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Project on Government Oversight

Federal Contracting and Iraq Reconstruction

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March 11, 2004


PROBLEMS IN THE CURRENT SYSTEM:

  • Contracts or a Buying Spree? Most of the Iraq reconstruction contracts have been awarded through a particular type of troubled contracting vehicle, the Orwellian-sounding "Indefinite Delivery Indefinite Quantity" (IDIQ). IDIQs allow the government to award an unspecified amount of future work to approved contractors. Once companies get on this list of approved contractors, they do not have to compete for work, nor is that future work ever publicly announced. As a result, small businesses that would be able to perform many of the tasks authorized under an IDIQ are never given the opportunity to compete for that work. It is estimated that this system costs small businesses, which don't get a chance to compete, $13 billion annually. Furthermore, information about the specific work and the cost of that work is never made publicly available - not even to Members of Congress upon request. As a result of this lack of transparency or accountability, contractors don't have an incentive to keep costs as low as they would in a truly competitive and open marketplace. For example, the January 6, 2004 contract awarded to Bechtel, which teamed up with Parsons of California, is for an amount up to $1.8 billion to repair the infrastructure of Iraq over the next 24 months. In other words, Bechtel and Parsons have an effective monopoly over any future tasks or services up to $1.8 billion.
  • Under the Radar. An IDIQ contract, which is made up of task and delivery orders, does not define a firm quantity of services or goods that the government needs. It is not until goods or services are required that the government places an order. The General Accounting Office stated that those types of contracts "were not attaining the level of competition Congress had initially envisioned." For example, Kellogg Brown & Root, a subsidiary of Halliburton, and Bechtel have received task and deliver orders worth billions. Those task and delivery orders fall below the procurement radar screen and are not open for bidding or available to Congress or the public.
  • "Competitive" Contracting. The term "competition" has lost all meaning in federal contracting, and various laws and regulations "permit contracting without providing full and open competition." Currently, a contract can be considered "competitively" bid when only a few favored contractors are offered the opportunity to compete for a contract, or even when there is no competition at all. Furthermore, open and full bidding can be suspended when a contracting agency is presented with an "unusual and compelling urgency," a circumstance that would "compromise ... national security," or when an "agency head determines that it is not in the public interest." For example, the oil contract awarded to Halliburton's subsidiary Kellogg Brown & Root had been described by the head of Iraq reconstruction contracting as "competed ... in a classified competition." Additionally, the Iraq infrastructure reconstruction contract that was awarded to Bechtel in April 2003, was not open for full and open competition, but was sent secretly to seven American companies of which only 2 bidders were deemed "competitive." Although those contracts were rebid in open competitions, both companies had an inside advantage, with KBR receiving $1.2 billion to restore Iraq's oil infrastructure to pre-war levels and Bechtel receiving $1.8 billion to repair Iraq's infrastructure.
  • No Public Oversight. The bidding and award process must be transparent to allow the American taxpayer to hold government agencies accountable for their actions and ensure integrity in the procurement system. For example, Halliburton's oil reconstruction contract was awarded on March 8, 2003, but was not announced until March 24, 2003. Its value was not revealed until April 8, 2003.
  • Bundling. Contract bundling is the consolidation of two or more procurement requirements for goods or services previously provided or performed under separate smaller contracts, i.e., separate and distinct contracts become one super-sized contract. Because of the monstrosity of the bundled contract, only the largest contractors can bid on it, thereby preventing competition and squashing small businesses. The contracts awarded for the reconstruction of Iraq include distinguishable services that could have been segregated and opened for competitive bidding. In fact, based on the number of subcontractors that have been hired to do the reconstruction work, the prime contractors have become, in essence, contract managers. It begs the question - if KBR was the only company or the most experienced contractor out there, why was a Kuwaiti company - the Altanmia Commercial Marketing Co. - hired to import fuel from Kuwait to Iraq.
  • Lack of Contract Oversight. Oversight agencies have historically saved the taxpayer far more money than they cost - they prevent a great deal of contractor fraud and waste when properly funded and staffed. "Reforms," however, have cut most of these agencies' oversight staff by up to 35% and their budgets by up to 41% in some offices. To continue to cut back staff levels and oversight budgets is to throw away money. An additional $18.6 billion has been earmarked for the reconstruction of Iraq, but who in the federal government will have the staff or resources to monitor that money? Despite the recent contracting horror stories about overpriced fuel, kickbacks, and the exploitation of cost-plus contracts by contractors, Congress has been slow to act on war profiteering laws and even had them removed from the $18.6 billion Iraq supplemental that was approved by Congress in October 2003.
  • Suspension/Debarment. The federal government continues to conduct business with companies that repeatedly violate laws and regulations, despite rules specifying that "[p]urchases shall be made from, and contracts shall be awarded to, responsible contractors only." Iraq reconstruction contracts that have been awarded to contractors with problematic contracting track records, include:

Lockheed (84 incidences of misconduct);
Northrop Grumman (36 incidences of misconduct);
Fluor (15 incidences of misconduct);
Computer Sciences Corporation/DynCorp (9 incidences of misconduct),
Bechtel (6 incidences of misconduct);
SAIC (5 incidences of misconduct)

By continuing to award contracts to unethical companies, the government is rendering its own laws, established for the protection of the taxpayers, toothless. See POGO's Federal Contractor Misconduct Database.


RECOMMENDATIONS

1. Full & Open Bidding. Establish a bidding process that is open to large and small contractors. Strict oversight would ensure that any lack of full and open competition was necessary under the circumstances, including instances when an agency awards a sole-source, limited bid, or classified contract or acquisition. Considering the emphasis on the war on terrorism and homeland security, which could shield contracts from open and full bidding and disclosure, the American taxpayer must be assured of the procurement system's integrity. Additionally, Congress should eliminate loopholes in the Competition in Contracting Act of 1984 and restore 1980s-era procurement laws, which ensured that as many contracts as possible were fully competed, allowing the government to receive the best deals.

2. Fairness. Notice provisions must be followed and contractor offers must be evaluated fairly, giving weight to the overall interest of the American taxpayer rather than being based on speed and ease of contracting.

3. Competitive Bidding. Congress should restore the definition of "competitive bidding" to require at least two bidders.

4. Modify Procurement Practices. Task and delivery orders should be made public if they exceed $25,000. Currently, task and delivery orders under IDIQ contracts for hundreds of millions of dollars are not publicly available.

5. Restore Funding for Contract Oversight. Contractors and their friends in Congress consider oversight as unnecessary "red tape," but procurement oversight agencies have consistently proven themselves to be very effective, and indeed very necessary in exposing contracting improprieties and returning money to public coffers.

 

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