THE BLOG
08/16/2012 09:46 am ET Updated Oct 16, 2012

The Invisible Foreign Subcontractor

Last year I wrote a report for the Project on Government Oversight about and subsequently testified to Congress, regarding a Kuwaiti-based KBR subcontractor which had exploited hundreds of third-country nationals (TCN) coming from various South Asian countries.

Some of the subsequent press coverage criticized KBR, but that missed the point. Sure, in several respect KBR could have done much better, but at least it held special inspections documenting atrocious living conditions and threatened to cut off awards to the subcontractor.

But the real story is how little information the U.S. government has over the operations of foreign subcontractors. As I noted in my congressional testimony:

Subcontracting is among the most challenging parts of the U.S. government's widespread outsourcing of war-related tasks. It works like this: A government agency - most likely the Defense Department, State Department, or U.S. Agency for International Development - will award work to a "prime" contractor. That prime contractor, usually a large American company like Kellogg, Brown and Root (KBR) or DynCorp International, will often subcontract some or even a majority of its work to other companies, including foreign-owned firms. Those subcontractors sometimes then turn around and subcontract part of the work, and so on.

...

But in footing the bill for all this work by a network of companies, the U.S. government often doesn't know who it is ultimately paying. And that can lead to fraud, shoddy work, or even taxpayer funds ending up in the hands of enemy fighters.

For more detail the article "Limitations Of the Contingency Contracting Framework: Finding Effective Ways To Police Foreign Subcontractors In Iraq And Afghanistan" by Carissa N. Tyler in the Winter 2012 issue of the Public Contract Law Journal provides some valuable detail on the scope of this problem. For example, "Subcontractors are responsible for approximately seventy percent of the work of prime contractors; however, the Government has extremely limited visibility into these subcontractors' operations. U.S. taxpayer dollars are at risk because U.S. agencies cannot directly police foreign subcontractors. "

Like many other spending issues this is in large part due to a lack of good data. The article noted:

The overarching problem is that the DoD, State, and USAID have not systematically tracked how much money is paid to foreign subcontractors. The National Defense Authorization Act for the Fiscal Year 2008 (NDAA FY2008) mandated that these agencies identify the total number and value of all contracts including "subawards at any tier." While there are data on prime contracts and orders, these agencies have been unable to produce similar data on subcontracts. These agencies also failed to fully implement a system to track their contracts and associated personnel. The Deputy Assistant Secretary for Army Procurement was unable to state an approximation of how much the Army spends on foreign subcontractors but stated that the amount is "likely in the lower-billions of dollars...."

In theory the Defense and State Departments and USAID could use a database called the Synchronized Predeployment and Operational Tracker (SPOT) to gather the information. SPOT is a system that provides a centralized source of information on contingency contracting. For each contract, grant, and cooperative agreement to be performed "in Iraq or Afghanistan that involves work for more than thirty days" or that is valued at more than $100,000. The system also tracks contractor personnel.

Unfortunately, SPOT does not accurately reflect actual subcontracting spending because the agencies using the database do not uniformly collect contractor personnel information. Even worse, according to Tyler:

The implementation and integration of SPOT has become especially problematic because of the absence of an agreement among the three participating agencies regarding how to accommodate their respective data-collection needs. Additional coordination among these three entities is essential in order for them to successfully oversee the operations of their foreign subcontractors. Current standards defining what contractor personnel data must be entered into SPOT vary across DoD, State, and USAID policies; this inconsistency fails to comport with the three agencies' MOU and fails to improve data collection on subcontractors.

Even if the government knows a foreign subcontractor is doing wrong, bringing claims against foreign subcontractors in the United States is doubtful because U.S. courts lack personal jurisdiction over these foreign defendants. And, according to Tyler, "[f]oreign courts may be unavailable, unreliable, or otherwise unable to hear these claims."

It is true that government agencies seek to oversee the activity of foreign subcontractors through flow-down provisions, which prime contractors include in their contracts with subcontractors. A flow-down clause imposes on the subcontractor the same obligations and responsibilities that the prime contractor has to the Government, albeit with a loophole that fixed-price contracts currently do not allow the Government to access subcontractors' cost records.

But the Defense Contracting Audit Agency (DCAA) found that:

prime contractors "have not consistently monitored subcontractor performance against the negotiated statements of work and have not actively engaged subcontractors in cost-control activities or initiatives." In March 2010, the DCAA reported a deficient estimating system within contracts awarded to DynCorp under a LOGCAP IV proposal in Iraq. During the audit, DCAA discovered that forty percent of the direct costs associated with DynCorp's subcontractor, Agility, were unsupported. Agility's proposed subcontractors were all foreign-based. DynCorp initially denied the DCAA access to Agility's proposal, alleging that its prices were commercial prices and thus not subject to the requirement that subcontractors submit cost and pricing data. The DCAA report ultimately attributed $800 million of unsupported subcontract costs to Agility and its affiliates. As such, Agility and its affiliates were suspended from receiving any government contracts prior to the release of DCAAJS final audit report. Notwithstanding this suspension, the Pentagon subsequently sought to award a sole source contract extension to Agility in December 2010, despite this suspension.

Is there a solution to these and other problems? Tyler thinks so. Aside from improved and updating the SPOT system her recommendations include the following:

  • To fix the loophole in the flow-down provisions she calls for amending the (FAR) Federal Acquisition Regulations to be amended to allow Government access to contractor reports and documentation containing contractors' "internal audits to and other types of management reviews pertaining to government contracts.
  • The FAR should also be amended to include a mandatory flow-down provision on "Contractor Code of Business Ethics and Conduct," to require mandatory vetting and certification of foreign subcontractors. Prime contractors should be required to use enhanced vetting procedures for foreign subcontractors to prevent the hiring of poor-performing or corrupt subcontractors.
  • The FAR should be amended to include a mandatory flow-down provision that requires foreign subcontractors to consent to U.S. jurisdiction as a condition of accepting a contract award.