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July 7, 2006: 

The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Member:
Committee on Armed Services:
United States Senate: 

The Honorable Duncan Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Member:
Committee on Armed Services:
House of Representatives: 

Subject: Contract Management: DOD Vulnerabilities to Contracting Fraud, 
Waste, and Abuse: 

In recent years, the Department of Defense (DOD) has increasingly 
relied on goods and services provided by the private sector under 
contract. Since fiscal year 2000, DOD's contracting for goods and 
services has nearly doubled, and this trend is expected to continue. In 
fiscal year 2005 alone, DOD obligated nearly $270 billion on contracts 
for goods and services. Given the magnitude of the dollar amounts 
involved, it is essential that DOD acquisitions be handled in an 
efficient, effective, and accountable manner. In other words, DOD needs 
to ensure that it buys the right things, the right way. 

Enacted January 6, 2006, the National Defense Authorization Act for 
Fiscal Year 2006[Footnote 1] required us to review DOD's efforts to 
identify and assess the vulnerability of its contracts to fraud, waste, 
and abuse. We reviewed the areas of vulnerability that DOD faces with 
regard to contracting fraud, waste, and abuse, and the recent 
initiatives that DOD has taken to address these vulnerabilities, 
including actions DOD has taken in response to a March 2005 Defense 
Science Board report on management oversight in acquisition 
organizations. 

Because of the limited time available to conduct our work, we relied 
heavily on a review of GAO and DOD Office of the Inspector General (DOD 
IG) reports issued over the past 5 years (listed in app. I) 
supplemented by interviews with senior acquisition policy, general 
counsel, and investigative service officials at the Office of the 
Secretary of Defense level and within each of DOD's military 
departments. We also reviewed relevant studies prepared by or for DOD, 
the most notable of which is the report written by the Defense Science 
Board, a panel of high-level outside experts that conducts analyses and 
advises DOD's top leadership on such areas as scientific and technical 
issues and acquisition processes. We met with a Department of Justice 
task force established to address contract fraud. To identify recent 
DOD initiatives, we interviewed senior acquisition officials and 
reviewed applicable policy memorandums and management oversight 
reports. We focused on DOD activities and actions rather than on 
contractor actions and efforts. Several contracting-related terms are 
used in this report and are described in appendix II. We conducted our 
review between February and June 2006 in accordance with generally 
accepted government auditing standards. 

Summary: 

DOD faces vulnerabilities to contracting fraud, waste, and abuse due to 
weaknesses in five key areas: sustained senior leadership, capable 
acquisition workforce, adequate pricing, appropriate contracting 
approaches and techniques, and sufficient contract surveillance. 
Because of numerous concerns about control weaknesses in these areas 
and others, GAO has had contract management on its list of high- 
risk[Footnote 2] areas since 1992.[Footnote 3] DOD's recent reports and 
studies, plus our discussions with senior DOD acquisition officials, 
point to specific weaknesses in these five areas. One of the senior 
leadership issues pertains to the tone at the top, which includes 
leadership's commitment or lack of commitment to sound acquisition 
practices.[Footnote 4] DOD has emphasized making contract awards 
quickly; sometimes, however, the focus on speed has come at the expense 
of sound contracting techniques. Increased demands on the acquisition 
workforce have led to vulnerabilities in contract pricing and 
competition and in the selection of the most appropriate contracting 
techniques. Some practices have led to insufficient contract 
surveillance, and such surveillance is essential for ensuring that 
contractors provide quality goods and services as required by their 
contracts. For each instance in which an area of vulnerability affects 
a contract award or execution, DOD risks paying contractors more than 
the value of the goods and services they provide. 

DOD has taken several steps to address the above contracting 
vulnerabilities. In particular, DOD initiated a Defense Science Board 
review in November 2004, after a high-level Air Force official pled 
guilty to a conflict-of-interest and admitted giving favorable 
treatment to a large DOD contractor in negotiations and contract awards 
involving billions of dollars. In March 2005, the Defense Science Board 
concluded that nothing in the department's existing general acquisition 
structure or policies would prevent contracting malfeasance such as 
that carried out by the senior Air Force official from happening again. 
The board also made 20 recommendations to address its concerns. In 
response, the Office of the Under Secretary of Defense for Acquisition, 
Technology, and Logistics (AT&L) has begun several initiatives, 
including issuing numerous memorandums to acquisition personnel 
reemphasizing their roles and responsibilities related to ethical 
conduct and revitalizing ethics training. AT&L also asked each military 
service in November 2004 to assess its own acquisition functions. In 
March 2006, AT&L completed its analysis of the military services' self- 
assessments and proposed six recommendations to address weaknesses in 
the oversight, source selection, and contract award processes to 
improve the integrity of DOD acquisition decisions. The military 
services and DOD have taken other steps to address fraud, waste, and 
abuse. Two of the military services established the Procurement Fraud 
Working Group, a DOD-wide grassroots forum for acquisition personnel to 
discuss ways to better address vulnerabilities to contracting fraud. 
The working group recently developed a Web-based community of practice 
to allow the immediate dissemination of information. Since September 
2004, DOD has issued several policy memorandums to improve the 
oversight of the department's use of interagency contracts and time and 
materials contracts. In addition, the military services have each 
undertaken specific initiatives, which range from creating new offices 
to focus audit and investigative efforts on areas of vulnerability to 
promoting general awareness about fraud through training and 
newsletters. Because the recent initiatives are still in their early 
stages, it is too soon to determine what impact they may have on 
reducing vulnerabilities to contracting fraud, waste, and abuse. We 
provided a draft of this letter to DOD for comment. The Department 
concurred with our findings. 

Background: 

DOD defines fraud, waste, and abuse in the following ways: 

* Fraud is any intentional deception taken for the purpose of inducing 
DOD action or reliance on that deception. Fraud can be perpetrated by 
DOD personnel--whether civilian or military--or by contractors and 
their employees. 

* Waste is the extravagant, careless, or needless expenditure of DOD 
funds or the consumption of DOD property that results from deficient 
practices, systems, controls, or decisions. Waste includes improper 
practices not involving prosecutable fraud. 

* Abuse is the manner in which resources or programs are managed that 
creates or perpetuates waste or contributes to acts of fraud. Abuse is 
also called mismanagement. 

Studies have shown that, generally speaking, the position a perpetrator 
holds within an organization will tend to have the most significant 
effect on the size of losses in a fraud scheme. Trust and access to 
funds and assets that come with senior leadership and tenure can become 
a vulnerability if the control environment in an organization is weak. 
Although waste and abuse are not as well defined as fraud, their 
effects can be just as profound. 

The amount of DOD funding used to contract for goods and services 
continued to increase in the past 5 years, as shown in figure 1. If 
this trend continues, more and more funds will be vulnerable to 
potential fraud, waste, and abuse unless effective controls are in 
place. 

Figure 1: DOD Contract Obligations for Fiscal Years 2000 to 2005: 

[See PDF for Image] 

Source: DD350 database, actions over $25,000; GAO (analysis and 
presentation). 

[End of Figure] 

Oversight and management of DOD contracting activities is shared among 
numerous organizations. Collectively, these organizations help detect 
instances of fraud, waste, and abuse, try to prevent them from 
happening, or are involved in correcting policies and procedures when 
they occur. Table 1 shows DOD organizations involved in overseeing and 
managing contracting activities and what the primary responsibilities 
are. 

Table 1: DOD Organizations Responsible for Oversight and Management of 
DOD Contracting Activities: 

DOD organization: Office of the Under Secretary of Defense for 
Acquisition, Technology, and Logistics (AT&L); 
Responsibility: Provides policy, guidance, and oversight to acquisition 
functions. 

DOD organization: DOD Office of General Counsel; 
Responsibility: Establishes procedures to implement policies relating 
to prosecution of identified instances of fraud (Department of Justice 
has primary responsibility for handling prosecutions related to fraud 
in federal court system); oversees ethics programs throughout DOD. 

DOD organization: DOD Inspector General (DOD IG); 
Responsibility: Conducts audits and oversees matters relating to 
detection and prevention of fraud, waste, and abuse; collaborates with 
numerous other DOD entities, as many activities are involved in 
addressing these issues across DOD; DOD IG does not issue policy 
regarding acquisition. 

DOD organization: Defense Criminal Investigative Service; 
Responsibility: Investigates fraud allegations. 

DOD organization: Defense Contract Audit Agency; 
Responsibility: Makes investigation referrals, usually to DOD IG or to 
Defense Criminal Investigative Service, regarding situations that 
reasonably appear to entail fraud that it encounters during its 
contract audits. 

DOD organization: Air Force, Army, Navy; 
Responsibility: Conduct audits and investigations; each military 
department has its own audit agency, criminal investigation service, 
and office of general counsel. 

Source: DOD (data); GAO (presentation and analysis). 

[End of table] 

Table 2 shows prosecutorial actions and monetary collections related to 
DOD procurement fraud cases for the last 5 fiscal years. Although fraud 
settlements are significant, it is likely that the amount of funds lost 
to DOD contracting waste and abuse exceeds those lost from fraud. 

Table 2: DOD Procurement Fraud Case Results for Fiscal Years 2001-2005 
(dollar amounts in millions): 

Fiscal year: 2001; 
Criminal indictments[A]: 177; 
Criminal convictions[A]: 137; 
Military Article 15[B]: 6; 
Criminal judgment amount: $38.6; 
Civil settlement amount: $103.5; 
Administrative amount: $4.9; 
Investigative recoveries and seizures: $0.6. 

Fiscal year: 2002; 
Criminal indictments[A]: 200; 
Criminal convictions[A]: 109; 
Military Article 15[B]: 14; 
Criminal judgment amount: $313.6; 
Civil settlement amount: $528.4; 
Administrative amount: $2.4; 
Investigative recoveries and seizures: $4.8. 

Fiscal year: 2003; 
Criminal indictments[A]: 176; 
Criminal convictions[A]: 121; 
Military Article 15[B]: 10; 
Criminal judgment amount: $40.7; 
Civil settlement amount: $492.4; 
Administrative amount: $19.3; 
Investigative recoveries and seizures: $3.8. 

Fiscal year: 2004; 
Criminal indictments[A]: 86; 
Criminal convictions[A]: 113; 
Military Article 15[B]: 7; 
Criminal judgment amount: $28.0; 
Civil settlement amount: $61.8; 
Administrative amount: $40.2; 
Investigative recoveries and seizures: $0.7. 

Fiscal year: 2005; 
Criminal indictments[A]: 79; 
Criminal convictions[A]: 85; 
Military Article 15[B]: 2; 
Criminal judgment amount: $27.1; 
Civil settlement amount: $263.6; 
Administrative amount: $23.7; 
Investigative recoveries and seizures: $0.0. 

Fiscal year: Total; 
Criminal indictments[A]: 718; 
Criminal convictions[A]: 565; 
Military Article 15[B]: 39; 
Criminal judgment amount: $448.1; 
Civil settlement amount: $1,449.6; 
Administrative amount: $90.4; 
Investigative recoveries and seizures: $9.9. 

Source: DOD IG (data); GAO (presentation and analysis). 

[A] Convictions sometimes occur in the year or years following 
indictments and therefore may be less than or exceed the number of 
indictments. In addition, some indictments do not result in 
convictions. 

[B] For minor fraud committed by military personnel, punishment is 
usually levied by the commanding officer. Such non-judicial punishment 
is referred to as an Article 15 procedure. 

[End of table] 

DOD Continues to Face Vulnerabilities in Contracting Fraud, Waste, and 
Abuse: 

On the basis of our review of relevant GAO and DOD IG reports from the 
last 5 years, as well as current discussions with senior DOD officials, 
we found that DOD continues to face vulnerabilities to contracting 
fraud, waste, and abuse due to weaknesses in the areas of sustained 
senior leadership, capable acquisition workforce, adequate pricing, 
appropriate contracting approaches and techniques, and sufficient 
contract surveillance. While we believe the overwhelming majority of 
DOD acquisition professionals are ethical and hard-working, 
vulnerabilities in DOD's contract management organizations and 
functions are not new. GAO designated aspects of DOD's contract 
management as a high-risk area in 1992 because of the large amount of 
dollars involved and numerous concerns about control weaknesses over 
its management of contracts. Despite DOD efforts to address some of 
GAO's concerns, changes in the acquisition environment--such as 
increasing reliance on contractor-provided services, reductions in the 
acquisition workforce, and the introduction or expansion of alternative 
contracting approaches--have caused DOD's contract management to remain 
on GAO's high risk list. 

Sustained Senior Leadership: 

DOD senior leadership is a critical factor in providing direction and 
vision as well as in maintaining the culture of the organization. As 
such, senior leaders have the responsibility to communicate and 
demonstrate a commitment to sound practices deemed acceptable for the 
acquisition function. Without sustained and prominent senior 
leadership, DOD increases its vulnerability to contracting fraud, 
waste, and abuse if it does not ensure that its decision makers, 
personnel, and contractors act in the best interests of DOD and 
taxpayers. DOD faces vulnerabilities in aspects of its senior 
leadership because of certain disconnects, including senior positions 
that have remained unfilled for long periods of time, the acquisition 
culture fostered by management's tone at the top, and the management 
approach used in new industry partnering relationships. In the March 
2005 Defense Science Board report, DOD recognized that senior positions 
requiring confirmation by the U.S. Senate remain unfilled for 
significant periods of time.[Footnote 5] An environment in which senior 
positions remain vacant provides opportunities for determined 
individuals to circumvent established policies and procedures for their 
own personal gain or otherwise fail to act in the government's best 
interest. Vacant positions can allow a breakdown in one key internal 
control at senior leadership levels, that being separation of duties. 
For example, this type of environment allowed a former senior Air Force 
official's misconduct to go unchecked as the official amassed a 
significant amount of power and control within the acquisition 
function. When we recently discussed senior leadership issues with DOD 
officials, they acknowledged that some positions remain unfilled. In 
addition, an AT&L official emphasized that filling the senior-level 
vacancies requires assistance or actions beyond the Office of the 
Secretary of Defense. 

DOD's tone at the top allows a certain level of vulnerability to enter 
into the acquisition process. Senior acquisition officials ultimately 
shape the environment that midlevel and frontline acquisition personnel 
operate within, and it is that tone that clearly identifies and 
emphasizes the values deemed acceptable within the acquisition 
function. The Defense Science Board report stated that the department 
lags behind the "best in class" in creating a systematic, integrated 
approach and in demonstrating the kind of leadership necessary to drive 
ethics to the forefront of organizational behavior. DOD officials told 
us that, in recent years, the tone set in DOD was one of streamlining 
acquisitions to get results as fast as possible. While this is a 
desired outcome of the acquisition process, the acquisitions should 
still be carried out within prescribed policies and practices. With 
regard to the situation involving the former senior Air Force official, 
the misconduct of that official occurred within a centralized 
acquisition process that was often praised for being streamlined. But 
the environment failed to provide sufficient management oversight and 
control, allowing the abuses perpetrated by this official to continue 
to override management controls, disregard organizational transparency 
of key decisions, and demonstrate unprofessional behavior toward other 
DOD personnel and contractor officials. 

Effective senior leadership at DOD's major program management level is 
also needed to minimize fraud, waste, and abuse. In recent years DOD 
has been using a lead systems integrator approach that allows one or 
more contractors to define a weapon system's architecture and then 
manage both the acquisition and the integration of subsystems into the 
architecture. This new approach relies on contractors to fill roles and 
handle responsibilities that differ from the more traditional prime 
contractor relationship the contractors had with program offices and 
can blur the oversight responsibilities between the lead systems 
integrator and program management officials. For example, the Army's 
Future Combat System program is managed by a lead systems integrator 
that assumes the responsibilities of developing requirements, selecting 
major system and subsystem contractors, and making trade-off decisions 
among costs, schedules, and capabilities. While this management 
approach has some advantages for DOD, we found that the extent of 
contractor responsibility in many aspects of the Future Combat System 
program management process is a potential risk.[Footnote 6] 

Moreover, if DOD uses a lead systems integrator but does not provide 
effective oversight, DOD is vulnerable to the risk that the lead 
systems integrator may not make its decisions in a manner consistent 
with the government's best interest, especially when faced with 
potential organizational conflicts of interest. DOD acquisitions 
require that tough decisions and trade-offs be made when new 
technologies do not work out, available funding is reduced, or changes 
in performance expectations are made. 

Capable Acquisition Workforce: 

DOD needs to have the right skills in its acquisition workforce to 
effectively implement best practices and properly manage the 
acquisition of goods and services. In the ever-changing DOD contracting 
environment, the acquisition workforce must be able to rapidly adapt to 
increasing workloads while continuing to improve its knowledge of 
market conditions, industry trends, and the technical details of the 
goods and services they procure. Moreover, effective workforce skills 
are essential for ensuring that DOD receives fair and reasonable prices 
for the goods and services it buys. However, DOD's acquisition 
workforce is subject to conditions that increase the vulnerabilities to 
contracting fraud, waste, and abuse: 

* The overall contracting workload has increased. 

* The demand for contract surveillance (addressed later in this report) 
continues to grow because of DOD's increasing reliance on contractors 
for services. 

* DOD is making greater use of alternative contracting approaches, 
which offer the benefits of improved efficiency and timeliness for 
acquiring goods and services. 

* Many contracting personnel are due to retire in the next few years, 
taking with them a wealth of experience and capabilities. 

Between fiscal years 1989 and 2002, DOD reduced its civilian 
acquisition workforce by about 38 percent without ensuring the 
department had the specific skills and competencies needed to 
accomplish future DOD missions. The size of the acquisition workforce 
has remained relatively constant since fiscal year 2000. However, 
overall contract obligations and the number of contract actions 
processed by DOD have increased nearly twofold, as figure 2 
illustrates. 

Figure 2: DOD Contract Obligations and Workforce Size for Fiscal Years 
2000-2005: 

[See PDF for Image] 

Source: Contract obligations data from DD350 database; work force data 
from Office of Personnel Management for 14 acquisition-related job 
series, GAO ( analysis and presentation). 

[End of Figure] 

Some of the DOD contracting workload increases can be attributed to 
post-September 11, 2001, acquisition demands, including increased 
deployments to support military activities overseas. To handle some of 
the additional work, DOD has begun using contractors to provide 
technical support to its acquisition activities. In other words, 
contractors are helping carry out the contracting function.[Footnote 7] 

The acquisition workforce continues to face the challenge of 
maintaining and improving skill levels for using alternative 
contracting approaches introduced by acquisition reform initiatives of 
the past few decades. Because the contracting approach influences the 
type of contracting vehicle to be used and the pricing and payment 
options considered, this expanding universe of approaches requires DOD 
acquisition personnel to have the knowledge and skills to successfully 
select and implement each approach. For example, in the past several 
years, the workforce has been increasingly involved with the use of 
multiple-award indefinite delivery/indefinite quantity contracts, 
performance-based contracts, and interagency contracts. Participants in 
an October 2005 GAO forum on Managing the Supplier Base for the 21st 
Century commented that the current federal acquisition workforce 
significantly lacks the new business skills needed to act as contract 
managers.[Footnote 8] 

Finally, DOD will be subject to vulnerabilities in the next few years 
as experienced acquisition personnel are expected to retire from 
government service and significant amounts of acquisition knowledge and 
experience will be lost. As GAO reported in 2005, more than half of 
DOD's current workforce will be eligible for early or regular 
retirement in the next 5 years.[Footnote 9] More recently, Navy 
officials told us that they already are seeing a "hemorrhaging" of 
senior contracting officers as large numbers have started to retire. 

Adequate Pricing: 

DOD is generally required to obtain fair and reasonable prices for the 
goods and services it procures.[Footnote 10] The Federal Acquisition 
Regulation provides procedures for making price 
determinations.[Footnote 11] As our work has shown, DOD faces various 
risks associated with obtaining adequate contract pricing that can lead 
to vulnerabilities. These pricing risks stem from non-competitive 
contract actions, delays in setting requirements for undefinitized 
contracts, failure to use available pricing information, and 
misclassification of items as commercial items. 

The Federal Acquisition Regulation emphasizes the use of competition in 
the acquisition process.[Footnote 12] While a competitive environment 
provides more assurance of reasonable prices than a noncompetitive one 
does, DOD continues to be exposed to contracting vulnerabilities due to 
practices that limit competition. For example, we have reported that 
DOD often did not promote competition when issuing task orders under 
General Services Administration schedule or multiple award indefinite 
delivery/indefinite quantity contracts.[Footnote 13] 

DOD's lack of timeliness in finalizing requirements for undefinitzed 
contract actions, which are usually in the form of letter contracts, 
leaves DOD vulnerable to waste and abuse. In fiscal year 2004, DOD 
obligated nearly $6.5 billion under letter contracts. While this type 
of contract may be necessary to initiate work quickly to meet urgent 
operational needs, costs on letter contracts are more difficult to 
control because information detailing the requirements and potential 
costs are likely vague or undefined. In August 2004, the DOD IG 
reported that contracting officials did not adequately definitize the 
acquisition requirements within the required time frames, and the 
report said the officials did not document the reasonableness of the 
profit rates charged by the contractors.[Footnote 14] In another 
example, an undefinitized contract action to support ongoing efforts to 
rebuild Iraq was modified nine times over a 6-month period, increasing 
costs from about $900,000 to over $200 million without DOD and the 
contractor reaching agreement on the scope of work or price. Delays in 
definitizing contract requirements can pose various risks and 
potentially increase DOD's costs and exposure to waste and abuse. 

DOD's failure to use available pricing information for sole-source 
contract awards leaves it vulnerable to waste. In the case of sole- 
source awards, the contractor may be required to provide the department 
with pricing information to support proposed prices and to justify 
proposed costs. Furthermore, where such information is not required, 
DOD contracting officials should use other available information and 
techniques to determine price reasonableness and conduct price 
negotiations. DOD contracting officials are expected to review the 
information obtained and use appropriate techniques to ensure that DOD 
avoids paying unreasonable prices and questionable costs. Prior GAO 
reports show that, in some cases, DOD did not sufficiently evaluate the 
data or DOD waived the requirement for the contractor to provide the 
data. For example, when the Air Force purchased spare parts for the 
Airborne Warning and Control System aircraft program, it did not obtain 
sales information for the spare parts or similar items to justify the 
contractor's proposed price.[Footnote 15] Neither did the Air Force 
consider analyses performed by the Defense Contract Management Agency 
that showed a much lower price was warranted. Instead, the contracting 
officer relied on a contractor-prepared analysis. Similarly, the Army 
Corps of Engineers (the Corps) recently purchased portable classrooms 
from a contractor to support Hurricane Katrina relief 
operations.[Footnote 16] The Corps accepted the contractor's proposed 
price of $39.5 million although the Corps had information that the cost 
of the classrooms was significantly less than what the contractor was 
charging. We believe that by not using available information, the Corps 
could have, but failed to, negotiate a lower price. When various 
pricing information is not fully utilized, DOD contracting activities 
remain vulnerable to paying more than warranted. 

Also, DOD sometimes uses commercial item procedures to procure items 
that are misclassified as commercial items and therefore not subject to 
the forces of a competitive marketplace. While the use of commercial 
item procedures is an acceptable practice, misclassification of items 
as commercial can leave DOD vulnerable to accepting prices that are not 
the best value for the department. When an item is designated as 
commercial, DOD should be able to determine if the price is reasonable 
on the basis of prices in the commercial sector. However, if DOD 
designates an item as being a commercial item when it is not readily 
available in the commercial market, DOD limits its ability to assess 
the reasonableness of the contractor's price because it might have less 
information on prices to make its decision. The DOD IG reported in the 
past few years on two cases in which a commercial item determination 
was unjustified.[Footnote 17] 

Appropriate Contracting Approaches and Techniques: 

When selecting contracting approaches and techniques for an award, the 
government's objective is to negotiate a contract type and price that 
will result in reasonable risk and provide the contractor with the 
greatest incentive for efficient and economical performance. While the 
full extent to which business like contracting approaches and 
techniques have transformed DOD's acquisition processes cannot be 
ascertained, data collected by GAO suggest that DOD's increased use of 
certain contracting approaches and techniques over the past few years 
has increased DOD's vulnerability to contracting fraud, waste, and 
abuse. 

The interagency contracting approach enables DOD and other federal 
agencies to leverage their buying power and provide a simplified and 
expedited method of acquiring goods and services. DOD has the option to 
go to other federal agencies to carry out the contracting process for 
selected goods and services. When this contracting approach is not 
utilized properly, however, DOD is exposed to greater risk of fraud, 
waste, and abuse. In January 2005, GAO designated the use of 
interagency contracts as a governmentwide high-risk area.[Footnote 18] 
GAO and DOD IG have identified instances in which acquisition personnel 
were provided insufficient training and guidance on the use of 
interagency agreements and a lack of effective management control and 
oversight over these contracts occurred. In our high-risk report, we 
reported that instances of insufficient oversight of contractor 
services occurred because of blurred lines in the shared contract 
management responsibilities between DOD and the awarding agency. The 
DOD IG also reported that the department used interagency contracts to 
"park"[Footnote 19] several hundred million dollars in funds, a 
violation of DOD funding policies and regulations.[Footnote 20] 
Additional vulnerabilities arose when the non-DOD agency providing 
acquisition support did not follow prescribed policies and regulations. 
For example, DOD obtained interrogator services in Iraq through a 
Department of the Interior acquisition center that used a General 
Services Administration contract for information technology services. 
In this situation, the contracted services were not within the scope of 
the contract and were not subject to competition. 

DOD also faces vulnerabilities when it misuses multiple-award 
indefinite delivery/indefinite quantity contracts and General Services 
Administration multiple-award schedules. For multiple award indefinite 
delivery/indefinite quantity contracts, DOD is required to provide all 
contractors a fair opportunity to be considered for each order unless 
certain exceptions apply.[Footnote 21] This is meant to provide an 
ongoing competitive environment in which each awardee would be fairly 
considered for each order issued.[Footnote 22] When ordering from the 
General Services Administration schedules, agencies are required to 
follow certain ordering procedures, which, for services, can entail a 
comparison of quotations from multiple schedule contractors. But in 
practice, DOD officials have on numerous occasions avoided the time and 
effort necessary to compete individual orders and instead awarded all 
the work to be performed to a single contractor. GAO work shows that 
this practice resulted in the noncompetitive award of many orders that 
have not always been adequately justified.[Footnote 23] Without 
competition for individual task orders (or adequate justification for 
awarding them noncompetitively), DOD faces increased vulnerability to 
fraud, waste, and abuse. 

DOD faces additional vulnerability to fraud, waste, and abuse in the 
way it structures and implements award and incentive fees. These 
monetary incentives are intended to motivate excellent contractor 
performance and improve acquisition outcomes. However, GAO recently 
reported that DOD paid an estimated $8 billion in award fees for 
contracts in the study population regardless of the outcomes of the 
contract.[Footnote 24] Furthermore, DOD gave contractors a second 
opportunity to earn an estimated $669 million of initially unearned or 
deferred fees on approximately half of the award-fee contracts. GAO 
believes these practices, along with paying significant amounts of fees 
for "acceptable, average, expected, good, or satisfactory" performance, 
undermine the effectiveness of fees as a motivational tool, marginalize 
their use in holding contractors accountable for acquisition outcomes, 
and waste taxpayer funds. As our report noted, DOD has little evidence 
to support its belief that these fees improve contractor performance 
and acquisition outcomes. 

Sufficient Contract Surveillance: 

The role of the acquisition function does not end with the award of a 
contract. It requires continued involvement throughout contract 
implementation and closeout to ensure that contracted services are 
delivered according to the schedule, cost, quality, and quantity 
specified in the contract. The Federal Acquisition Regulation requires 
that quality assurance, such as surveillance, be performed at such 
times and places as necessary to determine that the goods or services 
satisfy the contract requirements.[Footnote 25] If surveillance is 
insufficient, is not conducted, or is not documented when appropriate, 
DOD risks paying contractors more than the value of the goods and 
services provided. 

In the past 4 years, GAO and DOD IG have reported that DOD's contracts 
have been subject to insufficient surveillance. In July 2004, we 
reported that DOD did not have a sufficient number of trained personnel 
in place to provide effective oversight of its logistics support 
contractors.[Footnote 26] These contractors provide many of the 
supplies and services needed to support the Logistics Civilian 
Augmentation Program, which has been used to support operations in both 
Kuwait and Afghanistan. In another example, we reported in March 2005 
instances of inadequate surveillance on 26 of 90 DOD service contracts 
we reviewed.[Footnote 27] In each instance, at least one of the key 
factors to ensure adequate surveillance did not take place. These 
factors are (1) training personnel in how to conduct surveillance, (2) 
assigning personnel at or prior to contract award, (3) holding 
personnel accountable for their surveillance duties, and (4) performing 
and documenting surveillance throughout the period of the contract. The 
DOD IG reported similar findings in its reports issued in October 2003 
and October 2005. Officials we met with during this review expressed 
concerns about the current state of the acquisition workforce to 
support surveillance. The comments included those of Air Force 
officials who told us that they are concerned that surveillance remains 
an "other duty as assigned" and, consequently, is a low-priority task. 

Recent DOD Initiatives to Address Contracting Fraud, Waste, and Abuse: 

DOD recognizes that its contracting practices leave the department 
vulnerable to misusing or wasting taxpayer dollars and is taking some 
actions to mitigate the risk. In addition to the Defense Science Board 
review, we identified several DOD-wide and military service initiatives 
taken since the fall of 2004 that address aspects of the acquisition 
process in an effort to deal with vulnerabilities to fraud, waste, and 
abuse. These include a DOD analysis of the self-assessments of the 
acquisition function made by each military service, the establishment 
of the Procurement Fraud Working Group, and issuance of policy to 
address concerns about the use of interagency contracting. The Defense 
Science Board review and the DOD analysis of the military service self- 
assessments are directed primarily at senior leadership and oversight 
vulnerabilities and do not deal with the other areas of vulnerability 
we identified above. While the initiatives are positive steps, several 
DOD officials we spoke with agreed that it is too soon to see an 
impact, particularly from those memorandums dealing with the 
acquisition culture. 

DOD-wide Initiatives: 

AT&L initiated the Defense Science Board task force review of 
management oversight in acquisition organizations in November 2004 to 
examine the checks and balances of the processes to ensure the 
integrity of acquisition decisions. In the resulting March 2005 report, 
the Defense Science Board identified weaknesses in the acquisition 
function related to processes, oversight, leadership, and people, and 
provided 20 recommendations to address these issues. In response, AT&L 
initiated multiple efforts to address each recommendation, including 
the issuance of several policy memorandums to the defense agencies and 
the largest defense contractors to address the issue of ethics. For 
example, beginning in fiscal year 2005, AT&L began trying to shift the 
tone at the top by issuing a series of memorandums to acquisition 
personnel and contractors with the intent of changing the culture and 
reinforcing the importance of ethics in the acquisition function. In 
addition, AT&L issued other memorandums emphasizing the need for the 
contracting officer to remain independent from the program office and 
stressing acquisition personnel's responsibility to report unusual 
practices. Other actions created an overarching fraud awareness and 
ethics training program. To assist in this effort, the Defense 
Acquisition University, a DOD-run training institute for the AT&L 
workforce, appointed a performance learning manager for ethics who is 
responsible for ensuring that ethics issues are addressed not only in 
the traditional acquisition courses but also in the executive-level 
courses. The Defense Acquisition University also added specific ethics- 
related information to its Web site, including discussion vignettes 
that pose ethical dilemmas or questions for readers to test their 
judgment. Appendix III provides a detailed account of the Defense 
Science Board recommendations and AT&L's responding actions. 

Also in November 2004, AT&L issued a memorandum to the military 
services and other defense agencies directing them to perform a self- 
assessment of their acquisition organization and processes for use in a 
DOD-wide Acquisition Integrity Analysis. In March 2006, AT&L completed 
the analysis and proposed six recommendations to address weaknesses in 
the oversight, source selection, and contract award processes to 
improve the integrity of DOD acquisition decisions. AT&L's 
recommendations included the need for several new policies to address 
(1) specifically prohibiting senior leaders from performing multiple 
roles on major acquisition projects, (2) filling vacant positions from 
below on an acting basis until permanent appointments are made, (3) 
requiring documentation of the source selection processes, and (4) 
requiring legal review of the source selection documentation prior to 
award. AT&L also recommended that Acquisition Process Reviews, which 
are currently performed for other defense agencies, be instituted for 
the military services. 

In late 2004, the Air Force's and the Army's general counsel offices 
initiated a grassroots effort that resulted in the Procurement Fraud 
Working Group. The goal of the working group is to provide a discussion 
forum that will develop closer working relationships among the relevant 
DOD activities and agencies that identify, investigate, and prosecute 
contracting fraud--the contracting officers, quality assurance 
personnel, investigative staff, and legal staff--and provide an 
exchange of information and ideas among these DOD agencies, the 
Department of Justice, and other government agencies. The working 
group, which is hosted by the Defense Contract Management Agency, 
recently established a Web site that allows working group members to 
solicit advice and share good practices. The working group held its 
second annual conference in March 2006. The conference provided 
attendees with information on current issues, future trends, 
investigative strategies, and enforcement remedies related to 
contracting fraud. Although the working group includes members from 
levels within various acquisition and investigative functions across 
DOD, the working group does not have formal sponsorship or authority 
from AT&L. 

DOD has issued several policies directed at strengthening controls over 
these types of contracting approaches and techniques. In September 
2004, AT&L issued policy on the department's surveillance of cost- 
reimbursable and time and materials contracts. DOD also issued policies 
on the use of interagency contracts in October 2004, March 2005, and 
March 2006. 

Military Department-Specific Initiatives: 

Each of the military departments has taken steps to address some of the 
vulnerabilities related to contracting fraud, waste, and abuse. These 
initiatives range from creating new offices to focus resources on the 
most vulnerable areas to promoting general awareness about fraud 
through training and newsletters. 

In December 2005, the Navy centralized its approach to addressing 
vulnerabilities to contracting fraud, waste, and abuse by creating its 
Acquisition Integrity Office. The office links the legal, audit, and 
investigative resources by dedicating units from both the Naval Audit 
Service and the Navy Criminal Investigative Service to work alongside 
the Office of the General Counsel in a coordinated effort to detect, 
investigate, and correct instances of fraud. The idea for this office 
grew out of the General Counsel's interest in pursuing fraud and the 
low number of suspension and debarment cases involving Navy 
contractors. The Acquisition Integrity Office conducts risk assessments 
of acquisition functions and has begun data-mining efforts to focus the 
investigative and audit resources to areas they deem as being most 
vulnerable to fraud. The Acquisition Integrity Office is also 
developing a newsletter and a "desk book" reference to educate and 
assist acquisition personnel in identifying and addressing fraud. In 
addition, the office is responsible for issuing fraud alerts to 
acquisition personnel, as necessary, to inform them of identified 
instances of fraud. 

During 2005, the Air Force initiated several changes to its acquisition 
policies and procedures to address vulnerabilities identified during 
the investigation of the senior level acquisition official convicted of 
violating a conflict-of-interest law. To begin, the Air Force made 
changes to the Air Force Federal Acquisition Regulation Supplement to 
require further documentation of source selections. The Air Force also 
issued memorandums regarding ethics and postemployment restrictions as 
part of an effort to shift the acquisition culture from the previous 
emphasis on streamlining procurement to "doing the right thing." As an 
additional initiative, the Air Force created a Special Assistant for 
Acquisition Governance and Transparency position to monitor new weapon 
acquisition programs and ensure that all weapon acquisitions are fully 
explained to Congress and the public. The goal of the special assistant 
position is to ensure procurement integrity and adherence to 
procurement guidance in all weapon acquisition programs. The Air Force 
also created an ombudsman program to handle concerns of government and 
contractor employees. 

Also during 2005, the Army set up new procurement fraud advisers' 
offices that are deployed alongside units in Afghanistan and Iraq to 
address the high vulnerability to fraud in contracts to support the war 
and reconstruction efforts. The advisers' offices also coordinate with 
Special Inspector General for Iraq Reconstruction. In addition, the 
Army created a Fraud Fighters Web site to promote fraud awareness and 
discuss various issues related to fraud as they arise. 

Conclusions: 

With awards to contractors large and growing, DOD will continue to be 
vulnerable to contracting fraud, waste, and abuse. As the last several 
years have shown, those vulnerabilities have resulted in numerous cases 
in which taxpayer dollars were misused or wasted. As these cases have 
come to light, DOD has begun to respond. As in other areas, the impact 
of DOD actions to make corrections will be evident as policies get 
translated into effective practices. Otherwise, DOD will remain at 
risk. Ongoing monitoring of results will be the prudent course of 
action. To do this may be a challenge because no single office within 
DOD maintains responsibility to monitor the efforts related to 
detecting and preventing fraud, waste, and abuse across all 
organizations in DOD. 

Agency Comments and Our Evaluation: 

The Department provided written comments, which are reproduced in 
appendix IV. DOD concurred with our findings and stated that it shares 
our concern about the areas of vulnerability to contracting fraud, 
waste, and abuse that we cited in this letter. 

We are sending copies of this report to the Secretary of Defense and 
interested congressional committees. We will also make copies available 
to others upon request. In addition, the report will be available at no 
charge on the GAO Web site at [Hyperlink, http://www.gao.gov]. 

If you have any questions about this report or need additional 
information please contact me at (202) 512-4841 or schinasik@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. Key contributors 
to this report were James E. Fuquay, Assistant Director; Noah Bleicher; 
Lily Chin; R. Eli DeVan, Tim DiNapoli, Matthew T. Drerup, Jean K. Lee, 
and Adam Vodraska. 

Sincerely, 

Signed by: 

Katherine V. Schinasi: 
Managing Director, Acquisition and Sourcing Management: 

[End of Section] 

Appendix 1: GAO and DOD Inspector General Reports Reviewed: 

Senior Leadership: 

GAO, Highlights of a GAO Forum: Managing the Supplier Base in the 21st 
Century, GAO-06-533SP, Washington, D.C.: March 31, 2006. 

GAO, Agency Management of Contractors Responding to Hurricanes Katrina 
and Rita, GAO-06-461R, Washington, D.C.: March 15, 2006. 

GAO, Defense Acquisitions: Business Case and Business Arrangements Key 
for Future Combat System's Success, GAO-06-478T, Washington, D.C.: 
March 1, 2006. 

GAO, Defense Ethics Program: Opportunities Exist to Strengthen 
Safeguards for Procurement Integrity, GAO-05-341, Washington, D.C.: 
April 29, 2005. 

GAO, Defense Acquisitions: Future Combat Systems Challenges and 
Prospects for Success, GAO-05-428T, Washington, D.C.: March 16, 2005. 

GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP, Washington, D.C.: February 1, 2005. 

Acquisition Workforce: 

Department of Defense, Office of the Inspector General, Audit Report: 
Report on the DoD Acquisition Workforce Count, Report Number D-2006- 
073, Arlington, Virginia: April 17, 2006. 

GAO, DOD Civilian Personnel: Comprehensive Strategic Workforce Plans 
Needed, GAO-04-753, Washington, D.C.: June 30, 2004. 

GAO, March 19 Hearing on Sourcing and Acquisition--Questions for the 
Record, GAO-03-771R, Washington, D.C.: May 23, 2003. 

GAO, Federal Procurement: Spending and Workforce Trends, GAO-03-443, 
Washington, D.C.: April 30, 2003. 

Pricing: 

GAO, Contract Security Guards: Army's Guard Program Requires Greater 
Oversight and Reassessment of Acquisition Approach,GAO-06-284, 
Washington, D.C.: April 3, 2006. 

Department of Defense, Office of the Inspector General, Audit Report: 
Procurement Procedures Used for F-16 Mission Training Center Simulator 
Services, Report Number D-2006-065, Arlington, Virginia: March 24, 
2006. 

GAO, Contract Management: The Air Force Should Improve How It Purchases 
AWACS Spare Parts, GAO-05-169, Washington, D.C.: February 15, 2005. 

Department of Defense, Office of the Inspector General, Audit Report: 
Undefinitized Contractual Actions, Report Number D-2004-112, Arlington, 
Virginia: August 30, 2004. 

GAO, Contract Management: Guidance Needed to Promote Competition for 
Defense Task Orders, GAO-04-874, Washington, D.C.: July 30, 2004. 

Department of Defense, Office of the Inspector General, Audit Report: 
Contracting for and Performance of the C-130J Aircraft, Report Number D-
2004-102, Arlington, Virginia: July 23, 2004. 

GAO, Military Operations: DOD's Extensive Use of Logistics Support 
Contracts Requires Strengthened Oversight, GAO-04-854, Washington, 
D.C.: July 19, 2004. 

GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and 
Management Challenges, GAO-04-605, Washington, D.C.: June 1, 2004. 

Contracting Techniques: 

GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive 
Fees Regardless of Acquisition Outcomes, GAO-06-66, Washington, D.C.: 
December 19, 2005. 

GAO, Interagency Contracting: Franchise Funds Provide Convenience, but 
Value to DOD Is Not Demonstrated, GAO-05-456, Washington, D.C.: July 
29, 2005. 

Department of Defense, Office of the Inspector General, Acquisition: 
DOD Purchases Made Through the General Services Administration, Report 
Number D-2005-096, Arlington, Virginia: July 29, 2005. 

GAO, Interagency Contracting: Problems with DOD's and Interior's Orders 
to Support Military Operations, GAO-05-201, Washington, D.C.: April 29, 
2005. 

GAO, High-Risk Series: An Update, GAO-05-207, Washington, D.C.: January 
2005. 

Contract Surveillance: 

Department of Defense, Office of the Inspector General, Audit Report: 
Contract Surveillance for Service Contracts, Report Number D-2006- 010, 
Arlington, Virginia: October 28, 2005. 

GAO, Defense Logistics: High-Level DOD Coordination Is Needed to 
Further Improve the Management of the Army's LOGCAP Contract, GAO-05- 
328, Washington, D.C.: March 21, 2005. 

GAO, Contract Management: Opportunities to Improve Surveillance on 
Department of Defense Service Contracts, GAO-05-274, Washington, D.C.: 
March 17, 2005. 

GAO, Military Operations: DOD's Extensive Use of Logistics Support 
Contracts Requires Strengthened Oversight, GAO-04-854, Washington, 
D.C.: July 19, 2004. 

Department of Defense, Office of the Inspector General, Audit Report: 
Contracts for Professional, Administrative, and Management Support 
Services, Report Number: D-2004-015, Arlington, Virginia: October 30, 
2003. 

GAO, Contract Management: High-Level Attention Needed to Transform DOD 
Services Acquisition, GAO-03-935, Washington, D.C.: September 10, 2003. 

[End of Section] 

Appendix II: Contracting Related Terms:  

Delivery order: An order for supplies placed against an established 
contract or with government sources. 

Indefinite delivery/indefinite quantity contract: A kind of contract 
used to acquire goods and services when the exact date of future 
deliveries is unknown but a recurring need is likely to arise. There 
are three types of indefinite delivery contracts: definite quantity 
contracts, requirements contracts, and indefinite quantity contracts. 
Indefinite quantity contracts provide for an indefinite quantity, 
within stated limits, of supplies or services during a fixed period. 

Interagency contract: Agencies may use another agencies' contracting 
services to purchase goods and services. Typically, such contracts are 
used to provide agencies with commonly used goods and services, such as 
office supplies or information technology services. Agencies that award 
and administer interagency contracts usually charge a fee to support 
their operations. 

Lead systems integrator: Typically, the lead systems integrator is the 
prime contractor with increased program management responsibilities. 
These responsibilities may include greater than usual involvement in 
requirements development, design, and source selection of major system 
and subsystem subcontractors. 

Letter contract: A written preliminary agreement authorizing the 
contractor to immediately begin manufacturing supplies or performing 
services. 

Obligation: As used here, a definite commitment that creates a legal 
liability of the government for the payment of goods and services 
ordered or received. An agency incurs an obligation, for example, when 
it places an order, signs a contract, or purchases a service. 

Performance-based contract: Performance-based contracting emphasizes 
that all aspects of an acquisition be structured around the results of 
the work to be performed as opposed to the manner in which the work is 
to be performed. When using this type of contract, the contracting 
agency specifies the outcome or result it desires and leaves it to the 
contractor to decide how best to achieve the desired outcome. 

Sole-source acquisition: A contract for the purchase of goods or 
services that is entered into by an agency after soliciting and 
negotiating with only one source. 

Task order: An order for services placed against an established 
contract or with government sources. 

Time and materials contract: A contract that provides for acquiring 
supplies or services on the basis of direct labor hours at specified 
fixed hourly rates that include wages, overhead, general and 
administrative expenses, and profit and materials at cost. 

[End of Section] 

Appendix III: Status of DOD Actions in REsponse to March 2005 Defense 
Science Board Recommendations: 

#: 1; 
Recommendation: For major procurements, Acquisition, Technology, and 
Logistics (AT&L) should codify best practices into policy (written 
recommendations by advisory bodies to the source selection authority 
[SSA] and the SSA decision and rationale); 
Action/status: AT&L is fielding a Best Practices Clearing House. It is 
also initiating implementation of Acquisition Process Reviews; Air 
Force issued new Air Force Federal Acquisition Regulation Supplement 
changes in August 2005 requiring documentation of recommendations made 
to the SSA, mandatory independent contract clearance approvals, 
notification of solicitation release for source selections over $100 
million; and expansion of the Ombudsman Program. 

#: 2; 
Recommendation: AT&L should ensure a process for meaningful feedback to 
bidders; 
Action/status: The Acquisition Process Review Working Group is 
reviewing the military departments'/agencies' use of debriefings. 

#: 3; 
Recommendation: AT&L should ensure distribution of delegated 
acquisition responsibilities for major procurements; 
Action/status: AT&L issued a memorandum, "Acquisition Integrity," 
requiring services/ agencies to prepare policy that reflects procedures 
for ensuring the separation of functions in all acquisitions, so that 
authority does not reside in one person. AT&L's Acquisition Integrity 
Analysis was completed in March 2006, but has not been issued; AT&L 
recommended issuing a new policy specifically prohibiting a senior 
leader from performing multiple roles for any one major weapon systems 
or major service acquisition. AT&L also recommended that vacant 
positions be filled from below to avoid accretion of duties at the top. 

#: 4; 
Recommendation: Oversight, source selection, and contract negotiations 
should not reside in one person; 
Action/status: Addressed by actions in response to number 3 above; AT&L 
issued a memorandum, "Change in Milestone Decision Authority" (MDA), 
March 2005, reducing the Air Force's MDA authority during management 
organization instability. In January 2006, AT&L redesignated MDA 
authority for 10 major programs back to the Air Force, but limited the 
authority to the Secretary of Air Force until a Senior Acquisition 
Executive is appointed and confirmed; Air Force eliminated the 
Acquisition Principal Deputy position, restructured the contracting and 
program management decision authority, and realigned its Program 
Executive Officer (PEO) structure. Air Force also updated the Air Force 
regulations. The Secretary of the Air Force appointed a Special 
Assistant for Governance and Transparency. 

#: 5; 
Recommendation: Provide many avenues for voicing concerns (Ombudsman 
and ethics offices set up to address concerns); 
Action/ status: The Acquisition Process Review Working Group is 
reviewing the military departments' oversight initiative; AT&L is 
gathering best practices from the Defense Acquisition University (DAU) 
and other sources; Air Force incorporated new Ombudsman program in 
August 2005. 

#: 6; 
Recommendation: AT&L should oversee processes as well as programs; 
Action/status: Defense Acquisition Performance Assessment (DAPA) study 
and Acquisition Process Review study in AT&L. DAPA report was released 
January 2006; Acquisition Process Review Working Group met with SAEs 
and outlined plan of action March 2006. 

#: 7; 
Recommendation: Identify and share best practices; 
Action/status: In fall 2004, AT&L fielded the Defense Acquisition 
Guidebook, which contains repository of best practices; Best Practice 
Clearing House effort is in progress. 

#: 8; 
Recommendation: Question unusual practices and organizational 
structures; 
Action/status: DAU is incorporating the policy and identified Best 
Practices in Acquisition Oversight into the content of Acquisition 
Executive Courses; Air Force eliminated the Acquisition Principal 
Deputy position, restructured the contracting and program management 
decision authority, and realigned its PEO structure. Air Force also 
updated its regulations. The Secretary of the Air Force appointed a 
Special Assistant for Governance and Transparency; AT&L issued a 
memorandum, "Question Unusual Practices," in October 2005. 

#: 9; 
Recommendation: Use mistakes and failures as case studies and 
communicate them broadly; 
Action/status: DAU plans to incorporate case studies based on mistakes 
and failures in senior-level courses and is reviewing level III courses 
in all functional areas for the appropriate use of similar case 
studies; AT&L developed ethics on-line training for the Acquisition 
Professional Community (APC). All APC staff were required to complete 
training by October 2005 (over 124,000 took the training as of December 
2005). 

#: 10; 
Recommendation: Require defense components to perform periodic self-
assessments and demonstrate continuous self-improvement; 
Action/ status: AT&L developed 360-degree assessments for key leaders. 
Pilot program was launched in October 2005. 

#: 11; 
Recommendation: Develop and periodically review metrics roll-up on 
senior acquisition leaders; 
Action/status: Plan to submit proposed metrics in October 2005 was 
delayed due to request for "framing" paper to send to Deputy Secretary 
for decision. 

#: 12; 
Recommendation: DOD should articulate more explicitly its vision and 
values as a high-integrity organization and expect the same of its 
contractors; 
Action/status: Issued memorandum, "Ethics and Integrity," signed by 
Secretary of Defense in September 2005. AT&L memorandum, "Acquisition 
Integrity and Ethics," issued in September 2005. 

#: 13; 
Recommendation: DOD should put ethics at the forefront of Department 
communications; 
Action/status: Issued memorandums, "Ethics and Integrity" and "Growth 
and Development," signed by Secretary of Defense September 2005. 

#: 14; 
Recommendation: Institutionalize an orientation program in Office of 
Secretary of Defense (OSD) for incoming senior leadership that 
addresses: 

* values/objectives of DOD,; 
* importance of leadership to sustain an ethical culture, and; 
* performance expectation tied to both of the above; 
Action/status: AT&L sent unsigned letter to P&R requesting OSD 
Orientation Program for Senior Leaders July 2005. AT&L and P&R met 
December 2005 to discuss. Washington Headquarters Services is now the 
lead on an orientation program; OSD Director of Administration and 
Management (ODA&M) is coordinating with DAU to provide quarterly 
leadership orientation program to address the Defense Science Board 
recommended objectives. Course material developed March 2006. 

#: 15; 
Recommendation: Senior DOD leadership should ensure flow-down; 
Action/status: AT&L and Secretary of Defense issued memorandums to 
articulate promotion of ethical behavior, encourage prudent risk 
taking, and distinguish it from illegal and unethical behaviors in 
September 2005; AT&L issued memorandum on ethics to top 100 companies 
and trade associations in January 2006. AT&L issued memorandum 
addressing tanker and leasing issues in March 2006. 

#: 16; 
Recommendation: Secretary of Defense should place priority on filling 
appointed acquisition positions: 

* champion reforms to streamline nomination and confirmation 
processes,; 
* institute a succession planning process, and; 
* avoid more restrictions that would limit interest by experienced 
personnel; 
Action/status: This effort requires coordination at the very highest 
levels (i.e., Secretary of Defense, President, Senate) across multiple 
branches of government; DOD supports the efforts of the administration 
to correct these findings. DAPA study recommended that the Secretary of 
Defense ask the White House Liaison Office to create a pool of White 
House precleared, non-career senior executives and political appointees 
to fill executive positions in acquisition. 

#: 17; 
Recommendation: P&R modernize Senior Executive Service performance 
management practices: 

* institute 360-degree feedback,; 
* implement 5-year DOD-wide rotation policy, and; 
* reissue bonus and new award system; 
Action/status: AT&L 360-degree pilot program is serving as a pilot for 
the departmentwide initiative; AT&L memorandum on rotation and tenure 
is in process. P&R discouraged changes to tenure/ rotation policy in 
light of the need for balance between accountability/retention and "too 
much authority" concern; Addressed by DAU actions in response to number 
10 above. 

#: 18; 
Recommendation: Standards of Conduct--add disclosure requirement for 
employment of majority children; 
Action/status: AT&L is developing memorandum, "What you do sends a 
message about your ethics.". 

#: 19; 
Recommendation: DOD should undertake a top-town internal assessment to 
simplify and streamline the acquisition system and better align 
workforce as a result;
Action/status: DAPA report was issued in December 2005. 

#: 20; 
Recommendation: AT&L should closely monitor the new defense component 
services acquisition oversight processes, especially in confirming that 
these contracts represent the best use of DOD resources; 
Action/status: AT&L Acquisition of Services Policy Review is in 
progress. 

Source: DOD (data); GAO (analysis and presentation). 

[End of table] 

[End of Section] 

Appendix IV: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
3000 Defense Pentagon: 
Washington, DC 20301-3000: 

Acquisition Technology And Logistics: 

JUL 06 2006: 

Ms. Katherine V. Schinasi: 
Managing Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Ms. Schinasi: 

This is the Department of Defense response to the GAO draft report, 
"Contract Management: DoD Vulnerabilities to Contracting Fraud, Waste 
and Abuse," dated June 19, 2006 (GAO Code 120518/GAO-06-838R). 

The Department wishes to thank you for the report. The Department 
concurs with the report statement that "it is essential that DoD 
acquisitions be handled in an efficient, effective, and accountable 
manner" and that "DOD needs to ensure that it buys the right things, 
the right way." The Department shares your concerns in the specific 
areas identified in the report: Sustained Senior Leadership, Capable 
Acquisition Workforce, Adequate Pricing, Appropriate Contracting 
Approaches and Techniques, and Sufficient Contract Surveillance. 

The Department specifically wishes to thank you for recognizing some of 
the Department's initiatives in these areas, including the efforts of 
each military department, the establishment of the Procurement Fraud 
Working Group, and our aggressive efforts in the area of interagency 
acquisition. We look forward to working with you in our continued 
efforts to identify and eliminate DoD vulnerabilities to contracting 
fraud, waste, and abuse. 

My point of contact for this action is Michael Canales and he can be 
reached on (703) 695-8571 or via e-mail at michael.canales@osd.mil. 

Signed by: 

Shay D. Assad: 
Director, Defense Procurement and Acquisition Policy: 

[End of Section] 

(120518): 

FOOTNOTES 

[1] Pub. L. No. 109-163, sec. 841. 

[2] GAO's high-risk designation is given to major programs and 
operations that need urgent attention and transformation in order to 
ensure that our national government functions in the most economical, 
efficient, and effective manner possible. It also emphasizes programs 
that at high risk because of their greater vulnerabilities to fraud, 
waste, abuse, and mismanagement. 

[3] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005). 

[4] "Tone at the top" refers to management's philosophy and operating 
style, which sets the degree of risk the organization is willing to 
take in its operations and programs, including the acquisition 
function. 

[5] Defense Science Board. Report of the Defense Science Board Task 
Force on Management Oversight in Acquisition Organizations, Washington, 
D.C.: March 2005. 

[6] GAO, Defense Acquisitions: Business Case and Business Arrangements 
Key for Future Combat System's Success, GAO-06-478T (Washington, D.C.: 
March 1, 2006). 

[7] Congress has recently placed certain requirements on contractor 
performance of DOD acquisition functions closely associated with 
inherently governmental functions. 10 U.S.C. 2383, added by sec. 804 of 
the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 
2005, Pub. L. No. 108-375. 

[8] GAO, Highlights of a GAO Forum: Managing the Supplier Base in the 
21st Century, GAO-06-533SP (Washington, D.C.: March 31, 2006). 

[9] GAO-05-207. 

[10] See Federal Acquisition Regulation 15.402(a). 

[11] Federal Acquisition Regulation subpart 15.4. 

[12] Federal Acquisition Regulation part 6. 

[13] GAO, Contract Management: Guidance Needed to Promote Competition 
for Defense Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004); 
Interagency Contracting: Problems with DOD's & Interior's Orders to 
Support Military Operations, GAO-05-201 (Washington, D.C.: April 29, 
2005); Rebuilding Iraq: FY2003 Contract Award Procedures and Management 
Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004). 

[14] Department of Defense, Office of the Inspector General, Audit 
Report: Undefinitized Contractual Actions. Report Number D-2004-112, 
Arlington, Virginia: August 30, 2004. 

[15] GAO, Contract Management: The Air Force Should Improve How It 
Purchases AWACS Spare Parts, GAO-05-169 (Washington, D.C.: Feb. 15, 
2005). 

[16] GAO, Hurricane Katrina: Army Corps of Engineers Contract for 
Mississippi Classrooms, GAO-06-454 (Washington, D.C.: May 1, 2006). 

[17] DOD, Office of the Inspector General, Audit Report: Procurement 
Procedures Used for F-16 Mission Training Center Simulator Services, 
Report Number. D-2006-065, Arlington, Virginia: March 24, 2006, and 
Audit Report: Contracting for and Performance of the C-130J Aircraft, 
Report Number D-2004-102, Arlington, Virginia: July 23, 2004. 

[18] GAO-05-207. 

[19] The term to "park" funds refers to the transfer of budgetary funds 
by DOD officials to another agency's acquisition center for the 
procurement of goods and services under circumstances where the bona 
fide need determination is in doubt. 

[20] DOD, Office of the Inspector General, Acquisition: DOD Purchases 
Made Through the General Services Administration, Report Number D-2005- 
096, Arlington, Virginia: July 29, 2005. 

[21] 10 U.S.C. 2304c. 

[22] H.R. Conf. Report No. 103-712, at 178 (1994), reprinted in 1994 
U.S.C.C.A.N. 2607, 2608; Senate Report No. 103-258, at 15-16 (1994), 
reprinted in 1994 U.S.C.C.A.N. 2561, 2575-76. 

[23] GAO, Contract Management: Guidance Needed to Promote Competition 
for Defense Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004). 

[24] GAO, Defense Acquisitions: DOD Has Paid Billions in Award and 
Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 
(Washington, D.C.: Dec. 19, 2005). 

[25] Federal Acquisition Regulation subpart 46.4. 

[26] GAO, Military Operations: DOD's Extensive Use of Logistics Support 
Contracts Requires Strengthened Oversight, GAO-04-854 (Washington, 
D.C.: July 19, 2004). 

[27] GAO-05-274.

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