what it shows, as people are trying to get care, they are running up against the capacity of the provider supply. this was an issue prior to reform that has become more of an issue as more people have care in the state. ..

the public programs and the public programs were within four plans and it was a fairly narrow provided network, the very rapid increase in coverage, but nevertheless, we are seeing some difficulties getting access to care in the state. and then the next issue we looked at was affordability ofs@ care, and health care costs in massachusetts are going up as they are in the rest of the country. that predates reform and it's not a function of reform, but what we're starting to see is some effects of that on reform, so here as in the access measures, we saw gains in affordability in the first year under health reform by fall 2007 and then by fall 2008, some loss of ground on those measures, so that we no longer see this significant gains -- or significant improvements in hayfordbility over time.

-- affordability over time. so based on these findings, it does look like the trends in rising health care costs in the state are start to go undermine the early gains in affordability in health care reform. and then i just wanted to -- since part of what massachusetts was able to achieve was bringing together desparate stakeholders, everybody was able to get a little bit and give a little bit. that reform has remained strong, despite much press about the higher levels of enrollment based on the estimates that were in place before. support has remained strong across the population, when we look at higher and lower income, it remains strong, when we look at gender, men and women of different regions of the state are supportive, so it's amazingly supportive across the

reform. so let me recap what we now as of fall of 2008. there were significant gains in insurance coverage across the state, there is no evidence that private health care coverage is being crowded out. significant gains in access to care, particularly in the last year as people kept coverage for the full year and there were some significant improvement in aaffordability. despite these successes, there were some indications of problems over the last year. there's some loss of the early gains in affordability as health care costs have continued to rise in the state. and limits on provided supply with the increased demand for care have created barriers to care for some people in the state and finally as i mentioned earlier and as deb mentioned, health care costs is really round two of health care reform in the state and massachusetts is just beginning to really address health care costs. and it's clear that the sustainability of health reform in the state will really be a function of their ability to

bend that cost curve, just as it will be at the national level. thank you. [applause] >> great, thank you very much. thank you, sharon. we've come to the part of the program where you get a chance to ask questions. as i say, there are microphones that you can go to to ask them. if you fill out a written question on that green card, and hold it up, someone will bring it forward. let me just start, if i can, sharon, with one of the points that you were making about what the -- what the reforms are starting to do to access even as people are having more frequent doctor appointments. there is a -- in the materials, a survey that was taken in a number of cities, that seemed to time, than those in most other places in the country, in

getting an appointment to see a physician. tell us what you think of that, and whether it's something we have to watch out as we work on access more generally. >> well, i think there's actually other evidence from the massachusetts medical association that is consistent with that, that there has been kind of more demand for care and as more demand for care, longer waits for care. if you look at kind of the timing of the increase in coverage in the state, it's clear enrollment happened faster than the state expected, people got coverage, but it happened quickly, within a rather narrow set of networks, so there was increase in demand. what we thinks happen over times, we don't have the data, that some of the pentup demand will be mitigated. people have coverage for the full year, it's knots just cycling in and out, so as that happens, we expect some push

back against that high level demand. >> susan? >> and i think this underscores why delivery system reform is such an important component of overall reform. we all know the phrase, you get what you pay for. what we get today is doctors get paid, if you come into the office and they have a visit with you. in the fee for service system, they don't get paid if you don't come in, which is why your doctor is likely to recommend that you come in to see him or her. if you look at systems that have moved away from fee for service, like kaiser-permanente, we publish a study several months ago that looked at what happened when kaiser put in place secure e-mail capability between patients and their physicians, and lots of other interventions, so that you didn't necessarily have to come into see your physician. what happened, visits dropped by 25%. people, it turns out, don't really want to get in the car and drive three hours to go see their doctor if they don't have

to, nancy. i think you would concur. so -- but the delivery system has in a way been frozen around the way we pay it. and so as we think of new ways to pay the system, the system will break up these frozen blocks of frigidity and do things like use e-mail and do other kinds of things that will make them possible to have more encounters, if you will, with individual patients and free up some of the capacity to be used to just in the old fashioned visit. >> all right. we have someone at the microphone. if you would identify yourself and let me just ask all of you who come to a microphone to be as brief as you can, to allow us to get to as many questions as we possibly can. yes, sir? >> al milken, am media. how do each of you see abortion access and coverage affecting overall health reform?

>> well, you can see everyone is leaping to answer that question. and if we have no takers, i'm going to have to when i on it. nancy, -- whiff on it. nancy, do you want to take a crack at that? >> i think it's another set of services this some doctors or some providers will perform and some will not. some payers will pay for and some will not. i suspect that it's just not an issue that's going to substantially tip this one way or the other, although it does have the potential, i guess, to elicit enough polarization that it could perhaps unused to either push in favor or push against reform, but i would think that we should look at it as a service as opposed to something that ought to define whether this wins or loses.

>> mr>> ok. yes, sir? >> georgetown medical school. massachusetts, to begin with, is in a far more favorable state in terms of medical resources, both primary care physicians in terms of rates and specialists, and the proportion -- more proportion of people are undercover, substantial community hlt centers. were there to be analogous reform through congress, i'd like you to address the work force issue, because it appears on the two years that that's already a serious problem in a very favorable, probably among the most favorable situation we have in the nation. >> well, one comment, i agree with you, that there's some aspects of massachusetts that are very favorable. we had a lower uninsured rate than other parts of the country and as you point out, there's

a -- there's strong academic resources for medical, education in massachusetts. however, there's also some big challenges. for example, the cost of living in massachusetts and the ability to maintain a lifestyle in massachusetts, and as nancy was saying, as a practicing physician there, earn enough to live there, and so we feel that while there may be aspects of the experience in massachusetts that are easier to achieve than our state, there are probably some issues in other states that are going in the other direction. but i think what is going to be similar is that creating access to coverage will immediately bump into the significant problem of affordability and that fund alley, although that affordability issue may vary a bit between states, i do think we all have that issue that the

cost of care are growing more rapidly than what we can afford to cover. and so i think the work around how to restructure the care, so that it's more affordable may be more similar across the states. does that address your question? >> sir, if you're going to speak, speak into the microphone. if you would, please. >> i sense from the preliminary data, is the issue of actual access to physicians. morphy significances not taking people, particularly apparently lower income individuals. therefore, a greater discrimination in terms of who you see and apparently some backlog in terms of people able to get access to care that they wish. >> and i think part of what massachusetts is hoping to do with their health cost reform is to address some of those issues to provide the incentive to see

the patients and primary care settings and make some of the adjustment that susan was talking about, that it's more effective care delivery the other point i would make along deb's, is health care costs are high are in massachusetts than other parts of the country and they are rising in massachusetts, so that piece is not the positive picture in massachusetts that other aspects are. >> and just to underscore what nancy said earlier, the key issue is primary care. she mentioned barbara starfield's work and it's very clear from barbara's and others work that primary care is highly correlated with the most cost effective, highest quality care. so if you've got access to a primary care physician or primary care providers, you're going to have better care overall. so that we know. now, we have this crazy system, as nancy said, go back to we get -- you get what you pay for, so we take the people in the system who provide the best,c most reliable, high quality care

and we pay them the least. what's wrong with this picture? how did the system get this way? and then we take the people for whom, frankly, specialists, many of them are very wonderful people. if you know much about the evidence base in medicine, the evidence base for a lot of specialty medicine is pretty thin, so we take the people who are applying the things that we have the least amount of evidence about, and we pay them the most. what's wrong with that picture? so we have to undergo this long-term process of equalizing the payments so we're paying more for the stuff that we have a better sense provides higher quality, more affordable care and less for everything else, and if we all think this is going to be easy, just mention this proposition to your average highly paid medical specialist. it's going to be quite a war, but over time, we think we can make progress, but it's why the overall gradual payments and reforms are going to be so important. >> i do think it's worth adding though, if you go back to the

1990's, when managed care and cappation briefly held sway, it may not be -- it will be every bit as painful as susan and the others have said, but it may not take as long as we think it will. during the 1990's, a decade of reform in terms of how we paid for care, we created tremendous numbers of new primary care training programs, filled them, probably the first -- only time in my history, with the top students in the classes, it was the place to be because we thought we were going to change the way we paid for care and what we valued in this country, so if in fact, reform can begin to show that there's a, going to be the -- that it's going to exist for a while and not just a couple of years, and that we're going to shift what we pay for, i think that we will in fact find many graduates who begin to look at primary care much

faster, perhaps, than we had originally anticipated. the 1990's is the evidence i would have to look at. >> ok. yes. >> former v.a.d.o.d., cms, congress. in the 1970's, i want to challenge how we're approaching this. in the 1970's, late 1970's, we built an inner city, public-private comprehensive health system, one of the larger communities in the united states and the key, we learned a lot from it to learn what you actually need to produce healthy communities and healthy people. the health reform to date has been good slices, like primary care, health insurance, this kind of thing. speak to me a little bit about what we would really need, what's missing from the health reform discussion about if you really want to build healthy communities, and make that happen. >> healthy communities. >> well, i think most held

policy experts and public health experts in particular, would agree that there isn't a whole lot of emphasis on public health in the reform bills. now, there's some. there's more payment for preventive care, etc., etc. but we look at some of the situations that we face now, for example, the obesity crisis and we know we're going to need to bring a whole lot more to bear on those problems than just insurance coverage. i think that the whole issue of the so-called social and economic determine determinants of hit, that is to say, your health status is to a large degree going to be determined not by your health care access and the treatment you get in the health care system, it's going to be determined more by fundamental factors like your income level, did you grow up next to a toxics waste dump, all of those kinds of things and that's going to be a work no progress. everybody agrees the public health system in particular is going to have to address p more

assiduously in the years ahead. >> take a more positive perspective. there are pieces in at least the house bill that address building increased infrastructure for public health, there are specific sections that address the value by attaching payment for things like smoking cessation, thing that have not been included in an awful lot of payment mechanisms, so i think that perhaps, if you add that to the concepts of patient center medical homes, we will in fact have opportunities for a number of these communities to begin to grow up, if you will, and then because we're very competitive, we may find that we can use those communities to encourage others, that the cost of care goes down if you have the infrastructure of public health and then the primary care

overlay and we'll begin to use those to put the next layer. i don't think we're going to get this all done in the first cut, but we've proven, as you said, that if we take it a slice at a time, we don't make any progress at awvment. >> i'd -- at all. >> i'd just make the observation that most frequently i've read criticism that these bills too much or try to do too much, rather than they don't try to do too much. there's a substantial minority in congress who would say maybe we are biting off more than we could chew. we have a whole raft of questions about -- why am i blanking on the non-sexist word for manpower issues. work force, thank you very much. work force issues. and let me just attack a few of them, because they are related. one of them has a pretty simple solution. for the shortage. why not make medicare and medicaid acceptance required of all providers, in order to close

the access gap? sounds like a reasonable idea, doesn't it? >> didn't massachusetts try that? >> would our massachusetts people like to address that? [laughter] >> i'm not sure i know. >> well, i'm not sure exactly where the question is coming from. physicians are required -- yes. >> let me just sharpen it a little bit. one of the ideas floating around as the bills started to get marked up is linking participation in medicare participation and a public option, a public plan, as a way of making sure that access for that group of people presumably more of the subsidized folks, would be relatively guaranteed since doctors and hospitals couldn't afford to right off medicare, and as i recall, it was not met with a unanimous approval.

>> i'd say that's the understatement of the day. >> and that's perhaps the answer to his question. well, a fundamental issue here is are you going to require provides to do certain things, number one, but also, what are you going to pay them? now, in medicare, obviously the federal government has levers to control what physicians are going to be paid and that's what we've been talking about, some of the payment reforms that would basically make it more attractive for primary care physicians in particular to see medicare patients. on the medicaid side, it's a little bit more complicated, because medicaid is jointly run between the states and the federal government and jointly paid for between the states and the federal government and localities, so to raise payment rates in medicaid means that the states have to go along with that as well and the states as you all know are in a pretty injured position at the moment, with respect to their economic considerations and their fiscal

considerations, so how we address that over time will be an issue. in the house bill, the medicaid expansion that would take place would be entirely paid for by the federal government. so that's an attempt to address this notion. but it's not utterly obvious that that is going to mean that payment rates get bumped up in medicaid. and nancy can say more probably from a direct experience about how low medicaid rates really are, but they are serious barrier and until they're addressed, i think, access for medicaid patients probably is going to be an issue. >> they vary state by state, but they oftentimes are as much as 30 cents -- 30% of what medicare pays, which is perceived in most places to be probably 80% of what private insurance pays, so now you're getting down to a fraction of the cost it takes to drive the process. i would probably say the best reason though, ed implied, is

that while physicians and other health care providers are not a big enough group to kill health reform on their own, if they in fact are insensed enough to try opposed to a bill, they can in fact at least seriously disrupt the likelihood of passage, and mandatory participation would probably be adequate to get that kind of activity going. >> and this one actually addresses the same question at a state level, and initially, it's directed at you, sharon. how have state government payments changed since 2006, to doctors and hospitals and how has it affected or how will it affect access in your opinion? well, one of the -- well, one of

the things that massachusetts did was to raise medicaid payments rates for doctors and hospitals, so they did address that. they're not as high as as i'm sure the doctors and hospitals would like to see them, but they were moving those up to address the capacity issue and i think, you know, once they've done this, kind of along the lines of the earlier questions as minnesota, if you want to participate in medicaid, you have to participate in the state government health insurance programs, so it's a way to tie the other programs together to increase the incentive to come into medicaid. >> and this one is addressed to both you who are familiar with massachusetts situation. were co-payments or are co-payment and deductibles still included in these insurance programs and have they been altered? >> they are still included. >> that is not affected bit changes in your payment experiment then? >> in the blu blue cross-blue sd contract, we are applying that contract to our hmo right now u and employers and members can

purchase different types of benefit packages, but all of them include some level of co-payment or deductible in the product. and what we want to do as an earlier question addressed is to start to introduce some alignment between the members and the physicians, so that lifestyle issues, members who are focused on maintaining their health, either through smoking cessation, weight loss programs, etc., on the other side, do get rewarded for that in addition to having co-payments and deductibles for medical services. >> and one thing that the state did with the minimum credible coverage, which is setting the floor on what counts as insurance in the state was to place restrictions on what out pocket costs could be for the year and maximum expenditures, so there are pushbacks on out of pocket costs and for people who are eligible for public programs under 150% of poverty, there aren't co-pays, so there are some limits on who has to -- or who's subject to co-pays, but

there is also some caps on how high they can be and i should also say, preventive care is for everybody in the state, for the insurance to qualify, it has to be outside of the deductible, so you've seen an increase in preventive care in the you united states. >> continuing on this same theme, this is a question addressed to dr. dicky, met-pac, that would be. medicare payment advisory commission, has proposed increasing primary carrie i am burrsments and decreasing specialist reimbursements in medicare. many primary care physicians have actually objected to decreasing specialty reimbursements. what would your advice be to policymakers on this issue? >> well, i think that to the degree that there's a single bucket of medicare dollars that are going to be used to reimburse providers, physicians and advanced practice nurses and others, the reality probably is

that some of the adjustment, if we want to adirect more primary care, will have to come by adjusting it out of subspecialty payments. now that may not be payment per service, it could be that you reduce the numbers of specialty services, which is part of that bending the cost curve many of us think will occur, so i'll get paid just as much for every coronary artery bypass i do, maybe i just don't need to do as many of them. if i follow evidence-based information. obviously, i would assume that those primary care physicians who don't want to take a pay increase off the backs of their colleagues assume that somebody will put additional dollars into the bucket and therefore specialists continued to get paid at the he rates they are and will simply raise the tide and if that's an option, we'll all go for that.

none of us want to be divisive within our peer groups. i don't think that's an option. i think we need to talk about the fact that the money that's in the system needs to actually either go to providing more care or somehow bend it so there's even less money in the system, suggests that we're going to have to take the dollars that are there and we're going of to have to spread them around differently than we have, so it's nice that you want to take care of your colleagues, but i think the data says we need more primary care. >> ok. here's one that goes back to something that several of you have referenced and that is the importance of preventive care. the questioner he states, 37 states currently require insurers to provide prostate cancer screening as a benefit. but then real lose that benefit in currently debated health bills, because they are not recommended by the u.s. preventive services task force.

how can we ensure access to these important measures? if i can add a second half of that question, how do you judge what's an important measure if you don't take the word of the preventive services task force. is there some higher authority? >> let me reference the comparative effectiveness research that is hey dressed in the -- addressed in the bills and has had a fair amount of conversation. about half of what we do in medicine today has pretty good research that says this makes a difference, or it doesn't make a difference. and what the bills have attempted to do is say, for that 50% that we have pretty good data, we ought to practice based on what the data tells us is good practice. for that 50% for which we do not have good data, then we ought to be spending some of our research

dollars to collect the data, one way to do that by the way would be to say, for that 50% of care for which we don't have data, if blue cross is going to pay for it for you, you should be enrolled in a study, so that three years or five years or seven years from now, we would be able to give you data that says it either helps to get this care or it doesn't help. and so we he could then begin to say, at least for insurance purposes, for which a third party is going to pay for your care, we will pay for those things that appear to make a difference in your longevity, in your quality of life, and in the timeliness of your recuperation and then if you want to buy those things out of pocket, for which there isn't good evidence, but which either your physician or someone has convinced you you probably want to have it anyway, that's fine. you can always write a check for that. you just can't ask your insurance company to pay for

that, but if we don't have the data, as we don't for about half or a little more than half of what we already do, then we've got to find some way to collect the data and so we'll know where to put those things, on the list or off the list. does that sound like a fair description? >> just to say a word more about the specific case of prostate cancer, it sounds like it should be a slam-dunk. if it you have prostate cancer, you want a test that tells you you have it, you want to know sooner he rather than later. well, it's not that simple. prostate cancer grows very, very, very slowly. the odds are in many individuals they will die of something else, not the prostate cancer that they have. we only now are beginning to be able to discern which prostate cancers will grow fast and which will grow slowly. several years ago, a study was done of people who died -- young men who died in vietnam and a lot of them had early stages of prostate cancer. now, they weren't dead and they weren't going to die of prostate

cancer. they were -- cancer. they were probably going to die of something else. so with you look at screening tests, you have to not just say does the screen test show what we think it shows, i have prostate cancer or not, not me obviously, but a man, then what is the intervention that that individual has, does the intervention kill the person, you know, do i get excess surgery, does the intervention make me impotent, when i didn't have to be made impotent, because i could have gone to a different surgeon, or i could have undergone watchful waiting. you have to take into account this whole array of things that get done to people and then you have to say once all those things get down to people or not get done to people, what do they die of, so you have to follow them for a really long time and find out whether they died of prostate cancer or something else. when all of this has been looked at by the u.s. preventive services task force, the answers are not clear, that prostate cancer screening is always a slam-dunk and it is clear that some pete get treatment that

they -- people get treatment that they don't need and die of treatment they didn't need for a disease that wasn't going to kill them, so as nancy says, until we understand all of this, it really -- it comes down to are you going to recommend that we take our precious health carrie sources and spend money on them, or are we going to gather the evidence to figure out whether we really should be doing these other things hornot. >> there was an article in the -- i'm sorry, i don't remember the source, it was an article about some british health care coverage and my legal counsel for my academic health center came in and thought he was going to start a fight i think because he said, you know, the brits have put a dollar figure on it and at the decided if a cancer treatment costs more than, and i'll get the numbers wrong, i apologize, but more than $20,000, and doesn't extend your life by at

least 90 days, they're not going to pay for the care. so they began to say, we'll spend this much money, for this much longevity. and i said, you know, i'm not sure that's all bad. we have treatment interventions that cost tens of thousands of dollars that we can't demonstrate, extend your life at all, and being a cancer survivor, i can tell you some of those treatments might make whatever extension of life you get almost not worth it. fortunately for me, i'm hopefully cured, but -- so we are going to have to start asking difficult questions about which interventions we do, whether we he do interventions for some groups and not for others, because different groups of people respond differently. but we should do it based on science, on having collected information from an adequate supply ofúpeople that we can then sit down with patients one-on-one and give them some information in which to make intelligent choices. to do that, we'll probably move

a lot of things that we think of as routine care today into experimental models, where we begin to collect this information and there will be those who immediately scream, you're rationing care, but the reality is that if we're giving you care that costs you or more likely someone else, money and doesn't improve your life, then we probably ought to is a those dollars for something that could make a difference in your life or somebody else's, so it's going to be a tough time, i think, as we begin to explain to people that this thing we think of as great science often doesn't have much science at all behind it. >> well, that is a more profound thought than usually passes the lips of our panelists. and it demonstrates to me the -- that the high quality of the conversation that we have been having on this bundle of issues, let me just ask you to fill out those blue evaluation forms. i see some you writing on now as

we finish up here. our thanks also to the robert wood johnson foundation for their participation in and support of this briefing. thank you for staying with this not uncontroversial bundle of issues that bubble up in a whole range of places in this debate and ask you to join me in thanking our panel for a very thoughtful and useful discussion. thank you very much. [applause] [inaudible conversations] >> taking you live now to capitol hill, this is the commission on wartime contracting in iraq and afghanistan. on your screen is chris shays, one of the co-chairs of the hearing and their looking into

contracting in high rack and arcs just getting underway here live on c-span2. >> director of contracting, dcma. our second panel will consist of witnesses from the contracting industry. the three companies represented are the three primary contractors, prologue cap 4 logistics contract, the witnesses are william ballihaus, president anesthesia c.e.o. of dyncorp, william walter, director at kbr, david methot, with fluor government group. before we hearing the responses from the witnesses, we want to offer basic remarks on the purpose of today's hearing. from 2001 through mid mid 2009, congress has appropriated about $880 billion to fund u.s. overseas contingency operations with a great majority of that

funding devoted to iraq and afghanistan. over that period, america's reliance on contractors has grown to unprecedented proportions. to support logistics security more than 240,000 contract employees, about 80% of them, foreign nationals, work in iraq and afghanistan at one time to support department of -- the department of defense. additional contractor employees support the department of state and the u.s. agency for international development. contractor employees outnumber u.s. military person emin both theaters. they have a critical mission and according to reports from the military in theater, they are doing an exceptionally good job providing security, transportation, meals, laundry and other services. the questions raised today in no way detract from the overwhelming good opinions of

contractors' support for u.s. missions, or obscure the fact that nearly 1,400 contract employees have died on duty in southwest asia. the questions do however reflect serious concerns about government's ability to evaluate the cost of contractor services, and provide good stewardship of taxpayers' dollars. are we spending too much for services for which we could and should be paying p less? are we overpaying and wasting precious resources? the commission's internal report at what cost, called policymakers and lawmakersg attention to eight issues of immediate concern that we felt should not languish unaddressed until completion of our final report. one of the eight was contractor business systems, about which we simply said, too many contractor business systems are inadequate and must be fixed. commission staff examined a

selection of reports on 100 business systems used by 15 contractors, who had raised $43 billion in contracts for work in iraq and afghanistan. we learned that 30 of those 100 systems had been judged inadequate or inadequate if part by the defense contract audit agency. fully half of the billion in compensation systems were considered inadequate. every other category of applicable business systems, accounting, budget, electronic data processing, indirect and other direct costs, labor and purchasing, also showed inadequatcies, although to a lesser extent. as we issued the interim report, dcaa identified three more contract business systems as inadequate, including the labor billing and compensation systems that are essential parts of a contractor's overall management

control structure. this issue of inadequate business systems in the contingency contracting environment is growing. but after more than six years, the opposite should be expected. this is a serious problem that should concern the president, every member of congress, and every taxpayer. as the commission said in its interim report, significant deficiencies in contractor systems increase the likelihood that contractors will provide proposal estimates that include unallowable costs or that they will request reimbursement of contract costs to which they are not entimed. or which they cannot support. the commission's may 2009 hearing heard that although that through fiscal year 2008, dcaa had taken exception to over $13 billion in question and unsupported costs associated with the efforts in theater. some of those shortcomings

reflect inconsistencies or ineffective operations of contractor business systems. and even if further inquiries provide documentation for question costs, their shortcomings demanded extra time and effort from federal oversight personnel that shouldn't have been needed and has resulted in higher costs for taxpayers. dcaa has also testified that inadequate government systems may prevent the government from closing out some iraq and afghanistan contracts for years. because of missing or incorrect data. u.s. army contracting demand previously testified before this commission about "overtaxed business systems under log cap 3 that created problems with management subcontractors making accurate estimates, reporting costs and purchases and other issues." army contracting command has adopted a policy under the new,

three vendor task force competition log cap 4 contract that seg greghts 15% of the award pool to provide incentives for good management business systems. and small business subcontractor performance. this is a welcome reform, but the test will be in its consistent and strict application. the harsh fact we still face is that some contractor business system deficiencies have remained uncorrected. without consequences. for months or even years. federal regulations require contractors to maintain adequate business systems. regulations also permit, but doc not require contractor officers to withhold payment when a contractor fails to correct significant deficiencies. but previous dcaa testimony indicates that many contractors continue to operate inadequate

business systems with little fear of effective discipline. further, there appears to be disagreement at times between dcma and dcaa on whether withholds should be imposed after a dcaa determination of inadequacy. we will explore these disagreements at today's hearing at some length. this state of affairs is both alarming and puzzling. why can't private corporations, who don't face bureaucratic obstacles to change of a federal department, find ways to make prompt corrections to systems that log vital data? how can large corporations manage their affairs effectively and provide accurate information to shareholders, let alone meet their regulatory obligations to the federal government with business systems that are truly inadequate. our federal definitions of adequacy irrelevant to real world operations or are contractors using some parallel

system of enterprise management that remains invisible to federal oversight? with whatever concerns we have, with the private sector, we don't intend to give the government a free pass on this issue. contractors are not the only ones with business systems issues. for example, the business systems modernization program at the department of defense has been on the government accountability office's high risk list since 1995. not 2005, 1995. tackling that issue is outside the commission's mandate, but we can still ask, is government doing its job to ensure that contractors comply with federal requirements? it's a procuring contracting officer, the administrative contracting officer and the auditor can ensure that needed improvements are timely made, who can? and who is accountable on the federal side of contracting?

these are just a few of the questions that might colleagues and i hope to learn about -- learn more about in today's hearing. again, we thank our witnesses for their cooperation. as is customary, a question and answering period will follow the testimony. after we adjourn, the hearing record will remain open for 10 business days, to allow responses to questions. for the record. and with that, we welcome our witnesses. our first panel, i'd invite you to stand. i would like to swear you in as is the custom of this commission. raising your right hand. do you solemnly swear or affirm that the testimony you will give before this commission is the truth, the whole truth, and nothing but the truth? thank you.

>> your statements are long in some instances, so we will, as you know, ask you to summarize your statements. we'd like you to keep you were statements between five and seven minutes, that would be our preference. and we'll be sure to make sure that anything that you need to say, you'll be allowed to say even if we haven't asked the question, we'll give you that opportunity at the end. so we're going to go in order with you, mr. parsons, then you ms. stevenson and then you, mr. ricci. >> thank you, distinguished commissioners of the commission on wartime contracting, thank you for for this opportunity to discuss the importance of contractor business systems in army contracting. effective business systems are central to the conduct of sound business operations. contractors must have systems in place such as accounting,

payroll and billing at the time of contract award that are in compliance with government cost accounting standards, federal acquisition regulations and federal regulation acquisitions. the systems must reasonably contract labor and material contracts, ensure purchase and fabricated material charged or allocated to a contract are based on valid requirements. maintain a consistent equitible and unbuy aced logic for costing of material transactions and labor. contractors must maintain the systems throughout the life of the contract. the army considers the relative condition of a contractor's management systems, including business systems, during the source selection process. generally, this is included as part of the management area of contractor proposals and related evaluation criteria. under the logcap 4 source selection, the criteria established that managements of which business systems was a subfactor took precedence over all other factors. this area was given a higher than usual wait because of the

difficulties of managing quick response program if an austere environment, and the need for robust systems to respond as contract requirements change and to keep up with wartime threats. in evaluating the relative strengths of business systems, as part of the source selection process, the contracting officer and source selection authority relying on the input of experts from the defense contract audit agency and the defense contract management agency. after the business systems are considered under the source selection process, they are previewed again before award is made. the contracting officer may not award a contract unless he or she has made an affirmative determination of the contractor's responsibility. in making this determination, the contracting officer must consider whether the contractor has the necessary accounting and operational controls in place, such as accounting, payroll, and invoicing systems, applicable to the services being performed by the contractor and subcontractors. when cost site contracts, the

contracting officer must determine that the contractor's accounting system and related internal controls provide reasonable assurance that the accounting system and cost data are reliable, misallocations and mischarges are mimeoed and contract allocations and charges are consistent with invoice procedures. during contract performance, the contractor must maintain its systems to support billing and payment under its contract, and must be able to accurately track the cots associated with the contract baseline and any changes made to the contract. the cost allocation amongst various work packages must be verifiable and must track back to the discrete contract change. this is the method the government uses to l validate the cost charged under the contract are fair, reasonable, and applicable. if a problem with any of the contractors' business systems is noted during a dcaa incurred cost audit or dcma surveillance, the contracting officer is notified.

dcaa and dcma work together to resolve what adjustments will be made to the billing rates or invoices and the contracting officer supports that process by taking appropriate contract action, if necessary. in the case of an award fee contract, pressure can be brought to bear through the award fee criteria. that is one ofúthe levers used under the logcap award fee process, which has criteria directly associated with corporate management and business systems. should the contractor not react in a timely manner, the army will dialogue with senior management in the corporate chain. depending on the severity of the problem, senior army or defense officials may engage with the contractor's most senior managers to make sure the army's needs are met at a reasonable price. the army contracting command is committed to excellence in all contracting, including the log cap contracts. we continue to collect lessons learned and make adjustments along the way to ensure mission success and protect the

government of the u.s. taxpayers. the army is committed to excellence in managing and documenting contractor performance and the overall discipline of contract administrative services. this is my honor to lead the army contracting command team as we persevere to achieve those goals. thank you for inviting me today to speak with you. this concludes my statement. >> thank you. >> chairman thibault, chairman shays and members of the commission, thank you for the opportunity to have before you today. i am pleased to be here. as requested, i will describe the audit effort performed by dcaa on business systems for contractors performing effort in thee term. a more detailed account is provided in the statement that i ask be submitted for the record. dcaa has implemented planning and coordination procedures to effectively integrate audit work between the iraq branch office, opened in may 2003, and more

than 60 dcaa offices stateside. just recently, i approved the opening of a second audit office in theater in afghanistan. through june 2009, dcaa has completed over 200 business system audits and has cited deficiencies in more than half of these audits. when a contractor's business system is inadequate, the data generated by the contractor is unreliable. which in turn results in the risk of non-compliances, with government laws and regulations, mischarging, fraudulent acts and contract overpayments. the requirement for adequate business systems dates back to 1977, to the foreign corrupt practices act. the results of which were further refined in 1985 by the national commission on fraudulent financial reporting, known as the treadway commission. the commission developed a framework that defined internal

control as a process, designed to provide reasonable assurance about the republic liability of financial reporting, efficiency and effectiveness of operations, and compliance with applicable laws and regulations. currently, public laws, contract terms require government contractors to maintain adequate business systems. using these previous bodies of work on internal controls, dcaa established audit procedures for the 10 contractor business systems listed if my written testimony. dcaa's opinion on contractor business systems is advisory and the contracting officer, usually dcma, has the ultimate decision to approve or disapprove the contractor systems. since inadequate business system is considered a critical breakdown in the contractor's processes, the acquisition

regulations require contracting officers take certain actions, when deficiencies are found, such as considering whether it's appropriate to suspend a portion of interim payments. even when the contractor has proposed an apparently adequate corrective action plan, until that plan is effectively implemented, the contractor is still processing transactions with an inadequate system of internal controls. as a result, there is a greater risk of overpayment. during our audits of contracts and contractor business systems in theater, we have reported a number of system deficiencies. for example, since march 2p09, we have reported three business systems at dyncorp to be inadequate. in the last few months, 50% of sampled billings at dyncorp have been rejected for exceeding allowable amounts.

shortly after dyncorp was awarded the task orders for kuwait, it submitted change order proposals, requesting an increase in price at about 51% or $50 million increase. the increase is primarily due to stated incurred to hire employees in theater. we identified a number of other billing deficiencies throughout our audits of the department of state contracts at dyncorp, resulting in $13 million of overpayments being refunded. as stated in hour testimony to the commission on may 4, we have reported a number of issues related to system deficiency at kbr. rather than repeating the extensive list of issues, in this testimony, we refer the commission to our prior testimony. however, it is worth noting the effects of this inadequacies in kbr's purchasing system resulted in significant unreasonable subcontract prices, on logcap iii contract.

we have issued in excess of 100 suspensions, known as a dcaa form 1, suspending hundreds of millions of dollars due to unreasonable and unsupported costs, many of which stem from deficient systems. in april 2009, dcaa issued an audit report on kbr's purchasing system with an opinion of inadequate, primarily due to kbr's failure to perform adequate price analysis of subcontractor proposals as required by the regulations. for example, kbr purchased about 4100 living units at an average units price of $38,000. with a lower priced vendor proposed 18,000, for containers having similar amenities, the $20,000 unit price difference equates to $82 million. dcaa has found that contractors do not always follow through to correct deficiencies in internal

controls. in june 2006, dcaa reported significant deficiencies withc kbr's purchasing system, and in that same year, kbr stated it initiated a corrective action plan. but our followup audit issued three years later in april 2009, we identified similar deficiencies as well as two new deficiencies that led to issuing an overall opinion of inadequate. based on these events, it is clear that kbr did not take the correction of the reported deficiencies seriously. we believe a contributing factor is dcma's practice of recognizing the existence of a contractor's corrective action plan as the basis to render a system adequate. auditing contracts for contractors performing effort in theater has been very challenging in many areas. these challenges are discussed in greater detail in my written

testimony. for example, it appears that dcaa and contracting officers apply different criteria when assessing the adequacy of systems. dcaa must follow the government auditing standard, which encompasses months of testing contractor internal controls before rendering an opinion. in contrast, just recently, dcma performed its review of kbr's purchasing system in about a week. >> mr. skwrao: try to finish up in the next minute. >> yes, i'm also done sir and determined that the system was adequate. clearly, we have different criteria. and the be -- on the opinions of an adequate system. in closing, the challenge of applying sound business practices having daunting and required our auditors to be flexible. i would be pleased to take your questions. >> thank you. >> good morning, chairman

thibault, chairman shays and commissioners, on bar of the defense contract agency, i thank you for the opportunity to thank today on contractor business systems. dcma is responsible for the administration of about 325,000 contract were unliquidated obligations of over $220 billion, awarded to over 19,000 contractors. dcma accepts approximately three quarters of a million shipments of supplies and 1150 aircraft each year. we also manage over 136 billion of government property and administer about $36 billion worth of contract financing payments each year. that workload, coupled with a significant reduction in personnel over the years, has posed a tremendous challenge to the agency. contractor maintenance of reliable business systems would help address that challenge. simply put, robust planning and control systems increase the likelihood that conforming supplies and services are delivered on time and at a fair price. : recommendations are

appropriately considered last november we revised our internal policies to any determination inconsistent with dca recommendations the subject of higher level review that may include review by the dcma head

of contracting activity, a senior executive service position within dcma. there are several major contract businesses by regulation. these systems are accounting, estimating material management and accounting, property, earned value and cost accounting standards disclosure statements. there is no consolidated list of these systems in the fares or defars. many contractors maintain adequate systems but there is room for improvement. even the largest defense contractors with years of experience in government contracting have significant deficiencies in their system. only two of the 10 largest business units have "systems across-the-board. four of those ten business units are considered inadequate and three or more of the seven systems evaluated. taking a broader view of the 435 contractor purchasing systems that have been reviewed, 19, about 5%, have had their approvals withheld. of the 2479 contractor property systems that have been reviewed,

80 about 3% have been found inadequate. of the 66 earned value emergency management compliance in april 2006, only four suppliers have been found fully compliant with those guidelines. however, focusing on whether a system is rated acceptable doesn't paint the whole picture. that's because an acceptable system may contain some deficiencies. long-standing practice and regulatory guidance allows contractors in many cases to avoid having systems disapproved if they submit adequate corrective action plans and make timely progress against those plans. the system rating is important as it may result in specific consequences. for example, disapproved purchasing system automatically leads to increased subcontract consent requirements. but knowledge of the individual deficiencies is no less important. the impact can often be mitigated by government action albeit typically through the expenditure of additional government resources.

to illustrate this point consider that the regulatory guidance for contractor cost estimating systems lists a number of potential risks mitigation strategies. these include use of a different contract type, performing different cost analyses or a re-opener clause. for that reason we're working to improve the quality of our communications with contracting officers relative to system deficiencies. the consequences of failing to maintain acceptable systems vary by system. i mention the consent requirements disapproved purchasing systems. here's a few other examples. an inadequate accounting system may preclude the award of cost type contracts or limiting financing options. an unacceptable system may increase post-war reviews for defective pricing. an inadequate property system may lead the government to revoke its assumption of risk and hold contractors liable for loss, damage, destruction or theft of government property but with an exception of mas none of

the consequences expressly and importantly contractually include reductions in contract price, payments or financing. certain clauses allow the government to impact cash flow when contractors fail to maintain acceptable systems or correct deficiencies in a timely manner. both the payment based clauses allow tore reduction or suspension of those financing payments for any material noncompliance with contract terms. the incentive fee and fixed fee clauses allow the contracting officer to withhold payment of fee after 85% has been paid up to a total of $100,000. although this has generally been done to ensure submission of final rate proposals, not to encourage improvements in business systems. finally, the allowable cost of payment clause gives the contracting officer the authority to suspend or disallow reimbursement of costs found to be unallowable. however, unless a system deficiency has been found to

directly impact a specific cost allowibility, use of this clause is generally not appropriate. before it can be used to suspend cost under our current contractual authority, we need to demonstrate through substantial evidence a reasonable nexus or causality deficiency and a cost to be suspended. i know i'm over and i'll finish up quickly. we recently offered some ideas to the director of defense procurement policy additional incentives to for compliance. we're also considering submitting a specific regulatory change to address suspension of costs for deficiencies. we will work this with the director of defense procurement and acquisition policy through the formal rulemaking process including the opportunity for public comment. in closing, we share the concerns you have with the adequacy of contractor business systems and appreciate congressional support of our efforts to obtain improvements

in them. again, thank you for the opportunity to appear before the commission. this concludes my statement. i'd be pleased to answer any questions. >> thank you very much. we're going to go in this order. commissioner thibault and commissioner hanky and then myself. we're going to go for eight minutes. and we will -- we'll go for 8 minutes and then we'll have a follow-up question of 5. so mr. thibault? >> thank you, commissioner shays. thank you for each of you taking the time to come up and prepare for this. i have several areas of interest. this is a really important area. i don't see any difference of a view that it's a really important area and i'm going to talk about, though, i see differences of treatment of the

outcomes. but before i go into that, director stephenson, you indicated to us last may, four months ago, you acknowledged the uptick or the significant increase in afghanistan for workload. and a big part of this commission's effort is to try to take lessons learned from iraq and the importance and i know the dcaa was one of, if not the first, noncombat agency to go into iraq in 2003, summer of 2003, and the event started in early spring of 2003. and in may, we kind of highlighted that when we went out, we didn't see as much of dcaa as we might have expected given the uptick. can you talk a little bit about actions you might have taken and then the other thing we talked about is dcaa going to get out into the outlying areas where so much of the costs are incurred and look at operations?

can you update what, if any, actions you have taken as the director? >> yes, we took your recommendations very seriously and we do appreciate the commission's support on these. shortly after that hearing, we did assess what the staffing needs both in iraq, kuwait, afghanistan. i call that the in-theater effort. and just recently, we have opened an office in afghanistan. we'll have two offices. we'll have the iraq branch offices until the drawdown is complete and audits are no longer necessary in that area and we have the office that will be opening in afghanistan and we're coordinating with centcom on the logistics that's necessary for that. we've also approved and have a manager in afghanistan right now along with an audit team, although, it's not as the office is set up, it is on a temporary travel basis. we are shifting as need be. on your question regarding the operations audits, we have

initiated 15 operations audits split between iraq, kuwait, afghanistan. in iraq, it's mostly focused on the drawdown and do we have too many people doing too little work. in afghanistan, it is the control of various things such as the transition of equipment and property. we anticipate we will be spending in 2010 over 12,000 hours on operations audits. >> thank you. one of the things, and then i'll move it around, but one of the areas that we were also interested in -- and i think i'd like to start with you, mr. parsons, at the last hearing was the business system evaluations in terms of coordination between the three organizations, the three organizations that are here now

in terms of, you know, is there -- we felt and we got an agreement from every agency that there was a need for improved or more directed or more focused. there were various coordination activities but we had these differences that we're going to talk about and update in a bit, but i guess i'm interested in following that hearing, what kind of actions were you involved in that were trying to address these differences where you might have dcaa saying it's a 50% or that we have very significant issue and you might have dcma with a different view. so can you talk a little bit about what actions -- you know, and the army is so critical because you're the ones spending money on the contracting effort, mr. parsons? >> as i mentioned in thee statement these business systems are very important to us as far as our contract skill under

logcap and as such we put a lot of focus on that on the source selection for the basic logcap contract and at the task order level. and there's some differences of opinion between dcaa and dcma and that's one of the things the contracting officer has to wrestle with. and the contracting officer is informed by dcaa of audits where they are finding inadequacies they are in communication with dcma as well and they've got to understand the positions of those organizations. i think it was last month that we actually held a meeting out at rock island where dcma and dcaa participated all the regional directors, in fact, were in from dcaa and gave a very thorough review of all of the issues that they have identified with a different contractor business systems and there was quite a bit of discussion about those. and as recently as a couple of weeks ago, dcaa gave a follow

update on the contracting service center that they have with these business systems. so the contracting officer needs to address them when they make the responsibility and determination they make tradeoffs between what the information provided by dcaa and then dcma and come to a conclusion on whether they believe or not the rkl is so high that it can't be mitigated on whether it can be mitigated and take appropriate action. >> let me say thank you for that. let me share -- it seems we're doing a lot of talkingsy but it seems on based on some of the testimony that we haven't done a lot of resolving and/iñ dcaa answers through theruñ comptrol and they come up from the acquisition side and my observation seems like something is not getting done in terms of addressing these important issues in trying to figure it out. and director stephenson it's really focused as much with you

mr. ricci you share 475 contract to purchasing systems reviews performed by your cpsr team with -- i think the number was 19 exceptions. that's a pretty small percentage just as an observation. you just shared that typically than 50%. so you got whatever 19 out of 45 which is maybe 45% and you got 50% south one advisory organization saying to contractors and saying to your customers, the army, hey, we got a 50% hit rate problem. we got another one saying we got another 5% hit rate problem and i'm just talking about purchasing. now, i'm sensitized because when you briefed us, mr. ricci, and we appreciated it in advance of the hearing, you outlined -- and -- there it is, the staffing

reductions that your cpsr teams have encountered and i think it's important to share in '94 your cpsr team your thresholds are pretty low and it's important to look at you had 102 individuals performing these reviews. you had -- you went down by 2002 to 32 and in the present you have 14 that you shared with us. you also said,, i believe, that you thought it was reasonable. i'm here to tell you/[w intuity and logically that it really doesn't seem reasonable and then i feel like we kind of got a hatfields and mccoys situation going on because in director stephenson's testimony, she stated that the cpsr team conducted its review in less than a week. so shes,l didn't put that in th because as a compliment, quite frankly, and she said there were 2 or 300 separate procurements by week's end they said it was adequate and dcaa for

long-standing had said it was inadequate so using that as an÷ example and using the  it is really troubling that we have these differences and that the two agencies haven't been able to resolve it. lasti point is that you end up with companies, you know, there are great companies out there and maybe they don't know how to assess this much rather the army. there are companies out there that have had continuing problems and maybe they're using it as excuses. well, dcma is telling me one thing. if you look up at that chart up there, dcma is telling me one thing and the others are telling me something else. when i get to the questions at the next round, i'm going to be focused just on that and what's going on here? what qiq going to take to get these twohkñ agencies together figure out a good course of action and to speak as one since you have a mutual customer,

united states military in this case. mr. chairman? >> thank you, that's a nice introduction, but it may get answered before you get your second round. >> well, that's just excellent. >> thank you, mr. chairman. my respect to miss stephenson and the dcaa for the professional diligence for your two lieutenants. always a resource for me. my chairman, mr. thibault, i respect and draw on his deep insight into these systems. i could not look into them without him.le okay. at the mayt0b 4thñ0 hearing we expressed our concern that the army contracting command might not

>> i have to admit i tried every angle possible to get involved with the preaward audits of the task orders for afghanistan. i have met with mr. parsons. he did follow through on his effort to meet. i met with charlie williams, lee thompson. i even went to -- within at & l and met with sheik assad and expressed the risks associated with the preaward as mr. parsons mentioned, we all had a meeting where i brought in every one of my executives involved with the three contractors, and we had a

meeting with the individuals responsible for awarding the task orders for afghanistan and an entire day meeting and went through each and every one of the orders in logcap. unfortunately the train left the station without us and we were not engaged in auditing the proposals for logcap iv for afghanistan. >> you're being diplomatic. the train didn't sort of have no engineer on board. mr. parson opposed you and won as he went up the ladder with you. is such auditing crucial for the drawdown -- i'm sorry? i want to follow up about the auditing. our highest strategic imperative in iraq is the drawdown. there's nothing more important. the commission sent me two weeks ago to baghdad to talk to -- i ended up talking to general odierno and i'll talk more about that later. for the drawdown is such auditing of proposals crucial

for the new task order in iraq, which is coming? it hasn't been completed yet. it's coming. >> i would say the audits are more critical with the drawdown. and the reason being prior to awarding the task orders for the drawdown, we have to have a good understanding of the prices at a low enough level that when the draw down occurs we can assess cost containment and cost growth. and given the inadequacies with the business systems with these three contractors, if these internal controls are not improved, coupled with a poorly priced drawdown, the drawdown in iraq and these iraq task orders are become a deep pocket for these contractors. >> a what? >> a deep pocket. it is going to be critical that we have an adequately priced drawdown. now, in this effort as mr. parsons said, we've had at least two meetings since june to talk about dca's involvement.

i have mr. parson's commitment that we will be involved with auditing the task orders on the preaward basis for iraq. >> well, we've heard promises of cooperation before. i'm glad this is a little more than in the past. what objections are you meeting and how do you answer them about why they didn't last time and they wouldn't this time let you audit the proposals which as you say could become a deep pocket, the drawdown could become a deep pocket for contractors. go ahead. >> i'll talk in generalities whether it's been from afghanistan or kuwait for the task orders in general. i hear such things as dcaa takes too long. we need an audit quickly. i've heard that you asked for too much data. you want the contractors to submit more data than what perhaps is needed. and you have too many issues that gets raised that delay in the awarding of the contract. and we recognize -- we sincerely

recognize that delays in contract audits do no one any good. and to mitigate this, we have set up a central person that will be the point of contact on all the iraq -- on all the logcap task orders to help facility. if we have enough time -- and i'm not talking months. we can do this in weeks. >> weeks, you said. >> we can do this in weeks if we have enough time we can certainly do this. and generally, it can even be in four weeks or less depending on the amount of data. if contractor estimating systems provide adequate data that's easily supported when we go in and we assess it, we can get in and out quite quickly. however, if the contractor data is deficient and in some instances it's been severely deficient, that will indeed hamper our audits getting done quickly. >> let me get on to another topic which is key for the second panel. when i asked them about their labor system and whether that

poses risks to the contractor drawdown in iraq, risks to it, you have some familiarity with kbr labor system on task order 159, the last big task order. i look on page 11 and it says, we questioned 368 million and change, of direct labor costs as summarized by schedule. what's the problem with kbr's labor system? is it too high a level of generality and you can't -- you won't have internal controls within kbr to tap into, to keep them from becoming as you said a deep pocket in situations like this? >> our internal controls in labor are in process. i want to be careful that i don't get into issues that might be premature. however, there are a couple of issues that i can talk about. we have recently provided -- kbr

recently as in last month, what we call a statement of condition for their assessment regarding the level of data that is gathered within their labor system meeting at a too high of a level to be able to assess whether the tasks are being accomplished or even better yet, when there are change order proposals and there's a lot of change order proposals. >> that's technical talk. a statement of recommendations, is that in effect -- could we, lay people, consider that a criticism of the kbr system? >> i call it a statement of condition because it's in the process of the contractor having an opportunity to respond to it. we want to ensure that we have not missed something. but this is very similar to what was in the task order 159 report which is the level of detail. you need to ensure labor is at a low enough detail that when a change order proposal or the drawdown proposals or other things come in place -- and there's a lot of those that come in place, that there's not a

duplication of the reimbursement of labor costs where you aren't paying the same person doing the same effort more than once. >> my time is almost over. i want a short answer to this. is there a danger that kbr will in effect build double fee on its labor being used in change order situations in the drawdown? double fee -- you know, once on the basic contract, once -- >> absent improvement in their internal controls, there is a risk of a payment of inappropriate or double fees as you're saying. there is a risk. >> thank you, my time is expired. >> before going to mr. hanky, let me just say to the other witnesses, take notes on anything you want. mr. parsons, you'll be given an opportunity to respond anything you have heard. i'll use my time if i have to but you'll all be able to respond on everything that's been asked. >> a question for mr. parsons. your statement, page 2 and page 3, twice says the army considers

the relative condition of contractors of management systems relative to what? you've gone out of the way to say there the army considers the relative strength of systems -- most importantly during the selection process. >> correct. during the source selection, we put a lot of increased emphasis on management proposals submitted by the contractors with an emphasis on the contractor business systems because of the importance miss stevenson has said with these costs that are being incurred and estimated. >> so if you have three proposals, three vendors, you're comparing those three relative to each other or to a standard? >> to both. to both. so first of all, you're going to determine whether or not these systems are approved. identify if there are deficiencies in there what the risk associated with those deficiencies -- whether there is opinions by the dcma on

corrective action plans that have been submitted or other mitigating actions so you compare -- you compare them to the standards of whether the systems are approved and then to one another. is one contractor business systems in better state of health than the others? >> how do you make a judgment about systems relative strengths to a standard, to an independent objective accessible standard other than relying on your experts, dcaa and dcma? >> we do rely upon those experts but we do have people that are familiar with, you know, price analysts and cost analysts that understand a lot of these aspects. they do evaluate what -- the conditions of the systems are based on what dcaa has found and then make some kind of judgment on how much risk we may be assuming with going with a contractor that may have those deficiencies. so we don't -- you know, i think we do have the expertise but

ultimately we do have to rely upon our subject matter experts out of dcaa and dcma. >> okay, you've had some vendors with long-standing systems problems, deficiencies, correct? >> correct. >> and some of those deficiencies date back to '2004, '5, '6 have not gotten better, in fact have gotten worse if i understand the estimating system at kbr, is that right, miss stephenson. but it's gotten worse over time. okay. in that context, your statement, mr. parsons, you said, quote, contractors must have systems in place such as accounting, payroll and billing at time of contract award that are in compliance with cost accounting, the far and the defar. to me, that statement is no willing room. they must have it in place at the time of award as soon as they are compliant. so how did you do what you did

which was award contracts to vendors who don't have compliant systems? >> again, this is back to dcma's role versus dcaa's role and at the time we made those awards all the systems were either in -- were in approved status by dcma. so while dcaa identified issues and found those systems to be inadequate or inadequate in part from way back, dcma ultimately is the one that makes the call on whether those systems are approved and the contracting officer has to rely upon that judgment. >> it seems to me -- something as simple as this is going on, if you ask -- if my kid asks mom to do something and she says no, he goes and get a different answer. he goes and asks me for something that he may get a different answer about. and he finds the answer he wants. miss stephenson, i want to talk

about your grading scale. and as i understand last year you changed from a three-grade system to a two-grade system and i would like you in the time remaining to just walk us through your thought process and your rationale for making that change. it used to be you'd have an inadequate, inadequate in part or an adequate judgment and now you have effectively a past/fail, adequate or inadequate. that strikes me as interesting because the language of accounting isn't always just binary. as you know and construct me on, you have material weaknesses and significant deficiency and less reportable deficiencies. it seems if you have a pass/fail system, you're removing that

judgment. you're supplying less information to your dcma and your commanders and if i'm looking at a report card and it's a, b, c, f i know where to focus first. if i'm looking at a report card that's pass/fail and it's mostly passes or it's mostly fails, i don't know where my most risk is so just walk us through why you made that change and how it's been implemented. >> sure. i'd be happy to. prior to december, you're right, we had three opinions that we provided. adequate, inadequate and in time we have assessed the inadequate and part opinion was not getting the attention it needed by either the contracting community or the -- what i'll call the contracting officer community whether that's with the service or if dcma. case in point, kbr's purchasing system was inadequate in part in 2006.

as part of our process of reassessing our systems and our audits of internal controls, as we have done in the past year, through various things that have come to our attention through oversight organizations, we have gone back to the basics of the auditing standards and the acquisition regulations to determine if an inadequate in part opinion is required and it is not. in fact, under the auditing standards it's either adequate or inadequate. >> are those the yellow book standards. >> yes. >> you didn't -- you don't have any discretion. the auditing standards applied to the federal government are adequate or inadequate. >> right. when we assessed it, we saw that the there really wasn't a requirement for inadequate in part. there wasn't a requirement in the acquisition regulations. and given that inadequate in part was not getting the attention it needed and many times was seen as a caution as

opposed to an issue, we realized we needed to change something. >> do the accounting standards prevent you from having anything other than adequate, inadequate? >> i wouldn't say it prevents but i wouldn't say it's required. so because it's not required, we assess what we could do better in this process. now, keep in mind we only perform internal control audits at very large companies. >> uh-huh. >> that have internal controls. these are the very, very large companies. in order to report a deficiency, it's a breakdown in what's called a controlled objective. i'm sorry to get into the accounting terminology but it's a control objective. if it fails, it's critical to the system. so even though one of many may fail, in the past that may have been inadequate in part because they all didn't fail, case in point, 2006 kbr, the subcontract piece failed, however, that piece resulted in hundreds of millions of dollars of overcharges to the government. we realized we had to do

something different. we were at risk. and we were perhaps with our inadequate in part exacerbating that risk. so we eliminated the opinion. to where it's now inadequate. that's where kbr's purchasing system became inadequate in april of 2009. the controls over subcontracts is inadequate. >> okay. i'm out of time but i'll come back on the second round. thanks. >> i just make the point to you, i'm not sure you're getting any more attention by doing pass/fail. and you are disguising the degrees of challenges. so i think you may want to revisit this so we now go to the commissioner. >> i'm struck -- i'm struck by the way the term is adequate. we're not really asking these systems to be stellar or role models. we're asking them to be adequate. we basically them to be a c.

so it's pretty depressing to think that some of our major companies can't meet a c standard for getting their business systems in order. now, i know it's technical term they use in auditing but the impression is that it just has to be adequate. you said all three of you that it's -- i think april stephenson you used the term, it's critical, it's crucial. the and they said the business systems are crucial to protecting the taxpayers. it's of great concern when i think mr. ricci you said that only two in your testimony only two of the major defense contractors out of 10 have "business systems. now, the both of you have a regular review these business systems. dcaa does it from the auditing

perspective. trying to meet the generally accepted government auditing standards. to ensure the adequacy of controls. and dcma you do it from a contract management perspective. to improve a contractor's system and to reduce the risk to government. is that right? so you come at this from different perspectives? >> slightly. >> both of you -- mr. ricci, is that right? >> i would say we kind of look for compliance with acquisition regulation and again, in order to reduce the risk and also to save us time and money by being able to rely upon the systems. >> okay. >> so if i could just -- one point about inadequate in part. acquisition regulations recognize the disapproval of selected part of the systems. so since again that's what's in our regulation, we would continue to make such recommendations whereas dcaa, it's black or white, i guess. >> uh-huh. but with kbr you never found an

inadequate in part system? >> no. >> mr. ricci, have you? your view, the dcma view is the green line for those top four systems that you're particularly involved in in that first chart. and you've never found an inadequate in part system for kbr. in fact, you never found an inadequate system for kbr, have you? >> i don't believe that the formal status that we assigned to any of them have been unacceptable or disapproved. >> right. and that's even though, director stephenson is saying that the purchasing system in kbr has gotten worse over the years, not better. it hasn't even improved. it has gotten worse. and yet dcma is still assessing that purchasing system as adequate.

>> you know, one thing to understand is that dcaa has responsibility for some of these systems. dcma has authority for performing a review for others. purchasing, for example, by regulation, dcma, with our purchasing specialists, conduct the reviews and provide recommendations to the acos. we actually do our reviews in accordance which was once part of the regulation appendix c that we actually provided to this commission. again, dcma's audit -- they're doing it, i guess, for internal control purposes for that 242.75 subsection of the far. to talk about the purchasing, if i may -- [inaudible] >> okay. dcma, okay, issued a report on june 10th that basically looked at the purchase orders awarded basically during calendar year

'07. in that report, we had 13 recommendations. those recommendations essentially mirror those in the 2009 dcaa audit report that has been referred to. now, dcaa has them grouped in three but if you go through specifically what they are, they're essentially the same. the thing is that the 2009 dcaa audit was based upon data for calendar year '07. whereas, our 2009 cpsr that we recently completed -- i believe that's july, july 10th -- we looked at 200 purchase orders from july '08 to april '09. a time period that affordeded kbr the opportunity to make the corrective actions. so again, dcaa -- i know they're currently always doing audits of subcontracts on all the task orders so that may be calling

their opinion but the 2009 audit again was simply an audit that was delayed for release. so i don't think that it's reasonable to compare it again. you talked about the fact that we did it in a week. actually, i believe it was like three and a half or four days. we sent four people in. that means they looked at a purchase order. probably one every 30 to 45 minutes. since it was a follow-up on those thirteen deficiencies that we found a year before, i don't know that it is unreasonable. again, these folks do this full time and so until dcaa issues an audit, i know they're working on one now, and we'll be happy to see it, we'll definitely consider any findings, i must go with the recommendations from the cpsr group that's given that authority in the regulation. >> director stephenson, do you want to respond to that? >> where to begin. first of all, i'm going to say

the proof of the inadequate purchase system is in the proposal. task order 159, october, 2008, a billion dollars unsupported because of the inadequacies with kbr's purchasing system. i think that alone regardless of the other testing that we have done have shown that there is systemic deficiencies in this system that need to be addressed. i do not want to pass judgment on how another organization reviews invoices but with my expertise i have looked at a number of invoices over the years and been involved with a number of reviews i could not possibly determine the adequacy of an invoice, 2 to 300 invoices in a week, i could do that. i'm not sure how others people do that. it takes a lot of peeling back the laser to determine if something is adequate. we obviously have a disconnect between our two organizations, and i do invite mr. ricci and our organization to work together to try to address this. the disconnect is just too large.

>> mr. parsons, did you have anything to add to that? >> well, i think just this exchange demonstrates the complexity and difficulty of these -- of these issues. and i agree with mr. ricci. i think, you know, the regulations do need to be examined in this area to be more specific. and what are those standards? i think even the standards that we are going to hold the contractors accountable for in front all the different systems need to be very specific and very clear. and my opinion -- i don't think they always are that clear. and there is a lot of room for judgment and differing of opinions and that's part of the difficulty that needs to be resolved. i can tell you personally i'm upset after what we did with logcap iv that some of these business systems have some deficiencies and some of these contractors are going to get a wakeup call when we start doing the award fee determinations

where we've set aside an award fee for, you know, management and for the business systems to see if it get their attention because i don't disagree with miss stephenson that in many cases we have not gotten their attention. >> have you sought for this regulatory change or is this something you want to go forward. this is an issue that's been going around for some time. there was a 2002 d.o.d. ig report that there was miscommunication between dcma and dcaa. lack of cooperation. and then there was a 2009 d.o.d. ig report. i mean, it seems to me it has been a very pressing issue for some time. has your office taken any responsibility to try to move the ball forward? >> no, ma'am, we have not. >> do you wish you had? >> i do believe this is an issue that needs to be addressed at the osd level, you know, certainly the army could initiate some type of regulatory proposed change but i really think the issue, like you said,

has been around and needs to be addressed by osd. >> okay, i want to move over to one issue and another issue here -- [inaudible] >> i thought i had a minute left. oh, i'm in the bad part. well, it's a long question. it's about with holds. so i'll do it the second round. thanks. >> let me just say, mr. ricci. you've left the impression that dcaa's inadequacies in every case you've either ignored them or overruled them. that's the impression that's left so far with this -- for kbr. so i would just like to ask this question, have you ever accepted dcaa's -- >> like i said, dcaa is intrical -- >> i didn't ask that. have you ever accepted them? have you ever said -- they said they're inadequate and so you agreed they're inadequate or have you overruled them every

time? >> no, i can provide data for the other contractors. we're looking at really -- >> you know, that's not an answer to my question. it will be a question i'll get into. >> okay. >> thank you. mr. ricci, first of all, i want to point something out to everybody here. this isn't just about the details of green eye shades. this is operation and maintenance budgets. every dollar that get wasted or gets lost is money that could have gone to training, that could have gone to the maintenance of our equipment and, therefore, goes to the protection of our soldiers' lives. it's not just the taxpayers. it's the kids that are being shot at. and i don't want us to lose sight of that, number one. mr. ricci, i would like for you to define adequate for me. i'll tell you why, on page 7 you make the remark, the logcap contractors each have only one, quote-unquote, inadequate

system. as i understand it, if a contractor has a corrective action plan, you rule the contractor adequate in that business system, yes or no? >> generally, yes. >> generally yes. give me an example where you didn't. >> on e3 contractors? >> no, where somebody has a corrective action plan. sometimes you say that's not enough. i would like an example please. >> not with e3 contractors. >> not with those contractors, okay. so somebody says i'm going to fix something, i promise i'm going to be a good boy. they tell you that in 2003. do you give them six months before you come back to it to see if they corrected it? >> generally, six months to a year, yes. >> as my colleague here pointed out, in some of these systems, some have actually gotten worse. it's six years since 2003. what have you done about that? >> if you're referring to the kbr purchasing system. >> i'm referring -- >> well, that's what the focus appears to be on. >> no, no, no. i'm referring to any system.

you've ruled a ton of systems is adequate. we've heard from mr. parsons and they see things are going hell in a hand basket while you rule them adequate because there's a corrective action plan. tell me at what point you invoke defar 247 and withhold the money? is it a year, six months, two years, three years, five years? we're in a war of seven years, when? >> it would depend upon the severity and their lack of progress. >> give me a case where you did that. >> we have numerous systems that are inadequate throughout all the contractors that we are responsible for. >> so give me -- >> on these three contractors here, we have not yet done so. >> not once since 2003; correct? >> correct. >> okay, fine. next question, page 10, you make

a whole play here of why actions that involve withholding funds are, quote-unquote -- do not represent the hammer some folks seem to believe it. i don't know who the folks are. i want to quote the dfar, parenthesis a4. the aco which is the administrative contracting officer will consider whether it's appropriate to suspend a percentage of progress payments or reimbursements of costs proportionate to the estimated cost to the government. considering audit reports relevant input. until the contractor submits a corrective action plan acceptable to the aco and correct the deficiencies -- now it seems to me if you withhold 15% of somebody's money, you're going to get their attention. why is that not a hammer? >> okay. this regulatory guidance has no contractual authority behind it. when you look at the acquisition

regulation, this subsection of the dfars accounting and i guess related controls generally -- how the subsection ends with a proscription for a clause. that's what give us the authority. and again, if you look through the regulation you'll find that in almost every section. this is guidance to the contracting officer and then the contracting officer needs to find an appropriate clause under which -- >> yeah, but that's not the point. well, the point is you make an assertion that this isn't a hammer. now, if you're going to wait and not -- and you're going to withhold 15% because the deficiencies have not been corrected, that's a sledgehammer. why do you think this isn't effective? that's what i want to know? >> that's guidance that give us no authority -- >> no. i'm not interested in the guidance. def >> if the person chooses to do

that why it won't make a difference? >> because i have other contract clauses that provide other direction. >> and 15% withhold is not effective? i know you have other clauses. i'm asking you about this clause. i want to know why it's not effective? >> that gives the aco no contractual authority. it tell us to consider doing this, okay, and then we need to find a clause like the progress payments, performance-based payments clause and the remedy comes through those clauses. again, the authority is provided there. >> so there are remedies elsewhere, fine. when was the last time you withheld payments from these three contractors? >> there's lots of suspension of cost but i don't believe that we've actually withheld funds. again, withholding of funds is not really a term of art.

i mean, there's suspension or reduction of financing payments. but again, given regulatory guidelines, for example, if i could read you what it says for estimating systems, which dcaa finds to be inadequate -- here's the guidance. if the contractor has neither submitted an acceptable corrective action plan, nor corrected significant deficiencies within 45 days, the aco shall disapprove all or selected portions of the system. again, the regulation says there that if they submit the corrective action plan, they make timely progress, we don't disapprove the system. in my opinion, we're making a little too much of the overall status of the system when what we need to focus on with the questions that were directed to mr. parsons are the significant deficiencies themselves. again, purchasing for kbr, i guess, every commissioner will ask me about it.

but even if we disapprove the system, commissioner, all we're going to do is they're going to be subject to additional consent requirements. the army has already made kbr subject to them. so in effect, whether the system is inadequate and inadequate in part or adequate doesn't so much change what the government actions would be to protect its interest. >> could i just ask a question. >> just a minute. what i would simply remark is this, to my simple mind, if somebody with holds money from a contract, you're going to get their attention and they're not just going to give you a plan. they're actually going to act on it and since we've seen over the last seven years that people have given you plans but haven't acted on it, and you keep saying they're adequate, you're not helping them, the taxpayer, or the soldier, sailor, marine or airmen who desperately needs that o & m money. >> i just want to ask if you

find a purchasing system inadequate, does that mean that your c.o. has to review each purchasing invoice before it's approved? is there work that becomes incumbent upon your dcma employee if you were to find that purchasing system inadequate? >> yeah, either us or the contracting officers. it's often delegated but at times withheld as you're going to hear tomorrow in the gls. >> so to some extent there's an advantage for you to find the purchasing system adequate because you don't have to -- >> it would be different. i don't believe that enters into our decision. again, our purchasing system analysts are in a separate group like a center, if you will, so -- >> thank you. >> thank you. let me may on my preparatory remarks build on the commissioner. the key issue for me and i think the key issue as you've seen from all the commissioners is that of accountability.

and unless and until we hold these contractors responsible for continually having inadequate business systems, we'll continue to see waste, fraud and abuse and the very same mistakes we made in iraq at the beginning of that war in 2003 are going to be repeated and continued as we draw down there and they're going to be continued in afghanistan as we ramp up there. and as the commissioner said, this is not a waste, fraud and abuse issue but it has real consequences on the battlefield for the lives of our men and women there. so there is no more important issue it seems to me for us to be focusing on today than business systems. it's anything but dry. now, with that, by way of preface i want to get into this whole issue of coordination. to me it's not an issue of coordination between dcma and dcaa. it sounds like you have lots of meetings. it's at the end of the -- and you've all acknowledged this, but we haven't really talked about it explicitly. at the end of the day, dcma calls the tune and all we have

demonstrated in the hearings so far, dcma deems these systems to be adequate. and this allows contractors to play dcma and dcaa against each other. now, we're going to get into this with mr. walter from kbr in his testimony. but he says on page 2, our systems are regularly reviewed and approved by the government. just last month the government's most recent review resulted in approval. and then at the end he makes this plaintive plea, if the commission can identify the means that will allow the government to speak with one voice in instructing its contractors in future contingencies this would be a significant improvement of the contracting system and i say to that amen. so with that, my question is this, isn't the fundamental problem that dcma's audit recommendations audit to be auditory. can you elaborate on your review on that matter and then i want to hear from mr. parsons and mr. ricci.

>> i have to say over my years my frustration has probably led me to say i would like them to be mandatory. however ibz do recognize that not all systems it's just dcaa. i would say instead of mandatory i would like there to be an accountability when dcaa's findings are ignored or appeared to be ignored. and i think the purchasing system is that example. and it is certainly -- knocks the wind out of here when you hear a week is spent when your own people have spent thousands of hours reviewing a system testing transactions and found over time there to be a significant amount of costs that were overcharged to the government. that's my concern at the end of the day. i along with commissioner -- this is for the soldiers that we're protecting. money that can be better spent for the soldiers. so i would like there to be a better accountability. >> all right. i want to give mr. ricci and

mr. parsons an opportunity to comment on that. i think it's only fair. mr. ricci? >> again, we're responsible for dispositioning all audit findings for reportable audits in the contract follow-up system. and again, we definitely value dcaa's input and to ensure the recommendations are fully considered, again, we established this board of review process that if the contracting officer seeks to make a decision that's contrary to a dcaa recommendations it will be elevated and in many cases will rest with the senior contracting personnel. >> it sounds like i just demonstrated while it's considered, it's never ultimately used to hold contractors accountable, right? >> i mean, it has not been -- we have not disapproved any of the systems for the three contractors, correct. but again, we're looking at 3 out of 19 solvent contractors we

administer and understand most of these rules don't apply to small business. i'm just saying the universe is much larger than the three, commissioner. >> mr. parsons? >> sir, i'll just repeat, i don't disagree that we need to hold contractors accountable but i think the real question is, what are we holding them accountable for? what are the standards that are expected and then getting to some other points, what do we mean by adequate? and to be quite honest with you, i don't think that those standards and the definition of what is adequate have been vetted through the regulatory system for all these systems and i think that's where some of the frustration -- i know when the contracting officer part gets is that when you read the dcaa opinion and you get the dcma opinion. you take a look what's in the regulations. there's a lot of room for interpretation and it's not real clear in many cases and it gives that -- so i think something needs to be done. >> well, i think that's a fair point. let's delve in that.

in your testimony, miss stephenson, there are standards the dcaa reaches its opinions by way of contrast as i understand it from your testimony the aco has considerable discretion as you just acknowledged it sounds like mr. parsons in coming to a conclusion and yet at the end of the day, it's the entity, aco, dcaa/aco that has the final decision with regard to the matter and yet that entity doesn't have any objective standards that they are forced to rely on by way of -- by virtue of contracts of dcaa. let me ask about the withhold interest, isn't the answer that this language that was just on the screen, dfars they will consider that the appropriate that the aco shall expend a percentage until a corrective action plan is not just

submitted but corrected and audited by dcaa to confirm that the -- that the plan has been implemented and corrected deficiencies? isn't that answer in this particular interest? >> i have seen the withhold being very powerful over time. and i'll give a case in point. titan corporation which was now l3 used to be the incumbent to the linguist contract we'll be discussing tomorrow. in 2004, had almost a nonexistent internal control system in theater on labor. we issued an inadequate opinion and recommended a withhold. within 30 days of our recommendation to dcma they implemented a 10% withhold on all labor. that went on for two years. and it went up to $40 million, and i will tell you that withhold was the greatest carrot that contractor had to correct those deficiencies to where they adequately staffed their billing and accounting department. they adequately -- they put adequate staff not only in the

restin area where their corporate headquarters was for their segment but also in theater. they met weekly with our people and went through everything that they were trying to do. thursday night action. -- this got action. i have seen it with our floor. although there has not been an actual percentage withheld, joist recently in july, the contracting officer based on our advice on some issues that we reported have not reported fluor to build certain indirect costs. that got fluor's instant attention and they are working hard to improve those systems. i feel it's effective. ..

>> mr. ricci? >> again, opposite of the army, but i can to the extent i would make that part of the plan they can base their decision on that to some degree. also considering other factors, ability to perform. >> would you all, mr. parsons, mr. ricci, were you for or against the idea of a mandatory suspension, the last question. four and an adequate system? >> we actually proposed clauses that would essentially give us

that ability to defense procurement recently. i think it would be very helpful, as well as revisions to the regulatory language which i read estimated one, also for property it applied that you direct the contract officer not to disapprove a system if there is an adequate corrective action plan in place. so i would welcome that. >> mr. parsons? >> i support that is what. i don't disagree with the ms. stephenson. i think that suspensions and withhold you get the attention of the contractors and i think we just need to be very specific again about what those standards are, very specific in the contract that we will withhold in the event that there are deficiencies found. >> thank you, and thank the three of you for your frankness today. at the risk of beating a dead horse, mr. ricci, in your

statement, you indicated in order to ensure dcaa recommendations are appropriate considered we mandate in our internal policies that any determination inconsistent with dcaa recommendations is subject to higher level review that may include review by the dcma head of contracting out to be senior senior executive service position with the dcma. you made a big deal about this. how many, and maybe you have answered this, but how many -- and how many cases was a review reversed the position of the aco? >> i need to make the point that for 15 years, dcma had no internal controlling such as this. this has really put in place in march of this year are okay. so it is relatively --

>> and how many times? >> i can think of one time, but we are talking probably, i don't know, seven to 10 borge review that actually got raised to my level because of dollar value or other issues. so once i'm. >> and how many times was the one time when you did not support the aco or the dcaa recommendation? >> we actually supported neither the aco nor dcaa but we decided we need to find a certain, this was a cost accountant, not compliance, we are going to pursue recovery of over $45 million. >> in continuing a line of questioning that we have heard from others here, i fully recognize today the different missions of your two organizations, but i also remain concerned, and the ms. stephenson called it a

disconnect. others, commissioner kieffer refer to it as, you know, provinces of cooperation. and i think those are nice wor words, but i don't see evidence of a lot happening in that area, other than we're going to get together and talk about it. let me say that, you know, i come from an operational background. so my tendency is to support the force in the field. and i gather in many cases, that is the tendency of the contracting officer, and i can understand the pressures that a contracting officer comes under from the field. but i also have to believe that there are occasions when dcaa

has made a recommendation for a business system when the outcome of that can be so onerous, so costly, that they should prevail. so my question to the two of you -- to the three of you, is how would you react to an independent, more senior forum to resolve the differences? not the day to day differences, but the ones that dcaa, for example, can show as hugely significant. >> i am all for trying anything different that will help resolve these major issues eric the kbr purchasing system i realize we have used up a lot today, but by

golly, that has resulted in us over paying hundreds of millions of dollars. when we are in that situation, when this is money that is going in the contractors pocket than to the soldier, we need to find a better way. so commissioner green, i am open to anything that can be suggested to try to resolve these issues, to where we can get these systems improve. that is ultimately what we need. the systems improved so we don't have these overcharges. >> we are today is the court of last resort? to resolve differences between the two? >> when i have differences, i take them to charlie williams, the director of dcma, or to check aside, within html. >> but to me, that is on dcma side. you know, you kind of run out of altitude and airspeed after that. mr. ricci? >> i would say what apel said is

correct, that mr. assad would probably deal with any serious issues. although i don't recall ever being over there for a meeting on a specific contractor system status. but actually i believe it should rest within the contracting authority so i believe it should be within dcma. >> you don't support in a separate independent board, if you will, or individual who would mediate these differences? >> i am a believer in contractual authority in this case the aco. so again, anything i think needs to be considered given the differences of opinion, but i wouldn't be inclined to do that. >> mr. parsons, do you have an opinion on this? >> yes, sir. , i think it goes back to what i have been making a point before. i think the underlying issue is why are there differences of

opinions. putting another board above two bodies to resolve what differences to me isn't the long term solution. to me is that let's go find out why there is this ability to have divergent opinions of what ought to be in my mind some reasonable standards put in place, and let's clear that up so that there isn't this kind of disagreement or a lot of room for interpretation rather than putting another board in. i agree with mr. ricci. it still needs to be in the contracting authority. >> okay. for you, mr. parsons, one hopefully quick question. in february of this year, the logcap directed that kbr freeze its hiring and staffing. this was based on a $50 million labor cost overrun. in the recent trip to iraq, the

commission was told by senior military folks that they were reiterating to kbr the necessity to draw down the workforce. what is the interaction between army contracting command, kbr, in the field, it in ensuring that this happens? >> mr. lee thompson, who is the executive program director for logcap has got a responsibility to ensure that that is happening, and he is tracking that on a weekly basis with reports coming out of kbr. he has been making frequent trips over to iraq and afghanistan, especially iraq to verify that. >> is the size of that contracting force coming down? >> of kbr's organic force is coming down, yes. >> thank you. >> i give myself eight minutes. we are in one fight that we're

all on the same team. those of you out there, and you are on the same team. but it doesn't sound like it and it doesn't look like it. and that we need to do is go with the truth takes is. whatever that takes us. what comes across to me is, ms. stephenson, you have been ignored so you have changed the system and you have made the system worse. because you're basically saying adequate or in a adequate, and there are too many and adequate with huge varying degrees, where do you put your attention. some are inadequate and some are really inadequate. mr. ricci, you come across like you will tolerate dcaa, but you're going to ignore it. that's the way you come across. mr. parsons, you come across as saying you know what, these systems are bad and we're going to check it out but they have been bad for a long time. and you haven't been, you, and

china appear to have been around. and it just strikes me as pathetic. because it is not a hard thing to resolve. you need to pay more attention, mr. ricci to what dcaa does. dcaa is suggesting. you give the impression that everything is advisory. her opinion is advisory. you have advisories on whether you can withhold money or not. we could write the system, we could recommend as a commission that we force you to do what you have to do. take away all good judgment, take away all flexibility, and in would have other problems that come from that. that's what we will have. so, mr. ricci, you have basically given me the impression that all of the inadequate you have overruled. articularly as it relates to these three contracts. and that is stunning. you have got to explain to me if it's advisory, you have the

authority. it doesn't say you have to use it. why the hell don't you use it once in a while? explained to me just because it's advisory doesn't mean you can't do it. so why haven't you done it? why haven't you withhold money, kept it back, tell me why. >> okay. short answer would be, okay, prefer. that contract provision that we keep saying does not in and of itself have any teeth. i must go to the financing clauses or the allowable cost in payment clause. we do, not what these contractors, these are cost contracts. but we do do a lot -- >> are you saying it is advisory but do you have to go toward? do you have the authority to withhold money? >> i have the authority to reduce or suspend progress payments on fixed-price contracts. >> that is basically withholding money.

but you do have the authority? >> in certain cases, depending upon what causes are in the contracts. >> you do have the authority. >> yes, sir, and we do respin or reduce payments quite often because the threshold, any compliance with the contract. it is in fact easier. you will see we have far more withhold comment if you will, on fixed-price contract directed at the financing than we normally do on cost site contracts. >> you can also withhold from cost contracts as well. and these aren't fixed -- these are, but you can withhold. >> again, these are all aware. there are few withhold that we can do. again, up to 100 grand, so not too significant. our withhold of the reimbursement of costs on these contracts that we are talking about comes from the allowable

cost a miklos. and again, there we believe we need to show a logical nexus or between a specific system deficiency and the cost, meaning that the specific deficiency is likely to lead -- >> you know what, i'm struck with the fact that there is a little bit of gray area so you're going to make sure that you are going to be totally on the contractor's side. it would be rather refreshing for you to test it, to have them complain about it. but it strikes me you might get some action before then. ms. stephenson, how do you respond to what mr. ricci has said? >> i know that dcma has been withhold on cost type contract to the inadequate systems and i have seen that they work. i saw that they got action. i feel it can be done. i am not an attorney. i don't know about the causes and all that but i know it has been done. it has been effective and it has gotten action and it has resulted in appropriate costs

being charged to contact. >> since i joined this commission the one thing that i am struck with is that people on the inside aren't outraged. the way they should be outraged. we have contractors who go overseas and their folks -- and there may be, you know, six electricians in a basement and you only need to and they're only working two hours a day in terms of jobs, but they are on duty for 12 and they charge 12. we have civil servants who go and charge 12 hours a day and get double their salary in half a year. and there is no outrage because people save that's just the way the system works. it would be refreshing to see some outrage with this to see, mr. ricci, for you to just be so outraged at some of this and say no, it ain't going to happen. and then see what it gets you. i think it would get you a lot. this commission has talked about the fact that if this hearing

ended up kind of the way it has, that we are going to ask you to come back in 60 days. and we are going to ask you to show us that you have resolve these differences. because it is just wrong. and i hope, ms. stephenson, that you reevaluate this pass/fail. >> and if i can, just for one second, when you say outrage, we are outraged. we are absolutely outraged at this. we have been inside and seen this go on for too long. consequently, we did change. and as you say you would like us to reassess -- >> let me daiwa. and i do feel your outrage and you are a very credible witness and i want to say that. it is a little easier to be on the side of just reviewing. it easy for us to criticize. is he for you to criticize. i give them a little slack that they have to make the system ultimately work. and they have got lots of other pressures. but it seems asic to me that if

mr. ricci is going to ignore or overrule that he should have to come in and explain point by point why he disagrees. and if it's three days, we, seems a little absurd to me as well. i have my own opinions about the. the bottom line is this has got to stop. >> of what i want to explore a bit what commissioner tiefer brought up. simple question. on logcap iv afghanistan, you told us, first of all, director stephenson expressed absolute support to involve herself in that pressing action. that was in may. said she had been communicating for an extended period. you were supporting, and then yet when we were briefed by dcaa

about a month ago, they indicated the army's present position is that they hope to involve dcaa war in iraq but they they did not involve dcaa and afghanistan and logcap iv in afghanistan. billions and billions of dollars with issues that everybody knows about and we have talked about. why didn't you used dcaa's support earlier, or it may in whatever format? whether director stephenson says i can do something in very few weeks. i can tailor it. why didn't you? >> the acquisition strategy for logcap iv was assuming that the competition would drive the reasonable price at. >> but don't we know that you can still use of audit services for cost realism to assure they are properly putting the packages together for a variety of other means? so i don't want to hear about acquisition strategy. i want to hear why didn't you use dcaa.

>> based on information that they were provided in the proposal, at the cost detail level that they had they felt that they had sufficient competition and had enough information to do that analysis to ensure themselves the cost was realistic. >> so the short version would be as i listened to, they didn't feel they needed dcaa input, regardless of dcaa's offer to tailor that input in any way, shape or form. they felt in their opinion they didn't need a. >> correct. >> is that the simple short version? >> correct, along with the other thing you understand from operational needs we need to get those task orders awarded to support the war fighter xo in terms of that you are talking about the timeliness of dcaa's director stephenson said i will tailor it, but you said regardless you had concerns about timeliness. >> right. >> let me go on. >> can i follow up though? >> you will get a chance at the end. because i don't want my chairperson to jump me again.

i want to go back. we are trying to help you, david, mr. ricci. in the sense of trying to bring issues out and focus on them and support you. so i want to go back. 1994, you are right. we are using contractor purchasing system review is subcontracting is sort of a featured area for discussion. your teams, and i've worked with your teams. there are some pretty sharp people. i have worked with them extensively in my time, and i am pretty impressed by what they do. they had 102 people in 1984. they have 14 faq would have to grow it by 800% to be back where you were and we have seen study after study. we could have charged that the workload is more demanding right now for dcma, more demanding, then it was back in. but we all got out with this peace dividend and we absolutely support the secretaries initiative to hire. absolutely support them. i am just at a loss how, and i

think you clarified, and my question is going to be focused. you clarified that the team that went in in the review and kbr where we have this difference of opinion that we are getting animated on, is that there were 13 follow-up items and they looked at the items, they were satisfied. dcaa came in and said we brought all sorts of new items to the table in a detailed brief, and they expressed concern they were addressed. >> i don't believe that is correct. when i said that cpsr team that. i made a very good this was reviewed at a very high level, which this commission is. they try to put their best people on it and they try to do the best job that they can. i'm sure they did. they don't want to be here talking to you next. dcaa identified 20 to 30 purchase orders that they thought the team should look at and those were included in the sample. they said they did. so again, i had the review

results from the cpsr team. dcaa is working on an audit, and again, the clause provides that we can revoke our acceptance at any time. if i get contrary evidence from dcaa we are going to look at it and we're going to do what we think is right. but right now all i'm saying is i said and dedicated specialists, and they reported that the deficiencies were corrected. >> so we have this difference of opinion. i have one last, and it is in support i think of comment by commissioner zakheim and by cochair chaise. that is at the pass/fail, i like the analogy except i wouldn't say abc or f. the april report card on system adequacy. i would just propose that you look seriously at it. you are trying to get their attention. i think we are trying to let you get their attention. but we sat with your regional

executives, the two regional directors, and they said, for example, and dyncorp, they are doing the whole series of reviews. they said with a new policy everyone of them is going to show as an adequate. it will be surprising if it is not. and they said the same thing about kbr. if i am a contracting officer, i get back to the point they raise. tell me which ones and we get into suspensions, i wanted to withhold cost consistent with the guidance. but i would say tell me which ones and how it's impacted that i need to focus on. don't just go cross them off. that might be what i do it as a contracting officer and i would think would be more hopeful to them if you would be willing to stand back and say material internal control we does, you have to move the. internal control weaknesses, maybe we except the corrective action plan. you know, it's in the party together and find something where it's not a sponsor, the hatfield and mccoy because i've talked to enough people on the side that i proposed you it's

not just a disconnect. it is the hatfields and the mccoys, and that is not the government that i knew. and it is disappointing. so i go back and i encourage you, go back and look at what you can do in terms of holding your independent reporting, aggressive reporting. i commend you for that. you are kind of out on a plateau that is very narrow on all sides. and you are standing there, and i commend you for that but sometimes i think, you know, i'm not even going to ask for a response or i would ask you to consider what my cochair, my partner, and the other commissioners have said. thank. >> mr. tiefer? >> thank you, mr. chairman, and identify myself completely with the remarks of chairman tivo on this subject. we left with an impression at the beginning of may by you, mr. parsons which was not carried out that you're going to work real hard in getting in on it from ms. stephenson.

ms. stephenson, i'm going to revisit some of the key systems, especially first labor system and in the subcontract system that handles the contract but i want to set a context. the commission simi to baghdad. i realized i didn't at least ask them what i was talking about. general de niro sat with me in his baghdad office tuesday july 28 i believe it was and he shared his challenges and perspectives about the drawdown in general, but about what i call the contract drawdown in particular. and this afternoon i'm going to refer to a washington post article because it is on the public record and it says in a command wide directive issued january 31, general odierno, etc. etc. ordered all military units to start cutting u.s. contractors at a target rate of 5% each quarter and to hire more iraqi's to do their jobs. as we transition more and more responsibility, as we transition more responsibility, to control the governor of iraq, it is time

to make this change your tv is reducing the footprint of u.s. contractors. he wants to bring the numbers down. he shared vision with me with his real reduction of contractors, not playing games. not just eliminating vacancies. but real. how would what you describe that you just issued a statement of conditions, a form of criticism of the kbr labor system, how might it get in the way of oversight in baghdad of whether kbr does a real reduction, and thereby saved the cost? >> i tell you, the labor system when it comes to the drawdown is going to play a critical role. and that's one of the reasons we got out ahead and try to identify the weaknesses as this drawdown is beginning to start. it will be critical that these internal control weaknesses within that labor system be addressed probably. because without the lack -- with this lack of visibility that we are in right now, we do not

know, the risk, i should say the risk is significantly higher, that we will not know if the cost-containment is indeed happening, or if what we have is cost growth. it will be critical to get this corrected quickly. i am in hopes that kbr has taken our statement of condition and recommendation seriously, and is right now putting improvement in place to improve that system. >> think you. i have a very quick question and i don't want to dwell on it. it is the allow ability system and its component, on allowable excess on compensation. you had a report in 2006, had one order of report that said their compensation system was not adequate. on this particular element, the end allow ability, you ticked off that kbr would be pleaded in fy 2003, in 2004, 719,000, in

2005 kbr deleted for .1 million, what do you talk about when you say they deleted these? >> there is a statutory requirement that has been intimated in the regulations that places a ceiling or a cap or limit that the government will take on the top five executives within a company. >> is that from the ceo down? >> yes and it is the top five. when we talk about kbr reboot x. amount, that means the amount that was above that cap, they have removed from that sufficient. >> because they originally had in their submission and then they later realized that. >> sometimes it is that we. in a particular instance of kbr i'm not sure if it got him, came out later or took it out before they submitted to. >> let's go back to labor. we not only, we found that general warner was the logistics person who was closest to watching the drawdown, showed us charts, but handled contractors as a whole, but this is what

general odierno said specifically when i asked him specifically, he said what we have looked at logcap as we close these bases. i wasn't seeing a reduction of contractors. we had to make logcap accountable. now logcap means kbr, because there is a monopoly of logcap in iraq, and kbr subcontractors, is there a problem with the purchasing system with kbr watching its subcontractors and do you have even less visibility into the subcontractor labor than you had into kbr's own labor? >> yes, we have less visibility into subcontract labor than we do kbr employee labor. and yes, the risk is greater because of the weaknesses with kbr's purchasing system as related to subcontracts. and yes, it is a great risk with the drawdown that if those weaknesses are not improved, we will not know what the appropriate amount of the subcontract costs could be and we will not know if there has

been quoted cost-containment that everyone has been speaking of. >> thank you, madam director. >> thank you, commissioner >> you get a lot of credibility to, i'm going to look at this in the award heat process and i'm going to hold contractors accountable for systems in the incentive reward these, right? and it just struck me, what's the maximum dollar value in an award fee scenario that you can withhold from the contractor? i heard a hundred thousand dollars. >> will, -- >> is that the maximum number you have? >> the award fee is just that, it is a key that is, you know, earned by the contractor above what is expected. 15% of the award fee pool has been set aside for corporate management. part of that assessment --

>> but you can withhold, i heard already one of the statement, up to 85%. >> 15% of the award fee, it will be 15 million will be set aside for the corporate management. >> so it is not capped at 100,000. i was crossing apples. >> i didn't mean to mislead you, commissioner. there are three different types of the. there is dixie, and a worthy. since the award fee, they have a lot of authority to craft their own solution to the. i only refer to the insanity, not an award fee. >> logcap iv and the transition from 3 the 4. we commanded you in may for having a competitive basis for awarding logcap iv and particularly logcap iv passport is. in the interim report, we lauded the army for apparently finding

the savings that one would expect to come from competition. we cited your kuwait task order. i think that was your first substantive logcap iv task order. that used a two cost about $125 million or i think you would call it the kuwait ao are, right? perform an old contractor of $125 million. you awarded it to one of the new contractors for 44% less, 75, 74 billion. we were thrilled that we thought the benefits of competition are coming to pass. did you ask dcaa to do a proposal audit on network? >> for the preaward? >> yes. >> no, we did not. >> did you, april stephenson, did your organization do an audit on that? >> the preaward, no, sir. >> okay.

jeff, i'm going to ask you to tell us what is going on here. because we read in the statement that now shortly after award, and i want to know exactly after a war, when was it awarded to dyncorp? >> when was the award? i will have to get back. i do whenever. >> would you ask one of the staff in the audience? >> i think about five or six months ago. >> whenever the award to the contractor come in until you i've got a new number for? >> i think what several months after the initial award and there was a request for a just and. i think we are getting dcaa assistance on this. >> what happened? >> i really don't know. i would have to get back to you. >> you don't know? >> no, i don't. >> commissioner, do you mind if i shed some light? we were informed as to why they came in for the price increase is they needed to hire employees in theater. the employees in theater were

kbr, and the employees wanted more money. and dyncorp -- they wanted more money, and that was part of the increase. >> what's the connection with that scenario, which is set beyond unfortunate, which their labor system or the estimating system? what is the connection that you would make? >> the connection i would make is more with the estimating system in this particular case. but i don't know the amount or the level of data that was submitted with the proposal, whether it was at a low enough level that the army could assess whether dyncorp had actually had employee agreements are actually had gone out to determine what the cost of that labor would be. having to hire kbr employees on the market or whoever else they hired, what that cost would be prior to putting that did in. that is something a preaward audit would have looked into. did they actually go out and determine what that labor would be, or did they put a number into a proposal on the hopes that is what people would be hired for.

>> so you, with the right level of detail in the work, you could have found something? >> we could have found something that i am optimistic we could have found something, we miss things also but i'm optimistic we could have found that they had and did not actually checked with the labor would be on the market. >> okay. as much as we were thrilled to see a first result, and the army was thrilled to see if you i am sure, with a 44% reduction over an old price, than to have within months of an award, the contractor coming in to say the old price is not good, i'm going to give you a change of proposal and give you raa or request for equitable adjustment and come in and say i can't do the work for what i did. you are going to have to pay me this price. that is -- this is a rhetorical question. where did the savings from competition go? >> that is a rhetorical question. again, it's the reason why the contracting officer with the eca assistance is trying to figure that out. you know, what has changed that

has caused the labor rates, sort of labor to go up as much as what dyncorp is claiming it to go up. and, you know, ms. stephenson and i have had this conversation before, and it may be somewhat true that do we really have an environment in those deployed theaters that allowed you to have competition. and as a result, we are definitely getting dcaa involve with the iraq task force as a result of what we have learned. deck just a quick question. missed under. >> if they come back with much higher number, once they have a contract until they had a contract? >> when you say withdraw the contract, we always have the option not to exercise options. so that is something the contracting officer is going to have to wrestle with, okay, do we exercise the option. >> thank you. are we able to say what that

number is? by the way, what the proposed cost increase is. or is that confidential? okay. so we know it's about $50 million in. so it's a 50% cost increase. okay. mr. ricci, you were saying that this dfars clause isn't embodied in a contract clause, and therefore you can't use it to do a withhold, it's kind of unenforceable, is that right? you have to look at other caus causes. >> that's our position here that is not a cause. that is regular toward. >> so my question to you is, do you need more authority, regulatory, for withhold? do you want more authority and do you need more authority? >> if this is unacceptable, and i think that we all agreed it is, i would need more authority, maybe a contract clause that implements that, some changes to

existing causes. but what i would also like, what we need, i need a regulatory guidance, nobody here except the mere submission of an acceptable corrective action plan that that should affect the status, but that is the regulatory direction. so i would need that direction change. the contract officers, they go by the contractor to. >> where is the radio tour direction that the submission of it corrective action plan is adequate to make a business system adequate? >> it varies by system. another think -- >> the application of this statement is the absolute opposite philosophy that you have to have a corrective action plan and it has to be and the deficiencies have to be corrected in order to -- >> i understand. again, that's what you would assume that says. that right there. but again, remember, going through what causes are in there that mandate certain systems, there are seven. and they are actually different from the internal control, dcaa

looks at, that dfar doesn't even mention the terms much less provide any coverage. >> is there ever like content regulation says that a corrective action plan is sufficient? >> within the clause, yes. do you want me to redo if you? for estimating and for properties, it is very explicit sirach it's as if they submit corrective action plans in the system can be approved? >> if they submit it, and make adequate progress, the system -- >> but there is a requirement for adequate progress. corrective action plan alone is not sufficient. >> for estimating systems, it's as if the contractor in acceptable correction plan would be sufficient for estimating systems, again, if they did make progress against it, then we are going to take the position of. >> would you yield for a second? the challenges you don't sound like you want that authority.

it does say, and it corrects the deficiencies, and the deficiencies aren't being corrected. you haven't asked for that authority. so i don't have a warm and fuzzy feeling like you really would like to use this. it's like you are finding every reason to avoid withholding. are you on record at any time saying i don't have the authority, i want the authority, please give it to me? >> i hope so. >> no,. >> yes. i would like to have the authority. >> mr. ricci, you are under oath, and i only say that by saying i asked a simple question. have you ever asked for this authority lacks in any official way other than, you know, i don't have it. >> again, we did a presentation for the director of defense procurement acquisition policy on july 1. mainly focused on earned guy did manage system because the performance was so awful there but we did identify the other

systems. so yes, i have. >> you are a gross and you have asked for the authority to withhold money from contractors. >> i provided -- >> i want you to be real careful not. >> i will be real careful of. >> and this is not coming off your time. >> we provided a presentation, and we identified enhancements, we called them greater incentives, that we would like to see so we could have, let's say more of a hammer with contract -- >> that's not what i asked of you. have you ever asked for the authority to withhold money from contractors? >> i mean, i did a presentation where i suggested these are changes that are beneficial for us to have that authority. i have never submitted -- >> i'm going to suspend there.

it is her time. >> guest, i will yield. >> and you will get the time. >> you said that the presentation primary was earned value management system, dbms, right? >> it is not on the table today, is it we are talking about a set of business system that are not e.g. ms, are we? >> it would not be on. i don't know why it would not be on. we have a list of the 10 business system. evm is mostly about making progress, not about the 10 business systems. as for these 10 business systems, not your evm presentation. would you answer the chairman's questions as to the business systems we're talking about today. the chairman's question was had you asked in so many words for the authority he is talking about? >> and can i just asked, all we need is a yes or a no.

>> i don't believe that i have specifically requested additional authority for the accounting system and related internal control. >> you have three minutes. we will give you an extra minute. >> okay. let me ask, do you think that the fact that these three companies and these contracts are involved in contingency contracting, make it more likely for dcma more likely to improve the business system than not? i mean, is there an element of the fact that in a contingency situation we have to make sure we deliver to the troops and this is about logistics? does it, the decision that your people would make in terms of approving a business system? >> i believe that the standards we would have would be, it would consider the environment that they are operating in. the fact that a lot of the prime contractors that have eight deficient system that i mention

in my testament, they're making subcontractor of war to raytheon, companies here with established suppliers whereas kbr and the others logcap contractors, they are dealing with subcontractors that really can't be expected to have the same level of sophistication. so the short answer is yes. i believe that considered. >> actually doesn't that make the requirement for solid business system even more important that kbr is dealing with subcontractors that are not known? >> it would make it more important, yes. >> let me just ask about how we determine whether a corrective action plan is complete. i think this is a pretty fuzzy area to where the responsibility lies if they correction plan is offered and accepted. how do we determine and who determines, who has the responsibility to determine the progress on a corrective action plan and when it's complete when there has been sufficient progress made on it?

>> can i start? >> please. >> certainly with a corrective action plan, when a contractor informs us that the correction action plan has been implemented and the system is ready to test, meaning that they have indeed implemented it, we generally will permit a cycle of cost, whatever that may get usually three months to get a complete cycle of costs in the system. and then perform a follow-up audit to determine whether the system has indeed improved. sometimes there is a length of time that it takes for the contractor to implement it, and we don't go in while they are implement it known that the deficiencies are still going to exist that we do give them an opportunity to fix the question is who monitors what that length of time is. i have to say for most instances that is the contracting officer who is going to monitor that. however, i will say in some instances we could have done a better job in monitoring that and saying something sooner and asking for a withholds or. i do say we could have done that. especially with kbr's purchasing system.

however, we did take that into effect when we did the number of suspensions that we have done, over 10 145 of some suspensions. what we did while they were implementing those corrections to ensure the government interests were protected. ultimately, the audit of the corrective system, idly, says whether that action plan has been effective or not. >> okay. so that usually takes how long did? >> usually anywhere from six months to a year. >> so is it reasonable to have a withhold vote for that length of time? >> i have seen it in the past, and it has been useful. we have been pieces of the system, and as that piece was audited it determined to be adequate the portion of the withhold was returned. >> so there is a way. >> there is a way we can do it. >> thank you. >> thank you. >> i would like to follow up on that. first, mr. ricci, from what i heard from chairman thibault,

your 800% down in terms of the number of people you had doing this kind of decking, down to 14 people i understand. is that correct? >> that is correct. >> how many people have you asked for in current, since the new defense budget how many people have asked for in the program? >> ewing under the defense acquisition workforce development? >> you put together a budget. i happen to know a little bit about budget. you're going to come in with a request. have you requested 100 people? 50? 200? what have you requested? >> i believe we are looking at 2500 over the next five years. >> this coming year? >> i can give you an exact number. this is a first year we have asked for a lot more than what we have over the past. we hope to just a flat. >> so over the past you were prepared to stay flat. again, you didn't ask last year. you didn't ask for an increase? even though you had all the

stuff going on and hundreds of millions of dollars being flushed down the toilet and you didn't have for any more people? >> i can provide based. >> did you or did you? >> again, i'm not on that side of the house, the comptroller site but i don't believe we asked for a permit is increased. >> david, if i can. i think we can focus and i think you will know you went from 102 to 14. and you got all the stuff, lots of challenges. again, that's present. the end of fy 2090 are you going forward it in 2010 with the same 14, or did you ask for 25 or 50 in order to get the job done? >> i personally asked for more from our comptroller. again, i can guarantee that will go forward. >> let me ask director stephenson. so we were talked a little

earlier about you get a crack at this corrective action plans and essentially you say, well, they have done something, they haven't done something, it takes six to 12 months. then what happens? you go back to dcma and you tell them they haven't done it, or the army? who do you go to and what you say? >> it goes back to dcma. we have the instant scenario with dyncorp right now. they have pre-and adequate system. they have exhibited corrective action plan. the dcma contracting officer asked us to look at it whether we thought the action plan as written was adequate. we determined one of the three was not. and at that point in time we wrote the contracting officer and dyncorp and said this needs to be improved before it is even considered an adequate for corrective action plan. on the other two, that were considered adequate, given that they were just implemented were given about three months to get a cycle so we can adequate test in the new process, and then we will initiate an audit. once that audit is completed it

will be issued back to dcma, and because it is a logcap iv contract we have a green agreement with the army that we include the army so they will be aware if there is indeed an issue. and in the meantime, if we find problems we will do suspension on a real-time basis and not wait for that system report opinion to be issued. >> so if you have a corrective action plan that was put together in 2442005, you will keep coming back and saying they still haven't done anything, correct? >> that's right and we will follow up with a recommendation for withhold. >> so now, mr. ricci, given that, are you saying even though you have been told the corrective action plan has not been implemented, your hands are tied and you still can't have a withhold? >> i can withhold cost if we can show the causality between the deficiency and that cost.

if we don't do that, it is essentially a penalty. >> fine. then let me ask director stephenson. when you go back to mr. ricci's organization, do you show the logical pathology? >> yes. task order 159, a billion dollars in october 2008. i don't think you get any better than that. >> mr. ricci, if dcaa shows you logical, are you willing that they are illogical? >> the fact that 1 billion? >> billion. >> one billion was considered suspended doesn't in and of itself, it is suspended, right? >> if i can elaborate. it was a billion dollars that kbr did not perform adequate price competition or adequate analysis of the psalm contracts. this is not a suspension. they fail to do their job. >> to my simple mind, that's a

pretty logical causality. tell me why my mind is even simpler than that and it is illogical? we will take that one example about the price analysis. >> to the extent that did occur, we have the differences of opinion regarding the purchasing system. but if i can show that lack of adequate price analysis has led to unallowable cost, i can kind of say that 5%, yes, i can withhold cost with the notice to disallow costs. it's the blanket, say, i have a deficiency so it is 10%. so again at labor accounting system that april mentioned before, i can see how the labor accounting, you can definitely quantify it. you can do things also like disallow all the labor costs. so again, i'm not saying we can never do it. i am saying it's not as broad. >> but nobody is arguing about

that, and i want to go back to what my cochairmanhas said. when dcaa comes to you with something that looks pretty rigorous to me, and you know, this is a pretty rigorous organization. i think they are amongst the best of the u.s. government or anywhere in doing this kind of work. and they come to you with a rigorous argument and a rigorous case, there are two ways you can go. you could go and say, hey, we are losing billions of dollars here. it's affecting the people in the field, the men and women in the field. i have a strong case to back me up. i'm going to withhold. or, you could do what you have done which is find a way not to withhold. and it troubles me very, very deeply that you are coming up with reasons not to do things that frankly are undermined the efficiency and safety of our people in the field, as cochairman shea has pointed out very eloquently.

>> let me just pick up on that if i may. i agree with his. i survey, and i think it is true to say that all of us are trying to be fair to you, mr. ricci, here but you seem to be searching for an excuse, the rationale for not doing what is clearly called for. can we just intuit that there is definitely a nexus between efficiency and cost and that it may be a question of how much cost is but can't we stipulate to that? >> depend on what the deficiency, i don't believe all of them logically lead to suspension. >> but what about some of them and what about this particular one? >> i believe that we would need more granularity about what the specific deficiencies are and how they lead. the issue that i would have with this, and again, i just said my purchasing system team in there. they found -- they didn't find any additional defects in the

system. because the cost is suspended, doesn't mean it is ultimately not allowed. so that's the issue i have. certainly on a lot of these systems, we can look for greater opportunity to implement the withholds, and one thing that i will do is to pursue a policy that lays out when it is appropriate. because we used but it didn't happen here and i can speak for the contract officers. you can bring them before you, they would have to say position as me. again, i have coordinated this with our federal council. they also have the same concerns that we show this nexus that it is arbitrary. by the way, is there a statutory or regulatory requirement for the nexus be shown? >> yes, we believe that -- the regulations indicate there should be such a nexus so that it doesn't end up being a de

facto penalty. >> can you submit for the record a statement from her counsel to that effect and that points to the regulatory requirement that you think is their? >> it is an interpretation of the regulation, but i will provide something to that affect. >> back to the corrected action plan. is there a statutory or regulatory requirement to accept a corrective action plan before it has been implemented and validated by dcaa, a statutory or regulatory requirement that you have to accept it? >> i just want to get a little clarification. >> are you required by law or regulation to accept a corrective action plan before the plan has been implemented, and before it has been validated as being committed by dcaa audit? >> the regulations for most of the business systems is something i presented, not the one that dcaa -- >> talk about the ones we are talking about a. >> that is difficult because

those comedy accounting, the purchasing, the estimating, there's contracts in the contract to maintain those systems. the other related internal controls, i understand why they are important, and i understand how dca does the reviews, but they are not expressly, explicitly set forth in the contract. and the requirements for what is adequate is not subject to the rulemaking process, but rather contained within the dcaa's own internal memo. >> who writes these contracts? do you have the right to insert into the contract whatever language you think is necessary in order to hold the contractorcontractor's feet to the fire? >> there is provision for special clauses, but they are the standard causes provided by regulation. they are reviewed, tailored or custom closets. >> could yield a second on that one, clark?

>> sherbet. >> there are a few tailored causes, the government and write a contract like anybody can write what they want, and in the contractor can decide whether or not to accept, isn't that correct, mr. ricci? >> yes, sir. again, we don't write the contract. >> me ask. you can write what you want, correct? >> yes, sir. , for an individual contract, as long as it is within the laws and regulations, the answer would be yes. but if you're going to put clauses in multiple contracts, there is a rulemaking process that has to be followed and has to be vetted. that is why there is a far counsel, dark council that does that. that is what mr. ricci was in many, that's what i would submit needs to be done is all the systems need to be examined, how are they with the standards and let's get on with it. >> to comment about this issue, ms. stephenson?