Origins of Outsourcing

Substantial reductions in troop strength occurred after the end of the cold war, especially within logistics and support units. Between the Gulf and Iraq wars, the U.S. Army saw a 40 percent reduction in manpower. These reductions created a dependence on outsourcing logistics support, especially combat support, and certain security duties, during world-wide conflicts, now called contingency (a term used for an event) operations. When combat units storm onto a battlefield, logistics support still has to be there. To make up for the gap between combat units and logistics units created from force reductions, the DOD made the decision to outsource those previous military support functions to contractors. Outsourcing support for contingency operations thus begat a new form of DOD procurement called contingency contracting; and the emergence of a new industry; the war service industry, to support contingency troop mobilization and operations.


Contingency Operations

Contingency operations, as defined by globalsecurity.org, are military actions deployed in support of national policy short of war. These operations are usually undertaken when vital national interests are at stake and when direct and indirect diplomacy or other forms of influence have been exhausted or need to be supplemented by either a show of force or a direct military action.

Funding Contingency Operations

DOD components do not normally budget for contingency operations. Such funding is accomplished initially through the use of appropriated funds until emergency supplemental money is appropriated by the Congress. Supplemental funding has been the most frequent means of financing contingency military operations including contracting.

Contingency Contracting

Contingency contracting is direct contracting support to tactical and operational forces engaged in the full spectrum of armed conflict and military operations (both domestic and overseas), including war, other military operations, and disaster or emergency relief. Contingency contracting support has evolved from purchases not greater than the simplified threshold to defense procurement services for military operations such as in Iraq.

LOGCAP

The Logistics Civil Augmentation Program, known by the acronym LOGCAP,is an initiative by the U.S. Army to use civilian contractors to provide certain services such as supplies, construction of base facilities, feeding and maintaining base infrastructure in wartime and other contingency operations in support of U.S. military forces. It was designed to provide timely support for unplanned, short-notice contingency operations.

History and Development of the LOGCAP contract

During Vietnam and Gulf War I, the military relied on contractors primarily to maintain and operate sophisticated weapon systems such as guided missiles and other tech-heavy, computer-operated, systems. Usually, they were manufacturing representatives who gave the military its own technical support, but, with few exceptions, remained out of harm's way. Contractors did not replace military tasks in those wars but merely provided skills the military lacked.

Privatizing military functions in modern warfare was a post Vietnam War idea that gained traction after the end of the Cold War. The Pentagon downsized the military, in the late 1980s, in response to Congressional demands as part of the peace dividend. Most of the cuts occurred in the support areas, such as a 60 percent reduction in the AMC, creating a large gap in the military's ability to support troops engaged in the post cold war spread of conflicts. At the same time, the rest of the DOD budget, especially for expensive weapon systems and aircraft, has had a healthy growth in the past seven years. The DOD wanted to hold on to many of its glamorous weapons systems in development so support and logistics became an easy target for cuts. The gap formed as a result of the budget disparity, created a reliance on private contractors to make up for the lack of support and logistics soldiers. The Pentagon believed that channeling corporate efficiency to the military would lead to cost savings and free up troops as trigger pullers.

To implement this reliance, the Pentagon created the Logistics Civil Augmentation Program (LOGCAP) in December 1985 in response to the Defense Appropriations Law, enacted in 1983-84, that directed DOD set up a contingency contract for support of military mobilization deployment actions. The Pentagon hierarchy intended that LOGCAP provide rapid, responsive and flexible support to the Army. This contract would be a non-traditional method of logistics integrated into an Army steeped in tradition. Not surprisingly, LOGCAP caused resistance among Army brass. Military commanders, at the time, expressed considerable distrust of a contractor's ability to supply troops on the battlefield because they would be too slow, unreliable, and uncontrollable.

In an effort to reduce these concerns, the Department of the Army decided to decentralize the LOGCAP process to active numbered Armies, each would develop, award, and administer their own LOGCAP contracts. For many reasons, the decentralization concept did not work well and, by 1990, in response to continued concern by military commanders of contractors on the battlefield, the Army limited LOGCAP chiefly to administrative support in non-hostile environments. In doing so, the Army decided to centralize LOGCAP and establish it as an umbrella support contract awarded to one contractor. Operation Desert Storm (ODS), in 1990-91, provided an opportunity for LOGCAP planners to conduct field-testing of LOGCAP that could be used for future events. After ODS, the Army felt LOGCAP would work for future contingency operations and decided to move forward with implementing the contract.

In 1992, Dick Cheney, then Secretary of Defense under President George H.W. Bush, awarded a $3.9 million contract (later raised to $9 million) to Halliburton's subsidiary, KBR (was also known as Kellogg, Brown and Root). The contract was awarded to study how private military contractors could provide support to soldiers on the battlefield around the world. KBR's classified report convinced Cheney it was possible to award one umbrella contract to a contractor to provide all the support services necessary in a conflict. As a result, the Pentagon created a super contract that became known as LOGCAP Umbrella Support Contract (also dubbed the mother of all service contracts).

The Army awarded the first LOGCAP contract (LOGCAP I) to Brown & Root (now KBR) in August 1992 that provided support to contingency operations in Haiti, Somalia and the Balkans. In 1995, Cheney became the CEO of Halliburton. Under Cheney's leadership, Halliburton moved up from 73rd to 18th on the Pentagon's list of top contractors.

However, in 1997, KBR lost the contract when the Army awarded LOGCAP (LOGCAP II) to DynCorp Services to continue operations in the Balkans. But in January 2001, Cheney became Vice President of the United States and, in December 2001, KBR managed to regain award of LOGCAP III. For the war in Afghanistan and Iraq, the Army decided to use LOGCAP III to provide logistics support to its troops. Primarily due to a sharp increase of contracting connected to the war in Iraq and Afghanistan, Halliburton has increased its receipt of contracting dollars by 600 percent between 2000 and 2005 making it the fastest growing defense contractor during that period of time.

In 2003, the Pentagon, under Secretary of Defense Donald Rumsfeld, started a plan to increase its long-term reliance on contractors. The plan, called the Third Wave, was overseen by then Army Secretary Thomas White. It called for replacing up to 214,000 military and civilian positions that would go to private contractors. Although White put the plan on the back burner for a while, it gained new life. News reports, at the time, suggested there would be a replacement of 20,000 support military personnel with private contractors by October 2005, with a target of 300,000 more within the decade. However, Secretary White, in a memorandum dated March 8, 2002, warned the Army lacked the basic information needed to manage effectively its expanding force of private contractors. In addition, he wrote "Currently, Army planners and programmers lack visibility at the Departmental level into the labor and costs associated with the contract workforce and of the organizations and missions supported by them." Little did he know how true his admonition would become in Iraq.

LOGCAP Funding

LOGCAP funding has depended primarily on supplemental funding appropriated by Congress. In the absence of supplemental funding, DoD components finance contingency operations and contracting through existing appropriations -- usually taken from the Component's Operations and Maintenance budget, that the Army calls cash flowing. When supplemental appropriations is passed, the money, normally colorless, in that is a blank check to be used as determined by the Army, is allocated to the Office of Management and Budget (OMB). OMB, in turn, apportions the money to the Under Secretary of Defense (Comptroller) who then apportions the money down to the military services. In the case of the Army, to the Army Resource Manager, or G8.

Supplemental money is allocated to the Army, by OMB, incrementally, usually on a quarterly basis. If the incremental money is used up before the end of a quarter or new supplemental funding is delayed, a cash flowing problem is created and money has to be shifted from the regular O&M budget. Such cash flowing causes a strain on the Army's budget that could, for example, affect their ability to purchase needed combat equipment in order to fund LOGCAP.


Contract Oversight

With almost two billion dollars a week being spent on the war in Iraq and Afghanistan, spending on government oversight has declined. The DOD has experienced massive budget and staff cutbacks in contract oversight personnel. In the 1990s, Legislation was passed by Congress under acquisition reform and pushed by the defense industry, to cut back on the number of DOD contracting and oversight personnel. Downsizing continued under then Vice President Al Gore's Reinvention of Government initiatives. The Defense Contract Management Agency (DCMA), the agency that manages DOD contracts, had its staffing levels cut more than 55 percent over the last eleven years. The Defense Contract Audit Agency (DCAA), the agency that audits DOD contracts, saw its staffing levels cut more than 40 percent. With depleted oversight staffing levels, DOD was not prepared to perform even adequate control and oversight of the rapidly expanding task orders of the LOGCAP contract in Iraq, Kuwait, or Afghanistan. Even prior to September 11th, DOD oversight staffing levels made it difficult to keep up with overseeing normal levels of traditional forms of procurement. Despite skyrocketing procurements since September 11th, oversight staffing levels have not kept pace causing a serious inability to manage contracts, especially cost reimbursable contracts.

By the time the Iraq war was underway, there were not enough auditors, contracting officials, inspectors, or investigators, to monitor over 50,000 contractor personnel and the multitude of subcontracting layers created by prime contractors. The GAO warned in 2004, "DOD did not have sufficient numbers of trained personnel in place to provide effective oversight of its logistics support contractors." The Army activated and deployed Reserve units responsible for supporting the LOGCAP contract, but many of the personnel had little knowledge of the contract. DOD generally has been unable to determine whether LOGCAP work is actually being done competently and efficiently or that costs are allowable. Even the DoD Inspector General, the primary oversight agency within the DoD, has had no personnel in Iraq due to budget constraints. More recently, they have set up an office in Qatar, but with limited personnel. Such a lack of oversight in Iraq and Afghanistan encourages fraud, waste and abuse -- a lawless land for contractors to operate. Some contractors have been honest enough to avoid the temptations, but others have run wild with greed.

In addition to anemic levels of oversight personnel available in Iraq to monitor performance on the LOGCAP contract, there has been little to no effort to oversee, manage, or supervise the thousands of security operators running loose throughout Iraq.

Exposure of fraud, waste and abuse in Iraq contracting has been left to whistleblowers and Democrats in Congress. Despite aggressive efforts on the part of contractors to discredit whistleblowers, they are still emerging to reveal serious performance problems that have affected both the troops and the taxpayer.

When war in Iraq became imminent, Secretary of Defense, Donald Rumsfeld, insisted on a light, rapid combat force for what was anticipated as a short-term effort -- implementation of Rumsfeld's 10-30-30 plan -- deploying to theater in 10 days, defeating enemy within 30 days, and ready for redeployment elsewhere in another 30 days. In order to pull off Rumsfeld's plan, the Army was forced to turn the contractor faucet on full blast to keep supplies moving to the troops advancing to Baghdad. It would be the first true test of the Army's dependence on contractors under battlefield conditions.

The Congressional Research Service estimated, in April 2006, operations, maintenance and procurement costs have risen from $50 billion in 2004 to $88 billion in 2006. The Army's budget has been strained by Iraq and Afghanistan to the degree that it is considering requesting an additional $23 billion to its fiscal year 2008 budget. The Army alone obligated more than $103 billion in procurement expenses in 2005. LOGCAP expenses are rising to the $18 billion level. With KBR billings on average, $450 million per month, how much are these obligations affecting the Army's ability to buy necessary combat equipment for their troops?


Oversight Agencies

The DOD has a number of contracting officials and agencies responsible for various aspects of contract and contractor oversight. The Contracting Officer (CO), or Procuring Contracting Officer (PCO), serves as the sole authority to bind the Government through the obligation of funds in the pre-award process. They have the authority to enter into, administer or terminate contracts and make related determinations and findings. The PCO has the responsibility for ensuring performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the U.S. in its contractual relationships.

The Administrative Contracting Officer (ACO) acts at the direction of the PCO, or in the capacity as a Defense Contract Management Command employee, to monitor the daily performance of contractors. The ACO administers contracts, often at a contractor's location, on behalf of the DOD and acts as the official spokesman for the DOD with respect to claims and disputes between the DOD and the contractor. The ACO also assures contractor compliance with cost, delivery, technical, quality and other terms of the contract.

The Defense Contract Audit Agency (DCAA) supports the PCO in auditing both pre-award and post-award contracts. The DCAA also audits the contractor's accounting and internal controls systems. Also, DCAA determines the accuracy and reasonableness of a contractor's cost representations.

The Department of Defense Inspector General (DODIG) conducts audits, investigations, inspections and evaluations of DOD contracts, personnel, programs and operations. It is also responsible for developing oversight policy for DOD functions. The Defense Criminal Investigative Service (DCIS) is the criminal investigative arm of the DODIG that investigates allegations of contractor fraud among other responsibilities.

Cost Reimbursable Contracts

LOGCAP was awarded as a cost-reimbursable contract. Under this type of contract, contractors decide how much a service will cost to perform. These contracts are also known as cost-plus contracts because the contractor's profit comes from fees paid by the government beyond the cost of the service. Cost-plus-percentage of cost contracts were used extensively in World War I with unfortunate results to the government. The incentive with this form of cost contract, for the contractor, was to increase costs in order to increase profits. Because of substantial fraud and abuse by contractors, this type of contract was made illegal after World War II and replaced with cost-plus-fixed fee (CPFF) and award fee (CPAF) types of contracts.

CPFF contracts include reimbursement for incurred costs plus a fixed fee arrangement while CPAF contracts include an award fee, based on a subjective evaluation by DOD, on top of a base fee. LOGCAP is a CPAF contract with a base fee of 1% and an award fee of 2%. They usually include a ceiling, or not-to-exceed cost that the contractor may not exceed except at their own risk or approval by the government. The biggest concern of the CPFF contract lies in the reasonableness of the costs incurred by the contractor. As such, these types of contracts require a significant level of oversight, or audit, to validate a contractor's incurred costs.

Cost Plus contracts were used on a very limited basis during the cold war era, usually reserved for work that is very urgent or research and development efforts which area hard to decide how much work is required. The contract type of choice for the Pentagon during this era was the Fixed Price contract that put more risk on the Contractor. With the emergence of contingency contracting, the Pentagon has gone back to the use of Cost Plus contracts because of the urgency of the services and the unknown costs of specific operations such as in Afghanistan and Iraq. There is almost no risk for the contractor under cost-plus contracts and no financial incentive to work efficiently or to seek ways to save money.

Contract Definitization

The definitization of a contract is the agreement on, or determination of, contract terms, specifications, and price, which converts an undefinitized contract action (UCA) to a definitive contract. An undefinitized contract action is any contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun under the action. An UCA is used when the negotiation of a definitive contract action is not possible in sufficient time to meet Government requirements and the Government interest demands that the contractor be given a binding commitment so that contract performance can begin immediately. Each UCA must include a not-to-exceed price. Government liability, under an UCA, is normally restricted to a maximum of 50 percent of the not-to-exceed price.

In the rush to war in Iraq, task orders under the LOGCAP contract were hastily negotiated and agreed upon under an UCA based on the fact that Government requirements had not been fully determined. Under LOGCAP III, the contractor agreed to begin negotiating promptly with the Contracting Officer the terms of a definitive contract. The definitive contract would replace the not-to-exceed price with a negotiated price in no event to exceed the not-to-exceed price. Timelines are established in the contract for definitization that is normally spelled out in the number of days for submission of proposal, beginning of negotiations, and a target date for final definitization.

Reimbursement Rate

Under the LOGCAP III contract, FAR clause 52.216-26 (Payments of Allowable Costs Before Definitization), the Government will promptly reimburse the contractor for all allowable costs under this contract at the following rates:
(1) One hundred percent of approved costs representing financing payments to subcontractors under fixed-price subcontracts; provided, that the Government's payments to the contractor will not exceed 80 percent of the allowable costs of those subcontractors.
(2) One hundred percent of approved costs representing cost-reimbursement subcontracts; provided, that the Government's payments to the contractor shall not exceed 85 percent of the allowable costs of those subcontractors.
(3) Eighty-five percent of all other approved costs.
The determination of allowable costs will be made by the Contracting Officer in accordance with applicable cost principles of the FAR. The total reimbursement made shall not exceed 85 percent of the maximum amount of the Government's liability.

Allowable costs

Allowable costs includes recorded costs that result, at the time of the request for reimbursement, from payment by cash, check, or other form of actual payment for items or services purchased directly for the contract. Also, cost of contract performance in the ordinary course of business and costs incurred for supplies and services purchased directly for the contract and associated financing payments to subcontractors.

Allowable costs include direct labor, direct travel, other direct in-house costs; and properly allocable and allowable indirect costs as shown on the records maintained by the contractor for purposes of obtaining reimbursement under Government contracts. Also allowable are the amount of financing payments that the contractor has paid by cash, check, or other forms of payment, to subcontractors.

Incurred Labor Costs

Incurred labor costs, especially for cost reimbursable contracts, usually are the most significant costs charged to the contract. It is normally used to comprise the base, or the largest element of the base, used for allocating indirect costs. Historical labor costs are often used to estimate labor for follow-on contracts. Thus, if a contractor inflates labor costs, the ramifications can be enormous to the Government for a current contract and as a basis for follow-on contracts. Contractor personnel have complete control over the documents of original entry such as timecards and the responsibility for accuracy is diffused throughout the contractor's organization. Consequently, the risks associated with the accurate recording, distribution, and payment of labor is almost always significant to the Government.

U.S. Department of Defense LOGO Clause

The Defense Federal Acquisition Regulation Supplement § 252.232-7007, Limitation of Government's Obligation (LOGO) clause states "the contractor will not be obligated to continue work" beyond that point. That point occurs when the Pentagon runs out of appropriated funds for a given period of time and must wait for additional funding. The military can not spend money beyond the amount appropriated. This can happen during a contingency operation with incremental funding. On April 12, 2006, DOD issued a final ruling changing the language to "the Contractor is not authorized to continue work beyond that point."

For LOGCAP III, the Army inserted clause § 52.232-19, Availability of Funds for the Next Fiscal Year: The Government's obligation for performance under this contractis contingent upon the availability of appropriated funds from which payment for contract purposes can be made. No legal liability on the part of the Government for any payment may arise for performance under this contract until funds are made available to the Contracting Officer for performance and until the Contractor receives notice of availability.

Defense Contract Audit Agency Audit of KBR's Billing System

DCAA Audit Report No. 3311-2002K11010001, May 13, 2004, found that KBR's billing system was inadequate in part. They found deficiencies in the contractor's billing system that were not prepared in accordance with applicable laws and regulations and contract terms. They also found system deficienciesm "resulting in material invoicing misstatements that are not prevented, detected and/or corrected in a timely manner." Findings included:
Not following its written billing procedures when processing vouchers. Billing rates were not adjusted to actual rates in a timely fashion and the Administrative Contracting Officer was notified of refunds and overpayments.

KBR did not have adequate controls over subcontract billings. Policies and procedures were inadequate for notifying the government of potential significant subcontract problems. KBR also did not monitor the ongoing physical progress of subcontracts or the related costs and billings.

As a result of their findings, the audit agency directed that KBR was not authorized for direct billing and will be required to continue to provide all billings to DCAA for provisional approval prior to submission for payment.

LOGCAP III

LOGCAP III (Army Contract No. DAAA09-02-D-007) was awarded to KBR in December 2001. It is an indefinite-delivery/indefinite-quantity cost-plus award-fee and an on-call provider service contract with actual costs dependent on specific requirements. LOGCAP III is an umbrella contract with task orders issued to specifically address performance requirements and contract terms for a particular event or requirement. Task orders are negotiated independently and contain their own statement of work and Not to Exceed dollar limits. The Not to Exceed amounts have been determined largely on cost estimates provided by the Contractor.

The contract provides a Partnering provision stating "The primary objective of the process is providing the American soldier with the highest quality supplies/services on time and at a reasonable price. Partnering (between the Army and KBR) requires the parties to look beyond the strict bounds of the contract in order to formulate actions that promote their common goals and objectives. It is a relationship that is based upon open and continuous communications, mutual trust, and respect, and the replacement of the us vs. them mentality of the past with a win-win philosophy for the future. Partnering also promotes synergy, creative thinking, pride in performance, and the creation of a shared vision for success."

Force Structure Planning

Force structure is defined as the numbers and types of units that comprise the force, their size, and their composition (i.e. divisions and brigades). Force structure planning is normally submitted as a plan for deployment of certain combat and support units strategically to meet possible conflicts and other challenges.

Time-Phased Force & Deployment List

Time-Phased Force & Deployment List (TPFDL) is referred to in the military by the acronym "tip-fiddle" or "tip-fid" for short. TPFDL is the military plan for the deployment of individuals and units into battle, the order of their deployment and the deployment of logistical support. It is a major planning document for how troops and logistics are going to move into a war zone.

The Army depended on the coordinated deployment of troops and logistics to handle all the tasks necessary to fight and support a war and the TPFDL was the means to achieve this very important function. According to the GAO, TPFDL was replaced with a deployment plan called Request for Forces. This new plan segregated the initial deployment plan into over 50 separate deployment orders.

DoD's priority was for combat forces to move into the theater of operations first while logistics unit commanders had to justify the flow of their units and equipment into the theater -- often with little success. Each deployment order required its own transportation feasibility analysis that caused an imbalance in the types of personnel needed in the theater to handle logistics requirements. Two major support commands were either deleted from the deployment plan or shifted back in the deployment timeline. As a result, logistics personnel could not effectively support the increasing numbers of combat troops moving into the theater.

Total Asset Visibility

Total Asset Visibility (TAV) was developed by the Pentagon as part of its Revolution in Military Logistics to support deployable supply and maintenance information systems using automatic identification technologies. It is a fully-automated system to provide complete, integrated visibility over logistical assets. This is done by using optical memory cards, bar coding, and radio frequency tags and readers for rapid data capture. Users gain access to the system through personal computers set up to give commanders in the field visibility of critical logistics. The goal of this system is to contribute to reduced inventories and receipt-processing time; improved visibility of in-theater truck convoy and rail movements; and increased throughput of shipments.

Theater Transportation Mission

The Theater transportation mission is set up to facilitate transportation requirements wholly within a theater of operations. It involves movement control and terminal operations that provides transportation support to the theater, to carry out linkages to strategic transportation, and to support reception and forward movement of supplies.

Theater Distribution Center

The Theater Distribution Center (TDC) is a supply center within a theater of operations that receives cargo from seaports and air debarkation points for processing. In Kuwait, the TDC is located near Camp Doha. Cargo moves from the TDC into Iraq or to other facilities in Kuwait.