THE BLOG
07/18/2007 12:21 pm ET Updated May 25, 2011

Iraq Contracting: Overpay Now and Overpay Later

USA Today wrote two articles earlier this week about how the Army is paying a higher amount of questioned costs on KBR's contract to support the troops, the largest contract in Iraq. The contract is now well over $20 billion with more and more bills coming in every day. The Defense Contract Audit Agency (DCAA, which has its ranks deeply cut in the 1990s) has been trying to scrub the numbers find the waste and overcharging. The Army has been overruling DCAA and allowing more of the questioned payments to go to KBR than the average DOD contract (Believe me, the average DOD contract is not a bastion of efficiency.)

According to the USA Today report, "almost two thirds of costs challenged by Pentagon auditors as inflated, erroneous or otherwise improper -- more than $1 billion -- were eventually approved by project managers. That compares with 44 percent for all defense contracts in 2005." The Army is answering this with the usual blather that more of these costs were justified because we are at war. While researching my book, I had dozens of soldiers and contractor employees tell me of outrageous padding of costs and purposeful waste by contractors, especially KBR. I have been investigating these padding of costs for over 25 years in defense contracts but this war has taken this scheme to breathtaking heights.

Padding of costs is an old game that the contractors play with the DOD. Everyone knows their role. The contractor pads his costs to the government, as much as twice the real costs, the DCAA scrubs the numbers and pushes the costs down by 44 percent (often they know it is much more but also know that the politics in the Army will not let them scrub harder), the government contract manager claims a victory for the government and the contractor gets paid far more than his work was worth.

It is obvious that this hurts the U.S. Treasury and the available resources for the soldiers but most people, including most members of Congress, don't realize that we are also going to pay later for this kabuki dance between the Army and the contractor. Most DOD contracts are based on historical costs, i.e. new contracts are determined by how much the past contracts have cost. That is one of the reasons that the price for each generation of fighter planes for the Air Force increases exponentially -- all the waste, fraud and fat that is not scrubbed out by the auditors becomes the new baseline of the follow-on aircraft.

Since we now have about as many contractors in Iraq as troops, contractors have become a dangerous and expensive part of the logistics. Short of troops, the Army has allowed contractors to infiltrate into the Army in a way not done by any other war. Because of this, the Army's ability to do its own logistics has atrophied and they now will be heavily reliant on the contractors in the future. This also means that all the unscrubbed fraud, waste and fat in these wartime contracts will become the new baseline for all the contracts in the future. Because of the lack of cost controls now, we will be paying way too much in the future. The inevitable result will be what is happening in this war now, the contractor billings have sucked up the supplemental war money and the soldiers are still not getting what they need to fight, no matter how much money the Congress shoves to the Army. Over pay now and hurt the troops, overpay later and hurt the troops. This math should not be too complicated for the Congress to grasp and do something about it.