AIR FORCE AUDIT AGENCY CANCELLED IRAQ RECONSTRUCTION PROGRAM TASK ORDERS AUDIT REPORT

AIR FORCE AUDIT AGENCY CANCELLED IRAQ RECONSTRUCTION PROGRAM TASK ORDERS AUDIT REPORT F2008-0013-FD1000 11 September 2008

Executive Summary INTRODUCTION OBJECTIVES The Air Force Center for Engineering and the Environment (AFCEE) manages Iraq Reconstruction Program (IRP) contracts and task orders for the Multi-National Security Transition Command - Iraq. To accomplish IRP projects, AFCEE establishes Indefinite Delivery, Indefinite Quantity contracts for environmental and construction projects and issues task orders for these contracts to complete specific construction projects. From fiscal year (FY) 2003 through 31 January 2008, AFCEE cancelled 25 IRP task orders, valued at over $308 million. AFCEE officials requested this audit because of oversight concerns related to payments to Ellis World Alliance Corporation (hereafter referred to as Ellis Corp.). Our objective was to evaluate whether AFCEE effectively managed cancelled IRP task orders. Specifically, we determined whether AFCEE: Effectively managed task order fixed fee payments. Properly approved and effectively managed IRP subcontracts. CONCLUSIONS AFCEE officials did not always effectively manage cancelled IRP task orders. Specifically, opportunities existed to improve fixed fee payments and IRP subcontract management. AFCEE officials did not base fixed fee payments on the percentage of contractor work completed as required. Disallowing unearned fixed fee requests and obtaining reimbursement for unearned fixed fees paid will provide the Air Force over $1.78 million of additional funds that can be used for other funding priorities. Although AFCEE officials properly approved and effectively managed cancelled IRP subcontracts for six task orders reviewed, AFCEE contracting officials did not properly approve subcontracts totaling $24.8 million for the Ellis Corp. task order. Properly approving subcontracts will provide AFCEE the opportunity to review the task order scope and determine if they should negotiate i

Executive Summary the price increase or cancel the order before major costs are incurred. RECOMMENDATIONS MANAGEMENT S RESPONSE We made two recommendations to AFCEE to improve the task order cancellation process. (Reference individual Tabs for specific recommendations.) Management concurred with the audit results, recommendations, and corrective actions planned and taken are responsive to the issues in this report. Furthermore, while management agreed that implementing the recommendations in Tab A could generate a potential monetary, the exact amount is unknown until all contract closeout actions are complete. ROBERT F. BURKS Associate Director (Engineering and Environment Division) JAMES W. SALTER, JR. Assistant Auditor General (Support and Personnel Audits) ii

Table of Contents Page EXECUTIVE SUMMARY i TAB A Fixed Fee Payments 1 B Subcontracts 5 APPENDIX I Audit Scope and Prior Audit Coverage 9 II Locations Audited/Reports Issued 11 III Points of Contact 13 IV Final Report Distribution 15

Tab A Fixed Fee Payments BACKGROUND AFCEE issues task orders on a cost-reimbursement plus fixed fee basis to complete specific construction projects. To report task order progress, IRP contractors submit project completion estimates and billings for work completed. Under costreimbursement plus fixed fee task orders, the government reimburses the contractor for all allowable, allocable, and reasonable contract costs plus a fixed fee. Further, all task orders require Cost Schedule Surveillance Reports (CSSRs) on their Contract Data Requirements List. CSSRs include the cost of work scheduled, cost of work performed, percentage of work completed, and estimated cost at completion. Also, according to the task orders, fixed fees should be paid as the fees accrue, in regular installments based upon the percentage of work completed. AUDIT RESULTS 1 FIXED FEE PAYMENTS Condition. For 3 of 6 task orders reviewed, officials inappropriately allowed fixed fee payments based on percentage of total costs incurred rather than the percentage of work completed as required per the task order (Table 1). For example, AFCEE officials allowed $1.8 million in fee payments, 93 percent of the total fixed fee for Ellis Corp. task order number 0017, even though Ellis Corp. had performed only 25 percent of the work. Also, AFCEE officials did not require Fluor Enterprises to submit CSSRs necessary to identify the percentage of work actually completed, resulting in a $331,511 fixed fee overbilling. Contractor Contract # Ellis Corp. Environmental Chem. Corp. Fluor Enterprises Toltest Inc. Toltest Inc. Washington Group Task Order # * $386,131 is the fee claimed on Fluor s termination proposal. ** Unearned fee paid amount for Fluor is based on their termination proposal and has not yet been paid. Table 1. Fee Paid/Earned. Cause. This condition occurred because AFCEE officials did not establish procedures to effectively link fixed fee payments to the percentage of work completed on the CSSRs. Instead, officials made fixed fee payments based on a percentage of cost incurred rather than the percentage of work completed. 1 Percent Complete Fee Paid/ Proposed Unearned Fee Value Fee Earned FA8903-04- D-8694 0017 $ 34,204,750 25 $1,804,974 $ 484,029 $1,320,945 FA8903-06- D-8511 0013 $ 27,509,710 76 $1,205,254 $1,074,369 $ 130,885 FA8903-06- D-8512 0003 $ 21,280,964 5.4 $ 386,131* $ 54,620 $ 331,511** FA8903-04- D-8678 0117 $ 16,131,698 100 $1,194,941 $1,194,941 $ 0 FA8903-04- D-8678 0120 $ 35,715,592 88.6 $2,343,977 $2,343,977 $ 0 FA8903-04- D-8680 0002 $ 11,409,173 100 $1,037,197 $1,037,197 $ 0 Totals $146,251,887 $7,972,474 $6,189,133 $1,783,341

Tab A Fixed Fee Payments Impact. Linking fee payments to the percentage of work performed would have reduced the fixed fee paid to Ellis Corp. from $1.8 million 1 to $484,000. Obtaining reimbursement for unearned fees paid and disallowing unearned fees requested on cancelled task orders will provide the Air Force more than $1.78 million of additional funds to use for other funding priorities. Recommendation A.1. AFCEE should: a. Establish procedures to review and validate cost vouchers against CSSRs. b. Obtain reimbursement for the $1.3 million in unearned fee paid on the Ellis Corp. task order, 2 and for the $130,885 in unearned fee paid on the Environmental Chemical Corporation task order. c. Disallow $331,511 in unearned fee included in the Fluor Enterprises termination proposal. Management Comments. The AFCEE Commander concurred with the audit results, recommendations, and potential monetary benefit, and stated: a. Concur. We concur with recommendation A.1. and have established procedures to review and validate cost vouchers against CSSRs. The contractors are required to submit CSSRs with all cost vouchers. The Contingency Operations Branch (AFCEE/EXO) reviews and validates cost vouchers against CSSRs. Any discrepancies found in the vouchers are sent back to the contractors for validation and/or correction. Estimated completion date: CLOSED. b. Concur. These task orders are undergoing DCAA audits at this time to determine allowable and allocable cost and fee. In addition, one of the task orders is under investigation by the Special Inspector General for Iraq Reconstruction (SIGIR) and the results of both the DCAA audit and the SIGIR audits will determine the corrective action that will have to be accomplished on these task orders. Implementing this recommendation may generate monetary benefits. However, we cannot determine the exact amount of potential monetary benefit until AFCEE has coordinated with DCAA and SIGIR to determine the actual amount of fee paid. Because we believe that we will be dealing with many contentious issues we can only estimate a completion date and have established a one year turn around to resolve all outstanding issues related to materiels 1 Ellis Corp. invoiced and was paid $1,804,974 in fees on voucher number 18. Three additional vouchers were submitted, but were not yet paid. The total amount withheld from voucher numbers 19-21 was $532,251. 2 Retention of the unpaid voucher amounts of $532,251, would result in an outstanding refund of $788,694 ($1,804,974 [fee paid] - $484,029 [fee earned] = $1,320,945 [refund due]). 2

Tab A Fixed Fee Payments purchased in support of the construction on this project for Iraq. Estimated completion date: 26 August 2009. c. Concur. The contractor s termination proposal is still undergoing final audit by DCAA and DCAA has requested an extension to 12 September 2008. The final fee will be negotiated based on the audit results and cost analysis performed by the contract specialist. Implementing this recommendation may generate monetary benefits. However, we cannot determine the exact amount of potential monetary benefit until AFCEE has coordinated with DCAA to determine the actual amount of fee paid and/or the amount of fee still owed. If the DCAA audit identifies that a portion of the fee paid needs to be returned to the government, negotiations for the return of funds will commence within 30 days following receipt of the DCAA audit results. Estimated completion for negotiation and settlement of costs: 31 December 2008. Evaluation of Management Comments. Management concurred with the audit results, recommendations, and corrective actions planned and taken are responsive to the issues in this report. Furthermore, while management agreed that implementing Recommendations A.1.b and A.1.c could generate a potential monetary, the exact amount is unknown until all contract closeout actions are complete. 3

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Tab B Subcontracts BACKGROUND The IRP contractors often established subcontracts to perform the required work to complete task orders. AFCEE contracting officers should pre-approve subcontracts when contractors do not have approved purchasing systems. If the contractor has an approved purchasing system, the contractor should notify AFCEE when subcontracts are established. To monitor the subcontracts, the contracting officer should insert Federal Acquisitions Regulation (FAR) Clause 44.2, Consent to Subcontracts, in costreimbursement type contracts. This clause directs contractors without approved purchasing systems to obtain contracting officer consent for subcontracts and contractors with approved purchasing systems to notify the contracting officer before entering new subcontracts. This clause applies to any subcontract exceeding $1 million or 5 percent of the total estimated contract cost. AUDIT RESULTS 2 SUBCONTRACT APPROVAL Condition. Although AFCEE officials properly approved and effectively managed cancelled IRP subcontracts for six task orders reviewed, AFCEE contracting officials did not properly approve subcontracts totaling $24.8 million for the Ellis Corp. task order. Specifically, Ellis Corp. 3 signed a security subcontract with Skychase for $12.5 million, and increased the Al-Khudhairy construction subcontract by $12.3 million for additional site requirements and convoy without AFCEE approval. Also, Ellis Corp. officials did not adjust the task order total cost estimate on the required CSSRs even though the additional subcontracts would have increased the total task order price to nearly $56 million or 60 percent. 4 Contractor Contract Task Order # Task Order Value Value Subcontracts Approved Yes No Unapproved Value Ellis Corp. FA8903-04-D-8694 0017 $ 34,204,750 $ 48,249,480 3 2 $ 24,800,000 Enviro. Chem. Corp. FA8903-06-D-8511 0013 $ 27,509,710 $ 19,538,471 3 0 $ 0 Fluor Enterprises FA8903-06-D-8512 0003 $ 21,280,964 $ 15,715,190 3 0 $ 0 Toltest Inc. FA8903-04-D-8678 0117 $ 16,131,698 $ 12,888,008 2 0 $ 0 Toltest Inc. FA8903-04-D-8678 0120 $ 35,715,592 $ 25,532,561 2 0 $ 0 Washington Group FA8903-04-D-8680 0002 $ 11,409,173 $ 6,361,599 3 0 $ 0 Totals $146,251,887 $128,285,309 16 2 $24,800,000 Table 2. Subcontract Approval. 3 Ellis Corp. did not have an approved purchasing system and thus required preapproval for subcontracts. 4 Ellis Corp. actually incurred approximately $18 million in expenses for the $24.8 million security subcontracts established without proper approval. 5

Tab B Subcontracts Cause. This condition occurred because AFCEE officials did not establish procedures requiring contractors provide advance notification and approval before establishing subcontracts, as required by the FAR. Specifically, AFCEE officials did not emphasize the importance of FAR Clause 52.244-2, Subcontracts, in the task orders 5. Further, AFCEE officials did not establish procedures to identify subcontracts established without proper notification. Impact. Requiring notification for subcontracts will provide AFCEE the opportunity to review the task order scope and determine if they should negotiate the price increase or cancel the order before major costs are incurred. For example, if Ellis Corp. had notified AFCEE officials concerning the security subcontracts established for task order 0017, AFCEE officials may have disapproved the subcontracts and avoided the additional $24.8 million security cost. Recommendation B.1. AFCEE should: a. Establish procedures to notify contractors at task order award of the requirement to review and approve subcontracts in accordance with FAR 52.244-2, Subcontracts, in all future task orders. b. Implement procedures to identify subcontracts established without proper notification or consent. c. Notify contractors that costs associated with subcontracts without proper notification or consent may be disallowed. Management Comments. The AFCEE Commander concurred with the intent of the audit results, recommendations, and potential monetary benefit, and stated: a. Concur. We concur with the recommendation to establish procedures to notify contractors at task order award of the requirement to review and approve subcontracts in accordance with FAR 52.244-2, Subcontracts, in all future task orders. FAR Clause 52.244-2, Subcontracts, is included by reference in the basic contracts. All applicable clauses from the basic contract flow down to the task order. To ensure that all contractors are reminded of the requirement, we have started putting FAR 52.244-2 in new task orders at award. In addition, if an existing task order requires a modification for another reason the FAR clause is being added at that time. Estimated completion date: 28 November 2008. 5 The Subcontracts FAR Clause 52.244.2 was referenced in the basic contract but the full text was not included. 6

Tab B Subcontracts b. Concur. AFCEE will implement a procedure into the voucher review process whereby the review team will check the cost for subcontracting that is included in the contractor s vouchers. The technician will add a question to the contractor s notification that their voucher is being reviewed and asking for certification that the subcontracts have received the proper reviews and/or that the proper notification was sent. Estimated completion date: 28 November 2008. c. Concur. We concur with the recommendation to notify contractors that costs associated with subcontracts without proper notification or consent may be disallowed. We will send a letter to all contractors working in the area of responsibility (AOR) instructing them on the requirements for subcontracting approval and notification and what may be the results of noncompliance. Estimated completion date: 28 November 2008. Evaluation of Management Comments. Management comments addressed the issues raised in the audit results, and management s actions planned and completed are responsive to the issues and recommendations included in this report. 7

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Audit Scope and Prior Audit Coverage AUDIT SCOPE Audit Coverage. We performed this review from January through June 2008 using documentation for cancelled IRP task orders dated from FY06 through 31 January 2008. We issued management a draft report in June 2008. We selected a judgmental sample of cancelled IRP task orders to determine if AFCEE effectively managed task order completion estimates. We reviewed CSSRs to determine the percentage of work completed. When CSSRs were not provided, we based the percentage of work completed on daily reports. We compared the percentage of work completed to the percentage of fee paid. We analyzed contract documents and public vouchers for the years ending FY06 through FY08 to determine if subcontracts were properly approved and effectively managed. We compared the amounts proposed to the amounts incurred. For those line items exceeding the proposed amounts, we reviewed supporting documentation to determine if cost overruns were due to unauthorized subcontracts. We used the following criteria to conduct this review: FAR Subpart 44.2, Consent to Subcontracts, 22 January 2008; FAR Subpart 44.3, Contractors Purchasing Systems Reviews, 22 January 2008; FAR Subpart 49.4, Termination for Default, 4 December 2007; FAR Subpart 36.2, Special Aspects of Contracting for Construction, 14 February 2008; Joint Contracting Command Acquisition Instruction (JCCAI), Contracting Officer s Guide to Special Contract Requirements for Iraq/Afghanistan Theater Business Clearance, 12 November 2007; JCCAI Acquisition Instruction for Iraq/Afghanistan, 15 December 2007; and the selected task orders and subsequent amendments. Sampling Methodology. We used judgemental sampling techniques to select and analyze task order payment data. We selected six task orders where the project award amount exceeded the deobligated funds by more than $10 million. Further, we used Computer Assisted Auditing Tools and Techniques to assess data related to financial records and payment calculations. Specifically, we used Excel spreadsheets to analyze financial data to evaluate if payments met or exceeded authorized amounts. We used advanced Excel functions such as count, if, and autosum to analyze data. Data Reliability. Although we relied on computer-generated data from the contractor s accounting system, we did not evaluate the adequacy of the system s general and application controls. We established data reliability by comparing source documents such as receipts, vouchers, and other supporting documentation to the computergenerated data. Our tests disclosed the data were sufficiently reliable to support our audit conclusions. 9 Appendix I

Audit Scope and Prior Audit Coverage Auditing Standards. We accomplished this audit in accordance with generally accepted government auditing standards and, accordingly, included tests of management controls related to contract agreements, and preparation of requests for payment. Specifically, we examined requests for payment for compliance with existing contract laws and regulations, FAR requirements, and Air Force and DoD policies and procedures. PRIOR AUDIT COVERAGE We did not identify any Government Accountability Office, DoD Inspector General, or Air Force Audit Agency reports issued within the past 5 years that contained the same or similar objectives as those addressed in this audit. 10

Locations Audited/ Reports Issued Organization/Location Installation-Level Reports Issued Field Operating Agency Air Force Center for Engineering and the Environment Brooks City-Base TX NONE 11 Appendix II

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Points of Contact Engineering and Environment Division (AFAA/SPE) Support and Personnel Audits Directorate 2509 Kennedy Circle Brooks City-Base TX 78235-5116 Robert F. Burks, Associate Director DSN 240-8035 Commercial (210) 536-8035 Kevin J. Iverson and Gary G. Caples, Program Managers Duane D. Tate, Audit Manager We accomplished this audit under project number F2008-FD1000-0402.000. 13 Appendix III

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Final Report Distribution SAF/OS SAF/US SAF/FM SAF/IG SAF/LL SAF/MR SAF/PA SAF/XC, AF/A6 AF/CC AF/CV AF/CVA AFCEE/CC AFCEE/AC AFCEE/ACQ AFCEE/EXO AF/A8 AF/RE NGB/CF ACC AETC AFISR AFMA AFMC AFOSI AFRC AFSOC AFSPC AMC ANG PACAF USAFA USAFE Units/Orgs Audited AU Library DoD Comptroller OMB 15 Appendix IV

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