the contract to a single provider over such a long period of time was a mistake. This monopoly has contributed to an estimated billions of dollars in wasteful spending that has plagued LOGCAP since the start of the wars.

To outsource, or not to outsource?

But more than just a question of healthy competition amongst contractors, the CWC also found logistics operations are inherently governmental. Like many other important duties that have been contracted out, they probably should never have been.

“Inherently governmental” has only been loosely defined by the Office of Management and Budget as a function well within the public interest. The OMB added that no task should be outsourced when a private contractor can easily influence policy. But apathy from politicians towards civil service, combined with a lack of a clear legal definition, has led to staff shortages in some agencies being filled by contractors, even though it is done unlawfully.

With the amount of contractors supporting contingencies in Iraq and Afghanistan outnumbering government personnel, the commission feels that this imbalance should be redressed, in part, by clearly defining what cannot be outsourced, and hiring an appropriate amount of government officials accordingly.

A clear example of something that the commission feels should not be outsourced can be found amidst Afghanistan's system of private military contractors. The administration of a private security oversight committee, the Armed Contractor Oversight Division (ACOD) in Afghanistan, was contracted to a British firm, Aegis, upon the ACOD's establishment in Afghanistan in February of this year.

Yes, that’s right. A government oversight division has been contracted. Not only is it fundamentally wrong that private interests are managing a government watchdog, but there is also the potential for conflict of interest. Should Aegis, or an affiliate of the company, bid successfully for a private security contract, then the company would be supervising itself, while collecting two separate checks from U.S. taxpayers.

Furthermore, there are no senior officers present at the ACOD in Afghanistan, even though the division's responsibilities include liaising with the Afghan Interior Ministry when investigations of armed contractor related incidents are required. It came as no surprise then that the CWC recommended, at the very least, stepping up an official government presence at the ACOD. The potential for a mishap is great enough when a private company assumes regulatory duties; that mishap can turn into an international incident when those duties involve diplomacy as well.

When the committee issues its final report and Congress discusses the recommendations, there are sure to be some major disagreements. Given the amount of money being thrown around, contracting is a very lucrative business that many influential people will not want to see be diminished anytime soon.

But that’s one facet of the problem, the CWC reported: government, pressured by contractors, doesn't even know where to draw the line when it comes to outsourcing. Thus private interests have influenced policy, overstepping their bounds and taking on “inherently governmental duties.” The commission is looking to stop them from hovering around agencies like ice cream men at the park on a summer afternoon. Appointing strong contract managers at government agencies could help us avoid this, say the CWC.

But more than just giving a clear definition of where the public sector ends and the private one starts, the Commission on Wartime Contractors is set to research how to vastly improve oversight. Its focus will be on enhancing government property management, accountability, human capital management, and how to apply the lessons to reconstruction, security and policy issues in Iraq and Afghanistan.

Time is a factor

Unfortunately for the taxpayer, with the final report not set to be issued until 2010, it may be too late for some recommendations to be made. The upcoming staged withdrawal in Iraq and the simultaneous build up in Afghanistan will present fraudsters with ample opportunities — something that the CWC recognized throughout the report on numerous occasions.

It is unlikely that Congress, with other issues on its plate right now, will pass laws overhauling the government's contracting system before this massive resource reallocation takes place. And although it is commendable that the commission is researching solutions meticulously, time is a factor; American troops are due to leave Iraqi cities by the end of the month. Government agencies — especially the Department of Defense — need to take the initiative in improving oversight in the meantime. 

Unless of course Congress creates an Oversight Commission to oversee the CWC.

 Also Interesting:

[+] The war on defense contractors

[+] Inside the world of war profiteers

[+] Defense contract fraud cases declined under Bush

[+] House Speaker Pelosi Promoting No-bid Contracting

[+] Why hasn't Obama eliminated private security forces?

[+] USAID missing the SPOT on contracting oversight

[+] Private security debacles in the Middle East